Scholastic Corp (SCHL) 2003 Q1 法說會逐字稿

Welcome to Scholastic's first quarter conference call.

I'm Ray Marchuk, Senior Vice President of Finance and Investor Relations.

Before we begin, I'd like to read the following statement:

"This conference contains certain forward-looking statements which are subject to various risks and uncertainties, including the conditions of the children's book and educational materials markets and other risks and factors which are identified from time to time with our filings with the Securities and Exchange Commission.

Actual results could differ materially from those currently anticipated."

To follow our slides on the Internet, you can log onto www.mshow.com or go to the investor relations section of scholastic.com.

The conference name is 71457.

Slides and audio will be available on both Web site until October 8, and a telephone replay will be available from 11:00 AM today until October 8, at 800-642-1687.

Now I'd like to introduce Mr. Dick Robinson, the Chairman, President and CEO of Scholastic, to review our first quarter results.

Good morning.

Thank you for listening in on our conference call.

With me are Kevin McEnery, CFO;

Beth Ford,

of global operations and information technology;

Barbara Marcus, President of children's book publishing and distribution; and Margery Mayer, President of Scholastic Education.

We've got good news in many areas this morning.

First, "Harry Potter."

Author J.K.

Rowling's book five: "Harry Potter and the Order of the Phoenix," is now under contract to be published by Scholastic.

As reported in the "Wall Street Journal" last week,

is polishing the manuscript and she said she should have it to us in three to six months.

When we have the manuscript in house, acting in concert with her and her agent, we will set a publication date, and that will determine whether the book falls into late this fiscal year or early next.

Therefore, we're staying with our EPS guidance of

to

, with a range largely a function of the timing of book five.

As soon as we know the publication date we'll update you.

Our first quarter results are in line with expectations with the loss of $1.11 per share, excluding the litigation charge.

As many of you know, the first quarter is our smallest revenue period, where most schools are not in session, and we always report a seasonal loss.

This quarterly loss grows with the company's growth, as we have a larger cost base in a lower revenue quarter.

We've made excellent progress in several areas.

Our education business is ahead of plan in the quarter, with strong growth in READ 180.

We're very proud of the turnaround in this business that happened in the last six months.

International is improving, with a 12 percent revenue increase in the quarter.

And we're confident of eliminating at least $30 million in annualized costs this year as we lay the groundwork for more cost reductions next year.

Fair bookings -- our school book fairs -- are strong for the fall.

And although it is still early in the second quarter, orders for book clubs and school-based continuities are running in line with expectations.

We also continue to make good progress with scholastic.com and Scholastic Entertainment.

There has been a significant increase in book club ordering online, with more than 15 percent of all club orders now coming through the Internet.

And this was consistent with our plans to encourage more online ordering, attract new teacher sponsors, personalize those services, and eventually reduce the cost of processing orders.

We're also happy to announce that Scholastic Entertainment has reached agreement with PBS Kids to produce the second Clifford TV series, which will be used to expand Clifford's highly successful franchise.

Now here's Kevin McEnery to update you on our first quarter financial performance.

Thanks, Dick.

Our first quarter revenue was $307 million, and the net loss was $44.6 million, or $1.14 per share.

This includes a previously announced after-tax charge of $1.2 million, or three cents per share, which resulted from the settlement of a securities lawsuit initiated in 1997.

Excluding that charge, the net loss was $43.4 million, or $1.11 per share.

Last year had revenue of $306 million and a net loss of $37 million, or $1.05 per share.

And this included an after-tax charge of $5.2 million, or 15 cents a share, for a change in the accounting for

.

This quarter's loss is consistent with the prior year trends.

As you can see from the slide being transmitted on the Internet, the first quarter loss typically increases as our full year revenue grows.

The exception to this was in the first quarter of fiscal 2001, which included the publication of "Harry Potter and the Goblet of the Fire."

Operating results for the individual segments in the first quarter were in line with our overall plan for the quarter and the year.

In children's book publishing and distribution, revenue was nearly level with that of last year.

And the operating loss was $39 million, as compared to $28 million in last year.

The Klutz "books plus" business, which we acquired in last fiscal year's fourth quarter, added $11 million in revenue and $2 million in profit.

Direct-to-Home continuities, which now includes a $3 million revenue benefit from the recent acquisition of Baby's First Book Club, had a revenue decline overall of about $6 million, and profits were down modestly.

Direct-to-Home is on plan, and its results are consistent with our strategy of eliminating the less profitable marketing programs.

The Direct-to-Home bad debt rate improved from last year's first quarter by approximately one percentage point.

Other changes in children's book publishing and distribution segments' operating profit reflect the summer spending in preparation for the higher level of book club and book fair sales when school begins.

Educational publishing's revenue in the quarter was $88 million, as compared to $92 million last year.

Our overall curriculum revenue was up slightly, with a very healthy $9 million increase in the READ 180 sales.

This largely offsets the decline which was anticipated in the sales of literacy place, which had revenue of $16 million this quarter, as compared to $26 million a year ago.

The

supplemental software business, which we acquired in the third quarter of last year, added nearly $3 million in revenue.

Our total supplemental publishing revenue was lower, as anticipated, compared to last year, when we benefited from a large $5 million paperback sale to New York City schools.

The total educational segment's operating profit was approximately $13 million in this quarter, as compared to $15.5 million last year.

As Dick noted, international revenue increased to $62 million, as compared to $55 million last year, while its seasonal operating loss of $3.2 million was slightly higher.

Only about two percentage points of this revenue increase came from favorable exchange rates.

And the reorganization in the U.K. is proceeding on plan.

In media, licensing and advertising, revenue was off slightly to $17 million, as compared to about $18 million last year, due in part to slightly lower advertising revenue in our consumer magazines.

The segment's operating loss was about $10 million, compared to last year's $9 million.

Free cash flow from operations was equal to that of a year ago, excluding the payment for the

litigation settlement that was made this past summer.

This was obtained despite the increase in the first quarter pre-tax loss.

Accounts receivable and inventories were flat, as compared to year-ago levels, excluding our subsequent acquisitions.

Our days sale outstanding, our DSOs, improved, and total debt as of August 31 was slightly below $700 million.

And now for an update on our cost reduction efforts, here's Beth Ford.

Thanks, Kevin.

As Dick said, we are very confident we will achieve this year's $30 million cost reduction goal.

In addition to the significant divisional cost reduction efforts, we have five initiatives that work that will benefit us both this year and in the years to come.

First, is our North American purchasing initiative, which includes the U.S. and Canada.

This is focused on reducing our direct costs, much of which are in costs of goods, and our indirect costs, most of which are in SG&A.

One of our chief strategies is channeling more volume in the key categories, such as promotional printing, freight and

, through fewer vendors and

multi-year contracts.

We are employing e-auctions and

to obtain the most favorable combination of pricing and quality.

And the bids we are receiving, and the contracts we're signing, are right in line with our plans.

Some of the benefit will fall into this year, and more next year, based on implementation timing.

Second, we have launched a similar purchasing initiative in our international operations as a key component in our plans to expand international margins.

This year we're focused on implementation in the U.K., with savings expected to kick in the next year.

Third, is process reengineering.

Here we're realizing productivity improvements in order processing, warehousing, picking and packing and shipping.

We've already seen significant benefits in our national service organization in Missouri.

We're now expanding this process reengineering to our book fair and international operations.

In the U.K., we're benefiting from the changes in

that we implemented last year.

In the U.S., we're achieving savings from last year's consolidation of the

continuities back office operation and its library distribution into our national service organization.

We also are achieving cost reductions in domestic packaging, customer service and warehousing.

As we continue to leverage our internal engineering, logistics and production control resources throughout our domestic and international operations, we look forward to additional savings in future years.

Fourth, is our new continuities facility in

, Arkansas.

will reduce unit costs by channeling more volume through a single new facility rather than two older facilities, one of which is outsourced.

We're on target in our timing for IT development, equipment installation and hiring.

We began transferring products from our outsource facility in the first fiscal quarter.

We start shipping from

in October, and we expect to complete the transfer product from our internal facility by next summer.

When fully operational,

should reduce our costs by $3 to $5 million a year.

This is our inventory forecasting planning initiative, which will significantly reduce our investment and inventory, while maintaining our service levels.

Everything has been running smoothly and we have begun implementation of this system in our book fair and Canadian operations.

Now here's Barbara Marcus for further insight into our children's book publishing and distribution operation.

Thanks, Beth.

As Dick said, we are very excited about our contract to publish "Harry Potter and the Order of the Phoenix."

And as soon as we know more regarding the delivery date of the manuscript we will let you know our publishing plans.

Now, looking at our segment results, virtually all operations were in line with our plans for the first quarter, which is our smallest.

In Direct-to-Home continuities, revenue should increase.

The first quarter was the last period we should see a revenue decline.

We are planning revenue growth for the balance of the year as we build upon the stronger customer base we have been developing.

In school-based continuities, early results from our new offerings in the September book clubs are generating a strong response.

New continuities based on

and

are attracting a lot of initial interest.

Assuming trends continue, this business will be much stronger than last year.

We will see the actual results as we move through our fiscal year.

In trade, while the traditional retail book market continues to be soft, children's books are one of the stronger categories, and Scholastic continues to be one of the top performers.

We had a good summer with "Harry Potter," which featured the successful July national release of "The Goblet of Fire" in paperback, with 3.5 million copies in print. "Goblet of Fire" has hit all best seller lists, and the backlist has received great support from our accounts.

New best sellers include "The Thief Lord," which is approaching 100,000 copies in print and is already on "The New York Times" best seller list.

Additionally, we have shipped over 350,000 copies of "Captain Underpants Extra Crunchy Book O' Fun 2," which is also hitting all best seller lists.

Other popular titles include "David Gets in Trouble" and "The Scholastic Children's Dictionary."

Looking ahead, we have strong publishing plans related to the new "Harry Potter" movie, "Chamber of Secrets," to be released this November.

This includes a collector's addition and a mass market paperback supported by national advertising and promotion.

For Christmas, we will have a box-set of all four trade paperbacks.

In our other trade business, Klutz is on plan with increased sales compared to last year.

New fall product has just shipped and we are incorporating Klutz product into our other channels as planned.

We are right on track for utilizing our international distribution for Klutz and expanding domestic distribution via our book clubs and fairs.

Meanwhile, our plans for expanding our trade publishing and distribution business in mass outlets are also moving forward.

This will involve licensed publishing current activity books and expanding sales of our trade

in these outlets.

We will share more news on this in later calls.

Turning to school book fairs, our fall bookings are on plan.

We are improving the training of our chairpersons, the parents and librarian volunteers who actually run the fairs in the schools.

As we've seen over the last year, we expect this will lead to continued strength in revenue building programs, such as Family Nights, Community Sponsorships and Teacher Wish Lists.

As for school book clubs, while it is too early to predict our order levels for the second quarter, to date, orders are building in volume, and revenue per order is solid.

In addition, our Internet ordering capability, which we call club ordering online, is beginning to play an important role.

Early statistics show that 80 percent of the online users are among our most active customers and nearly 10 percent are new customers.

I look forward to talking to you in December about the second quarter, which is the largest revenue period for our segment.

Now here's Margery Mayer to go into more detail on educational publishing.

Thanks, Barbara.

Because schools do most of their ordering for educational materials during the summer, the first quarter is our most important, and we are pleased with the results.

By refocusing our curriculum business on reading intervention, we have been less susceptible to declines resulting from unfavorable adoption cycles and budget restrictions.

It has been our experience that the funds are there for implementing programs that address the number one issue on which schools are being held accountable: raising reading scores, and that's our primary focus.

Excluding literacy place, educational segment revenue was up 10 percent in the first quarter, reflecting the strong performance of our intervention products.

READ 180 sales were three times of those of the first quarter of last year and averaged about $1 million a week.

We believe that READ 180 is building strong momentum, with new sales coming from existing customers who are enlarging their installations and from new customers who have learned about READ 180 from our marketing and word of mouth of our success in improving reading scores.

There are now more than 100,000 students in READ 180, but this is still a very small percentage of the potential market.

According to federal estimates, there are 20 million children experiencing reading failure in American schools.

We are especially proud of the response we have received to the release of our new high school version of READ 180 which leverages our technology.

With an increasing number of states requiring high school seniors to take exit exams, there is a tremendous push to address reading failure at that level.

This is a tough challenge for high school educators.

READ 180 offers a practical, effective solution.

Turning to our other businesses, we are satisfied with how supplemental publishing performed, considering the fact that it was up against last year's quarter, when we booked a one-time $5 million paperback sale to New York City.

We are also very pleased with the integration of last year's acquisition of the

business.

We've integrated our sales forces and sales are

plan.

To sum up, we believe our strategy is on track to offer schools effective and distinctive materials and programs to improve reading scores.

We've reduced our dependency on the adoption cycle and improved our cost structure by reducing development costs and cost of product.

We still have much to do, but we believe we are on the right path.

And now, here's Dick Robinson to wrap up.

Thanks, Margery.

First, just a little information about Scholastic Entertainment, which has two new series going on air.

debuts Thanksgiving morning in the 8:00 AM time slot on HBO Family.

This consists of 26 episodes, which will create added visibility for the

brand and content for a new TV tie-in book series.

The second new TV series is Clifford's Puppy Days for TBS Kids, based on Clifford's adventures before he got so big.

Puppy Days will keep Clifford fresh for our TV audience and will provide us with new material for publishing, licensing, software and promotion.

The air date is expected to be late '03 or early '04.

In other Clifford news, the current TV series continues to do very well domestically and internationally.

Books and videos continue to sell well in the U.S. and production has begun on the Clifford animated feature film for a possible March 20, '04 release by Warner Brothers.

To sum up, we're happy to report that

Rowling is close to completion of "Harry Potter Book Five" and that this title is under contract to Scholastic.

We performed very well during the first quarter in several key areas.

In educational publishing, our strategies are working and intervention products, including READ 180, are gaining momentum.

In international, revenue is continuing to grow and we're turning around our U.K. operations and improving in several other areas.

In the cost reduction arena, we're on target to meet our objectives through initiatives that will benefit us this year and in the years to come, as you heard from Beth Ford.

And looking ahead, early indications are that are school-based businesses are off to a good start in our important second quarter.

And while still early, we are on track with our goals for the year and are looking forward to improved profits in the range of $365 to $295 for the year, depending on when "Harry Potter" is published.

Thank you.

And now, operator, we'll open the call for questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from

with Goldman Sachs.

Barbara, you mentioned the Klutz business.

I'm wondering if you have any hard data yet in terms of whether offering the Klutz products through the fairs is having any measurable impact on revenue per fair.

That's question one.

And then question two,

has changed ownership again here recently.

And I'm wondering if you see anything in terms of their business model or their business approach that's changed or gives you pause in terms of what their impact on the business might be.

Hi

.

It is really too early to tell about the effect of Klutz in our affairs.

It is there.

We have -- you know, it is there.

We have a little section in the fairs for Klutz product, but it would be premature to say.

It looks great.

It looks great, so we're helpful.

But no real results.

And on

, they are sort of have a point of view which is different from the point of view of the last owners.

And we continue to say that competition in the book club business is a good thing.

And so that they are there and looking a little different and a little newer we think is good for both Scholastic and

.

How is their

different, do you think?

It's just, you know, different colors, a little more slant in the promotional offer.

You know, and different kinds -- a few different kinds of sell points.

Nothing substantial, nothing material, but just sort of livens up the market.

OK.

But no change in the promotional activity in terms of the point sale for the future...

Not substantially.

Not substantially.

OK.

And then the last thing, in terms of any early feedback on sales through the new trade channels, any sense of how that's going or how big that is or how big that might be?

You know the

are very interested in buying more from Scholastic.

But really, until the spring comes, we won't have any seriously beginning of our new publishing program.

So they are interested; we're talking to them about a variety of things.

But it takes us a little while for our publishing to catch up with our strategy.

So I hope that starting a little bit in the next quarter.

But, seriously, as move through the year we're going to be able to give you some interesting information.

Great.

Thanks, Barbara.

You're welcome.

Your next question comes from

with CSFB.

Good morning.

I wonder if you could talk a little bit about the -- kind of the longer-term plans for the media segment, both in terms of how the new series or separate series or

series, how those kind of roll out and impact and revenue and costs.

And longer term, looking at profitability, what are you kind of setting for goals in that division?

Well,

-- this is Dick Robinson -- you know the media business, the TV business that we talk about is primarily a support business at this time for our book sales and for licensing and merchandising.

So we look at the profitability of that business as the support that it gives and the extra sales that it creates primarily for books.

And those profits show up in the children's book segment, not in the media segment.

Now our longer-term plan is really to continue with the highly successful strategy that we've developed, where we take our, you know, important book titles, develop franchises around -- develop TV around these franchises, use licensing and merchandising and support our book and software sales.

So we are -- that is our continuing strategy.

We also, of course, have -- this goes on outside the United States as well.

And Clifford is a really strong success in the U.K., in Australia.

In the U.K., we're beginning to see the effect of the Clifford TV success on book sales there.

And we're seeing Clifford being licensed all over the world, which helps our revenues from a foreign licensing.

So that's our strategy.

So we don't expect that you'll see any immediate profitability change in that segment.

Although that segment also includes the Internet spending.

But the profits that are created in the children's book segment are significant both in the domestic and international arenas.

OK.

Kind of a different direction.

In education publishing, from two perspectives, I wonder if you could talk about what are your longer-term plans for the high school market.

I think you guys mentioned some decent traction there with the READ 180

older kids.

Any kind of a broader plan for high school students?

And second would be, give us a sense on kind of what the market opportunity and what your traction so far has been selling to Spanish-speaking kids with the same kind of products that you're selling to -- I guess to the rest of the marketplace right now.

Thanks.

Dick, do you want me to talk about the high school piece and...

Yes, why don't you do that.

Yes.

Well we're really just getting launched with our READ 180 for high school.

But we think that that is a very large opportunity for us because there is a large and looming need for materials that are interesting to kids, that will help them pass the exit exam.

And so we're exploring some additional ideas that would leverage our position with READ 180 to expand somewhat in that business.

But we're really going to be focused on reading intervention, improved academic performance on the tests, those kinds of things.

OK.

In respect to Spanish, the market for Spanish material in the U.S. in education has changed somewhat with the focus primarily on improving the English language learning of those Spanish-speaking kids.

Because of demographics, we continue to increase our sales of Spanish children's books to schools and libraries.

We are the largest publisher of books in Spanish and the largest publisher and distributor in the United States.

But we're looking,

, at Spanish as sort of a global opportunity.

And, in that context, we have just appointed a new vice president for Spanish publishing,

, who comes from

in Latin America.

And his charge is to coordinate all of our Spanish publishing in the U.S. and internationally and build our Spanish language publishing and distribution both in the U.S. and around the world.

So we are -- it's a long-term process, but we are focusing on this important market.

And, of course, there's remarkable demographic increase in Spanish surnamed people in the United States, especially among children, as you know.

OK.

Thanks a lot.

I'll turn it over.

Again, if you have a question at this time, please press star then the number one on your telephone keypad.

Your next question comes from

with Prudential Securities.

Good morning.

I wonder if you can give us an indication of what the "Harry" sales were from all the products in the first quarter so we can do a comparison from previous years.

Secondly, Margery, is there a way to figure out at this point whether any of the money you're getting on the reading programs is coming from

from the

?

Or how do you think that might feather in over the next couple of quarters?

Well, Steve, let me answer that first question.

In regards to "Harry Potter" sales, which in the first quarter were

exclusively in the trade, it was reasonably comparable to what it was last year.

It's about $15 million net trade sales in the quarter.

And in terms of

, I don't think we're getting any money right now out of

.

Not much

money is actually flowed into the states, as I think you know.

Only a few things have been approved.

And our sense of

is that most of our intervention products are geared for grades four and above.

And, as you know,

is geared towards primary.

But we think the

money is going to release other money that can go into helping kids in grades four and above.

And I can't tell you how important raising reading scores is for schools in grades four and above, when the testing is at grades three to eight and schools are being held accountable for what they're calling adequate yearly progress.

So they're finding the money to do what they need to do, I think, in reading in grades four and above.

And it's not specifically

, but there is money out there.

Some of the money is federal; it's Title I and other grants that come from the federal government.

But not

.

Thanks.

And you gave a couple of numbers on some of the acquisitions you made last year, and I

couldn't write fast enough.

Do you have a total, Kevin, of the acquisitions you made last year?

What impact that had on your revenue in the first quarter?

In the first quarter it was about $20 million of revenue.

Thanks.

Your next question comes from

with

.

Hi.

Dick, I was wondering if you, or one of the folks, would comment on sort of a big picture question of the state and local budget squeeze?

When we might see an effect from that and what the offset would be from the federal side.

Thanks.

Thanks,

.

Well there is a bit of a budget squeeze in schools.

But, as Margery said -- and I'm going to ask her to amplify on this -- the areas of need that we're serving in the school market are so great.

And the benefits for a schools superintendent -- you may notice from the "Wall Street Journal" that today there's -- or in "The Times" there's an article about how in New York City they're going to give bonuses to superintendents for improving reading scores.

This undoubtedly will be a controversial thing but, nonetheless, that shows you what's going on in schools.

The impact of raising reading scores both in human and in numerical terms in grades four to eight is very dramatic.

These kids are sitting there unable to read the books in science and math and social studies.

And when they get an increase in their reading scores, so they're able to read those books, they suddenly go from being unproductive students to being very productive ones.

And so that's a tremendous focus.

And the money is flowing into that.

So, Margery, do you want to make any other comment on...

Well, you know I think Dick basically said it all.

The one thing I would add,

, is that there is some tightness out there and we do feel it around some of our supplemental products.

But there is so much focus on raising scores, that it's more than offsetting the softness that we're feeling in some of the more supplemental areas.

Yes.

, I know you know this, but I'll remind the other listeners that Scholastic's revenue primarily comes from parents; certainly between 80 and 90 percent of it.

So the parents are also helping fund their children's reading by contributing to book clubs and book fairs and Direct-to-Home.

So we may be less effective than the pure educational publishing companies from budget constraints at school and at state and local.

So thanks for asking that question.

Yes.

Thank you.

There are no further questions at this time.

Well thank you all.

We feel we had a good first quarter.

We're excited about the "Harry Potter" news.

We're on track in a lot of ways and we appreciate your support for Scholastic.

Thank you for your participation in today's conference call.

You may disconnect at this time.