Scholastic Corporation
Q2 2020 Earnings Call Transcript

Published: 20 Dec 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Scholastic reports Second Quarter 2020 results conference call. [Operator Instructions].I would now like to hand the conference to your speaker today, Gil Dickoff, Senior Vice President and Treasurer, Head of Investor Relations. Please go ahead, sir.

[Gil Dickoff:]

Thank you, Joel, and good afternoon, everyone. Welcome to Scholastic's Second Quarter 2020 Earnings Call. With me here today are Dick Robinson, our Chairman, President and Chief Executive Officer; and Ken Cleary, the company's Chief Financial Officer. We have posted an investor presentation on our IR website at investor.scholastic.com, which we encourage you to download if you have not already done so.I'd also 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 afternoon on a Form 8-K, which has also been posted to our Investor Relations website. We encourage you to review the disclaimers in our press release and investor presentation and to review the risk factors contained in our annual and quarterly reports filed with the SEC.And now I would like to turn the call over to Dick Robinson.

[Richard Robinson:]

Good afternoon, everyone, and thank you for joining our call during this busy holiday season. Following our second quarter results, we're in a good position to realize our fiscal goals as our high-quality children's content is selling well, and our investments in technologies and efficiencies are showing benefits. Book Fairs performed strongly in the quarter with revenue per fair and profitability both increasing, a rebound from a difficult finish last school year. Children's Books remains strong for the publishing industry overall, with some growth in the category offsetting a decline in adult books. Based on 2018 revenues, Scholastic remained in the top 10 of global book publishers as recently reported by Publishers Weekly. And uniquely, we're the only publisher in this influential group that is solely focused on Children's Books and education sales in the K-12 market.The demand for children's content goes beyond publishing and is actively sought in TV and film as well. The new Clifford the Big Red Dog animated series had its larger-than-life debut on Amazon Prime Video and PBS KIDS earlier this month and buzz continues to grow. Internationally, this appetite for engaging content also extends to English language learning materials. We are expanding our essential connection to schools and families globally while utilizing technology advancements to improve operating income.With that, second quarter revenue was $597.2 million, a decrease of 1% compared to $604.7 million in the second quarter of 2019. Operating income in the second quarter was $105.1 million, a 7% increase compared to $98.2 million 1 year ago. We are affirming our outlook for revenues for the 2020 fiscal year in the range of $1.67 billion to $1.70 billion. And in a few minutes, Ken Cleary will detail our quarterly operating results, EPS and adjusted EBITDA.But first, I'd like to share some highlights and updates with you. Our trade business is having exceptional year-over-year growth at 8% in revenues, even when compared to prior year results, which included the release of JK Rowling's Fantastic Beasts

[Kenneth Cleary:]

Thank you, Dick, and good afternoon. Today, I will refer to our adjusted results for the second quarter, excluding onetime items, unless otherwise indicated. As Dick mentioned, revenues were $597.2 million versus $604.7 million in the second quarter of last year. The 1% year-over-year decline was in the face of tough comps with last year's release of Fantastic Beasts

[Gil Dickoff:]

Thank you, Ken. Joel, if you would, we are now ready to open up the lines for questions.

[Operator:]

[Operator Instructions]. Our first question comes from Drew Crum with Stifel.

[Andrew Crum:]

So it seems like you were able to make some progress with Clubs and Fairs against some of the issues that impacted the business back in the spring. As we look at the second half of fiscal '20, you're up against easier sales comparisons. With that in mind, should we assume an acceleration for these businesses?And I guess a similar question as it relates to segment profitability. Given some of the initiatives you highlighted, could we see a similar year-on-year improvement in the second half for Children's Books?

[Richard Robinson:]

Good question. I think we are struggling a little bit with our revenues in Clubs. And while we've overcome those by some very good cost management, cost control, including mailing fewer kits, we do expect that revenue to continue to be a little bit below where it was last year. You're right that we did -- it will be going up against a reduced fourth quarter, so we should be able to pick up something there. Fares seem to be quite strong, and we expect that we will have continued improvement in Fairs.

[Andrew Crum:]

And Dick, which business, have you seen the acceptance of the price increases? Is that Fairs or Clubs or both?

[Richard Robinson:]

Yes, I don't think we're seeing any significant price resistance in either of those businesses. We have modestly increased prices to overcome the impact of rising paper costs and tariffs, but we certainly haven't had resistance from our customers. Bearing in mind that we have an extremely strong lineup of trade books and which are also offered on our Fairs and our Clubs. So we're -- with our very strong product offerings, people are really not calling attention to the pricing, they're just grabbing up these books as fast as they can.

[Andrew Crum:]

Okay. I apologize if I misspoke. I thought I said I -- pricing acceptance not resistance. So it sounds like customers have been accepting of the pricing increases?

[Richard Robinson:]

Yes, I would say so, yes.

[Andrew Crum:]

Got it. Okay, okay. And then a couple of questions on the trade business. I guess, first, a housekeeping item. The revenue from Clifford, the animated programming on Amazon Prime and PBS KIDS, was that picked up in the fiscal second quarter? Or will that flow in fiscal 3Q?

[Kenneth Cleary:]

Yes, it was picked up in the fiscal second quarter. So we delivered the product and it was available. PBS and Amazon opted to launch it in December.

[Andrew Crum:]

Got it. Okay. And I think the initial -- or the planned initial print run for The Ballad of Songbirds and Snakes is 2.5 million copies. How does that compare to some of the other Hunger Game books?

[Richard Robinson:]

Well, certainly, it's in keeping with the -- of initial printings. In fact, it's higher than the initial printings of some of the earlier books. So we're expecting very good market response, and we're getting tremendous support from all the channels that, that book has been top seller on Amazon since the day it was announced.

[Andrew Crum:]

Okay. And then shifting to the Dog Man series is kind of looking through some numbers. Our sense is, at least the initial print run for the book launch in August was smaller versus the most recent title. Can you talk about the relative performance for the book was launched in December relative to some of the others you've launched in the past couple of quarters here?

[Richard Robinson:]

Well, the book that we just launched in December was -- had a tremendous positive response, outselling the books that came out in August. So we see the Dog Man the taste -- the drive for Dog Man among our young customers is greater than ever.

[Andrew Crum:]

Got it. Okay. And then just lastly, on cash flow. Can you talk a little more about some of the unfavorable changes to working capital that you saw in the quarter? And then just any updates on priorities around uses of cash? I think it was maybe almost two years ago, you guys were planning to do and accelerate share buyback. That was eventually scrapped, but is that something that you would reconsider?

[Kenneth Cleary:]

So Drew, this is Ken. Yes. So in terms of working capital and really the payables, you have utilized cash to negotiate with vendors on terms regarding early pay discounts, so that has caused us to utilize some cash. And there's some just pure timing in when the payments were made this quarter. So we're looking at some of that.In terms of plans going forward, as we've mentioned in the past, we are always in conversation with our Board regarding that. And we don't have announced -- anything to announce at this point in time. But again, it's constantly being discussed. You did see us buy back a larger number of shares this quarter and really this year-to-date, opportunistically in the open market, and that's a good part of what you're seeing in terms of the total cash decline in the year.

[Operator:]

And I'm not showing any further questions at this time. I would now like to turn the call back over to Richard Robinson for closing remarks.

[Richard Robinson:]

Well, thank you all for your support of Scholastic, and we're happy about this quarter. We're looking forward to fulfilling our financial goals for this upcoming year as well as delighting our customers with the amazing books that we're putting in their hands. Happy holidays to all.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.