SCHL - NASDAQ

Good day, and thank you for standing by, and welcome to the Scholastic reports Fourth Quarter and Fiscal Year 2025 Results. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeffrey Mathews. Executive Vice President and Chief Growth Officer. Please go ahead.

Hello, and welcome, everyone, to Scholastic's Fiscal 2025 Fourth Quarter Earnings Call. Today on the call, I'm 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'll be discussing some non-GAAP financial measures as defined in Regulation G. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the company's earnings release and accompanying financial tables filed this afternoon on a 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 e-mail address, [email protected]. And now I'd like to turn the call over to Peter Warwick to begin this afternoon's presentation.

Thank you, Jeff, and good afternoon, everyone. Thank you for joining us. Scholastic delivered strong financial and strategic results in the fourth quarter of fiscal 2025. Adjusted EBITDA grew robustly in line with our original guidance range. Effective cost controls and a sustained focus on operational efficiency allowed us to overcome continued pressure on consumer and school spending while positioning us for earnings growth in fiscal 2026. Revenue growth was also in line with expectations driven by a strong performance in our Children's Book Publishing and Distribution segment and the strategic acquisition of 9 Story Media Group early in the financial year. This strong finish reflects the collective efforts of our teams. Amid a challenging macroeconomic environment, we made meaningful progress on the priorities we set at the start of the year, strengthening our core businesses, unlocking value from our iconic IP and positioning Scholastic for long-term profitable growth. We continue to return capital to shareholders, investing over $35 million in dividends and share repurchases in the fourth quarter for a total of $92 million in fiscal 2025 while advancing efforts to unlock value from our significant real estate assets. At the same time, we began executing on a set of significant organizational changes, work that's continued into quarter 1 that we believe will strengthen leadership, enhance growth and improve efficiencies. These actions set the stage for continued earnings growth and increased shareholder value in fiscal 2026 while deepening Scholastic's impact in schools, homes and communities around the world. Let me now walk through our quarter 4 and fiscal 2025 segment performance. Children's Book Publishing and Distribution segment, revenue and profit increased last quarter, driven by strength across both publishing and book fairs. In Trade Publishing, we launched Sunrise on the Reaping, the newest installment in Suzanne Collins' Hunger Games series, which became the biggest publishing event yet this year. Released simultaneously in the U.S., Canada, U.K., Australia and New

Thank you, Peter, and good afternoon, everyone. Before discussing our outlook, let me begin with our consolidated financial results for the quarter and full fiscal year. As usual, I will refer to our adjusted results, excluding onetime items. Please refer to our press release tables and SEC filings for a complete discussion of onetime items and a reconciliation with related GAAP figures. Revenue increased 7% to $508.3 million in the fourth quarter and was up 2% to $1,625.5 million for the fiscal year. Adjusted operating income decreased to $63.4 million in the fourth quarter from $66.8 million in the prior year period. For the full year, adjusted operating income was $35.8 million compared to $44.7 million. Lower adjusted operating income in both periods versus a year ago was primarily caused by incremental amortization expenses on intangible assets related to the acquisition of 9 Story in the first quarter of fiscal 2025. Adjusted EBITDA increased 1% to $91.2 million in the fourth quarter and was up 6% to $145.4 million for the fiscal year. Turning to our segment results. In Children's Book Publishing and Distribution, revenue for the fourth quarter increased 9% to $288.2 million driven by strong performance in book fairs and our Trade Publishing division following the publication of Sunrise on the Reaping. For the full fiscal year, revenue increased 1% to $963.9 million, segment adjusted operating income was $58.2 million, up $7.8 million from the prior year period, reflecting higher revenue in our consolidated trade and School Reading Events divisions. For the full fiscal year, adjusted operating income for the Children's Book segment increased $7.5 million to $131.3 million. Within school reading events, book fair revenue increased 5% in the fourth quarter to $177.8 million and 1% for the full year to $548.3 million. These results benefited from higher fair count, partially offset by modestly lower revenue per fair. Book Clubs revenue was $13.1 million in the fourth quarter, a decrease of 9% as a result of lower orders in the quarter. Full year revenue increased 2% to $64.2 million, reflecting higher revenue per sponsor and an increase in orders during the year. As Peter noted, club's contribution margin improved in both periods. In our Trade Publishing division, revenue in the fourth quarter increased 19% to $97.3 million on increased sales driven by the latest Hunger Games title, Sunrise on the Reaping. Full year revenue increased 1% to $351.4 million, primarily due to increased sales for new titles in our global best-selling franchises Hunger Games and Dog Man, which more than offset the impact of consumer spending headwinds on backlist sales. In the Education segment, fourth quarter revenue was $125.7 million, down 7% from the prior year period and full year revenue was $309.8 million, down 12% compared to prior year period. Continuing headwinds in the supplemental curriculum market was seen in lower spending by schools and districts. This was partially offset by growth in sales to non-school, state and community literacy partners. Segment adjusted operating income was $31.3 million in the fourth quarter compared to $35.6 million in the prior year period. Full year adjusted operating income for the segment was $6.9 million compared to $21.9 million in the prior year period. Lower revenue impacted operating margins in both periods. In the Entertainment segment, fourth quarter revenue was $14.8 million compared to $0.6 million in the prior year period and full year revenue was $61 million compared to $1.9 million in the prior year period. Gains in both periods reflected the contribution of the 9 Story Media Group, which the company acquired in June of 2024. The segment adjusted operating loss was $2.1 million in the fourth quarter compared to a loss of $0.5 million a year ago. Segment adjusted operating loss was $7.2 million for the full year compared to a loss of $1.9 million a year ago. The fourth quarter includes $2.7 million and the full year includes $9.2 million of incremental amortization expense on intangible assets related to the acquisition. On a pro forma basis, 9 Story revenue was down relative to the prior year period, primarily reflecting lower production across the industry, which has begun to accelerate, as I'll discuss later on. In the International segment, revenue increased 8% to $76.8 million in the fourth quarter. For the full year, International segment revenue increased 2% to $279.6 million. Year-over-year, foreign exchange had an unfavorable impact of $600,000 in the fourth quarter and $1.6 million in the full year fiscal 2025. Revenue growth was driven primarily by strong trade channel performance across all major markets. Segment adjusted operating income improved to $6.1 million in the fourth quarter compared to $1.8 million in the prior year period. For fiscal 2025, segment adjusted operating income was $2.9 million compared to a loss of $3.1 million in the prior year, reflecting higher revenue and operational efficiencies. Adjusted unallocated overhead costs were $30.1 million in the fourth quarter, increasing from $20.5 million in the prior year period, reflecting the timing of employee-related expenses. For the full year, adjusted unallocated overhead costs of $98.1 million increased slightly from $96 million last year, primarily related to higher employee-related expenses. Now turning to cash flow and the balance sheet. For the full year, net cash provided by operating activities was $124.2 million compared to $154.6 million in the prior year period. This decrease was primarily driven by lower cash earnings and increased inventory purchases. Free cash flow was $29.2 million in fiscal 2025 compared to $73.4 million in the prior year period. This primarily reflects lower cash flow from operations and repayment of production loans, driven by working capital timing in our entertainment division. At year- end, the company had borrowings of $250 million under its unsecured revolving credit facility. At the end of fiscal 2025, net debt was $136.6 million compared to a net cash position of $107.7 million at the end of fiscal 2024, primarily reflecting cash used to fund the 9 Story Media Group acquisition and cash returned to shareholders through dividends and share repurchases. During the year, we continued to return excess cash to shareholders. through our regular dividend and open market share repurchases, consistent with our capital allocation priorities. We returned over $92 million to shareholders in fiscal 2025, including over $35 million in the fourth quarter. In total, we repurchased nearly 3.5 million shares, which net of approximately 300,000 shares issued related to stock compensation, represented 11% of the company's shares outstanding. Our current share buyback authorization is $70 million. The company expects to continue purchasing shares from time to time as conditions allow on the open market or in negotiated private transactions for the foreseeable future. As we discussed last quarter, we believe our strong balance sheet provides significant flexibility. We have modest debt. We also have nonoperating assets that could be monetized for significant valuations when appropriate and market conditions allow, which could be deployed in accordance with our capital allocation priorities, including debt reduction. Over the past 6 months, as the commercial real estate market has improved, we've begun a process to explore potential monetization opportunities to unlock value from these substantial real estate assets. In June, we retained Newmark Group to identify investment partners for a potential sale leaseback transaction of all or part of Scholastic's office and retail real estate in New York City. Earlier this month, we also retained Newmark for a similar process with respect to our distribution center in Jefferson City, Missouri. As we move forward with these processes over the next 90 to 120 days, we are optimistic about the significant opportunity for value accretion, although there can be no guarantee that these processes will result in transactions within the coming months. Regardless, we remain committed to maximizing value of our real estate assets for the benefit of our shareholders. I look forward to providing further updates on this process as needed and on our next earnings call. Turning to our fiscal 2026 outlook. Scholastic is targeting solid earnings growth in fiscal 2026 with adjusted EBITDA of $160 million to $170 million. An increase of approximately $20 million over fiscal 2025 at the midpoint, mainly driven by disciplined cost management and restructuring initiatives. Based on the current tariff policy, our guidance includes approximately $10 million of expected incremental tariff expense and our cost of product. We expect higher tariffs to primarily impact the cost of nonbook and novelty items sold in our children's book business, which we currently source from countries with tariff increases, including China. Overall, we remain confident that our global scale, highly optimized supply chain and pricing power will help mitigate against any further material tariff-related exposure this year. Fiscal 2026 revenue is expected to grow 2% to 4%, reflecting strength in our core businesses, partially offset by continuing headwinds on consumer spending. Our outlook for free cash flow in fiscal 2026 is $30 million to $40 million, reflecting higher expected earnings, improved working capital and lower cash tax, partially offset by higher capital investments and other accrued expenses. Over the last several months, we have taken strategic steps to position our organization to operate more efficiently, aligning spending with our long-term strategy and permanently lowering our cost structure by reducing nonrevenue-generating and consulting expenses. We expect the restructuring actions across all segments to further benefit this fiscal year's results. Each business segment has contributed significantly to our sustained cost management and execution strategies. In fiscal 2025, these actions resulted in cost savings of approximately $25 million on an annualized basis, of which $15 million was realized during the year with $10 million of additional benefit expected in fiscal 2026. In addition, we expect an incremental $15 million to $20 million in cost savings, plus actions to improve gross profit, including through pricing, to contribute to higher profitability. Together, we expect these actions to more than offset the impact of current tariffs and inflation. Turning to our segment outlook. In the Children's Book and Distribution segment, we expect revenue growth and school reading events. Given its high operating leverage, anticipated revenue growth will have a positive impact on operating margins and profitability. Revenue in Trade Publishing is expected to be solid. Given the strength of the publishing calendar and approximately level with fiscal 2025, which benefited from 2 global hits. In addition, we expect the strategic integration and reorganization of children's book group to drive long-term revenue growth and increase profitability in fiscal 2026 and beyond through operational efficiencies and alignment of our editorial, merchandising and distribution teams. In the Entertainment segment, we expect to benefit from recent production and development of green light momentum, as Peter discussed. These productions will contribute to revenue growth primarily in the second half of this fiscal year with the majority of the benefit in fiscal 2027, reflecting revenue recognition typical for developments and productions. We anticipate adjusted EBITDA in line with prior year. In the Education segment, we are targeting revenue approximately in line with prior year. As Peter noted, following our strategic reorganization under new leadership, we are repositioning this business for long-term growth. As we execute on several key initiatives, we anticipate improved profitability in fiscal 2026 and beyond. In the International segment, we anticipate a modest decrease in revenue and profits. Following the strong performance in trade channels in fiscal 2025. Unallocated overhead costs are expected to decrease next year as we continue to improve efficiencies and benefit from cost reductions in our overhead functions, as I discussed earlier. As a reminder, Scholastic's results are highly seasonal. We generally record an operating loss in our first and third quarters with profitable second and fourth quarters. In the fiscal first quarter, we expect a seasonal loss approximately in line with the prior year period. Thank you for your time today. And I will now hand the call back to Peter for his final remarks.

Thank you, Haji. We are very pleased with the meaningful progress our team has made over the past 6 months, executing strongly, reducing significant costs, strengthening our organization and organizational structures, returning capital to shareholders and taking steps to optimize our capital structure and balance sheet. Thanks to this work, which continues, we're well positioned for profitable strategic growth in fiscal 2026. We continue to focus on our long-term opportunity as a global leader in the children's publishing, media and education space where Scholastics brand, IP and distribution channels present compelling growth opportunities to meet kids, families and schools essential needs to educate, inform and engage kids. I want to thank our employees, authors, illustrators and creators for their tremendous dedication and hard work and our shareholders for their continued support. We all look forward to continuing our momentum to create value and impact in the year ahead. Thank you very much. And now let me turn the call over to Jeff.

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

[Operator Instructions] Our first question will come from the line of Brendan McCarthy from Sidoti.

I wanted to start off on the cost side. I know you pointed to potential cost savings in fiscal '26. Curious as to what are the sources of those cost savings going forward?

So a majority of the cost actions are coming out of non -- more discretionary functions, things that we can cut back on as we're looking to be more frugal as an organization. Things that are not really revenue-driven. Those are the major areas that we're looking at from our perspective right now.

Got it. So you expect that will flow through to overhead ultimately stepping down in fiscal 2016 compared to fiscal '25?

Exactly. So we're getting the full year impact of the stuff right in FY '26. So the FY '25 stuff as we showed in -- we talked about in the script, we're experiencing -- we saw $15 million of that in FY '25, and we're going to see another $10 million in FY '26.

Great. Great. Got it. And turning to the Education Solutions business. I think you mentioned you're looking for maybe flat revenue there in fiscal '26. Curious as to what are the kind of driving factors behind that expectation? And is that different from what you had expected for fiscal '26 a couple of quarters ago?

Yes. It's Peter here. Yes, we -- when we actually look at our overall education business, we do have parts which actually have been going well. And therefore, a lot of the state-sponsored work that we do, for example, and some of the supported work that we get, I mean, are going well. So we could -- we would certainly see those increasing. I mean, the market continues to be cyclically difficult, especially with districts and schools but we do expect the situation to progressively improve just because of the normal cyclicality of the education business. So we think that we'll be in a good position to at least have flat revenues in what we do in education. But allied to that is the fact that we see growth in the more profitable parts of the business that we are conducting and also, we've taken some major steps to make sure that we are operating as efficiently as possible and repositioning the business for medium- to longer-term growth.

Great. I appreciate the color there. And when you look at how states or school districts are approaching literacy instruction, are you still seeing a pretty large shift towards the science-based reading approach? And do you ultimately still anticipate to launch products geared towards the science of reading in fiscal '26?

Yes. I mean, science of reading is certainly continuing its sort of growth and the importance across states. We've already got some materials which we have, which are ready for it, the knowledge library, for example, is strongly aligned with the signs of reading. And has had very -- we expect it to have a very positive feedback. So that's all looking good. I think the other thing, which is happening around literacy though, which is worth saying, is this increasing realization that having books in the home is 1 of the really key things for helping kids. And of course, that's where our state sponsored and some of our other activities are based. So I think what we're doing is very, very much in line with the way in which literacy is being tackled in all states.

Understood there. And on the state-sponsored programs, what's the pipeline look like there? I know that there's a handful of states in the Southeast that you're -- that you've partnered -- have partnership with, just wondering what the pipeline looks there for additional state partnerships?

No we have -- the pipeline, we have multiple conversations which are going on with state governments. And I just had a full, as it were, a review of this actually this week. I'm pretty optimistic that things are going well, both in terms of being able to expand what we do in those states, which are, generally speaking, are in the Southeast. We also have to acknowledge that the sales cycles are quite long. And we've been in discussions for quite some time. But I think there's a growing realization that this literacy is a problem that really needs to be tackled. And people understand that that's what parents and electors and everybody else wants. And I think that we're seeing that there's very, very good progress being made in a number of states now. And it's also that we're very uniquely positioned here. Our brand, our books, our distribution channels, we can really offer a tremendous service here, and that's recognized by the way, we've been able to build our business here over the last 4 years.

Understood. I appreciate the detail there, Peter. And I wanted to talk about the trade channel combination with the school channels. I guess are you seeing or hearing any initial feedback from customers just related to that combination or maybe any internal feedback on kind of how that -- or I guess, what impact that combination has made so far?

Well, the main impact at the moment is really internal rather than external. And it's been tremendous, actually. I mean I've been super pleased with the way in which people feel that this creates an environment whereby both the publishing and the distribution channels can work more effectively together going forward. And there is tremendous excitement about that internally. And we're going to see that externally as well. I'm sure. I mean we have the opportunity to be able to link what we're selling in schools through the book fairs and book club channels in a much more integrated way than we've done before with the Trade Publishing. And we'll see that because they're working on short- term gains which we can leverage and benefit from in FY '26, particularly in book fairs in the spring, for example, and we have this secret sauce, which is that we are both a publisher and a distributor. And that gives us a lot of knowledge. It gives us a lot of leverage, and it's very, very powerful. And I think that bringing this together has been something that I think is really going to make a difference. And it's even going to make a difference in the short term. It's going to have a much bigger impact, I think, during the -- once you go forward into the next 2 financial years beyond FY '26.

Great. That makes sense. One more question for me just on the entertainment business. It looks like revenues stepped down there in fiscal '25, but you're looking for the return to revenue growth in fiscal '26. I guess from a profitability standpoint, what's your expectation there for the entertainment business for fiscal '26?

Brendan, this is Haji again. We expect it to be slightly lower, but in line with this year. We have the headwinds, of course, inflation that is impacting that organization. but we're guiding to see basically flat profitability.

Understood. And is that just -- just to provide more detail there. Is that just inflationary impacts on the production side, on the cost side? Or are there other cost trends in play?

Yes, so from an entertainment perspective, we're actually seeing the production activity pick up a little bit with more green lights coming in, but that's usually going to -- like I said in my talk earlier, it's going to mainly impact us in FY '27. We're going to see some stuff on the end of FY '26, but mainly in FY '27 on the revenue side.

Got it. Got it. And Haji, I know you mentioned the real estate assets and the potential monetization there. Are you able to provide any color on the timing of a potential sale leaseback transaction and looking at -- I know you mentioned potentially buying back shares or paying down debt. But are you confident in buying back shares at this level? Or how do you -- how can we kind of think about the capital allocation priorities?

Well, first of all, I'll talk about the timing. The team is working really hard right now to get things out. Newmark has been a really good partner with us so far. And we're hoping, as I mentioned earlier, to have something within the next 90 to 120 days. In terms of our capital allocation priorities, we're going to remain consistent with returning capital to shareholders as possible when we can. But we did a lot of share repurchasing in the fourth quarter which is shown in our numbers already. So we were ahead of the game because the share price was a good opportunity for us to really buy some stuff back.

And this concludes our Q&A. I will now pass the call back to management for any closing remarks.

Yes. No, I'm excited -- it's Peter here. I'm excited about the new fiscal year ahead. I mean, I think we're in good momentum. We've got a positive outlook, and we continue to focus on creating shareholder value and impact, that's so important to us. And we look forward to providing more updates including on our first quarter call in a couple of months' time. So thank you to all who joined us this afternoon live or if you're listening to the recorded call later, we very much appreciate your support. So thank you all very much, and goodbye.