Ladies and gentlemen, thank you for standing by and welcome to the Scholastic Reports First Quarter 2020 Results Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Senior Vice President, Treasurer, and Head of Investor Relations, Gil Dickoff. Sir, please go ahead..

Thank you, Latif, and good afternoon, everyone. Welcome to Scholastic's first 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 Investor Relations 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 our 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..

For Whom The Ball Rolls released at number one in August remains the top book across all categories and as noted by Publishers Weekly had the best first week sales of any Dog Man book to-date, all good news.

Dav Pilkey’s influence within the industry continues to grow as evidenced by Dog Man and Captain Underpants sharing the number one and two spots on bestseller lists. Well, Dav's Do Good Tour fills stadiums.

During these events, the champions messages of kindness, which resonate with kids as well as their parents, we know, are increasingly focused on character building when seeking out books for their children.

The power of graphic novels is a landmark example of Scholastic’s unmatched ability to understand what kids want to read, filling an unmet need by pioneering the genre for kids. Our Branches and Acorn lines of early readers are further example of our filling fast growing niches within the market.

Observing the kids who are graduating from early readers to chapter books to desire a bridge for that experience, our editors created these formats to meet kids where they are and better encourage lifelong readers.

Newly acquired Make Believe Ideas, Interactive and Innovative novelty books are yet another market leader we are proud to share with young families. Never Touch a Porcupine has been number one at mass market Sam's Club, and we will expand the best selling series to 10 board books in this fiscal year with the release of new titles.

As always, we have highly anticipated titles debuting including this week, Raina Telgemeier’s Guts, continuing to leverage our strength and graphics and bringing relatable struggles such as anxiety through strong characters to our readers.

Just this week, she filled the Barnes & Noble in New York City with young fans eager to talk with her about her book or characters and her life. She was in the building here at Scholastic today talking to the staff and as usual conveyed her unique approach to writing and linking her books to the real life of kids, real lives of kids.

Harry Potter and Goblet of Fire, the illustrated edition will release on October 8 followed by the November release of Harry Potter and the Cursed Child. The journey behind the scenes of the award-winning stage production and the global release of The Dinky Donkey, the sequel to viral sensation The Wonky Donkey will be available November 1.

As the live action Clifford The Big Red Dog movie moves to post production, and we eagerly await the December debut of the new animated series. We also anticipate increased buzz and publishing around our beloved character. In international markets, we continue to see growth in trade publishing, although a strong U.S.

dollar negatively affects our revenues. In addition, we are building upon global resources of print and digital content and strong brand recognition to support strong revenue and profit goals in our Asia business.

We continue to receive positive responses to our digital English language learning programs targeted to meet the needs of growing middle class of consumers. In education, we are -- in U.S., we are emphasizing a comprehensive approach to literacy working with school districts and community based organizations to build programs for 365 day learning.

We support literacy instruction in schools through a coordinated effort including personalized learning for students and professional development for teachers with supplementary products such as guided reading, our new core curriculum, Scholastic Literacy, and digital subscriptions with engaging content designed to create excitement all the while providing critical foundational skill development in phonics and vocabulary.

Scholastic literacy sales have begun, but are not a driver in this year's first quarter as the product is just coming off press and being delivered to early adopting schools in Alabama, Indiana and Ohio.

Our supplemental products remain strong and innovation continues to come from the group such as this coming quarters, Rising Voices, a new classroom collection designed to resonate with voice of color.

Scholastic digital subscriptions such as Scholastic First and Word, key components of Scholastic literacy as well as standalone offerings are gaining momentum as district administrators, school principals, curriculum spec specialists and teachers see how the needs of their students are directly met by these programs.

The largest sale of Scholastic Literacy pro to-date closed this summer with Cypress-Fairbanks, Texas purchasing eight years upfront.

As of this back-to-school season educators are welcoming increased ease of access to Scholastic digital education products available through Single Sign On integration with Google Classroom, as well as certified standards based LTI integration with their own learning management systems.

Finally across our businesses, we are seeing the benefits of our technology and efficiency improvements as guided by our Scholastic 2020 plan. Incremental savings are primarily driven through procurement, print optimization, warehousing efficiencies through process changes, rationalizing shipping costs and increasing routing efficiencies.

This fall, our educational sales team was using a dynamic automated dashboard via Salesforce.com to manage performance and pipeline. They now have better top line visibility into Scholastic's current relationship within each district and school account across Scholastic channels.

With that background, I will turn the call over to Ken Cleary, Chief Financial Officer..

Thank you, Dick and good afternoon. Today I will refer to our adjusted results for the first quarter excluding one-time items unless otherwise indicated.

We adopted the new revenue recognition standards pursuant to ASC 606 in the first quarter of the last fiscal year, so we will no longer break out the impact of the new standard on our results for comparison purposes. In the current quarter, we adopted the new ASC 842 lease accounting standard.

This adoption required us to record substantially all of our leases on the balance sheet, but no impact on the company's results of operations. As Dick mentioned, revenues were $232.6 million versus $218.4 million in the first quarter last year, an increase of 7%, the big story in the quarter was our strong trade frontlist worldwide with our U.S.

trade operations of 21% year-over-year. Most impressive was our strength in series publishing, Dog Man, Captain Underpants, Harry Potter, the Bad Guys and Wings Of Fire where each new release had a positive pull on the earlier titles in our backlist.

Our operating loss was $83.1 million versus $83.3 million last year with contribution from higher sales, along with better cost management and children's book publishing and distribution and education in the quarter. Adjusted EBITDAA showed a loss of $61 million compared to a loss of $64.5 million in the first quarter of 2019, an improvement of 5%.

We believe that adjusted EBITDA is the most meaningful measure of operating profitability and useful for measuring returns on capital investment over time since is not distorted by unusual gains, losses or other items such as share repurchases.

The better operating results in children's books and education are partially offset by higher depreciation expense and higher technology spend in corporate overhead both as expected, as well as slightly higher operating expenses in some of our international businesses.

I should remind you that Scholastic typically records a loss in its first quarter while most of our schools are closed for summer break and our school challenged and I have significant revenues.

We had 4.3 million of one-time items in the current period, all in overhead, $2.8 million in pre-tax severance associated with Scholastic 2020 repositioning programs and $1.5 million for an amicable no fault settlement, a legacy claim for an alleged patent infringement. There was $500,000 in one-time items in the prior period.

Now turning to our operating segments, Children's Book Publishing and Distribution first quarter revenues rose 15% to $109.6 million from $95.7 million last year. The main driver as we've already discussed, was a strong trade front list led by two new summer releases in our best selling Dog Man and Wings of Fire series.

This was augmented by the incremental revenue from our Make Believe Ideas business in the U.K. where we now consolidate revenues after having completed our purchase of a majority interest in the company this past spring. Prior to this, our minority position was held as an equity investment and sales were not consolidated in our operating results.

We also saw a positive contribution on the second top line from the timing of new Scholastic entertainment programming sales, as well as higher net redemptions of Scholastic dollars in our School Book Fairs channel.

While we are optimistic that we are effectively dealing with the new sales tax requirements and book clubs, and the impact from greater competition, the fair space is too early in the school year to make any meaningful comments on either front.

Segment operating loss improved by $4.3 million on the higher sales and trade and lower operating costs in clubs and fairs.

Education segment revenues increased 1% to $48.4 million with initial sales have recently released Scholastic Literacy, our new core literacy instructor program, along with higher sales or professional learning products and teaching resources.

These revenue gains were partially offset by declines in summer reading, and classroom collections in the quarter. Higher classroom magazine and digital subscription billings in the quarter will be recognized in future periods upon delivery. Magazines over the course of the fiscal year and certain digital subscriptions extending out multiple years.

The segment operating loss improved by $1.5 million or 10% on better cost management..

First quarter corporate overhead expense was $24.3 million versus $20.4 million in the first quarter of 2019.

The higher overhead excluding one-time items in the current period is mainly due to the timing of spend related to our ongoing rollout of new technology, data analytics platforms, as well as higher depreciation expense for recent new system implementations placed into service.

We expect cash to begin to build again in the later part of the second quarter as is typical for this time of year.

Net Cash used in operating activities was $97.6 million in the current fiscal quarter compared to the use of $89 million last year, and free cash use was $118.5 million in the first quarter of fiscal 2020 versus the free cash use of $125.9 million a year-ago, and improvement of 6% in line with our internal expectations.

At quarter-end, we have $199.4 million in cash and cash equivalents compared to $269.8 million a year-ago.

In the first quarter, we had $13.5 million of planned capital expenditures and $7.4 million in pre-publication and production spend as well as $12.6 million in open market repurchases and $5.3 million in dividends both reported below the free cash line.

I will note that our combined new capital and pre-publication spend is $16 million, or 43% below this time last year. We’re affirming our fiscal 2020 outlook for revenues in the range of $1.67 billion to $1.7 billion and adjusted EBITDA of $140 million to $160 million.

And we have more closely tied senior management incentive compensation through the achievement of these adjusted EBITDA targets. Our investments in new technology and data analytics, the key component of our capital spending plans this year remain on track with overall capital expenditures projected in the $75 million to $85 million range.

To achieve these year-over-year target gains, we're focused on controlling costs and improving efficiencies throughout our operations, significant process changes are underway supported by analytics, new systems and tools are altering the way we buy inventory, influencing business unit decisions through improved clarity around operational costs and helping us better assess the cost benefit trade-off across modes of distribution.

In particular in fairs, we’re reducing inventory purchasing through more efficient buying and printing strategies, freeing up working in human capital, encouraging the use of existing excess inventory with better margins and avoiding future inventory waste as well as using our Fairs Customer Incentive programs in a more targeted way.

Our new Oracle direct procurement system is slated to go live in Q2, enabling a series of process changes that will help with upstream product demand and supply planning for improved return on inventory purchasing spend.

We're also deploying a new workforce management solution in our Jefferson City, Missouri National distribution operations to drive warehouse labor savings through more dynamic and mobile enabled scheduling and managerial oversight. With that, I will hand the call back to Gil for the Q&A session..

Thanks very much, Ken. Latif, we are now ready to open the lines for questions..

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

I have a couple, maybe starting with Dog Man, you talked about the week one sell-through.

Can you address the initial current run, how that compared to the last book, I believe it was five million copies?.

It’s a similar print run, Drew..

Okay..

We’re not announcing the numbers, and we're keeping a focus on management of inventory, but our confidence in Dog Man grows. And as you may have noticed, the new book sold better than the last year’s release.

So, it's definitely on upswing and just judging from kids’ comments and the incredible amount of publicity coming in here and enthusiasm for kids and kids stopping people in the street and asking, “When is the next Dog Man coming?” It's really still accelerating its impact..

And then I know on a couple of occasions, you suggested it was a little bit early in the fiscal year to kind of gauge the efforts you're making around addressing competition and fairs and sales tax collections of clubs, but what does your guidance imply or embed in terms of improving margins for those two businesses? I know it's a target, it’s a goal obviously, but what does your guidance --?.

Well, certainly, we see good progress in cost management in the first quarter even though it's not an operational quarter. It is a quarter where we're doing an awful lot of stuff preparing for the year, and we’re holding our costs very well in fairs and everywhere else in the company in that quarter.

We have very targeted programs in respect to bringing down the cost of our operations in fairs. We have an ongoing group that works every single day to focus on a number of different projects in that area.

At the same time, we're very focused on being strong competitors and providing the very best possible fair experience including inventory availability and well-managed fairs and we are -- we believe that we're in the position to do that, while managing our costs down in fairs..

Okay..

On sales tax, it's too soon to say, but our guidance certainly implies that we don't see any major problems that it's too early to say because it's so early in the quarter and we're just beginning to get sales from teachers who we're collecting now for kids as kids come back to school..

And then the overhead costs were up year-on-year, you gave an explanation as to why that makes sense.

I'm just curious as to whether or not this is indicative of the type of increase we should expect to see through the balance of the fiscal year?.

So yes, you’ve got to remember a big piece of this is depreciation expense. So, you will see the depreciation expense continue to come through, and our spending in terms of technology spend, non-capitalized technology spend this year will certainly continue at a similar rate, will go down in years beyond that though..

Okay.

And then, I think going into the fiscal year, you guys are pretty bullish on Asia, I know it’s just one quarter, but can you address the lower direct-to-home sales in the quarter along with the export business, would you expect that to snap back in the out quarters?.

Yes, I think the Asia's direct-to-the-home sales are all that we carry these out in primarily developing countries including Malaysia, Thailand, Philippines, Indonesia are the principal markets for that business, and there's always something going on in those markets.

This year, in the first quarter, it was in Malaysia where there were some changes in the pattern of going into the malls. I will not bore you with the long description, but it's a timing matter and we believe that business will come back later. So, in export, with the strong U.S. dollar, export is facing headwinds because their pricing is in the U.S.

dollar, so that does affect the business but we seem to have -- we seem to have some momentum in that business, and it seems that they were on track for our budget overall for the year despite that performance in the quarter..

Okay, just one more from me.

Ken, can you quantify the impact from the new program and sale in the quarter? And how should we think about the cadence of these contributions for the balance of the year and I guess, separate item, you're consolidating the Make Believe business now, was that meaningful to sales in the fiscal first quarter?.

So, let me take the latter one first, in terms of MBI, yes there is sales in there, it's a part of the pickup that we have in trade, but it's single digits in terms of revenue for the quarter. Remember, MBI product is sold throughout all of our international operations as well as our U.S. channels or U.S. school channels.

So, you're not going to see it all in one spot. It really, it really is an integrated type of operation. In terms of SEI, our programming revenue, remember we had the big pickup last year, but that wasn't really backlist [ph] sale.

So, when you talk about contribution going forward, the biggest contribution, yes, there's some top line revenue in there, single digits. But you're not looking at a major contribution because we have programming costs or we have costs associated with that as well whereas when we saw the backlist, everything was already off the books.

So, you're not looking at a major contribution there but you're looking at an opportunity to sell product through as well, pull through product. So, it's good to get the brand out there obviously and that's what we're doing..

And just to clarify, Ken to go back to the MBI business, you're capturing or recording revenue in both trade and International?.

Yes, you'll see. They have yes. So trade international and what I'm saying is they sell product into our other subsidiaries and our other subsidiaries would sell the product. So MBI is a standalone entity has sales of their own, but we're deploying the other channels as well to, we're leveraging other channels as well to sell that product..

At this time, I'd like to turn the call over to Richard Robinson, Chairman, President and Chief Executive Officer for closing remarks..

Yes sir. Thank you all for listening to our first quarter report. We're happy to be moving forward in the new school year. And we will look forward to talking to you in December where we will be giving more information on our club and fair activity, of course. Thank you very much for your support, and thank you for listening today..

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