Scholastic Corporation
Q3 2020 Earnings Call Transcript

Published: 20 Mar 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Scholastic Report, Q3 Fiscal 2020 Results Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference call is being recorded. [Operator Instructions].I would now like to hand the conference over to your speaker today, Mr. Gil Dickoff, Senior Vice President, Treasurer and Head of Investor Relations. Sir, please go ahead.

[Gil Dickoff:]

Thank you very much Valerie, and good afternoon everyone, and thank you all for participating on today’s call.Welcome to Scholastic’s third 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 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 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.

[Dick Robinson:]

Good afternoon, everyone and thank you for joining our third quarter call.What a difference 20 days has made, especially in our outlook for the year. As we finished our strong third quarter just three weeks ago, our results showed continued strength in trade and Book Fairs, excellent growth in education, putting us ahead of our adjusted EBITDA targets for the third quarter and the nine months year-to-date.Now, millions of students in many states are at home due to sweeping school closures to help curtail the spread of coronavirus, with their parents and teachers’ doing their best to ensure that learning continues remotely.In the March to May period of any other year, our school-based Book Fairs and book clubs would be in full operation in 30,000 to 40,000 schools. This year, after a strong start in the first two weeks of March, just in the last few days, we have seen many of those schools either closed or preparing to close. This disruption is far-reaching and we are looking at a challenging situation in the final months of our FY ‘20 quarter, normally our most profitable period of the year.Though it is too early to know the magnitude, we will have less revenue in the quarter and therefore we need to withdraw our guidance. While we are finding new sources of revenue as schools turn to us to help them to provide better home learning and we continue to provide services to schools, we have simultaneously focused the company on reducing costs, preserving cash and ensuring the safety of our employees and customers throughout the U.S. and globally. I’ll share with you now a number of ways we are doing so.We are making hard, but necessary decisions to aggressively reduce costs throughout the organization. Our first action weeks ago with the safety of employees as a priority was to cease all non-essential business travel and functions. As the situation has evolved and intensified, we expanded efforts, including increased telecommuting. We also now have a high level rapid response team in place to take action implementing mitigation plans as possible.In this unprecedented moment, we have temporarily closed up to half of our Book Fair branches in the most highly affected areas of the country, as numerous scheduled school Book Fairs have been canceled and others postponed to later in the school year. Similarly, we’re reducing or eliminating scheduled promotions for our book clubs and anticipate some lost and postponed revenues in our education business, even while we are securing special orders from schools to provide books and online learning materials for kids at home or when they go to pick up meals at schools or centers which are opening to provide food.Additionally, staffing costs are being reduced via hiring freezes, furloughs and other labor-related actions and we’re curtailing all costs not directly connected to revenue production in the quarter. We are also preserving cash by deferring CapEx, reducing inventory purchases, delaying longer-term projects and more effectively managing inventory.The $40 million pre-tax non-cash write down of inventory in the third quarter will enable us to manage our book product more effectively to maximize focus on the newer titles. We also have a very strong balance sheet with $250 million in current cash, our unlevered New York Building, and an excellent revolver in place.This cash will enable us to manage through our current sales slowdown in the spring and through the summer months when schools are not in session, as well as into the next school year. We are therefore prepared for a period of slower sales, should that persist after this quarter. However, we believe that most schools will certainly open in the fall, if not sooner.Ken Cleary will give you more detail on actions we are taking to reduce costs, preserve liquidity, and communicate to customers and employees, while focusing on specific efforts to support our revenues in the quarter.Let me review some important actions we are taking as we address this evolving situation, by supporting parents and teachers with tools that will help them with their children in their lives and provide a sense of continuity whenever possible in the best way we know how.We’ve recently released a free digital hub of up to four weeks of daily instructional content to support learning at home when schools are closed. The positive response to Scholastic Learn at Home was immediate with administrators, teachers and especially parents actively utilizing these tools, some telling us that we have become a key part of their school’s home learning plan.A CNN story on this went viral sharing our resources beyond our own networks and according to a news tracking service, it was the most engaged article related to coronavirus from around the world in the English language in a 24-hour period a few days ago. In under a week, more than eight million visits and initial reports of 17 million page views are increasingly hourly as Scholastic through Scholastic Learn at Home is engaging with millions of families across America and the world, who are using our age appropriate resources for home learning.I want to acknowledge the dedication of our staff, who everyday are honored to have a role as partners with schools and families, but the value of the service can increase exponentially in times of crisis when there is an exceptional need. To meet this need, our employees and our experts, all work together with our customers to do what must be done and we showed our ability to help children learn at home in a time when they greatly miss the opportunity schools provide. We do think that this will open up the market for more home-learning in the near future.Changing the focus to our core business in the third quarter, I would like to provide a few highlights to acknowledge our success in the December to February period. Our trade books continue to be exceptionally well received. Publishers Weekly recently named Scholastic a Bestseller King as we led the children’s frontlist fiction chart in 2019 and 2020, our titles continued to top best-seller lists.Recording a 17% increase in revenues in the third quarter, best-sellers include the incomparable Dog Man

[Ken Cleary:]

Thank you, Dick and good afternoon. I would like to reiterate Dick’s thoughts in hoping that you and your families are all safe.Today, I will refer to our adjusted results for the third quarter excluding one-time items, unless otherwise indicated. The full scope of the impact of the coronavirus in terms of magnitude, timing and duration with the daily notices of school closings remains to be seen and we are not able to meaningfully project their impact on our important clubs, fairs and education businesses at this time.We have a cross-functional task force setup throughout the company to

[Gil Dickoff:]

Thank you, Ken, and Valerie, we are now ready to open up the lines for questions.

[Operator:]

Thank you. [Operator Instructions] We have a question from Drew Crum of Stifel. Your line is open.

[Drew Crum:]

Okay, thanks. Hey guys, good afternoon. First question maybe for Dick, just trying to frame or understand how clubs and fairs performs in fiscal 4Q. Obviously several variables here, it’s a very fluid situation, but is it unreasonable to think it could be comparable to fiscal 1Q from a sales perspective?

[Dick Robinson:]

Well, as you know, in the fourth quarter – are we speaking about the fourth quarter at this point?

[Drew Crum:]

Yeah, just sales for clubs and fairs in fiscal 4Q here, thinking about it relative to fiscal 1Q, which you know clubs and fairs aren’t really open for business.

[Dick Robinson:]

So I see, no - well, right now schools are closing every day, some are planning to reopen. We’ve scheduled fairs – we’ve rescheduled fairs for later in the year in case the schools reopen. I think it would be – I would think we would still do better in this quarter than we would do in summer in clubs and fairs, but clearly we’re going to be impacted by the school closings across the United States.

[Drew Crum:]

Understood, okay and then I was a little surprised that you’re sticking with the release date for Hunger Games. Just kind of walk us through that process and do you have the ability to move that release date if necessary?

[Dick Robinson:]

Yes, we do, yeah, and our trade group is really on top of this. They’re studying it every day, they are talking to booksellers. We probably have another month before we have to really decide that question, but they’re thinking every day ‘okay, what is going to happen, will the stores be open? What’s going to be the case?’ They are considering various options, but right now, they feel strongly that they want to hold to the date for now, but we do have the option of changing it a little bit later. Sorry, a good question that’s very much on our minds of course.

[Drew Crum:]

Okay, and I think as expected, you mentioned some weakness in Asia during fiscal 3Q. It seems that, at least through the press, the conditions are perhaps starting to improve there or at least stabilize. Are you seeing any uptick or any stabilization with your business in Asia?

[Dick Robinson:]

Yes.

[Drew Crum:]

In the fiscal 4Q?

[Dick Robinson:]

We’re getting right now – right now we are getting sales in there which we did not get from the January 20th to now, so – and we’re seeing people are shifting inventory. I mean some of it was just the fact that nobody was doing anything, right, everybody was confined to their quarters and there was no activity going on. That’s picking up now and we are forecasting some sales in April and May in China and Asia.

[Drew Crum:]

Okay, good. Have you guys had to access your credit facility in the fiscal 4Q? I think you guys have a $375 million limit on that facility if I’m not mistaken.

[Dick Robinson:]

I think it’s $375 million and normally we do access that facility in the summer and we probably will do so again this summer, but as we’ve tried to project for you Drew in this call, we’ve looked forward on the liquidity side and we are confident that we have resources that will bridge us well and through the summer and into early next year or beyond.

[Drew Crum:]

Okay, and then kind of on a related note, just in terms of uses of cash, I see the Board authorized another $50 million in share buybacks. Given where the stock is trading at currently, is there an increased appetite to do share repo or are you in more of a capital preservation mode through the…

[Dick Robinson:]

Yes, we are - our first order of business is preserving capital.

[Drew Crum:]

Got it.

[Dick Robinson:]

We’ve had two previous $50 million authorization in 2015 and 2018. The Board wanted to schedule another one at this time, but the whole point is it’s dry powder in the event that things change and we move from a capital preservation mode we will be able to have that available, but our first order of business is preserving liquidity and focusing on reducing our cash needs in the company, so that we can preserve our liquidity over the longer period.

[Drew Crum:]

Okay and then just one last one for me. Just looking ahead to fiscal ‘21, any sense that we could see some type of stimulus package for schools and education similar to what we saw back in 2009 which helped your education business?

[Dick Robinson:]

Yes, I think there probably will be, I mean I think schools are obviously – only 10% of the funding of schools comes from the federal government. The rest is divided pretty equally between states and local real estate taxes, but there obviously is going to be some disruption in the both state taxes and local taxes, probably sometime in the next 12 months. So I would expect that these bailout packages or the relief packages would focus on that need, because I think people understand that schools are our future, kids need education, they’re not getting it right now and this will become a major focus for our whole society I believe in the next 18 months. So I think your guess on that one, I would second guess you saying yes, there will be some form of stimulus from the federal government to states and local districts.

[Drew Crum:]

Okay, best of luck guys.

[Dick Robinson:]

Thank you so much Drew.

[Ken Cleary:]

Thanks Drew.

[Operator:]

Thank you. I’m showing no further questions at this time. I’d like to turn the conference back over to Mr. Robinson for any closing remarks.

[Dick Robinson:]

Well, thank you for listening to our third quarter call and of course our focus on the impact of school closings on Scholastic and how we’re overcoming the challenges and mitigating the revenue picture. We’re looking forward to talking with you again in July when we’re at our year-end.Meantime, thank you very much for joining us this afternoon. I trust that you, your colleagues and your families are all safe and well and will stay that way and thank you for the support you’ve shown to Scholastic in these difficult times, but we know that we’re going to prevail and we’ll get our society back together again and overcome this temporary problem. Thank you all, and good day!

[Operator:]

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