Scholastic Corp (SCHL) 0 Q0 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Scholastic fourth quarter year-end earnings release conference call.

(Operator Instructions).

It is now my pleasure to turn the floor over to Mr. Dick Robinson, Chairman, President and CEO.

Sir, the floor is yours.

Hi, this is Ray Marchuk, and for those of you on the phone, before we begin I would like to point out that our slides are being simul-casted on our Web site, Scholastic.com.

You can just click on Investor Relations to follow along.

I'd also like to note that this presentation contains certain forward-looking statements which are subject to various risks and uncertainties, including the conditions of the children's books and education materials, markets and acceptance of the company's products in those markets and other risks and factors identified from time-to-time with our filings with the Securities and Exchange Commission, and actual results could differ materially than those currently anticipated.

Now, I would like to introduce Dick Robinson, Chairman, CEO and President of Scholastic.

Thank you Ray and thank you all for coming here this morning.

Thank you all on the phone.

Those who were down in the front probably are shivering a little bit, but if we don't make it cold down here then it gets hot up there, so we thank you and keep you particularly awake here in the front.

I'm joined today by Mary Winston, our Chief Financial Officer, who will be speaking after me and also joining us are Barbara Marcus, Margery Mayer, Deborah Forte, Judy Newman, Beth Ford, Donna Iucolana who will be sitting here and they will come up for questions after the presentation, Huge Roome, Head of International and our token male, is on a three week business trip to Asia, so he could not be here today.

In fiscal 2004, Scholastic had significant achievements and disappointments.

On the plus side, our revenues grew 14% or 8% excluding Harry Potter sales and we produced 74 million in free cash flow.

We sold 12.5 billion copies of Harry Potter in the Order of Phoenix and we improved education Clubs, Fairs and international and we put in place our new CFO in February.

Our key Internet metrics also continued strong growth.

On our disappointing side, we missed our profit targets due to shortfalls in our Direct-to-Home business in our non-Harry Potter trade, because I know many of you are concerned about the margins of the company and, we just had an extremely remarkable change in our Direct-to-Home margins with a combination of the loss of profits and, the charge made it impossible for us to improve our margins in this year but, most of our businesses did improve their margins.

We moved to fix both of these areas of continuities and trade.

We announced significant changes in our continuities business and we'll tell you about our plans for that business in a few minutes.

We've also strengthened our trade organization.

As we look at our positives, one, we executed our plan to renew growth in our School Books Clubs and Fairs, which is critical to our overall strategy.

We also began with a new plan to revitalize our -- began a new plan to revitalize our trade business and are re-focused continuities business, and we have a strengthened team and new model that address the key drivers of profitable growth.

Our educational publishing segment delivered double-digit profit and revenue growth and, we continue to focus on educators needs to develop reading skills and, we have developed a leading position with our innovative technology products as well as, our teaching resources and supplementary business.

Fourth, our international segment also demonstrated its long-term potential, especially in exports and in Asia with double-digit revenue and profit growth.

Fifth, although our profits were disappointing, we showed our commitment to financial improvement exceeding our goal for free cash flow of 74 million or 64 million before the cash gain from the termination of a sublease in this building.

And these five themes form the basis for our 2005 plan.

Over the last five years, Scholastic children's book publishing and distribution revenues have grown 12% annually on average, expanding our market share as consumer spending for children's book in that period grows only 2% annually.

Continuing this market share growth, especially in School Books Clubs and Fairs, was a top priority for '04 and remains the driver of our future profitability.

School book Clubs revenues were up 15% and, operating margins were higher for the year benefiting from better teacher incentives, reduced promotion costs and other improvements.

We also successfully integrated the Troll assets and customer base acquired last July, which accounted for about half of the year's growth.

In School Book Fairs, revenues rose 5%, primarily from achieving higher revenue per fair, which is our primary focus.

Fair account grows modestly as we focus on scheduling larger more profitable Fairs.

The key element of our fiscal 2005 plan is to have profitable growth in both of these businesses.

In Clubs, we believe we continue to grow revenue while increasing our margins with more efficient mailing and pricing strategies.

Continued growth club ordering on-line is also an important aspect of our fiscal 2005 plans of Club.

In Fairs, our focus is on continuing last year's growth and revenue per fair to fresh products collection and merchandising and, we plan to improve fair margins by improving our logistics and distribution costs.

In trade, we had a mixed year of fiscal '04.

Revenues were up 54% due to the phenomenal success of Harry Potter and The Order of the Phoenix and overall, we had net sales of 104 million for all Harry Potter titles.

However, profits grew significantly higher did not meet our goals because of weak backlist sales and higher returns.

Trade sales, excluding Harry Potter, fell 7% last year.

We have strengthened our trade team and re-oriented the organization to work more closely with accounts to meet their changing needs.

We have also aggressively expanded our licensing -- the licensed publishing program developing partnerships with companies like DreamWorks and Lego and we're one again focusing more resources on our bread and butter paperback business.

We continue to repackage and re-promote, select backlist titles and, expect that a strong pipeline of best selling hardcover and paperback frontlists titles will continue to improve.

The on-going success of titles like Captain Underpants and Geronimo Stilton shows the benefits of our multiple distribution channels to build franchises.

We're already beginning to go see momentum from these changes in the fourth quarter.

We had strong frontlist sales with best sellers like Shrek 2, Chasing Vermeer, Geronimo Stilton.

We expect a strong frontlist to lead further improvements this year, new titles include a new Cornelia Funke novel Dragon Rider, Detective LaRue by Mark Teague, DreamWorks' Shark Tales, Care Bears and other licensed titles, more paper backs from Geronimo and new books from other best-selling authors such as David Shannon.

We also will be releasing Harry Potter The Order of the Phoenix in paper back on August 10th.

As Scholastic continuity programs, which you know obviously we're a source of our problems in '04, but historically they have been very profitable reaching parents at home and helping their children read and learn.

In fiscal 2004, however, this business obviously faced challenges including the federal "do-not-call" list and profits declined significantly.

This was a primary cause of Scholastic's revised outlook in fiscal 2004 and triggered a full review of this business.

As a result, we're implementing a new customer centric strategy that moves our Direct-to- Home continuity business from an undifferentiated general market approach, to a targeted model that focuses on building long-term relationships with families.

This new model addresses the three key drivers of profitability in this business, acquisition, cost, customer attention, pay rate and profitable growth for new product and channel development.

Aligned with the strategy we have a new organization, we're enthusiastic about our strong new management team here which has drawn from both senior positions at Scholastic and, from other parts of the industry.

The end of this presentation, Judy Newman will discuss in more detail how we'll be building this business to reposition it as the best introduction Scholastic brands for the young family.

The easiest way to describe this is, that the long time strategy for this business was to mail very broadly to lots and lots of families, try to reach almost everybody that has a child from zero to 5 and offer them free books or books, 8 books for $1.99 and bring a lot of customers into the business and then try to convert them to paying.

But, lots of those customers didn't pay or didn't pay very often and, we're shifting in the era of the Internet and world of improved customer service in many, many ways.

We're shifting to a more focused strategy where we're finding the people who really want these programs.

We're promoting to others less.

We're improving our customer service and product and focus on the people that want the program and we will therefore, spend less on promotion but have greater retention of those customers and higher pay rates.

So that, in a nutshell, is really what our strategy is, there are other components to it, which Judy will describe but that is the core of our revised strategy.

The Internet has had a dramatic impact across Scholastic generating sales of nearly 200 million last year, up more than about 50% in the year.

School Book Clubs have led the trend with 30% of teacher orders now being placed through teacher pool or club ordering on-line.

We have also seen a tremendous growth in our merchant Internet delivered product such as on-line professional development and Grolier on-line reference.

Usage of Scholastic.com by teachers, parents and children is also growing rapidly, up 42% last year as measured from page views.

In the month of May, Scholastic.com was visited by 1.24 million unique teachers and 1.34 million unique teachers of children and parents visitors, making Scholastic.com a top rated site for both of these audiences.

Going forward, we expect the Internet to continue transforming Scholastic's content and distribution.

For example, we're building on the success of teacher tool with parent tool to be rolled out next winter.

The parent tool will allow parents to play schoolbook of orders online but in the child teacher's mailbox, but it does open direct communication between them and Scholastic for the first time.

Based on positive user testing this spring, we expect parent tool to be a powerful online gateway to parents direct to strengthen their book clubs as well as our direct home business in the long-term.

It is an important trend as more people ordered through the Internet and more people order Internet delivered products.

Our strategy of helping a lot of people into our site to make them individual users of our site and converting them to e-commerce and to using our services more broadly, as it appears to be working its way through our system.

Educational publishing delivered profitable growth this year, exceeding our goals for fiscal 2004 and, further validating our strategy of offering educators reading solutions and this segment profits were up 27% and revenues up 13%.

Sales of READ 180 were by themselves up nearly 50% last year and making it the leading technology based reading intervention program.

Overall Scholastic had educational technology sales of more than $85 million.

Our portfolio is broad including established brands such as Tom Snyder and emerging ones like READ 180.

We also target the range of niches from beginning reading with WiggleWorks to middle and high school reading intervention, with READ 180 and online professional development in Scholastic Red.

We believe that these strengths position us to grow in this emerging technology category and, to help this category take the larger share of the $13 billion of estimated educational materials.

In fiscal 2005, we're launching an updated version of READ 180, which has an improved management system and more power for larger installations, as well as new READ 180 product lines and a new product called Read-About, a technology based program for reading in content areas designed especially for grades 3-5, which has a gaming theory in it which makes it a lot of fun and a little bit like this PlayStation game.

But there are very few existing technology products in that 3-5 -- grades 3-5 area and, these new programs should help us continue our growth.

Another important source of growth in fiscal 204 was teaching resources, sales grew 31% from, large increases in our Classroom Library and Paperback Collection businesses and there is also -- this is also an expanding category in educational materials where we have a leading position and strong competitive advantages of the two, Twin poles (ph) of this technology, Paperbacks and resources both growing in a rather stagnant total educational materials market, growing way faster than the market and together these represent our reading solution strategy, which we believe is a long-term differentiated path for growth in this area.

In our international businesses last year, profits were up 26% on a 16% increase in revenue a lot of -- some of this came from foreign exchange gains of the local -- in local businesses but in their local currencies, their revenues were up about 4%.

We had strong exports and improved operating results in Canada and the U.K. improved both top and bottom lines.

We're pleased to announce this week the appointment of a young but experienced Children's Publishing Executive, Kate Wilson as Managing Director in the U.K, which will help that business grow.

Revenues from School Book Clubs and Fairs were also up in Asia as we defined the Scholastic school distribution model with a strong and successful organization that currently focus primarily on door-to-door sales in seven of Southeast Asian countries.

In fiscal 05' and beyond, the major opportunity for profitable growth is leveraging our U.S. capabilities and our international infrastructure to meet the fast-growing global demand for children's books this includes continuing improvements in Canada, U.K., Australia and driving more growth from export sales.

In addition to adapting our unique distribution models outside the U.S., major opportunities for Scholastic is in English language learning and, our strong publishing and literacy skills in this country drafted on to our strong Southeast Asian and other companies that we've got, will help us build English language learning particularly in Asia.

To take advantage of synergies between children's books and international businesses, we also create opportunities that cut across the company.

This fall on PBS we're launching Maya and Miguel a new animated series, which we have produced with funding from corporation for public broadcasting and is completely developed internally at Scholastic, with a wide variety of advisors from Latino and other communities helping us.

Maya and Miguel is the first series we have produced that begins as a media property created in-house, most of our other stuff is based on books that we already have.

This opens many cross-divisional opportunities including of course book publishing, in spring of 2005 and we have several important licensing agreements including one for children's clothing.

We also continue to expand our Spanish language business given the growing number of Spanish speaking families and children in the U.S., as well as our reach in Latin America, Spanish language books, the entertainment and educational materials are priority growth opportunities across the company and, to meet this demand, we have launched Scholastic in Espanol a new Spanish language imprint and, are revitalizing our operations in Mexico, Argentina and Puerto Rico.

To summarize our plan and priorities for fiscal 2005, we expect growing our School Book Clubs and Book Fair, we expect to grow our School Book Clubs and Book Fairs and improve margins in both.

We also expect to continue last quarter's progress and trade with a strong fund list.

These steps will help us continue building market share in children's books in the U.S.

Second, we have refocused our continuities business and are executing our plans to resume profit and cash flow growth in the direct of the home channel.

This should lead to improved performance in this business in fiscal 2005.

We also have a concrete plan to build on our success, using Internet to transform our content channels including direct to the home.

Three, we expect revenues and profits in education to continue to grow as we build on our momentum and significant strengths and technology in teaching resources.

Fourth, we also plan to maintain profitable growth internationally, especially in export, U.K., Canada and Asia and, five, in some ways and most important, we're committed to maintaining our financial, and improving our financial discipline focusing on generating free cash flow and improving our profitability, capital, utilization and forecasting.

This remains a strong objective for the company and a bit of a sore point for us, because we had been improving our margins steadily in the 2000 - 99' to 2002 period and, in the last two years, due to changes in our core business, we've lost ground in margins but, we are working to rebuild those and are steadily maintaining our focus on improving margins and cash flow and profitability.

This is a very strong focus of the company although we're obviously interested in growth, we're also interested in strengthening our margins as our primary objective.

Together these elements of our fiscal 2005 plan should generate earnings-per-share of $1.50 to $1.70 on slightly lower revenues.

Mary Winston, our new CFO will of course be instrumental in helping us to achieve our financial targets.

She will now discuss in more detail last year's results and our plan for fiscal 2005.

Thanks, Dick and good morning everyone.

On arriving at Scholastic, I quickly established four priorities.

First, was to help Scholastic business growth profitably and second, was to manage our operations and balance sheet in a way that maximizes free cash flow and shareholder value.

Third, to improve our capital allocation processes and thus our financial return and fourth, to streamline financial processes to deliver better forecasting and budgeting.

While it is still early, I believe we have seen some successes in all four areas.

Before I discuss the fiscal year's results, I would first like to give you some detail on last week's announcement.

As you're aware, we have taken a $25 million charge in the fourth quarter of 2004, as a result of our review with continuities business.

This represents write-downs of inventory from discontinued programs, prepaid promotion expenses, small increases in bad debt expense and provisions for return and related severance cost.

These charges have been primarily recorded as components of cost of goods sold and SG&A in the children's book publishing and the international segments.

We also expect to incur charges in the first quarter of fiscal '05, $2.3 million or $0.4 per-share for additional severance cost related to the restructuring of the continuity business.

Also, last quarter we received a $10 million cash payment and recorded an $8 million gain, associated with the termination of sublease in our headquarters facility.

We also had severance charges recorded principally in the first half of fiscal '04 related to the May '03 reduction in force.

These items resulted in net expenses for fiscal '04 of 20.7 million, or %0.33 per diluted share.

This compares with the net expense in fiscal '03 of 9.9 million, $0.16 per diluted share.

Now, I'll review the base results for the year as well as our outlook for 2005.

Revenues for the fiscal year were up 14%, from tremendous Harry Potter sales in the first quarter and. from growth in our School Book Clubs, Fairs, education and international throughout the year.

In the fourth quarter revenues grew 5%.

Operating income declined 4 million for the year and 19 million for the quarter.

With previously mentioned revenue increases offset by lower profitability and continuities in of non-Harry Potter trade sells, as well as the impact of continuity charges I just discussed.

As a result, earnings per diluted share for the year, were even with last year at $1.46 and down for the quarter by $0.16.

Operating margins fell in fiscal 2004 to 5.1%, primarily due to charges and lower profitability in our continuities and non-Harry Potter trade business.

Excluding the charges in both periods, our fiscal 2004 operating margins was 6.4% compared to 6.7% in 2003.

Excluding the net charges and gains, in both periods, earnings-per-share for fiscal 2004 was $1.79, a 10% increase over fiscal 2003 $62.

As Dick just discussed, in children's book publishing and distribution we had strong revenue and profit growth in School Book Clubs and solid revenue growth and nearly level profits in Fairs.

Revenues and profits fell significantly in continuity.

Trade revenues and profits were up principally, from record sales of Harry Potter in the order of the Phoenix, but some was offset by declines and high margin sells of backlist titles.

Trade results began to improve in the fourth quarter, with growth in the frontlist sales nearly offsetting continued weakness in the backlist sales.

The continuities charges of each -- of which nearly 23 million were reported in this segment, also impacted profitability in both the fourth quarter and the year.

Overall, the segment's revenues grow 14% for the year while operating income declined 19 million.

Last year, last quarter, educational publishing again achieved double-digit revenue growth with strong 20% operating margin.

For the year, profits increased 11 million to 53 million.

This was a significant improvement over this businesses performance of several years ago, so we're really pleased with that.

International revenues last quarter and last year were also up from the growth in Canada, U.K. and the exports, which included large sales in the Department of the Defense schools system.

This segment's results also benefited from the impact of foreign exchange.

Operating income and margins both improved significantly for the year, but fell slightly in the fourth quarter reflecting expenses associated with the reorganization of our Australian operation.

Media licensing and advertising revenues for the year increased 10% on production fees from Clifford's Really Big Movie and strong sales for Back to Basics Toys, which was acquired in August of 2003.

This was partially offset by lower sales of software and consumer magazines.

Operating results improved slightly for the year.

Corporate overhead increased only 1% last year, in the year where revenue increased a total of 14%.

Cost of goods sold rose 49% -- to 49% of sales in fiscal '04, from 45% the year before primarily due to higher costs associated with the release of Harry Potter and the Order of the Phoenix.

SG&A declined to 40% of revenue from 42% primarily due to an increase in Harry Potter revenues, without a corresponding increase in SG&A expense.

This was partially offset by the continuities related charges of which 15 million was recorded in SG&A.

Bad debt expense was 4% of sales compared with 3.7% in the prior year reflecting slightly higher bad debt expenses in our top continuity program.

Last year, we demonstrated the company's commitment to converting the earnings into cash flow.

We generated 64 million of free cash flow, in addition to the 10 million in cash received last quarter on the termination of a sublease.

Key factors were, improved working capital management, especially with respect to inventory payables and receivables and, improved cash operating results.

The other factor behind last year's improvement was $41 million in reductions in capital expenditures.

As you'll recall in fiscal 2003, we had a $25 million capital investment in a major distribution facility.

In fiscal 2004, capital expenditures of 43 million was below our previously stated goals or our previously stated range of 50 million to 60 million, reflecting fiscal discipline and the timing of some of the investments.

Reflecting active working capital management, accounts receivable as a percent of revenue, at the end of fiscal 2004, declined to 11.9% from 12.9% in the prior year, while inventories declined to 18% of revenue from 19.6% and payables were up slightly.

Strong free cash flow resulted in reduced debt which net of cash and cash equivalent fell below 500 million and, our debt to cap ratio improved to 38% in fiscal '04 from 45% in '03.

Now, let me outline what we plan to do to achieve our financial goals in 2005, without the benefit of a new Harry Potter novel.

We expect to continue organic growth in Schoolbook Clubs with higher margins from operating, from improved promotion and pricing strategy.

In Schoolbook Fairs, we expect both revenue and profit gains, from increased revenue per fair and fair account and greater operating efficiencies.

In trade we expect solid growth, in non Harry Potter sales led by a strong frontlist, continuing improvements in the fourth quarter and continuities, we have taken steps to strengthen the management, improve customer service and focus on our most productive customers and, we expect to improve performance throughout the year leading to improved profitability and lower revenue, on lower revenue.

We expect to continue delivering profitable growth in education and international due to strong fundamentals in both businesses.

As we have in recent years, we'll continue to target cost reductions throughout the company in fiscal '05.

For example, we're expanding our global sourcing and purchasing initiatives and, improving operational and logistic efficiencies.

Improved operating margins remain a top priority for us.

Strong growth in our high margin education business, improved margins in clubs and fairs and continued cost reductions, all should help margins in fiscal '05.

Given our seasonality, we expect a significant loss in the first quarter of the year, which is typically our smallest revenue period, especially relative to fiscal '04 where we benefited from the Harry Potter release.

Our second and fourth quarters, which are usually the largest in clubs and fairs should benefit from growth in these businesses while our third quarter is expected to be nearly break-even.

Overall, our plan for fiscal '05 is to generate sales in between 2.1 to 2.2 billion and earnings of approximately $1.50 to $1.70 per-share.

In fiscal 2005, the company will continue to focus on generating free cash flow.

We plan to work extensively with the businesses, to improve asset management and, especially managing inventory levels in our publishing assets.

My team will work continually with the continuities business to rationalize promotion spending, which is typically a significant area of cash here.

While our fiscal 2005 plan includes approximately 50 million to 60 million in capital expenditures, reflecting a small increase in technology spending to continue strengthening our IT infrastructure.

We believe the prudent level of capital spending, which approximates depreciation and it's year forecast (inaudible).

Overall forecast of free cash flow is 40 million to 50 million for next year.

This is below fiscal 2004's results due to lower anticipated operating results but still reflects our commitment to generate a strong cash flow.

Another top priority for the year is to finding a new company-wide process for capital allocation.

This will allow us to evaluate individual opportunities against common metrics and hurdle rates.

A new oversight committee will evaluate both the new and the on-going investment against these criteria.

Over the long-term, I expect it has significant positive impact on the company's return on invested capital.

We're also committed and continuing to progress -- continuing the progress we have already made in improving the company's forecasting and budgeting capabilities.

As you're aware, we've already centralized the finance organization, which I believe improves both our visibility and our accountability for planning and forecast.

Over the course of the year my team will be rolling out enhancements for this processes and we have to standardize and increase their clarity and accuracy.

With that, I'll turn the podium back over to Dick who will moderate our question and answer period.

Thanks very much, Mary.

Many of you shareholders and analysts have asked about the Direct-to-Home business and so I thought that in my role as moderator of questions, I would ask the first question myself and I will turn the -- turn this over to Judy Newman who will tell you a little bit more about our strategy for the Direct-to-Home business.

She is been working very intensely since March on the Direct-to-Home business and worked for building a new team and a new strategy and I am sure you'll look forward to hearing from her as to exactly what she's trying to accomplish.

Thank you, Dick.

OK, as Dick said earlier, our Direct-to-Home business is about a new-targeted model, which focuses on gathering long-term relationships with families and addresses the three key drivers to profitable growth initiatives.

OK, so first our strategy focuses on customer acquisition costs, applying new statistical models to identify profitable customers segments and refuse profusely to unprofitable customers segments.

We're also revamping our promotions, placing greater emphasis on value placed offers as opposed to free books and this is going to improve the net profitability of promotions.

Overall, we believe our new strategy will significantly lower acquisition costs and improve promotional results.

Second, our new plan takes steps to improve customer retention and pay rates with new credit models that will govern our promotion campaign and our back-end marketing.

We've significantly improved our customer service with a new 800 number and we're implementing a new customer relationship management system.

Based on successful test results in this field, we expect the 800 number accesses for all customers is going to make improvements in the country as well as upsetting opportunities and greater customer satisfaction.

Third, we're developing key growth opportunities for this business in terms of new products and new sources of customers.

In addition, to especially a strong portfolio of core products like, the Dr. Seuss DVD, as well as our school based products.

We are also developing a number of new niche businesses.

OK, to execute this strategy we have realigned the organization, in June, we implemented a significant staff reorganization.

Eliminating a layer of long time senior management and I have brought in a strong new management team both from within Scholastic and the industry.

This new team includes Eric Fullove (ph), he is the new Head of Finance and formerly Head of Scholastic Internal Audit.

Steve Tate (ph) who is now head of Direct Marketing Services and he ran Scholastic National Distribution Center for over nine years and he also has good great sense in customer service.

We also have Heather Briget (ph), she is our Head of Marketing in the U.S. and product development and, she came to Scholastic from Readers Digest where she ran their young family's business.

These three join a very strong team.

Overall, I'm really confident about our new strategy.

I'm really confident about this new team and, the long-term availability of Scholastic Direct-to-Home business.

And I look forward to reporting our results to you in the future.

Thank you Judy.

Now, the floor is open for questions.

You know, the previous years we had lots of speakers in this presentation which I'm sure improved the interest but it also created a greater length and so we've gone to a little bit different format here and we have got our Senior Management team here as you know, Beth Ford, Head of Operations in IT, Debra Forte, President of Scholastic Media, including Scholastic Entertainment, Barbara Marcus, President of Children's Book Publishing Distribution, Margery Mayer, who is President of Scholastic Education, Donna Iucolano, President of e-Scholastic our Internet activities and, Judy of course you just heard from and, Mary.

I'm here to answer questions to moderate direct questions and I will take the questions on behalf of you for international.

So why don't we start with the audience here then we'll move to the telephone, bear in mind you need to identify yourself and speak into the microphone which, Peter, you have, and Peter Appert would you ask the first question?

Sure, thank you.

This would be I guess going out for either Judy or Mary, I'm wondering if you could quantify for us, the operating earnings benefit specifically accruing from the restructuring charge you're taking in the fourth quarter for the continuity business, so how much fixed cost is taken out of the business from that and, then secondly for Mary, given that you're here now a bunch a months, I am wondering if you could share with us your thoughts on what you think an appropriate level of profitability is measured by margin would be for the Scholastic businesses you know, over the next couple of years, particularly I'm thinking about in the non-Harry Potter years, thanks?

Peter, first of all, you know, we don't give breakdowns on our segments or the details within the segments so, operating profits for the Direct-to-Home business is not something that we disclose.

We can certainly make comments on the impact of the write-down and the general areas of profitability.

Let me just take -- let me take one question that you asked me independently about the continuity business.

You asked what kind of level of revenue declined would there be in the continuity business and we're believing there will be because of our more targeted promotion probably look for a 10-20 % range of decline but, profit of the promotion will go down more dramatically improving the margins, in that business and, that is part of the strategy for that changed business.

So, I'll ask Mary to deal with the question of the profitability of the business ,relative to the write-down and, of course her thoughts on improved profit margins and margin goals.

OK.

Well, and I think actually Dick answered the first part of the question just in the way I was going to which is that, the exact impact on the profitability for the fourth quarter relative to the charge is not something that you know, we would normally or can disclose at this point.

In terms of my views of the margins for the company overall, obviously, even though you characterized the whole bunch of months it has been, four plus months so it is still early days and I'm still learning the business, learning the company and I am learning the industry.

But there is no question as we look at the company, we do have opportunities to enhance our margins in all of our businesses and that is why that is a primary focus word as we go into next year.

And some of the things that we're looking at there is every element of the P&L basically, so driving top-line growth, managing our expenses more effectively to enhance margins and then of course looking for opportunities to generate cash flow from the businesses so it continues to be a high priority in terms of setting a specific margin target for the business yet, I'm still reviewing the business and have not quantified that on a specific concrete number yet.

I think we -- Peter, just to -- I'll add my own thoughts on this because I think it's a key question or the key question really for the company.

I said before we're increasing our margin several years ago and we had several changes in our business that have reduced our operating profits in those segments.

This is had a dramatic effect on our progress in operating margins.

I'm sure investors may sit there and think, you know, our operating margin for next year is only climbing a little bit, basically flat. why don't they just tear the place apart and get back to the 9%, 10% operating margin goal, which we previously had or higher?

And my conclusion is that and, it's partially reflected in the kinds of things you all have been saying too, is that we -- this is a slower turnaround process and we have big businesses, lots of them have operating, have growth in them.

We don't want to kill the growth off by indiscriminate cost cutting.

So, we are turning the ship by focusing on cost control, as Mary said, continuing to reduce our manufacturing and distribution costs and evaluating our pricing strategies, looking at areas that are under performing and getting rid of them or insisting that they improve their profitability, going after the ones that are high-margin businesses and pushing them harder and in that and I am quite confident, in that context we're improving our systems so we have better information about where our costs are and how to cross-promote to our customers bringing our promotion costs down, which is a key cost of the business.

And in by constant steady progress in these areas, I am confident we will resume our margin growth, yes.

Just wondering if you could talk a little bit about Maya and Miguel, is that kind of signal a new shift into enhance development and then secondly on continuities, we were just wondering how you see the mix of acquired customers evolving?

Is there one channel --?

OK, thank you.

That is a good question.

Barbara, will you take Maya and Miguel and then Judy, why don't you come back and talk about how you're going to find new customers?

Maya and Miguel is not necessarily characterized as a shift but, it certainly takes advantage of the expertise and resources we have in the entertainment group and, we're able to maximize them across the company without having to depend on a third-party.

So, I think that's good news for our group and good news for the company.

Good.

For new customers, one of the exciting new opportunities we see is in parent cool, which Dick mentioned and we've done some great testing in the past stream and beginning in late fall we'll be rolling out and leveraging our teacher cool channel and extending that to parent online ordering.

So, for the first time we'll be connecting directly to parents online.

We're rolling out to 200,000 teacher customers, so that's a great new opportunity for us to connect directly online to parents.

So that, we believe, a great offset to some of the Do Not Call.

One of the things about Do Not Call, we know the customers are there, we just have to find new ways to get to them.

OK, Yes.

Dick, you mentioned that trade was down 7% last year in ex-Harry Potter.

Could you address the issues that you think of attributed to that, was it cannibalization of the Harry Potter book and, then the follow-up on the Capex question, could you tell us what are the old hurdle rates for your Capex were and, what your new hurdle rates or returns you're looking for on Capex?

OK.

Let's see, Barbara has been working, you know, extremely hard turning around our trade business and she will comment on the state of the industry, what we're doing in that context to improve our business and trade.

I think we don't see it as cannibalization.

I think what we do see is there has been a shift in how the industry operates and, somewhat sluggish in children's book area and, I think we saw lower backlist sales, which we talked about in the presentation and, higher returns with our accounts used returns as a way to both manage on their cash flow and, I think we're aware and, are working with our accounts about how they order our books.

We internally have shifted some of our publishing because we have seen certain accounts experience growth, the mass market accounts as well as, really driving the growth and shifted our publishing and, we are working closely with our accounts to manage the inventory levels of our books and, we see that that we'll have a better net business.

Yes, I think in terms of the hurdle rates, I think we're putting in a more formal process.

We always have reasonable hurdles rates but, we didn't have a very good process or managing following up on.

We're putting in a more formal process.

We always had reasonable hurdle rates but we didn't have a very good process for managing, following up on them.

We're strengthening the process, getting more people involved, more stringently analyzing the proposals, Capex and in other areas of spending, all areas of the balance sheet spending in the company.

So, I think it is more the focus and process but Mary, why don't you take a crack at that one, too.

Yes, I think I would agree with everything that Dick said and, I think also as it relates to our Capital spending, now and in the past year, its pretty much infrastructure spending and baseline spending and things that you need to be done, in order to just enhance the baseline business.

So ,that is the realm that most of our capital spending is in.

But as Dick said, as we look at our capital allocation processes overall, we are certainly establishing formal criteria, we're reviewing all of our spending, not only capital but, other spending as well, relative to uniform criteria on a return basis with the recognition that we only have limited resources to invest and so, we will be drawing the line once we get to a point where we don't have further resources to spend.

Yes, I think that infrastructure point is an important one, we spend considerable money in the past -- two or three years ago, in building up the infrastructure relative to our $2 billion revenue level and now, we don't have -- we made that -- those expenditures and we're changing the focus of our Capex spending.

Yes.

A couple of questions for Beth, could you talk about the cash costs related to the areas that you oversee in 2004 how they changed and came down, and the outlook in 2005 on year-over-year and, then on a more revenue side for Margery and Hugh who is not here, both of you had did one time sales Department of Defense for Hugh and Margery, I think you had a Library sale in New York City.

How do you overcome those comps in 2005 on returning out for the harper (ph) of large size?

OK, let's see, Beth, do you want to talk a little bit about the infrastructure costs and the costs you oversee and, we will then turn to Margery and (inaudible).

Sure.

The primary focus of my responsibilities would be on the distribution warehousing logistics, cost of goods in purchasing areas.

We had a very good year actually, in those areas in terms of driving efficiency and cost reduction.

On the purchasing area we had the second year benefit of that multi-year purchasing initiative that we had underway a couple of years ago and, we overachieved our objective in that area and, we are able to drive down reduction and spending in terms of costs of goods.

In efficiencies, especially in network optimization as it relates to Fairs and, our ability to leverage the volume increase we saw especially in Clubs and take a cost per transaction decline, we had a very good year and -- in those particular areas we were able to take cost out as well.

In network optimization infrastructure, this past year as we have in previous years, we consolidated some smaller facilities into our national service organization, also continued the optimization of the Fairs network and some of those we will see benefits for again this next fiscal year.

OK.

Margery, do you want to talk about the one-time sale structure?

Yes.

We did have some nice one-time sales this year, but, more than our one-time sales, was our strong organic growth of our business.

We had good growth in our paperback business without our New York City sale and, we also had good growth in our curriculum business driven by Read 180.

We do have a couple of promising things happening this year, so we believe we will grow the business, without those one-time events.

I think in international, the same thing is true.

We did have a wonderful sale to the Department of Defense that won't recur.

On the other hand, all around the world we're seeing international revenue increases and profit increases.

Our focus in the U.K. and Australia has been more on profit, less on the top-line and in Asia we're seeing more top-line growth, so I think we'll be able to manage those effectively and, improve profitability in that segment even though we had a very profitable sales -- significant sales for the Department of Defense.

That is a challenge.

Yes, Andrew.

Much less profitable was Harry Potter, this edition of Harry Potter relative to others or, was it at all and, how do you see the trend going for the next couple?

Barbara, let me just preface that with the -- one of the issues for this year on Harry Potter was the -- we sold terrifically the new book but, less so the backlist books and, that did have an effect on our profitability.

Do you want to talk about that?

I think how we would answer that is that, we don't give details but, Harry as a property is extremely profitable for us, and as a comparison it was extremely profitable and, has been as the other books has been.

I think the issue which we did talk to you about is some of that profitability was eroded by the level of returns, which we did get back earlier in the year.

Any other questions from the audience here?

Yes.

Go ahead.

Just a couple.

First on the Capex discipline, Mary, if you wouldn't mind since you are new provide us some incite that you're trying to put more of the standardization practice and, without getting yourself in trouble I guess, how would you characterize, you know, ratings how it was done before and just seeing Capex go up in a 10% and 12% or whatever it is coming year, you know, is that something that is going to take a couple of years to filter its way through, and then just relative to the educational budgets this year would be -- you know, are we going to hear anything about that plus or minus in our municipality is starting to come out of that a little bit and opportunity to increase or what are your thought are?

Well, I think I will avoid getting myself into trouble, by characterizing how things were done in the past, I think though and what I have seen in terms of the capital spending that I reviewed in recent years, all those expenditures were approved and they made sense and, they were the things that needed to be done, so, you know, I think that what we're doing now is formalizing the process, adding a bit more rigor around it, adding a bit more -- well, increasing some of the hurdle rates, comparing the investments more stringently relative to each other across the various businesses and, across the company and, just formalizing the process and taking a tighter look at it than we have in the past.

Before I -- before Margery answers the question on the general education market, I would like to point out again, that we had a terrific year in education, despite the fact that there is, you know, there has been constraints in the marketplace and other people have been doing quite as well.

This is a result of our terrific strategy in education and, also to the leadership and, direction of Margery has provided so well --.

Well, thank you for that.

I'm sure you would like to comment on the overall education budget, please do.

Well, one of the things that has been good for us is that we shifted our business model away from dependency on adoption cycles which, as you know, has not been favorable for people to more funding coming from grants, federal funding, et cetera.

And our -- what we generally found is that when -- because of No-Child-Left-Behind and the pressure on raising scores, especially at the grades that are being tested, that when we go in with a good solution to raise reading achievement, the money can be found.

I do think there is going to be some relaxing of funding in schools but quite honestly, more often than not funding is not our issue.

OK.

Any other -- the last question from in here and then we'll turn to the phone.

Yes, I was just wondering if you could drill down a little bit on trends in Fairs and really in the year I think its maybe just a general concern about saturation, just curious if you could give the specifics of revenue per fair, some of the strategies that are working and, what you are planning going on forward?

Good.

Barbara, you should tell us about what the good things that are going on in the Fairs.

I think we are -- I think what you saw earlier in the year is that we were getting the fair bookings that we wanted but we were -- there were some inventory moments that we had, which wasn't our sense of revenue per fair that we achieved in the fall.

I think what we have looked at is, we are again, as the rest of the company is really looking at that business strategically and, even though our read renewal rate or read-booking rate is not at the 90% that is still not good enough.

We really feel there is a huge opportunity with those Fairs, with those customers that they should be coming back to us and, they have experienced a fair and, they are prime customers to go back and, so that is one area where we really feel there is an opportunity.

We also feel that there is revenue for fair opportunity, but we do feel, we continue to feel there is a second fair opportunity as well.

So we do feel there is growth in the fair count here.

OK.

Let's see, we'll go to the phone.

Thank you.

(Operator Instructions)

Our first question is coming from Lauren Fine of Merrill Lynch.

Please go ahead.

Thank you.

I guess I'll just follow up on Bill's question, Barbara.

If you could tell us the breakdown on revenues, of the increased revenue per fair and, what the percent change was in Fairs and, then similarly, on the book club business, in the past you shared with us whether there has been a change in the average size of the order and, then I do have a follow-up question.

I'll take the fair and then Judy will take the club question.

Sure.

OK, we have had on our increase in revenue per fair for the year, it is about -- we usually -- do we usually say -- OK, I wanted to make sure -- how we breakdown.

It is usually about, you know, between 2.5 and 3 and the rest is in fair count.

Did I answer that, Lauren?

Yes, it did.

On club order size, Lauren, we'll ask Judy to answer that.

In general, our growth this year was produced by increased orders, but we may see some-- next year we may see some increased revenue on fair but, why don't you give us your perspective.

I mean revenue per order.

Do you want to take that one, Judy?

I think it is pretty simple though there is no question this was a great year for the Club business but, as Dick said, a lot of the financial growth or the revenue growth was definitely driven by the number of orders as opposed to the revenue per order.

We did a lot of focusing on that business and providing incentives, the teachers, the order and also as you know, we acquired the Troll business and so we had a full year of that business integrated into our operations.

And typically the Troll club had a lower revenue per order than the traditional Scholastic club, so even though our overall revenue was up, you know, tremendously for the year, the revenue per order was slightly lower low.

OK.

I guess my follow-up is that in the past you've typically given us a sense of your growth by business for the upcoming year.

And if you're not prepared to do that, I'm wondering if you could give us a sense today, given that half of the club business growth came from Troll, so it was more of a single digit business and Fairs were obviously single digit.

Could you give us a sense of what you think the long-term growth rates are in each of your businesses and then Mary, I'm wondering if you want to commit to a margin target for '05 and, then finally, I understand you don't like to breakdown the individual margins of some of the businesses but was the Direct-to-Home business profitable, before the charge and, when you talk about the margin improvement in that business are you talking about pre or post charge?

OK.

That was like three or four questions.

Actually, it could have been four or five, I'm sorry.

Yes.

In terms of, I guess the question on committing to a margin, you know, for the coming year and, you know I would rather stay away from making a direct commitment to a specific margin for the coming year.

In terms of the margins for our businesses or give the detail that we have given you in the past, in terms of directional growth for our business is going forward, I think we have said that we expect growth in all of your core businesses and, I think the fundamentals are strong in all of our businesses and, without putting a specific number for to it, you're right, you specifically referenced the club business and the fact that we had the Troll acquisition but in addition to that we had a lot of organic growth in that business as well.

So, I think for the year, the growth in that business was about half from the Troll acquisition and, about half from organic growth and we expect to see that continue.

We have a lot of momentum in the education business, we expect to see strong growth there.

Same thing on the international front, so again without putting specific numbers to it, I can say that across the board in our businesses we do expect to see good growth from organic developments in the business.

Yes.

Direct-to-Home was marginally profitable before the charge but, it had been significantly profitable in the prior year and we expect it to be profitable on its own in the upcoming year that is without reference to the charge.

We usually talk about fair count and, I believe we can say that our fair count is on plan for the fall, for our fall fair that is an indication when you are showing given the (inaudible)

OK.

Any other questions on the phone?

Thank you.

Our next question is coming from Brandon Dobell of Credit Suisse First Boston.

Please go ahead.

Hi, good morning.

A couple of questions on the I guess kind of more generally, if you could give us a little bit of sense on the fairs what the -- if you think about the changes in inventory or logistic strategy.

Dick you mentioned kind of focus there on that is a big driver for improved profitability.

If you could give us some a little bit more color on what changes you might be contemplating either on the inventory side or, the warehousing side and I'm not sure if I heard this or not but for Mary, does the '05 guidance incorporates or not incorporates the charge (inaudible) in the first quarter.

We have a little trouble hearing you on that one, Brandon, but I think we can talk about it.

Beth, maybe you can deal with the fair inventory and warehousing costs side and then come back -- did you get the last question?

OK.

Actually I'm working pretty closely with Barbara and her team and, the fair inventory issue, one of the things that we're working on right now is addressing when the fair is actually going to occur during the school year.

That implies something about a level of inventory you would carry based on what working capital and inventory you would need out in the field.

So, as we're addressing that issue, which we call peak, we are addressing some of the underlying issues associated with it making sure we have the right product turning around at the right time in addition to our case or cases or our network side.

As we're looking at that and looking at optimizing the network, one of the things that you have to do to set up a network respectively and make sure it is optimized is understanding what the sales strategy is and, how do you need to service those customers.

So we're working on a number of elements on the sales side on the way we're interfacing with our customers, on what our customer requirements are and as we do that, it will allow us to continue to revamp the logistics on a network going forward.

Brandon, could you repeat your question on '05 guidance?

We got some of it but not all of it.

OK, sure.

Does the guidance contemplate the charge that you're taking in Q1 related to the recent announcements?

I think you said does it contemplate taking any additional charges?

We know that we have severance cost in the first quarter which we -- which was in the press release in the at home business.

Mary, do you want to address the rest of that question if we heard you properly Brandon.

Yes, I think other than that, I mean, at this point we don't contemplate any other significant, you know, significant charges.

OK.

I will follow-up later.

Thanks.

OK.

Thank you.

Our next question is coming from Rob Health (ph) of SMI.

Please go ahead.

Thanks.

Maybe I'll ask the previous question again.

Does the guidance include the charges that you discussed it is going to happen in the first quarter and second of all, I just have a question regarding the gap between earnings I guess the earnings guidance and the free cash flow number if you sort of back in what you think you can do in an earning basis, you know, net income would be about 60 million or 65 million on your guidance and your free cash flow is something less than that.

I'm just curious why there is such a big gap there?

It seems like after all you guys have been through and you have spent on the new distribution facility, you know, and sort of streamlining the businesses, unless you're really ramping up working capital which I doubt is occurring, where is all the capital spending and I guess where is all the money going?

Thanks.

OK, I'll take both questions.

The first question was around whether or not charges are included in the guidance and, typically when we give our guidance that is on the base operations exclusive of charges but, obviously we have already disclosed it in the fourth quarter, we do have a continued charge associated with the restructuring of the continuities business and, you know, that is going to be $0.4 per-share so in a $0.20 range, you know, yes.

The second question was around cash flow and, your observation that in your estimation our cash flow target seems a bit low but, I would call your attention to the fact that first of all cash flow was very high this current year because we cutback on capital spending and we took, you know, some direct actions but, we've always said that our baseline capital spending is approximately 50 to 60 million and that is cash flow neutral and it approximates our level of depreciation and that is what we're targeting for the coming year.

So capital spending is higher than it is in this current year but, it is not excessive, it is our normal base level of spending so there is no unusual high spending that is going on.

We're continuing to invest in our IT infrastructure to shore that up.

In terms of working Capital Management, that was a priority for us this year and, it continues to be a priority, with a particular focus in the coming year on inventory management.

So we are continuing to look at that and focus on that and we think the cash flow range of 40 to 50 million is a reasonable range.

I guess I'm just lost on if you take net income and you, you know, add back any non-cash charges to that and, if those are equal to your capital expenditure needs and prepublication, you know, capitalized numbers, you know, there is a gap there still of probably 10 or $15 million and I'm just wondering, you know, why that -- you know, assuming that working capital is being reduced because of perhaps continuities being a smaller business.

Well, first of all, I think it depends on which end of the range you calculate the gap on but the other thing that is happening is we do have some slightly increased investment, in our prepub spending, associated with our education business to support some of the new technology products that are coming out.

And I guess that is what I was getting at.

I mean, in a long-winded question it seems like then, where -- what is going to be the return on those?

Every year we have some more of these, you know, higher in prepub costs and, it just always gets furthered away it seems like and, I guess that is more editorial than anything else but, it seems like you guys should be generating free cash, you know, equal to above your earnings number.

So it is somewhat frustrating.

Thanks.

Let me just comment on that.

In the technology business your costs are very much upfront and your -- the margins on this business are high and, as we switch our business more to technology, we have more upfront prepub spending.

I would definitely not agree with your characterization of our prepub spending as frittering away money and, I think there is a good reason for it based on the technology shifts that we are seeing for prepub to go up slightly, but it is not going up dramatically.

There appear to be no further questions in the queue at this time.

I would like to turn the floor back over to Mr. Robinson for any closing remarks.

OK, well, first of all, Bill had asked about Maya and Miguel and Debra correctly said we were not expecting a dramatic shift in that business or a lot of new production.

On the other hand, we're extremely proud of this particular product and we think it is going to be great for the company and it is going to be great for the viewers and we expect to see considerable benefit from that program over time.

I also think that perhaps in our presentation here we're concerned obviously, about the fact that our earnings didn't meet our targets but, there is so many very strong things going on in the company and I -- and as I view it our future -- our future is extremely bright and our ability to manage our cash, I think, is significantly improved and, our focus on margins is intensified so I think you'll -- I believe that -- well, the mood of this meeting has been slightly quiet, I want to leave you with a feeling that this is a company that is committed to improving the financial characteristics of the business.

It has a great core of children's book business, which is gaining market share and, it has its ups and downs but, is generally moving forward beautifully and Clubs is improving in our Fairs and, the trade we know we need to turnaround in a non-Harry Potter year and, Direct-to-Home business has been a disappointment this year but, it needed to be changed in the direction to fit the way the world is receiving direct marketing these days.

We have made that change and, I think we can return that business to profitability, the education business is strong, International is growing and under the direction of our new CFO, we are definitely improving the ratios in the business and, we continue to focus on cost and improving cash flow.

So, I don't want you to leave thinking that we are sad and, we have our heads down by no means we're very confident and, we're building this company for the long-term but, we're also focusing on the improvements of the financial characteristics, which we know all of us want just as much or more than -- even than our shareholders.

So, you have my commitment to do that and, I know that you continue to believe in the company as a long-term franchise and we're riding the ship at this standpoint of improving our financial characteristics and, that is an ongoing commitment that will make us more profitable in the upcoming year in the future.

Thank you all for coming and, thanks to the staff who are here.

Thanks to our investors and, we will look forward to having a good summer and a strong fall.

Thanks again.

Thanks to all my fellow Scholastic people.