Scholastic Corporation
Q1 2018 Earnings Call Transcript

Published: 21 Sep 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Scholastic Reports Fiscal 2018 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I will now turn the conference over to Tammy Lemanowicz, Director of Treasury Operations. You may begin.

[Tammy Lemanowicz:]

Thank you and good morning, everyone. Welcome to Scholastic's First Quarter 2018 Earnings Call. Joining me here today are Dick Robinson, our Chairman, President and Chief Executive Officer; and Maureen O'Connell, our Executive Vice President, Chief Administrative Officer and CFO. We have posted an investor presentation on our IR website at investor.scholastic.com, which we encourage you to download if you have not done so already. I would like to point out that certain statements made today will be forward-looking. These forward-looking statements by their nature are uncertain and may differ materially from actual results. In addition, we will be discussing some non-GAAP financial measures, as defined in Regulation G and the reconciliations of those measures to the most directly comparable GAAP measures can be found in the Company's earnings release filed this morning on the Form 8-K, which have also been posted to our Investor Relations website. We encourage you to review the disclaimers in our press release and investor presentations and to review the risk factors contained on our annual and quarterly reports filed with the SEC. Now, I would like to turn the call over to Dick Robinson.

[Richard Robinson:]

Good morning and thank you for joining us today. As you know, schools are not operating in North America in the summer, so the first quarter is traditionally our lowest-revenue period of the year. Following very strong sales from the Harry Potter and the Cursed Child last year, we returned to a normalized summer this year, but nonetheless, we had excellent trade results. With the sensational performance of Dav Pilkey's Dog Man A Tale of Two Kitties, Scholastic has the top-selling book in North America for both children and adults in late August and early September. Dog Man has the makings of a breakthrough series which will grow revenues in the second quarter and throughout the year. In addition, Scholastic held four of the top six positions for children's series including Dog Man, Harry Potter, I Survived, and Pilkey's Captain Underpants, and the children's bestseller list included many other Scholastic titles such as Aaron Blabey's The Bad Guys, Allan Gratz's The Refugee, and Five Nights at Freddy's. Scholastic had the top two selling books in the UK for children

[Maureen O'Connell:]

Thank you, Dick, and good morning. This morning, I will refer to our adjusted results from continuing operations for the quarter excluding one-time items unless otherwise indicated. Revenues were $189.2 million versus $282.7 million in the first quarter last year, which benefited from the publication of Harry Potter and the Cursed Child Part 1 and 2, the bestselling book of 2016 across all genres. Operating loss was $93.5 million versus $62.5 million last year and the loss per share was $1.67 versus $1.15 last year. As you know, we typically report a loss in the first quarter. We had $8.3 million in non-recurring items in Q1 including $6.7 million in non-cash charges related to our headquarters renovation, as well as $1.6 million in restructuring severance charges. Turning to segment results. Children's book publishing and distribution segment revenues were $66.8 million. Trade results were unplanned. We had an anticipated a return to more normal levels following the extraordinary Harry Potter sales last year and we were very pleased with the performance of our non-Harry Potter core published this quarter. At the end of the quarter, we had four of the top six books in book stand's juvenile top 100 including Dog Man, A Tale of Two Kitties at number 1; I Survived the American Revolution, 1776; The Bad Guys and the Attack of the Zittens; and the new paperback edition of Harry Potter and the Cursed Child's Part 1 and 2. As children continue to embrace the new works of Dav Pilkey, we also saw a strong performance of both [indiscernible] and backlist titles in his Captain Underpants and Dog Man series in the quarter. And we expect continued strength in the back-to-school selling season and throughout the year. As Dick described, we are implementing our strategy to return to multi-grade book club offers and to grow revenue for fair in our most profitable segments by using deep analytics to better-match revenue opportunities to each school's demographics. Education segment revenues were $45 million compared to $55.2 million last year. The year-on-year sales decrease in education was related to the timing of orders. Our expectation for the year in education remain intact, which much of the sales weighed towards the fourth quarter than in-year. We are executing our strategy to grow revenues by extending our Pre-K to 6 balanced literacy programs for school district and capturing market share for our core literacy curriculum which includes guided and level-reading programs, classroom book collections and professional services. As Dick mentioned, we are strengthening our sales and marketing teams to bring in more professionals with experience in selling core literacy instructions - a number of whom have already been hired. In addition, we continue to expect year-over-year growth in core curriculum enhance by a number of new products including Scholastic EDGE, an expansion of our guided reading the lines that provide accessible compelling age-appropriate level fiction and non-fiction titles of various genres and text types. We also expect strong performance from version four [ph], our summer lit camps which grew very quickly in 2017 and a new writing grammar and usage programs scheduled for release later this year. International segment revenues were $77.4 million versus $89.7 million last year with the decrease largely driven by last year's Harry Potter sales in Canada and export. We are confident in our expectation for the year driven by strong trade including two popular September releases in the UK - The Ugly Five by Julia Donaldson which is currently the bestselling hardcover picture book in the UK, and Beyond the Sky

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Drew Crum of Stifel. Your line is now open.

[Drew Crum:]

Okay, thanks. Good morning, everyone. Maureen, just a follow up on your last comment on the hurricanes, are you saying that it's in your guidance or that’s the potential impact, or you could potentially get that back later in the fiscal year? I just want to understand how you're thinking about that $6 million impact you referenced .

[Maureen O’Connell:]

Right now we are trying to reschedule fairs, but in many of the Texas location, on Florida locations, the schools are still not open. At this point, that is our best estimate. We're trying to mitigate that as best as we can, but I would say that's a fair estimate at the moment.

[Drew Crum:]

Got it. Okay. And then on the education business, any way you can quantify the impact of this timing issue? Would you expect to pick some of that up in the fiscal second quarter? I think you made a comment that you expect to get some of it in the fiscal fourth quarter if I understood correctly. If that's accurate, are we seeing an ongoing shift to where this business is more back-end weighted more fiscal fourth quarter or is this year just unique and different and we would expect a return to more normalized performance going forward?

[Maureen O’Connell:]

Our business is fourth quarter-loaded. It is much greater in the month of May than any other month during the year and we continually make improvements in operations so that we can deliver that big peak in the month of May. So we do expect this year most of the growth will come in the fourth quarter.

[Drew Crum:]

Okay. One last question and I'll jump back into the queue. As it relates to the Dav Pilkey title, it released very late in the quarter, just to help us understand the order of magnitude, the contribution that you get in the second quarter relative to the first quarter?

[Richard Robinson:]

Well, the effect of Dog Man, the new title, the third one in the series, it was a little bit – at the end as you pointed out, it was shipped on August 29th and we recorded the initial trade sales distribution at that time. The popularity of that title was so strong and the ramp up for this series was so great that by far the largest part of this is going to be in the second quarter.

[Drew Crum:]

Got it.

[Richard Robinson:]

And the subsequent quarter. Typically as we get into January, Drew when the fourth one comes out, this series is having a terrific impact on children and we expect it to do very well for us in this fiscal year.

[Drew Crum:]

Great. Okay. Very good. Thanks, guys.

[Maureen O’Connell:]

Thank you.

[Operator:]

Thank you. And I'm showing no further questions at this time. I'd like to hand the call back over to Dick Robinson for any closing remarks.

[Richard Robinson:]

Thank you, all, for joining us. For those who are not able to be here because of the religious holiday, we will welcome you back at our next presentation in December. Thank you for your support to Scholastic.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone, have a great day.