Earnings Transcript for SCHL - Q4 Fiscal Year 2024

Operator: Thank you for standing by, and welcome to the Scholastic Reports Fourth Quarter Fiscal Year 2024 Results. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Jeffrey Mathews. Please go ahead, sir.

Jeffrey Mathews: Hello, and welcome, everyone, to Scholastic's fiscal 2024 fourth quarter earnings call. Today on the call, I am joined by Peter Warwick, our President and Chief Executive Officer; and Haji Glover, our Chief Financial Officer. As usual, we have posted the accompanying Investor Presentation on our IR website at investor.scholastic.com, which you may download now if you've not already done so. We would like to point out that certain statements made today will be forward-looking. These forward-looking statements, by their nature, are subject to various risks and uncertainties, and actual results may differ materially from those currently anticipated. In addition, we will be discussing some non-GAAP financial measures as defined in Regulation G. The reconciliation of those measures to the most directly comparable GAAP measures may be found in the company's earnings release and accompanying financial tables filed this afternoon on our Form 8-K. This earnings release has also been posted to our Investor Relations website. We encourage you to review the disclaimers in the release and Investor Presentation and to review the risk factors disclosed in the company's annual and quarterly reports filed with the SEC. Should you have any questions after today's call, please send them directly to our IR email address, investor_relations@scholastic.com. And now, I would like to turn the call over to Peter Warwick to begin this afternoon's presentation.

Peter Warwick: Thank you, Jeff, and good afternoon, everyone. Thank you for joining us. In the fourth quarter of fiscal 2024, Scholastic continued to execute on its strategy, investing in key growth initiatives and long-term opportunities while navigating current market headwinds. Increasing pressure on spending affecting our Education Solutions and School Reading Events businesses impacted consolidated revenue last quarter, resulting in a 10%, or $53 million, decline relative to last year's strong quarter-four performance, and that's in contrast to our expectations for modest growth. Consequently, profits in our seasonally most important fourth quarter fell below the prior year and our revised guidance. Fourth quarter adjusted operating income was $67 million, down from last year's record of $92 million. Adjusted EBITDA was $91 million, compared to $115 million a year ago. We took steps to manage expenses in line with lower-than-expected demand. SG&A and corporate overheads, excluding one-time items, both improved even as we maintained spending on long-term opportunities. For fiscal 2024, adjusted EBITDA was $137 million versus $196 million a year ago, again reflecting the revenue headwinds we've experienced since last fall. With careful working capital management and our businesses' capital efficient models, we continued to generate strong free cash flow of $73 million, up from $60 million in the prior year. This exceeded our revised outlook of $55 million to $65 million. Delivering on our commitment to capital allocation, we also deployed Scholastic's strong balance sheet to drive long-term value in fiscal 2024. We returned over $181 million to shareholders through dividends and share repurchases during the year. We also announced $182 million strategic investment in 9 Story Media Group, which we closed on June 20. Scholastic's investment to acquire 100% economic interest in 9 Story is a major advance in our evolution as a global children's media company. It greatly expands Scholastic's ability to reach more kids where they are and profitably participate in the full life cycle of our children's franchises and IP. Starting this fiscal year, 9 Story will be consolidated and integrated with Scholastic Entertainment in a new Entertainment segment. Since its 2017 reboot, Scholastic Entertainment has successfully proven that there's significant demand for Scholastic's brand and publishing IP on screens as well as on the page and that we can effectively and profitably meet this demand. In addition to adding a sizable business with solid EBITDA margins today, the 9 Story acquisition significantly expands Scholastic's opportunities to leverage its trusted brand, best-selling publishing and beloved global children's franchises across print, screens and merchandising. After only a month, the combined division is quickly moving forward with an integrated plan that I'll discuss shortly. Last quarter, Trade Publishing, the starting point for much of Scholastic's content, saw sales increase by 3%, excluding revenues from Scholastic Entertainment. The spring release of the 12th book in Dav Pilkey's Dog Man series reached the number one best-selling spot across all book categories in the US, Canada, Ireland, Australia and New Zealand, and the top children's book spot in the UK. Its success also drove strong sales of earlier titles in the series, demonstrating again Scholastic's ability to build global franchises. Despite solid trade results, last quarter's revenues in the Children's Books segment declined by 9%, reflecting the resizing of Book Clubs and the increasing pressure this spring on consumer spending and participation in School Book Fairs. School Book Clubs revenues were down 45%, with planned resizing, while we also tested new offers, marketing and promotional formats for the school year ahead. Sales in School Book Fairs decreased by 6% in quarter four, reflecting lower revenue per fair relative to last year's record level, partly offset by growth in fair count. As we've discussed, revenue per fair has been partly impacted by the addition of smaller fairs as we've grown fair count as well as increased churn among some higher-value fairs. Headwinds in the school environment, in particular high rates of absenteeism this year and increasing pressure on consumer spending across the economy, especially among fair's core market middle-class families, have impacted the number of transactions per fair, especially this spring when schools host second fairs. This has more than offset the benefit of higher transaction sizes, which reflects our strong merchandising. Turning to our Education Solutions segment, revenues declined by 17% in the business' seasonally most important fourth quarter. As many schools have adopted core curricula and implemented new structured literacy programs this year, they paused spending on supplemental curriculum products this spring. This particularly impacted sales of classroom libraries and book collections, as well as products not explicitly aligned with the science of reading. In contrast, sales to non-school state and community literacy partners rose overall. As we navigated the currently challenging market, we continued investing in this segment's long-term growth potential in anticipation of a cyclical return of spending on supplemental products in the 2025 and 2026 school years. We're currently executing on a comprehensive new product plan, as I'll discuss shortly. Finally, International revenues declined modestly last quarter, mostly reflecting headwinds in Asia. As I laid out a year ago, Scholastic's strategy to grow long-term earnings and free cash flow builds on the unique strengths of our domestic and international Children's Books and Education businesses, while also protecting the profitability and cash flow generation of our core business models. Leveraging our balance sheet and strong free cash flow outlook, we aim to sustainably fund these growth investments and return capital to shareholders. Scholastic's growth investments are guided by four key market trends and growth factors, which I'll run you through

Haji Glover: Thank you, Peter, and good afternoon, everyone. Today, I will refer to our adjusted results for the fourth quarter and full fiscal year, excluding one-time items, unless otherwise indicated. Please refer to our press release tables and SEC filings for a complete discussion of one-time items. As Peter noted, a more challenging market for our Education and Book Fair businesses caused Q4 performance to fall below our prior-year period and below our revised guidance. Widespread adoptions of ELA core curricula and the continued shift of science-based approaches for literacy instructions impacted spending on supplemental materials while increasing softness in customer spending impacted revenues per fair in Book Fairs. While steps were taken to preserve operating margins, we maintained spending on key initiatives including new structured literacy programs which we expect to launch in the 2025-2026 school years. In Book Fairs, we successfully added new fairs, but due to the strong operating leverage in this business, operating margins were negatively impacted by lower average revenue per fair. In response to these headwinds, we tightly managed inventory and cash, contributing to favorable free cash flow. Despite these challenges, trade channels in US and UK performed well due to a strong publishing pipeline and we resized our US Book Clubs business as we tested new offerings to profitably grow this channel in future periods. Internationally, our Canadian operations continue to benefit from restructuring activities in prior periods. Turning to our consolidated financial results, in the fourth quarter, relative to prior year, revenues decreased 10% to $474.9 million, reflecting the market headwinds I just described. Operating income of $66.8 million was down $25.2 million. Net income was $50.5 million compared to $75.7 million in the prior-year period, and earnings per diluted share were $1.73 compared to $2.26. This reflected in lower net income partially offset by the benefit of significant share repurchases, which lowered diluted share count to 29.2 million from 33.5 million a year ago. Adjusted EBITDA decreased to $91 million from $115 million in the prior year period. For the full year, revenues decreased 7% to $1.6 billion. Operating income decreased 58% to $44.7 million. Net income was $34.6 million, down from $86.3 million in a prior-year period. And adjusted EBITDA decreased to $136.9 million from $196.3 million in fiscal 2023. Full year earnings per diluted share were $1.14, down 54% from $2.49 in the prior-year period. Now, turning to our segment results. In Children's Book Publishing and Distribution, revenues for the fourth quarter decreased 9% to $266 million, driven by resizing of Book Clubs, lower revenue per fair in Book Fairs, and timing-related revenue in Scholastic Entertainment, partially offset by increased sales and trade. Revenues were down 8% to $955.2 million for the full fiscal year. Segment operating income was down $8.5 million from the prior-year period to $49.9 million, primarily reflecting the high operating leverage impact of lower revenue per fair. For the full fiscal year, operating income for the Children's Book segment decreased $21.5 million to $121.9 million. Book Fair revenues decreased 6% in the fourth quarter to $169.5 million and 2% for the full year to $541.6 million. Although fair count increased, revenue per fair was lower than prior year record levels, though well ahead of pre-pandemic levels on lower transaction volumes. Merchandising efforts resulted in higher transaction sizes, partially offsetting the spending headwinds that impacted participation, as discussed by Peter. Book Clubs' revenue in the fourth quarter of $14.4 million were down versus the prior-year period revenues of $26.2 million. Full year revenues of $62.7 million trailed the prior-year revenues of $117.8 million. As Book Clubs is resized to a smaller and more profitable business, efforts are underway to test various offerings to improve teacher engagement. Excluding Scholastic Entertainment revenues, which are also recorded in consolidated trade, channel trade revenue in the fourth quarter increased to $81.6 million compared to prior-year revenues of $79.3 million. Full year revenues were $349 million, in line with $348.1 million in the prior year. Despite a difficult retail market, the company's best-selling publishing continues to resonate with customers. Scholastic Entertainment revenues decreased due to the prior-year release of Eva the Owlet TV series. Beginning in fiscal 2025, Scholastic Entertainment will be combined with 9 Story Media Group in a new segment for the company. Excluding the impact from resizing Book Clubs and timing of Scholastic Entertainment release dates, the revenues in the segment decreased 3% in the fourth quarter and 1% for the full year. In Education, Q4 revenues were $135.7 million, down 17% from prior-year period, and for the full year, revenues were $351.2 million, down 9% when compared to 2023. As we discussed, the challenging market for supplemental literacy curriculum as well as increasing competition impacted sales for key product lines including classroom libraries and summer reading collections. This was partly offset by the growth in our sales to non-school state and community literacy partners, which we see as a strategic growth opportunity. Segment operating income decreased $19.4 million to $35.6 million in Q4 compared to the prior-year period. Full year segment operating income decreased to $21.9 million compared to $58.4 million in the prior-year period. Lower revenues coupled with continued investment in future product offerings resulted in lower operating margins. The International segment revenues of $70.8 million in the fourth quarter trailed prior-year period revenues of $73.9 million, partly reflecting $400,000 year-over-year impact of unfavorable foreign currency exchange. For the full year, International segment revenues of $273.6 million were down from the prior-year's revenue of $279.4 million. Year-over-year, the foreign exchange had a negative $1.1 million impact. The decrease in revenues was primarily due to lower sales in the Asia and Australia trade channels due to softness in the retail market. This was partially offset in the UK where the Company's popular global titles performed well. The segment operating income in the fourth quarter decreased to $1.8 million compared to $2.2 million in the prior period. For fiscal 2024, segment operating loss was $3.1 million compared to a loss of $3.6 million in the prior year. Unallocated overhead costs were $20.5 million in the fourth quarter, improving from $23.6 million in the prior period, reflecting lower employee-related costs. For the full year, unallocated overhead costs of $96 million were 4% higher when compared to the prior year of $91.9 million. The year-over-year increase was primarily related to inflationary impact on overhead costs. Now, turning to cash flow and the balance sheet. For the full year, net cash provided by operating activities was $154.6 million compared to $148.9 million in the prior year. Free cash flow increased to $73.4 million in fiscal 2024 compared to $60 million in the prior-year period. Improvements in cash flow were largely driven by lower inventory purchases, partially offset by lower customer remittance on decreased sales. At the end of the fiscal year, cash and cash equivalents, net of total debt, was $107.7 million, compared to $218.5 million at the end of the prior year. In fiscal 2024, the company continued executing its strategies to deploy capital, including returning excess cash to shareholders. Open market share repurchases combined with regular dividend returned over $181 million to shareholders in the fiscal year 2024, including nearly $20 million in the quarter. This represents a $21 million increase over fiscal 2023. In total, we repurchased over 3.9 million shares, which net of 500,000 shares issued related to stock compensation, represented 11% of company shares outstanding. Over the past two fiscal years, we repurchased 7.3 million shares, which net of 1.3 million shares issued for stock compensation, represented 18% of the company's shares outstanding. As we began fiscal 2025, the company borrowed approximately $200 million under its existing revolving credit facility to complete the 9 Story Media transaction and meet the seasonal summertime working capital needs of the organization. We are currently in the process of securing a more permanent debt facility to fund the acquisition. Based on budgeted growth investments and current forecast working capital needs, including inventory purchasing and lower expected earnings, our current outlook for free cash flow is $20 million to $30 million. We will continue to pursue opportunities to leverage our balance sheet and deploy capital by

Peter Warwick: Thank you, Haji. While market conditions are more challenging in quarter four as the cyclical trends that we've seen this fiscal year continued, we managed our businesses carefully and kept sight on Scholastic's substantial strengths and opportunity. Scholastic's strengths are deep

Jeffrey Mathews: Thank you, Peter. With that, we will open the call for questions. Operator?

Operator: Certainly. [Operator Instructions] And our first question for today comes from the line of Brendan McCarthy from Sidoti & Company. Your question, please?

Brendan McCarthy: Hi, good afternoon, everybody, and thanks for taking my questions. I wanted to start off looking at the Book Fairs business. Can you talk about your outlook for revenue per fair looking into fiscal '25? And do you expect to surpass the 90% of pre-pandemic fair levels looking out into the next fiscal year?

Peter Warwick: Yeah. It's Peter here. So, in terms of revenue per fair going forward, we're expecting modest growth in the forthcoming financial -- in the financial year 2025. We would be -- in terms of the revenue count, we expect that we're going to be probably less than we were pre-pandemic, because during the pre-pandemic period, we did do some book fairs that really didn't make very much money at all. And it's much better for us to focus on fairs which have the scale. I think what's important is that we put in place, as I described during the call, a number of big improvements, I think, which means that we will be able to make sure that there's less churn, to make sure that we can really focus on the fairs that do the best thing. And really, we focused on the addressable market, which means the addressable market is one where we can do well with the size of revenues that we hold.

Brendan McCarthy: Great. Thanks, Peter. I appreciate the color there. Wanted to turn to the Book Clubs business and the shrink-to-grow strategy. I'm wondering if you can provide some detail on how far along in that strategy Scholastic is, and maybe how much longer the company -- or I guess how much more work on that front does Scholastic have to do as it relates to fiscal '25?

Peter Warwick: Well, I think we've spent a lot of time working what's the best ways of handling that. And I think that we've worked hard and trialed a number of things that we'll be implementing from the fall of this year. I think we're optimistic the changes that we're making are going to be much more in tune with being able to grow back the business. But the key point about this, Brendan, is that we need -- this business needs to be profitable, and we have been able to make sure that the profitability year-over-year has not deteriorated. But what we want to be able to do is to modestly grow the business. And also, I think, most importantly, to really engage as much as possible teachers with us. I think that we're really committed in the period going forward to be as teacher-centric as we possibly can in the way that we manage that business.

Brendan McCarthy: Understood. And turning to the Education Solutions business, I know the broad transition to the science of reading has been a bit of a headwind on spending, but as it relates to Scholastic's capital allocation framework, I know acquisitions have always been a big part of that. Are you seeing any opportunity out there to maybe go out and acquire a company that is fully geared towards the science of reading?

Jeffrey Mathews: Hi, Brendan. This is Jeff Mathews here. I can address that on the corporate development...

Brendan McCarthy: Hey, Jeff.

Jeffrey Mathews: Hi. Hey, Brendan. From corporate development perspective. Look, as we've discussed, we see broad opportunities across both Education and our Children's Book segment, now adding the Entertainment segment. In the -- where we're seeing the most compelling opportunities are, we have some great products that weren't properly aligned. We are taking those kind of great bones and then making investments to align them with new pedagogies. The core value around independent reading is still there. That's mostly done organically. We continue to look at opportunities additionally in that segment, while we review opportunities on the children's content and media side as well.

Brendan McCarthy: Got it. Thanks, Jeff. And one more question for me looking out to fiscal '25 and as it relates to some of the guidance numbers that you provided. What factors have been causing material underperformance or outperformance relative to your expectations for fiscal '25?

Peter Warwick: Yeah, it's Peter here. There were two main factors. And they were -- the first factor was really that, during the final quarter, the number of kids who are actually buying books at our book fairs declined, because they didn't have any money from their parents to buy the books. And I think this is very much reflective of the economic environment of many sort of middle-class families whose kids go to public schools. That's certainly one fact. And that took us by surprise. The number of kids who are actually participating in the book fairs was lower than we had seen in the fall fairs. The other factor was the one that we've already mentioned really about in the education area that we expected that there will be more opportunities than actually turned out to be the case for supplemental reading materials. And that was because just the sheer volume of new literacy programs and new curricula and particularly those associated with the science of reading. We would see that as being a bit of a continuing headwind, if you like, during the forthcoming financial year, but it is cyclical. It's something which we'll be in a good position in school years '25-'26 to be able to provide schools with what they need in order to supplement the new materials they've got and to be able to -- they'll have much more time to be able to do that once teachers are properly trained and fully familiar with the new core curriculum materials that they're using.

Brendan McCarthy: Got it. Thank you, everybody. That's all for me.

Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Peter Warwick: Well, thank you very much. It's Peter here. And thank you to all of -- those of you who joined us this afternoon. Scholastic has got an important exciting year ahead. We look forward to engaging with our investors in the coming days and to providing further updates on our progress, including with our growth initiatives on our upcoming quarterly calls, including the next one in September. Goodbye.

Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.