Good day, ladies and gentlemen and thank you for your patience. You have joined the Scholastic Reports Q4 Fiscal 2019 Results and Fiscal 2020 Outlook. [Operator Instructions] I would now like to turn the call over to your host, Senior Vice President, Treasurer, and Head of Investor Relations, Gil Dickoff. Sir, you may begin..

Thank you very much and good afternoon everyone. Welcome to Scholastic’s fourth quarter 2019 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 morning on the Form 8-K, which has also been posted to our Investor Relations website.

We encourage you to review the disclaimers in the 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..

Splashy Weird from Australia.

We anticipate strong revenue and profit growth in our Asia business as we build upon our already strong brand in response to our English language learning programs targeted to meet the needs of a growing middle class of consumers whether the students we reach, we aim to reach are in school, at home or online, Scholastic can offer engaging and effective tools that are proven to work in building English language proficiency.

There is great enthusiasm for the existing digital education products, especially LitPro and Scholastic F.I.R.S.T. are foundational English language learning program for children 4 to 8.

These programs are sold to families through our local Internet sales partners or directly through our Scholastic early English franchises, Building on our global resources of both print and digital content, we will adapt the local market needs where necessary and can reach these consumers throughout Asia.

In conclusion for my remarks, our 2020 focus will be on improving operating income and cost management while developing Scholastic’s leading market position globally. With that, I will turn the call over to Ken Cleary, CFO..

The Crimes of Grindelwald, along with strong graphics and paperback series and the viral sensation The Wonky Donkey.

Operating income for the year was $82.9 million, a decrease of $23.1 million or 23% as compared to the prior year, driven by lower sales and higher costs in Book Clubs, as we rolled out new sales tax collection program and differentiated online and paper based offers and higher costs in Book Fairs associated with expanded services and increased promotional activity as well as, the accounting impact of ASC 606.

In the fourth quarter, the children’s book segment sales were down $27.3 million versus the fourth quarter of 2018, with higher trade sales more than offset by a decline in club revenues related to the new sales tax collection program, as well as the impact of ASC 606, which caused $24 million in fair revenues to be deferred on the balance sheet.

Segment operating income in the fourth quarter declined $32.7 million, as compared to the prior year. $16.7 million resulting from the impact of ASC 606 and the remainder due to the lower sales volumes in clubs and higher marketing promotion spend in fairs in response to competitive pressures.

In addition to higher depreciation expenses associated with the new Book Fairs point-of-sale system now in service. The deferred revenues and profits associated with Scholastic Dollars will be recognized largely in the first half of fiscal year 2020, with an equivalent amount of revenue deferred in the second half of fiscal year 2020.

Accordingly, in fiscal 2020, on a full year basis, we expect recognized revenues and profits associated with Scholastic Dollars to be flat year-over-year.

And education, for the fiscal year, segment revenue was $297.4 million, up 3% compared to $288.6 million a year ago, with higher sales were instructional products and programs, including Guided Reading, Leveled Bookroom and LitCamp are summer reading program.

Segment operating income was $30.6 million in fiscal 2019, down $3.3 million from the prior fiscal year, with higher costs in the current year with the launch of Scholastic Literacy and the higher amortization new digital subscription products now in the market.

Education segment revenues in the fourth quarter was $117.7 million, slightly ahead of last year’s $117.2 million in recorded revenues. Segment operating income for the quarter was $36.9 million a $5.7 million drop versus the $42.6 million recorded in the fourth quarter of fiscal 2018.

In the international, segment revenues for the fiscal year fell $3.4 million or 1% to $366.2 million, compared to $369.6 million in the prior year. Higher trade publishing results in all of our major markets and increased education sales in the UK, Australia and Asia were more than offset by $15.4 million adverse impact from foreign exchange.

In constant currency terms, revenues were up 3% year-over-year. Segment operating income fell $3.2 million was 17% to $15.3 million versus last year, mainly as a result of higher operating expenses on lower revenues in Canadian Book Clubs and education, in addition to a $1.1 million hit from foreign exchange.

Sales in the fourth quarter rose $1.3 million or 1% to $94.3 million versus the prior year period, driven by strong trade channels in all international markets. International finished on an upbeat note with operating income in the fourth quarter of 15% compared to the fourth quarter of 2018, largely driven by trade.

Unallocated corporate overhead expense for the fiscal year was $87.8 million, slightly higher than $83.4 million last year.

The increase was primarily due to increased costs linked to the ongoing roll out of a new cloud-based ERP system as we expected, as well as higher depreciation expense related to our recently completed headquarters renovation and new technology platforms now in service.

Net cash provided by operating activities was $116.4 million compared to $141.5 million last year, and free cash flow as defined by us was a net use of $12.4 million versus a net use of $16.1 million last year. Capital expenditures, the main driver of our free cash used in the year was $95 million versus $121.5 million in fiscal 2018.

As we discussed last quarter, we utilized our strong balance sheet to optimize our procurement opportunities throughout the year, which helped to address industry wide capacity constraints and longer lead times with our strategic printers – paper suppliers.

The higher inventory levels and quicker payment terms taking together had significant impact on our working capital utilization and resulting free cash used for the year. We distributed $21.1 million in dividends and repurchased $8.5 million of our common stock during the year.

We continued our open markets stock buyback program into the new fiscal year with an incremental $8.7 million in repurchases. After giving effect to these additional purchases of stock in the new fiscal year, we have $44.2 million remaining under our current authorization. Under this program which will continue to be funded with available cash.

We may repurchase our shares from time to time as conditions allow. At fiscal year end, our net cash position was $326.8 million, down from $384 million a year ago.

The lower net cash balance is primarily due to planned capital spending programs on technology investments aligned with our Scholastic 2020 long-term margin improvement plan, as well as the completion of our headquarters renovation.

We also made $18.5 million in acquisitions and other investments, including our purchase of the majority interest and Make Believe Ideas Limited in UK and a 4.62% investment PictureStory LLC of financing and production company working with top distributors, and content partners to make film, television and digital programming for the youth market.

Now briefly on cost reduction plans.

In the past fiscal year, we realized $10.8 million in sustainable savings from Scholastic 2020 plan initiatives and our recent investment in data and technology, although much of these savings were offset by wage inflation and distribution, transportation and some higher costs incurred with our paper and printing vendors due to capacity constraints.

As we talked about previously, our Scholastic 2020 deployment is championed by an integrated cross disciplinary team from operations, logistics, manufacturing, technology, data and analytics, and finance underlying proactive efforts to drive down spend.

In fiscal 2020, we are targeting an even higher net bottom line benefit from these efforts and we’ll report on these initiatives and result in savings throughout the fiscal year. Now to address our outlook and guidance ranges for fiscal year 2020.

We are projecting fiscal year 2020 revenues to be in the range of $1.67 billion to $1.7 billion, up from $1.65 billion in fiscal 2019 and we are seeing an adjusted EBITDA target of $140 million to $160 million, up from $121.3 million in fiscal 2019.

We are no longer providing annual EPS guidance as we believe that adjusted EBITDA is a more meaningful measure of operating profitability and returns on capital investments made without distortion from unusual items and share repurchases.

Revenue growth will be led by trade publishing, including new releases in our important Hunger Games, Captain Underpants, Dog Man, Wings of Fire, and I Survived franchises, as well as growth in licensing. The new Hunger Games novel set to release in May 2020 will have the positive impact on sales and operating profits in the fourth fiscal quarter.

However, there will be meaningful cash outlays may throughout the fiscal year for author advances, publishing costs, marketing and promotion. Trade sales will also see a boost from the recent majority acquisition from Make Believe Ideas.

Clubs and Fairs will continue to be important channels to engage students and their parents and sure kids have accessed to the best books at affordable prices. We expect the marketplace to remain competitive, as discussed earlier, we’re executing a plan to reinforce our market leadership.

We expect lower clubs and fairs revenues in fiscal 2020 as we work to transition more customers to our clubs online ordering platform and away from paper-based order forms and simplify our book fairs for organizing volunteers along with more company provide support services, including setup and fair replenishment.

We are working diligently to streamline our cost structure and clubs and develop more focused marketing and promotions and fairs and should see improvement in operating results in the new fiscal year. As Dick mentioned, we also expect targeted growth in education in both our supplemental business and our newly available core offering.

We believe that Scholastic Literacy contained a number of key features that differentiates it from other available products that will lead to initial market penetration in fiscal 2020. In international, we expect to accelerate revenue growth in trade and education, particularly in China through both Internet stores in our own channels.

We expect to achieve greater efficiencies as we leverage our new Scholastic Asia shared services operation. International also benefit from the upcoming Hunger Games novel. We are publishing rights in Canada, UK, Australia and India as well as audio worldwide rights.

In fiscal 2020, we plan to one, drive additional sustainable operational efficiencies throughout our supply chain. Two, target cost savings to help alleviate inflationary pressures and labor fuel postage, as well as an impact from tariffs. And three, implement selective pricing increases.

As we move further into our Scholastic 2020 transformation plan, we will achieve greater benefits from the new technology platforms and data analytics programs, including salesforce.com, integrated analytics, ERP deployment, POS and eWallet,e-commerce enablement and infrastructure upgrades we are placed in service, although we will continue to see higher levels of depreciation and amortization from these capital investments.

We also expect to receive higher rental income as we begin to lease out available space here in Soho, as a result of the investments we’ve made to create new high value retail and multi-purpose mixed use space over the past two years.

Our fiscal year 2020 outlook includes capital expenditures of $75 million to $85 million, compared to $95 million in fiscal 2019. Pre-publication production spend is projected to trend slightly higher in fiscal 2020, inclusive of an expanded development slate of children’s entertainment programming to maximize our creative content and characters.

And with that, I will hand the call back to Gil for the Q&A session..

Thanks very much, Ken. We are ready to now open the line for questions..

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

Okay. Thanks. Hi, guys. Good afternoon.

Talk a little bit more about your experience with the programs you’ve put into place to address the competition in fairs? And then I guess on a related note, the three issues that impacted fiscal 4Q, you kind of addressed this in your preamble, but could you maybe discuss in more detail when you expect these to stabilize? I guess, I’m speaking specifically to the sales tax collection issues for clubs, the competition in fairs and then the higher input costs?.

I’ll answer couple of these myself, Drew, and then ask Ken to supplement my comments. In terms of Book Fairs, you asked about the incentive plans and other operating costs. We did, as Ken alluded, we did give out some extra Scholastic Dollars to ensure that we got renewals affairs that we thought might be vulnerable.

But we probably extended that program a little further that we needed to, and we’ve gave away a little bit more Scholastic Dollars than we expected. We also had cost increases in certain core areas of shipping labor particularly, driver labor costs and areas like that. But the principle effect was through the Scholastic incentives Scholastic Dollars.

On the Club’s, we began the collecting sales tax in the third quarter March through May. We expect that we will have some additional sales tax impact from September 2019 through January 2020. After that we should recalibrate to what people did in the spring.

We have improved the offerings that we have made through our collection plus processes and so we’re not expecting a dramatic impact the way we got in the fourth quarter. We’ve corrected some of the issues that caused that revenue decline. So, we do feel we are going to get some impact from sales tax during the year.

It will be offset by the fact that as you know, we did pay we self-assess some sales tax historically in the business and as we collect full sales tax from all our customers that will it will that will drop off. I will turn to Ken for the other answers..

Sure, Drew. Just to build on Dick’s comments on Scholastic Dollars, there were higher incentives in Q4 and we also did some work to improve fair quality and really provide the fairs that are customers want. So, there was some labor and warehouse costs associated with that as well.

As far as sales tax goes, it really isn’t a cost issue going forward, the way it was, it’s now what’s going to be the impact on the business in terms of the topline.

So, the work has been done to implement what we’re doing in terms of the collection of sales taxes and we also had to lap some costs in terms of before we implemented sales tax last year.

We had to register in certain states and obviously we couldn’t collect in some states and although that’s with our program, we launched in March and we started collecting in March. So, let’s say, state went online with the registration earlier, as early as October in some instances. We were responsible for that sales tax.

So, we bought that burden and we talked a little bit about that earlier in the year. What was it? What was the could someone remind me the second question again..

Yes. You made reference to higher paper, printing and labor cost.

So that’s something that you see is ongoing or does that would be, can you offset it with pricing and other initiatives?.

Sure. So, we are actively working on pricing and other initiatives. In Dick’s comments you heard about margin improvement. So, we’re not predicting substantial revenue pick-ups in particularly in clubs and fairs next year, but we are expecting, margin improvement, and some of that comes through pricing. Now we do have some elasticity in those markets.

So, it’s somewhat targeted. It’s not across the board, but we are doing other things to without getting too many details we do have some cross-channel initiatives where procurement should be better targeted than stronger and we should be able to leverage our inventory across the organization better. So, there are things in play.

Some of our systems implementations are designed to address some of this as well, and support this. So, it’s really around some of the procurement efforts and making sure that we are doing our demand planning appropriately and on the other side selective pricing..

Okay..

I do think we did we lagged a little in meeting the cost increases. We knew they were coming, but because of the lead times that we have in our businesses. We weren’t able to quite catch up with last year. And we are doing a much better job going forward on that topic.

So, we should see some as Ken pointed out margin improvement next year offsetting that cost increases..

Okay. Shifting gears to the trade business.

Can you talk about your expectations for this new Hunger Games book maybe relative to what you experienced with the first three books and is there a way to size this Make-Believe Ideas franchise or book program that you’ve acquired?.

Yes. I think Make Believe Idea runs into the between $35 million and $40 million. Last year, we owned a portion of that. So, we got an equity pickup of some of the operating income, but no revenues. This year, we will get the revenues and we will also get the full benefit of the operating income..

Dick, I think growing is it a growing franchise?.

Yes. No, no. So wonderfully, it’s grown we acquired a minority interest four years ago and it’s grown doubled at least in that time..

Okay. Alright..

Early childhood business absolutely remarkable. It goes through mass market channels, primarily from reader link to Wal-Mart, Costco, Target and so forth and so on, so great business..

Okay.

And then on Hunger Games?.

Hunger Games, it’s hard to tell. We’re coming, it’s the last week of the fiscal year virtually that this thing comes out. So, we will put out a certain number of copies based on past performance. But it’s been some years since the last one came out.

And we are if we were confident that the program is as strong as ever, but we are not sure what’s going to happen until we put some copies out in the market and see what happens. So, we’ll be taking some reserves against that whatever expected revenue we might get, but it’s certainly been a great series over time..

Okay. And then on the education business, there has been some investments made ahead of the Scholastic Literacy launch.

Should we, now that’s behind you or I would think the majority of that spend is behind you? Should we expect to see OI improve and I’m sorry if I missed this, if you could cut out during your prepared remarks, but was there any sales impact from Scholastic Literacy during the quarter? And on the press release, if you could made reference to participating in some state adoptions and open territory state.

Is that calendar ‘19 or is that calendar ‘20?.

Most of the revenue is going to be fiscal 21. We’re getting some this summer, a little bit, Drew, but we introduced the program, somewhat late in the year we are sending out samples in February and March.

And so, we got some revenues for the summer quarter being the core textbook product in the summer quarters when you would expect the highest level of revenues, but because of the late production, it’s going to be fairly minimal for this summer.

But we are big is a several adoption opportunities, which I’m sure you’re aware of in ‘21 and we expect to be participant in that.

But I think the main thing is going to be, it just adds another way for us to go into talk to the Literacy Coordinator or the Chief Academic Officer and we’re offering a comprehensive literacy solution, including core supplemental digital, so forth and so on it just complements our offering and gives us expanded revenue opportunities but that’s going to take a while to show up in the operating statement..

Okay.

And just one more question, can you comment on what your expectations are around incremental rental income for fiscal ‘20?.

We’ll have some so we have several people who are actively engaged in competing for some states that we have, not all of it, but some of it.

And unfortunately, I predicted that we would be able to announce these signed leases in this quarterly call, but the market being what it is, it slipped a little bit and so we’ll probably have something to announce fairly soon.

And then, but the market is still there, as you know, the retail market is not great overall, but for this position in Soho that we have in the amount of space we have, we’re pretty, pretty strong competitor for all the major brands that want to be in Soho..

Okay. Great. Okay, Thanks guys..

Thank you..

Thanks, Drew..

Thank you. At this time, I’d like to turn the call back over to Chairman, President, Chief Executive Officer, Richard Robinson for any closing remarks.

Sir?.

Well, thank you very much all for your attention. This is a relatively long call for us, as we had an important quarter and we had an important year. We are very disappointed at our fourth quarter performance, as you know. We are taking intense steps throughout the company to improve that.

We’ve got commitment from everybody that we’re going to have a better year in 2020 and get back toward our better operating income as the year goes on. We thank you for your support and we will do our best to make good on our promises. Thank you very much and we’ll see you in September..

Thank you, sir. Ladies and gentlemen that concludes today’s conference. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time..