Scholastic Corp (SCHL) 2008 Q4 法說會逐字稿

Good morning.

My name is Bree, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Scholastic quarter four fiscal 2008 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

(OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the call over to your host, Jeffrey Mathews, Head of Investor Relations.

Sir, you may begin your conference

Thanks, Bree, and good morning everyone.

Before we begin, I'd like to point out that the slides for this presentation are available for simultaneous viewing by going to our website, scholastic.com, clicking on Investor Relations and following the link from that page.

We'd also like to note that this presentation contains certain forward-looking statements which are subject to various risks and uncertainties, including the condition of the children's book and educational materials markets, and acceptance of the Company's products into those markets and other risks and factors identified from time to time in the Company's filings with the Securities and Exchange Commission.

Actual results could differ materially from those currently anticipated.

Now I will introduce Dick Robinson, the Chairman and CEO and President of Scholastic, to begin our presentation.

Thank you, Jeff.

Good morning, and thank you, everyone, for joining us on our fiscal 2008 year end conference call.

I'm joined today by Maureen O'Connell, Chief Administrative Officer and CFO, and the Presidents of Scholastic Club Trade, Media and Education businesses, who will be speaking later.

As you know, fiscal 2008 was an important turning point for Scholastic.

Of course, we had to ensure the successful publication of Harry Potter and the Deathly Hallows, which launched just a year ago this week with a stunning performance, selling 14 million copies efficiently and profitably.

We also knew that this was the final year of a new Harry Potter release, so we took strong actions to attain our goal of 9 to 10% operating margins for fiscal 2010.

First, we executed our two-year, $40 million overhead cost production plan.

These actions mitigated approximately $15 million in cost increases, primarily from postage.

Second, we exited the unprofitable direct-to-home continuities business so we could focus on building relationships to the home through our profitable Clubs, Fairs and Online businesses.

Third, we invested across the Company in initiatives to drive revenue growth, as I'll discuss in a moment, and we continued to work on improving our cash and balance sheet.

We generated over 188 million in free cash flow, exceeding our plan and bringing our cumulative total over the past five years to more than 500 million.

This has allowed to us maintain a strong balance sheet and significant liquidity as we repurchased $220 million in stock.

Additionally this morning, we announced the initiation of the 7.5 cent quarterly dividend, demonstrating our commitment to returning cash to shareholders.

This morning, we will focus on what we are doing to reach our 9bto 10% operating margin goals.

First, further cost reduction is a key element of our plan and is our top priority in a tight economic period.

This is particularly critical because in fiscal 2009,we expect paper printing shipping and fuel costs to increase by another 15 to 20 million.

To offset cost inflation and to reach our goals of 9 to 10% margins in 2010, we have set an aggressive plan to further reducing costs by 25 to 35 million on an annualized basis in fiscal 2009.

As Maureen will discuss later, we are attacking our supply chain and manufacturing costs, as well as postage, shipping and freight.

We also plan to reduce head count and improve efficiency through streamlining some parts of our business.

Modest revenue growth is the other critical element of our plan to reach 9 to 10% operating margins: Scholastic's businesses have strong operating leverage, with high variable and profit margins; and therefore, modest revenue growth can drive significantly higher earnings and margin improvement.

Now let me give an overview of how and why Scholastic will grow.

First, we will leverage our scale of unique distribution channels to increase market share and profits.

Last year, Scholastic sold nearly half of the children's book in the U.S.

on a unit basis though our school Book Clubs, Fairs, Trade, Education and Online channels.

We have unmatched reach to teachers, parents and kids and a strong value proposition.

This advantage can be seen in last year's solid growth in book fairs, for example, which grew versus flat or negative same store sales growth among retail book sellers in the same period.

Our core children's book businesses represent a strong opportunity for increased profitability given their particularly strong operating leverage.

Second, we will implement strategic price increases.

After several years of trailing our competitors' price hikes, many of our books now sell at a significant discount to the market -- in Fairs and Clubs in particular, but also in Trade and Classroom Libraries.

Consequently, we have substantial opportunities to selectively raise some prices while preserving our value proposition and competitive pricing position.

We believe this will have minimal impact on demand, while providing at least 20 million of increased profitability in '09.

Third, we'll leverage our scale of differentiation to grow online as we expand our sales direct to parents and kids.

As Judy Newman, President of Scholastic Book Clubs, will describe shortly, Scholastic has an opportunity to substantially increase online sales across the Company, beginning with Clubs.

We are already the third largest internet book seller in the U.S.

With the launch of the second-generation of COOL, or Clubs Ordering Online, we are leveraging our online relationships with teachers and extending it to parents and kids.

COOL will also serve as a platform for selling digital products.

Fourth, as we have done for more than 20 years, from Clifford, The Babysitter's Club and The Magic School Bus, through Goose Bumps and Harry Potter, we will continue creating great children's content and use it in print, online, TV, film and digital media to grow revenues.

As Ellie Berger, President of Scholastic Trade, will discuss, this year we are introducing a number of strong titles, including an innovative multi-media concept, The 39 Clues, where books, collectibles, games and interactive website together engage kids in a great story.

Scholastic also has a strong track record, taking print franchises to TV, film and interactive platforms to drive incremental revenue and book sales.

Deborah Forte, President of Scholastic Media, will discuss our strong line up of television, interactive games and move production, as well as the recent excitement about 39 Clues.

Fifth, we will build on our lead in Educational Technology, where we are the number one player offering tech products that are proven to raise achievement.

The U.S.

educational system phases a staggering achievement gap and must continue to shift spending toward more effective tools such as our solid technology products, and away from unsuccessful traditional methods.

Margery Mayer, President of Scholastic Education, will describe how our growing Tducational Technology business is benefiting from this important educational trend.

Sixth, we will target middle class families around the world who want their children to learn English.

As you know, we have a strong base in Southeast Asia including The Philippines, Malaysia, Thailand, Indonesia, Singapore and India.

Our total revenue in this region exceeded 75 million last year and is growing at approximately 15 to 20%.

China is potentially an enormous English speaking market ,especially among the country's children who are the first generation being taught English widely.

For this reason, we are building a strong scalable position in China.

Several years ago, we launched Innovative English Language Teaching in our school in Shanghai and now have 1,500 students in five Scholastic schools.

Last year, we also launched Scholastic Book Clubs in China, with revenues approaching 1 million in the very first year.

Augmenting our own schools, we have recently moved into a licensing agreement with Red, Yellow, Blue Kindergartens, a private chain of early childhood centers in China to create Scholastic-branded English language centers inside their school.

This will substantially increase our English language teaching revenues in China.

We have also recently reached an agreement with China Daily, the premiere English language newspaper in China, to partner in selling English language classroom magazines for elementary, high school and college classes.

This is just one example of our growth plans in Asia.

These incremental investments we have made in six key areas will help build revenue growth in fiscal '09 and beyond, even in a challenging economic climate.

We also know historically that spending on children's education and books continues to grow even during economic slow downs.

And our competitive price and strong value propositions are key advantages relative to other channels of distribution, in particular when parents and teachers become more value-conscious or when school districts must pick the highest impact purchases in a constrained budget.

For this reason, we are confident we can achieve modest company-wide revenue growth in fiscal 2009 and in the long-term.

Now, I'd like to ask Judy, Ellie, Deborah and Margery to speak briefly about our specific plans in each of these areas.

Thank you, Dick.

Good morning everyone.

I'm Judy Newman, President of Scholastic Book Clubs.

School Book Clubs has built a highly profitable, direct selling model unmatched by any other book seller.

Over 1 million elementary and middle school teachers and tens of millions of families participate, buying carefully selected value-priced children's books each month.

For their support of Scholastic Book Clubs, teachers receive valuable incentive which they redeem for books and materials for their classrooms.

By supporting teaching in this way and offering quality, value-priced books for 60 years, Scholastic Book Clubs has earned tremendous loyalty among teachers and parents like few other companies.

Over the past several years, we have worked hard to continue to meet our customers' needs and increase profitability.

In particular, we have migrated the majority of teacher ordering to the internet through Clubs Ordering Online, which we refer to as COOL, and tightened our print catalog promotion strategy and spending.

This has improved profitability and strengthened the business.

We also know through our ongoing research that school book clubs and children's books remain as relevant today for parents, teachers and kids as ever.

Based on this solid foundation, we are poised for big steps ahead in fiscal 2009.

As Dick mentioned, in the upcoming school year we are rolling out New COOL, a completely revamped approach to our online business and our relationship with teachers, parents and children.

As you know, we have been taking orders with our first generation COOL for seven years.

But New COOL is much more than an ordering device.

It is a full-blown, online marketing system with up to the minute e-commerce functionality and significant additional information about our products.

As illustrated on the current slide, New COOL also makes it much easier for parents and their children to directly order competitively priced, quality books online and pay for them with a credit card, all the while continuing to benefit the teacher.

Teachers have always been the crux of the clubs business, and New COOL gives teachers convenient new tools to match children to just the right books for their reading levels and interests.

New COOL has functionality also to help parents make the best selections and teachers to make customized recommendations to parents based on the child's individual needs and tied to what she's teaching in class.

As you can see on the next slide, New COOL also has compelling new features, such as Teacher Classroom Wish List, whereby teachers can list books she wants parents to purchase for the classroom, a great resource for teachers and a great direct way for parents to be involved in their child's classroom.

New COOL maintains all the benefits of engaging teachers who still coordinate and much their students orders.

As always, we will continue shipping orders together and efficiently to the classroom, where the teacher is responsible for distributing the book to their students.

These are key points that differentiate our value proposition and economics from all other internet retailers.

This is really exciting.

Scholastic distribution businesses have traditionally required large fixed expenses to drive revenue.

For example, printed catalogs and postage in clubs and warehouses in logistics and fairs.

New COOL enables us to markets and sell to our unique customer base online, opening new growth opportunities and eventually transforming our economics over time.

With New COOL, we can better enlist the teacher to promote reading and books, give our customers access to all of our offers and clubs across grade levels and target promotions to individual teachers and families.

In addition to the push promotions in clubs, where we decide to offer which month, New COOL will become an online destination for all of Scholastic's products.

One of the exciting dimensions in New COOL is that for the first time in fiscal 2009, customers will be able to by books in core franchises such as Harry Potter, Clifford and Goose Bumps, at very competitive prices whenever they want to, not just when they are available in a monthly club mailing or a school book fair.

Overall, New COOL builds on a strong business and online foundation and will be change the game for Scholastic's online relationships with our customers.

Based on this, we are very optimistic that fiscal '09 will be a year of renewed growth and even higher profitability for clubs as we begin to transforming Scholastic's online relationships with our loyal installed customer base of teachers, parents and kids.

Now, Ellie Berger, President of Scholastic Trade, will discuss how we are building the children's publishing franchises.

Thanks, Judy.

Good morning, everyone.

Scholastic Trade and Publishing has earned the reputation as the leader in children's books, publishing books that are both commercially successfully and critically acclaimed.

Last year, for example, we raised the bar on pop-up books with Matthew Reinhart's successful Star Wars, a Pop-Up Guide to the Galaxy.

It includes intricately paper engineering, battery-operated light savers and spent 22 week on the New York Times Best Seller List.

We also published The Invention of Hugo Cabret, written and illustrated by Brian Selznick.

This 544-page book redefined children's picture books, winning very prestigious 2008 Caldecott Medal.

It is still on The New York Times Best Seller List more than one year after publication.

Both books were among our strongest (inaudible) revenue drives for fiscal 2008 and continue to have very strong back lift sales as we public and introduce exciting new franchises and properties in fiscal 2009.

In September, we will publish The Hunger Games by Suzanne Collins, the first in a futuristic trilogy for teens.

We have done an exhaustive prepublication launch campaign and in the industry this is the now one of the most highly anticipated book of the fall.

In October, we will publish Inkdeath, the anxiously awaited conclusion to Cornelia Funke's Inkheart trilogy.

The two earlier titles in the series spent 60 weeks on the New York Times Best Seller List, and we announced a large initial printing of 350,000 copies for the newest book.

The well-received Goose Bumps Harland series, just launched in the spring of 2008, is a great example of how we leverage and reinvent core Scholastic franchises.

Working with R.

L.

Stein, the author of original series, on a new 12-book arc, we have created an interactive website that accompanies all new Goose Bump books and delivers online games and rich, serialized content.

We've just published the first three books in this newly imagined series, and web traffic and sales are gaining momentum with each new book.

And of course, we continue to focus on bringing new generations of readers to Harry Potter.

On September 23, we will publish a special tenth-anniversary edition of Harry Porter and the Sorcerer's Stone with all new jacket illustrations by Mary GrandPre, with a page of exclusive new material from J.K.

Rowling.

Truly the most innovative product is the worldwide simultaneous English language launch of The 39 Clues on September 9th.

The idea for this multi-platform property was conceived and developed in-house at Scholastic and we own all worldwide rights to the property.

We partnered with best selling author Rick Riordan, who wrote the first book in the series, and mapped out the whole ten-book plot line, which we will publish over the next two years.

Each book in the series is being written by a well-known children's book author.

In addition to ten wonderful books, readers will be able to join the book characters' hunt online, gathering clues, collecting game cards, playing interactive games and winning prices.

We have announced a 500,000 copy first print for the first book in the series and for the first card back, which will be sold separately.

Building the multi-platform world for this exciting new Scholastic property has been extremely collaborative with Trade Publishing working closely with our online group and Scholastic Media on franchise developments.

Deborah will now share even more exciting details about the future of The 39 Clues.

Thanks, Ellie.

Good morning.

I'm Deborah Forte, President of Scholastic Media.

This year, we will build upon our strong track record of creating successful global media franchises which drive book sales and generate incremental production, licensing and merchandising fees by focusing on The 39 Clues and Goose Bumps as our major opportunities.

We are excited about our collaboration with Scholastic Trade Publishing on the web component of The 39 Clues.

Our team is energized and focused on developing the creative assets to build the property as a global media franchise for merchandise, interactive and movies.

As announced earlier this month, we are in development on a 39 Clues movie with DreamWorks and Steven Spielberg and have just hired a writer to begin scripting the project.

Interactive games for the Nintendo DS platform to be followed by the Wii platform are planned for fiscal '09 and '10, respectively.

Merchandise will roll-out in the Fall of '09.

Goose Bumps remains an important priority for us.

In September, we will unveil our newly designed Goose Bumps website which will provide a home base for the brand, allowing fans an opportunity to interact with all aspects of the franchise.

Our Goose Bumps TV series continues to attract audiences.

With Cartoon Network this fall, we are planning a Goose Bumps TV marathon, featuring new episodes from our library, and promoting our books and newly produced Goose Bumps games for the PlayStation 2, as well as the Nintendo DS and Wii platforms.

These games will be released in October just in time for Halloween.

In addition to all of this activity, we've just completed a deal to produce a Goose Bumps movie for Sony Pictures.

Scholastic Media recognizes that children spend a significant amount of time with screen media.

By aggressively extending our franchises so that they are available online, on television, in games and in movie theaters, we can maximize the value of our intellectual property and ensure that our brands have a strong presence in all segments of the children's and family market.

Now, Margery Mayer will discuss Scholastic's growth opportunity in Educational Technology.

Thanks, Deborah.

Good morning, everyone.

As Deborah said, I'm Margery Mayer, President of Scholastic Education.

Scholastic's Curriculum and Educational Technology business has been an important source of higher margin growth for the Company over the past five years.

Our research-based products, especially Read 180, the country's top reading intervention program, and ability to partner with school districts have made us the market leader in technology based instruction.

This segment of the education market continues to take a larger share of spending regardless of the economics cycle, as dollars are diverted from traditional print materials.

The momentum behind the use of technology in schools will continue, fueled by the critical need to raise achievement.

Despite some modest improvement under No Child Left Behind, roughly two out of three students do not still read at a proficient level.

These numbers are magnified in our country's biggest cities, many of which are struggling to graduate even half of their students.

The fact is that traditional print programs cannot move the needle at scale, and educators largely recognize this.

They realize that technology based on research and well-implemented is essential for providing students with the individualized learning that meets the needs and engages them.

Our focus at Scholastic has been technology that promotes teaching and learning; and in that arena, we are number one with more than 160 million in sales.

At the heart of our technology business is Read 180, which has evolved from being a product to a platform for technology-based instruction.

We are using our strong position with Read 180 to expands our business through more Read 180 sales to our existing base through new products that run on our proprietary enterprise management system and through an enhanced list of services we are offering schools and districts.

A great example of this can be found in the recovery schools in New Orleans, where the district is using Read 180 as their core adolescent literacy program.

They have enhanced the program by using our assessment SRI and our reading motivation program, Scholastic Reading Counts!

They've contracted with us to provide ongoing professional development, including in-room coaching.

They've leveraged their investment in our management system by purchasing our enterprise edition of our math fluency program, Fast Math, and they have expanded their classroom libraries as part of their comprehensive literacy plan with Scholastic paper backs.

The great news is that the recovery schools have made impressive gains in reading through their hard determined work and use of our programs and consulting.

In the coming year, we have an exciting lineup of products that build on our Read 180 base.

Most significant of these is System 44, which internally we call the Read 180 Prequel.

We've always told our Read 180 users that students need to have a certain level of prerequisite reading skills to benefit from the program.

Our customers have thus been using various programs to build foundational reading skills with varying success.

Now they can use System 44, which is named for the 44 sounds in the English language.

The product fits into Read 180 seamlessly or can be used independently.

It's pricing is also comparable to Read 180.

An additional benefit for us is that it allows us to keep a substantial percentage of students in the Read 180 system for an additional year, thus expanding our renewable business.

Perhaps more importantly, System 44 expands our addressable market in reading intervention by perhaps 20 to 25%, and should further deepen our track record of success in schools and districts that use our 180 suite.

In math, we've recently launched our (inaudible) enabled version of Fast Math; and in March, we published a new math intervention program with Americas top math educator, Marilyn Burns.

We are supporting these products with high level customer math forms and have been pleased and encouraged with our fast progress in the math market.

We have plans to do more math next year and beyond.

Lastly, I want to discuss our investments in sales and service.

Early on, we realized that technology cannot be sold the same way textbooks are.

To use technology effectively, school districts require extensive service, technical support, professional development and integration skills.

Scholastic has evolved a unique approach of selling both products and support to the school districts.

Last year, we took a major step forward in this strategy.

We separated the Technology and Curriculum organization from the Classroom and Library group and added new sales, implementation support and consulting staff.

As expected, this transition created extra work and expense and occupied valuable selling time.

Nevertheless, last year we bucked the market, maintaining our sales as many competitors saw declines in their supplemental curriculum revenues.

We will continue our evolution in fiscal 2009, consolidating sales management, streamlining spending and updating the compensation plan.

These will improve our efficiency and build on last year's progress.

School districts across the country face many challenges today.

Scholastic Education's mission is focused on addressing schools' most important long-term goal, raising student achievement.

Therefore, regardless of short-term pressures on spending, we are well-positioned for long-term profitable growth.

Now, I will turn the call over to Maureen.

Thank you, Margery, and good morning, everyone.

Fiscal 2008 was a solid year.

We made the top half of our guidance, with earnings from continuing operation of $2.82 per share.

We also significantly exceeded our cash flow guidance, which I'll discuss in a moment.

Looking first at our segment results, in Children's Book Publishing and Distribution, revenue and profits were up significantly for the year.

This primarily reflects tremendous sales of Harry Potter's seventh book in the series, mostly in the first quarter.

Fourth quarter segment results declined however, primarily due to incremental expenses incurred as a final accounting of the Harry Potter series.

Overall, this was our most profitable Harry Potter launch ever.

Very high sell through, efficient distribution and execution allowed to us achieve incremental margins in excess of 30%.

Of course, we obtained such high margins by leveraging Scholastic's substantial infrastructure and unique manufacturing, distribution and logistic capabilities.

Looking at the rest of our Trade business, sales held approximately level during the year and we had a number of hits on the New York Times Best Seller List, like the Star Wars Pop-Up book and Hugo Cabret.

Turning to School Book Fairs, revenue and profitability were up last year, driven by modest gains in revenue per fair, which provides the greatest operating leverage and continues to be our growth focus.

In Clubs, revenues declined as anticipated, as we continued streamlining promotions.

Increased spending on the roll-out of New COOL and on marketing tests impacted full-year and fourth quarter profits in this business.

Turning to the Education Publishing Segment, revenues were approximately flat and profits were down for the year and the quarter as we invested in a strong sales and service organization and in new product development.

However, even as industry-wide supplemental sales declined significantly over last year, our sales were solid in comparison.

Scholastic's print business decreased only modestly, and our sales of Educational Technology and Read 180 remained level.

In International, revenues roses strongly for the year as a result of strong sales in Australia, the U.K.

and Asia, as well as foreign exchange benefits.

Profits also rose from strong performance in those areas, offset partially by lower profits in our export business, which had a large Read 180 sale in the prior year.

In Media Licensing and Advertising, revenue and profits declined in the year and the fourth quarter, primarily because of a shift in School Book Fairs' merchandising strategy towards books and away from PC software, which is recorded in this segment.

Looking at the consolidated income statement, cost of goods sold increased in fiscal 2008 as a result of costs related to Harry Potter sales.

SG&A expense increased, primarily reflecting Harry Potter-related spending, the year over year impact of foreign exchange and greater spending on sales and service in education.

As we said in the press release this morning, we moved forward to negotiation for the sale of our Direct-to-Home business last quarter, and we expect to finalize terms in the first quarter of this year.

Last quarter, we also shut down our school-based continuity business.

This business was facing similar negative trends as our Direct-to-Home business, and would have required additional investment to operate independently.

As a consequence, this business has also been classified as a discontinued op in the current quarter and year, as well as in prior periods.

When we issue guidance in March, we had not yet decided to discontinue school-based continuities.

At that point, losses of approximately $0.06 cents per share for the first nine months of the year were included in results from continuing operations.

These losses have now been reclassed to discontinued operations.

Turning to cash flow in our balance sheet, free cash flow was very strong last year at 187.7 million, compared to 76.3 million in the prior year.

It also exceeded our guidance of 100 million, due to the timing of spending and working capital improvements.

First, prepublication and capital spending were approximately 40 million below our original guidance, as we staged the development and roll-out of new educational products.

Second, approximately 25 million in payables and royalties moved into 2009 due to timing.

The third and remaining benefit was working capital improvements at 20 million, largely in discontinued operations.

We were able to reduce spending in certain areas of our Direct-To-Home business in the fourth quarter, as we negotiated and gained an understanding of deal terms.

This factor was not included in our free cash flow guidance.

Compared to the prior year, the strong improvement in free cash flow was primarily due to higher earnings from continuing operations and favorable movement in working capital; especially, from strong cash collections and lower inventory spending.

Delayed payment of royalty and expenses and the working capital benefit in discontinued operations that I described also contributed to the year over year increase.

Last year, we not only had strong free cash flow, but we had a strong balance sheet.

Unlike many media companies with highly leveraged balance sheets, we ended fiscal 2008 with a net debt to cap ratio of 20%.

After repaying 75 million in bank debt and buying 15 million in public debt on the open market, we had 120 million in cash in the bank at year end.

Combine this with 325 million available under our existing credit lines, and we have ample liquidity and are well positioned to take advantage of strategic opportunities, especially in online and the Educational Technology spaces.

Last year, we also purchased 6.4 million shares of Scholastic stock for 220 million.

At the end of the year, we authorized a program to purchase an additional 20 million of common stock, under which we have purchased an additional 252,000 shares to date during the first quarter of fiscal 2009.

Now turning to fiscal 2009, as Dick commented, we committed to our goal of 9 to 10% margins in fiscal 2010.

Our plan for fiscal 2009 is to achieve modest ongoing revenue and solid margin growth, excluding Harry Potter.

Looking at the individual segments, in Children's Book Publishing and Distribution, we expect modest ongoing revenue growth and improved operating leverage.

This will come from: Incremental orders and higher revenue per order online in Clubs, as Judy discussed, especially in the second half of the year; continued growth in revenue per fair in our Book Fair business, a strong front list and exciting new series in Trade, as Ellie described.

We expect Harry Potter, now a classic on our back list, to generate fills of between 10 and 15 million as we leveraged the tenth anniversary edition of the Sorcerer's Stone, and in November release the sixth movie in the series.

With improved operating leverage, overall operating margins in our Children's Book segment should increase by at least 100 basis points next year, excluding Harry Potter.

As is typical, Clubs' and Fairs' seasonality follows the school year, with the greatest revenue in fiscal second and fourth quarters.

These businesses have minimal revenue in the first quarter when we typically report a seasonal loss.

In Education, Fall launches of new technology products, increased focus on implementation support, and the benefit of last year's new sales and service hires should drive renewed revenue growth in fiscal 2009.

Most growth is expected to occur in the second and fourth quarters, given the schedule of new product launchings.

Sales of Educational Technology, led by Read 180, are expected to rise approximately 3 to 5% for the year, though we will be down in the first quarter relative to the past year due to the prior year comparisons.

Education's operating profits for the year are expected to increase from higher margin sales growth and a consolidation of sales management.

In International, revenue and profits are expected to hold approximately level, reflecting growth in Australia, Canada and Asia, offset by a difficult comparison in the U.K.

In Media Licensing and Advertising, revenue and margins are expected to increase strongly, primarily as a result of solid interactive sales and retail channels.

Corporate overhead is expected to increase modestly from higher facility and medical costs, as well as stock-based compensation, partially offset by lower spending on salaries and outside services.

Our outlook for continuing operations for fiscal 2009 is for total revenue of approximately 2 billion to 2.1 billion, and earnings per diluted share of $1.75 to $2.10.

This outlook represents an approximately 3 to 5% revenue growth, excluding Harry Potter, and a 10 to 25% earnings growth.

You've heard a lot about our growth initiatives, pricing actions and operating leverage.

Now let me focus on the cost side.

As Dick said, we achieved 40 million in overhead cost reductions over the past two years, successfully mitigating 15 million in higher costs last year, primarily from postage.

As you know, commodity prices continues to rises, especially as the paper industry consolidates.

Also, rate increases in our printing contracts are typically pegged to CPI, which has accelerated in the past year.

Because of these factors, as well as rising fuel prices, we anticipate 15 to 20 million in higher costs in fiscal 2009.

We plan to improve margins, more than offsetting these higher costs by reducing spending by 25 to 35 million this year, on top of the price increase of at least 20 million that Dick described earlier.

So said another way, price increases will offset commodity increases, and we have a cost reduction plan on top of that of 25 to 35 million.

We are taking actions in several areas to achieve this.

First, we are aggressively renegotiating and consolidating our supplier relationships for paper, shipping, test service and travel.

Second, we are coordinating printing formats and paper specification across the businesses to increase the size of our paper buys and print runs and lower costs.

Third, we are linking more shipments in Clubs and reconfiguring warehouse operations to be more efficient.

We are also improving utilization of our fleet and book fairs.

Fourth, we are restructuring operations and lowering headcount to achieve a significant part of these savings.

We have already taken firm steps, eliminating positions in Book Fairs and consolidating sales management in Education.

Next, we are consolidating certain IT supply chain manufacturing functions as well as business operations to reduce costs and improve efficiencies.

Our outlook currently includes severance of $0.11 per diluted share, in line with last year.

However, there may be additional severance charges, which we will quantify during the course of the year.

Stock-based compensation expense is expected to be between $0.15 and $0.20 per diluted share after tax next year, compared to $0.11 per diluted share in fiscal 2008.

Based on the currently authorized share repurchase program, our outlook is to have approximately 38.6 million shares for the year on a fully diluted basis.

And fiscal 2009, despite the delay of approximately 60 million in spending from fiscal 2008 that I described earlier, we still expect to have strong free cash flow of 90 to 100 million.

Given the rescheduling of products -- projects, capital expenditures will increase year over year of between 65 and 75 million, while pre-pub and production spending is expected to increase 80 to 90 million.

As Dick discussed, we are beginning to pay a 7.5 cent per share quarterly dividend in September, or approximately 10 to $11 million per year.

Given our balance sheet and free cash flow outlook, we are well-positioned to return cash to shareholders and still pursue strategic initiatives.

In summary, we have a solid plan to deliver ongoing revenue, margin and earnings growth in fiscal 2009, as we move towards our fiscal 2010 margin goal.

We have a strong cash flow generation and we have a strong balance sheet.

With that, I will turn the call over to Dick.

Well, thanks, Maureen, and thanks to all of the speakers this morning.

As we have discussed, Scholastic is pursuing aggressive cost reduction combined with modest revenue growth and strategic pricing.

Our plan for fiscal 2009 delivers solid revenue and profit growth, excluding Harry Potter, in a tight environment.

This is a critical step toward attaining 9 to 10% operating margins in fiscal 2010, a goal we remain completely committed to.

We look forward to reporting on our progress during the year.

I will now moderator a question and answer period.

In addition to those who spoke on the call, we are joined by Hugh Roome, who can speak to our rapidly growing businesses in Southeast Asia.

With that, operator, let us open the call to questions.

(OPERATOR INSTRUCTIONS).

Our first question is coming from Drew Crum with Stifel Nicolaus.

Good morning, everyone.

I just want to get clarification on your revenue guidance for fiscal year '09 for the Education Publishing unit.

I think you mentioned in the press release 3 to 5% growth for Technology.

Does that apply for the entire segment?

Thank you, Drew.

The 3 to 5% does apply to Educational Technology.

Our print sales are slightly up, but not 3 to 5%.

Okay.

And Dick, maybe just discuss your confidence in your ability to grow that business the next fiscal year, just given what appears to be an increasingly more challenging environment?

Education, you mean?

Yes, Educational Publishing.

You are exiting the year with both supplemental and technology down.

Understanding that you do have some new products in the pipeline that are coming, but just want to get some additional color on that.

Well, let's go back to the year ago when we restructured our sales force -- redirected our sales operations and split our two sales forces into Educational Technology and Curriculum on the one hand, and supplementary Library and Classroom on the other.

Any change in the sales force organization is going to have some impact on the selling -- the smoothness of the selling operation in that year, and I think we did have a kind of a slow beginning to our sales force implementation.

At this point, however, the sales forces are fully engaged in their new missions.

Margery has done a terrific job of redirecting and reorganizing some of the sales force (inaudible) in the last few weeks.

And they are just about to have their sales meetings this coming weekend.

And both of the supplementary or Classroom and Library group and Scholastic's Education Technology sales force are very optimistic about the upcoming year.

We have good pipelines in both businesses.

We've got the coming of System 44, which is highly awaited by our customers.

We see a little momentum growing in our non-Read 180 business.

Some of our programs like Read About, which have been -- we've had for some years -- are showing real signs of growth as has our math publishing, as Margery mentioned.

And our feeling about the market is this: In tight times -- I'll ask Margery to supplement this, and I know of great interest to you, Drew, and to others -- our feeling is that in tight times, people are going to go to those things that have proven results.

And our Educational Technology business has proven results, changes the way schools operate, changes the way kids improve and attain higher reading scores.

And our customers know that and they are willing to invest money.

Some of them are having revenue issues or issues of funding.

But we haven't noticed that they are stopping their commitment to student achievement and to using the kind of programs that we are offering.

On the supplementary side, we held pretty flat this year in a market that declined significantly in other ways.

So we feel that our sales force is good.

We have good new products.

There's good pipeline, as I mentioned.

And so we are pretty optimistic about both businesses in the current educational funding climate.

Margery, do you want to add any color?

Yes.

No, I think Dick gave a great summary there.

I guess just one thing I would add is some of the pressures that are on school funding don't apply as much to us as they do to some other people that are selling to schools.

A lot of our funding comes from Federal funds, like Special Ed money and Title One.

We are not going to be affected very much by the decline in Reading First dollars.

We do sell some paperback books into there, but those dollars have largely gone to more traditional kinds of programs.

So our goal is to take our sales force, which we think we've made some really important strategic changes in how we're structured -- we are leaner, we are more agile -- and go where the money is.

And as Dick said, there is an incredible focus on raising achievement, and we just don't believe that that's going to dilute.

It's going to continue.

Obviously, there is a lot of schools that are under pressure on funding.

But there is also still 50 million kids going to school every day, and unfortunately two out of three of them still cannot read well enough to make the kind of choices about their future that we want them to be able make.

In addition to that, Drew, the Read 180 is still growing and we are expanding that and we are rededicating our sales force to expanding Read 180, both where we have strong installations, and also in new business.

And we are seeing momentum develop in that area.

Thank you.

Okay, thanks for that color.

Maybe I can shift gears and just ask about the school-based continuities business.

Just your plans operationally for that business, you said you are shutting it down?

Is it going to be sold or are you just going to wind it down?

It has been shut down.

We shut it down during this fourth quarter.

So it has been shut down.

It's completed.

Okay, got you.

And then lastly, just can you talk about the timing of the 25 to $35 million cost reduction program?

Is it front-end loaded in fiscal year '09 or is it going to be over the course of the period?

It will be over the course of the year, but we've already started taking actions.

We have already began renegotiating contracts; and as we said, we made adjustments in the sales force within Education and we've already executed against a plan to reduce headcount in Fairs.

So we've already begun, but it will occur during the year.

Okay.

Great.

Thanks, guys.

Thank you.

Thank you.

Our next question is coming from Peter Appert from Goldman Sachs.

Thanks.

Dick, a couple of questions.

First on the pricing strategy, what's implied by the $20 million number in terms of percentage increases overall in terms of price points?

Well, we are referring primarily to our $1 billion Children's Book business in the U.S.

Our average pricing increase or the average price increase in there is between 3 and 5%.

We are -- even if we believe we are going to achieve -- there will be some sales fall off from the higher price titles, we still believe that we can return $20 million in profit from those price increases.

And had you done any pricing in fiscal '08?

Yes, we've modestly increased prices in Clubs.

We were about -- we did not increase prices in Fairs.

Got it, got it.

And just switching to the COOL offering, because it feels like that's a pretty significant component of the strategy to drive the revenue acceleration and the profit margin improvement obviously over the next couple of years.

So the -- just so I better understand it.

Do the circulars get eliminated in this process and do they still exist?

They still exist, Peter.

I will let Judy answer that one; but over time, there may be some reduction of circulars, but that's going to take awhile for people to be ordering online directly.

But just the chance to see the books come up in color and with the further information that we can give gives a whole new flavor of experience to online ordering with New Cool.

So Judy, you want to amplify that?

Sure, Peter, how are you?

Yes, of course as Dick, said the longer term opportunity is for us to trim the number of catalogs that we mail; but initially, we do need to send those catalogs out to kind of instigate the order.

And so we've been doing a lot of testing with that, particularly in the fourth quarter.

The goal would be for COOL to trigger incremental sales -- second orders and third order from teachers and, of course, open up ordering parents.

So that one catalog and that one promotion investment will then really amplify and deepen -- it will give us a lot of operating leverage by driving incremental sales.

Right.

And is there -- can the teachers opt out of the online ordering?

Do you have to order online?

No, any classroom can have a combination -- it's a very good question, teachers ask us that through our research.

Teachers can submit an order that has a parent COOL order, an online order, a paper order and a phone order all combined, and our (inaudible) assistance can support that.

Okay.

Got it.

And is your expectation, Judy, that the offering COOL could theoretically cannibalize perhaps sales through the Fair and the Trade channel?

And if that were the case, would that have a negative implications in terms of revenue realization, just given the different price points through the various channels?

We have really no evidence that that's ever happened.

Actually, all boats typically rise together.

We've seen on our big franchises in particular that when a book is selling on one channel, it's really selling well through all channels.

And I think we -- all of us -- Ellie and the people down in Book Fairs and myself, we all say that the day that every child is reading a book is the day that we are saturated.

So we really don't see a whole lot of cannibalization.

We see a lot of mutual marketing support and do strategically kind of plan that out.

And we do discount, of course, but we do it at great margins.

And then on that point, Judy, as part of the price increase strategy that Dick was mentioning, any thought of lowering the percentage discounts you're offering in Clubs versus other channels?

Yes, we are working on strategic pricing, is what we are calling it.

So we are picking -- I would say we are picking our shots and making our discounts really matter, doing it strategically not across the board on every item.

But finding really compelling opportunities to do discounting.

So yes, we will -- you will see some differentiation.

Got it.

Peter, just by the way one of the key profits improvement plans we have is a much more strategic relationship among the pricing and the various channels.

We do this somewhat now, but we are making a big effort to improve that, and make it more planned pricing program.

And last thing on COOL for Judy, any early data to give some credence to the theory that order patterns really do improve or order rates really do improve as people move to online ordering?

Yes, we have significant testing going back now really almost 18 months.

It shows that when teachers and particularly parents order on COOL, we get much higher revenue per order on the parents.

Now it's not --, there's not a lot of scale on it yet but in our test market we do see that.

Okay.

Great.

Thank you.

And then one other unrelated item, Dick.

The international profitability in the fourth quarter took a hit year to year, and I know you mentioned this in passing on the call, but it seems noteworthy in the context of the benefit you are getting benefit from currency, et cetera, is there anything unusual in terms of international profitability?

Well, the exports business was primarily where this took place; but Hugh Roome is here, who operates that business, and he can certainly expand on that.

Peter, it's Hugh Roome.

We had a strong quarter overall.

We had some weakness where we had in the prior year some large sales in the fourth quarter related to educational product to entities in Latin American market.

Without that that this year, the comparison doesn't look as strong, but we hope that these sales will be completed over the summer.

Great.

Thanks so much.

Thank you.

Our next question is coming from Catroina Fallon from Citi.

Yes, hi, good morning.

Thanks for taking the question.

Can you speak a little bit about the Book Fairs business?

It looks like that was an area that actually saw growth year over year?

I'm wondering was there any change in the seasonality or timing of fairs?

Were there some fairs that were brought forward or back?

The April and May were extremely strong for Fairs.

The revenue per fair increased significantly, Catroina, in the fourth quarter and in those two months in particular.

So we see an acceleration in the Fair -- revenue per fair.

We did shift some fairs from case fairs, which are the once we ship to the schools in trucks, to direct mail fairs.

So some of the lower revenue fairs we shifted and that seemed to have had an impact on our efficiency and delivering our case fairs and helped revenue per fair.

But we also had some merchandising improvements in the fourth quarter.

So we think that that bodes well for our next year revenue per fair, and we just completed our sales meeting for that group and then the general managers all feel very confident that they can boost revenue per fair next year, which is of course their plan.

Okay, and how much was the Golden Compass contribution in the quarter?

Well, in the quarter it would reduce substantially.

The Golden Compass was earlier in the year.

Maureen, do you want to talk about that?

It was primarily sales of Philip Pullman's original novels and the film tie-in books that took place in the second quarter of the year just before Christmas, just before the release of the film in early December.

And then there was some related licensing and merchandising that came in at that time.

So most of that was second quarter.

The U.K.

did improve its profits ex Golden Compass this year, but The Golden Compass did help them quite a lot in that quarter.

Some of that will not be repeated of course in this year, and that's why we reference the U.K.

as not keeping pace with the other international subsidiaries and profit improvement for '09.

Specifically then on the residuals from the movie, were there any residuals from the DVD sales that came through?

Deborah, do you want to answer that one?

We would really be seeing that next year because the roll-out is continuing globally of the DVD.

So by the time that make its way back to us, we anticipate it will be at the very end of this year or we will see it next year.

Okay.

And on the Education business, I believe it was about a year ago when you talked about the separating of the sales forces and investing in the sales force on the Education side for Read 180 and eventually System 44.

Where are we at in the size of that sales force now?

And I guess it seems like the plans there have been reevaluated maybe the sales force there is being consolidated or shrunk rather than expanded?

Well, Margery can answer that.

I think we didn't make any substantial change in the sales force when we moved the education sales force primarily to Technology and Curriculum.

And we invested some money in the Expanded Classroom and Libraries sales force.

That has worked very well in the Classroom and Library and we've gotten increased sales as a result of that.

We -- during the year, we recognized that we need to do make some improvements in the Educational Technology sales force and Margery will describe what those are and when they happened.

Yes, I mean, we really view this coming year as Phase Two of our evolution.

And what we've done is -- what we wanted to do last year is we wanted to make sure that we maintained as much stability as we could.

Changing of sales forces is tricky business and -- a risky business might be a better way to describe it.

So what we've done this year is we are streamlining our sales organization now.

What we've done is we've preserved all of our territories or most of our territories and we've maybe combined one or two here or there, but we condensed our regions from six to three and we've eliminated some of our positions that we felt were not as revenue-producing as other positions.

At the same time, we are investing in our implementation team and our consulting business.

So it's really both a savings plan and somewhat a reallocation of resources.

We have -- we are going to have some more investment in strategic and high level selling.

We are really aligning our sales force to the kind of business we are, in which is not just selling product but talking to districts about their needs, matching their needs with solution products and services and services, providing services and then being in the district on a regular basis checking in with them on how it's going, helping them understand how to tweak what they are doing.

It's really put us in a whole different place.

Okay.

And then just kind of one further question.

On the guidance, if I'm backing out Harry Potter this year -- and I know you'll get some residual Harry Potter next year -- but it looks like guidance is looking for about 3.5 to might be even 8% revenue growth next year.

And I'm trying to foot that with the fact that we are seeing some price increases that could have some impact.

I know when we saw -- you mentioned there was some price increases in the Clubs, but in fact some of the Clubs then were kind of down this year.

So I'm just wondering, we've seen that price increases don't necessarily result in revenue increases, and I'm wondering how do we get to that kind of growth next year?

Well, we'll come back to the growth in a second.

I think our Club pricing in the current year was -- we did increase some prices in fiscal '08.

We are continuing to have a selective price increase in Clubs in '09.

But as Judy described, this is a very strategic pricing plan.

The main difference in our Clubs for next year is going to be a very, very strong online component and a revitalized promotion campaign and some different ideas about presenting how we present our product.

So with the combination of online and catalog selling, we believe that that will give some strength to revenue.

We also will -- having dropped the continuity business and exited that, opens up some space on the back of our four-page leaflets or four to eight-page leaflets that we have in Clubs, which will give us some additional spelling space to and we expect some revenue increases from that as well.

Maureen, do you want to talk a little bit about our revenue goals in respect to the estimates that Catroina has talked about?

Sure.

As we mentioned, our revenue assumption is a 3 to 5% growth.

I think if you do the math on the guidance we give you regarding Harry Potter you come in 3 to 8, as you said.

However, we -- with our cost saving plans and initiatives in place, we can still achieve the higher end of the guidance with the 3 to 5% growth, which is why we guided there.

And that would represent a 10 to 25% earnings growth.

So with the small to moderate growth in revenues is a substantial growth in earnings because of the leverage in our businesses.

And as you know, our businesses have substantial fixed costs in terms of marketing, promotion and operations.

And so a small increase in revenue yields a large increase in profitability.

As far as the pricing increases, as Dick said, we expect about a 20 million impact of the pricing against a $1 billion book business.

And so that does assume certain areas we will increase prices, but not in every area.

It will be selective, as Judy had said earlier.

Thank you.

Thank you.

The next question is coming from Amy Minella with Cardinal Capital Management.

Good morning.

Can you give us the dollar amount of the severance that was in the quarter, and also the dollar amount of the equity compensation?

In the fourth quarter?

Yes.

Hold on one second for that one.

I have the $0.11.

I have to go find the dollar amount.

Yes, it would help.

(SPEAKERS OVERLAPPING).

While you're looking for that, could you also give us a further break down of what the 2009 capital expenditures and the pre-publication and publication expenses would be?

You mean --

You mean more detailed than the number itself?

Yes.

It's primarily related to our Education business on the pre-pub spending, as well as our Media Licensing and Advertising business.

Those are the areas that we are investing pre-pub spending, and the capital would include our COOL initiatives, as well as some aspects of our online initiatives and our 39 Clues initiatives.

And would the fact that you have two movie deals going on --

No, we do not fund the movie deals.

We receive fees related to it but because we own the property, but we do not in any way fund the movie deals.

Okay.

Okay.

So severance for the period -- for the full year is about $6 million this year versus 12 million last year.

And the impact in dollars -- this is pretax dollars -- of the FAS 123 or the stock comp is 7 million last year and 3.6 last year.

Okay, and on the capex and pre-pub again, would you expect those levels of expenditures to continue into 2010 and 2011?

No, it's really because of the delay this year.

We delayed about $40 million of anticipated pre-pub spending and capex this year so it moved into the year we are guiding to right now.

Generally, we would expect our spending to be in line with amortization and depreciation.

Okay, okay.

Thank you.

Thank you.

Thank you.

At this time, there appears to be no further questions.

I would like to turn the call back over to Dick Robinson, Chairman and CEO for any closing remarks.

Well, thank you all for your attention as we tell our story about '09 and recap '08.

Obviously, we are still working on our deal to sell our -- and exit the home continuity business.

We expect that to be completed in the first quarter.

The upcoming year, which we expect to be in a tight economy, is comprised of cost reductions, price increases and modest growth in our core businesses.

We are very confident of our plan for '09, despite the difficult economy.

And we are very committed to our profit margin improvement and reaching our goal of 9 to 10% in our n'09 to '10 fiscal year.

Thank you all for your attention and thank you for your continued support.

I hope you -- the shareholders will appreciate the dividend that is coming their way in September.

All the best.

Thank you very much.

Thank you.

That does conclude today's Scholastic quarter four fiscal 2008 earnings conference call.

You may now disconnect your lines at this time, and have a wonderful day.