Scholastic Corp (SCHL) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's Scholastic third quarter 2009 earnings conference call.

As a reminder, today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Vice President Corporate Strategy, Business Development and Investor Relations, Mr.

Jeff Mathews.

Please go ahead, sir.

Thanks, Tricia.

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 to that page.

I would 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 book and educational materials market, and acceptance of the Company's products in 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, CEO and President of Scholastic to begin our presentation.

Thanks, Jeff.

Good morning and thank you, everyone, for joining us on our fiscal 2009 third quarter conference call.

This morning I'm joined by Scholastic's Chief Administrative Officer and CFO, Maureen O'Connell and members of the executive team are also available for Q&A at the end of this call.

We're encouraged by a quarter of solid progress for the Company.

First, we successfully sustained last year's sales level in children's books, demonstrating the strength of our products and channels even in a tough environment.

Second, we grew our educational technology business by 20% with the successful launch of System 44 and solid sales of READ 180.

Third, we continued working toward our goal of 9% to 10% operating margins.

We exited several non-core unprofitable businesses and wrote down assets in the UK, following a review of business operations and investments there.

We sold the non-core division for $29 million in cash, resulting in a gain of $21 million before tax.

We also are on track to reduce spending by another $20 million in the second half of this fiscal year, after achieving $35 million in annualized savings in the first half.

Fourth, we've affirmed our guidance and are positive about the outlook for the fourth quarter and beyond, especially given the significant increase in education funding under the stimulus package or ARRA.

We believe this represents $100 million revenue opportunity for incremental sales of educational technology, consulting services and classroom books, over the next 30 months, as we'll describe in a moment.

Consolidated earnings per share improved last quarter from a loss of $2.06 in the prior year to a loss of $0.98 this year.

As Maureen will explain shortly, excluding non-cash charges associated with the UK and severance related to this year's cost savings actions, continuing operations lost $0.12 per share in the third quarter compared to $0.03 a year ago.

The third quarter is our second smallest revenue quarter, when we usually generate a loss.

The slightly larger loss reflects increased spending on customer retention and acquisition in School Book Clubs in the US and lower results in the UK.

Other results from continuing operations improved year-over-year, reflecting solid revenue and the benefit of cost reductions.

Free cash flow on our balance sheet also improved last quarter, as Maureen will discuss.

Now I'll focus in more detail on the quarter's operating story.

Revenue in the children's book segment rose by 2% in the third quarter.

The second consecutive quarter of solid sales compared to the significant declines reported by major retail book sellers is further evidence of the strength of our unique children's book brands, distribution channels and value proposition.

Strong trade sales were the primary factor driven by series like the 39 Clues, our ground breaking multi-platform franchise.

With a publication earlier this month of the Sword Thief, book three in a ten title series, the 39 Clues is selling strongly and debuted on the New York Times children's series best seller list at number three.

Harry Potter sales also rose last quarter as anticipated, including the success of The Tales of Beedle the Bard, the short book of wizarding tales by J.K.

Rowling.

Profits from Beedle go to Ms.

Rowling's charity.

In School Book Clubs we continue to invest in customer retention and loyalty programs, which impacted segment results last quarter but successfully drove higher customer activity and order volumes.

Lower sales reflected late school reopenings and lower revenue per order in January, after a strong December, and February sales improved and were level with a year ago.

Club's new online marketing and ordering platform went live in February, enabling about 20% of our Club teachers to offer the new online service to parents.

While the impact on revenue will be small this year, we're encouraged by early results and are on track to make new COOL available to all teachers' classrooms by the end of the school year.

In School Book Fairs, sales declined slightly in the third quarter, primarily because of lower revenue from clearance sales where we sell excess inventory.

In our core book fair business, the largest segment, parent and student traffic remained strong.

This contributed to modestly higher revenue per fair and improved profits for Book Fairs.

In the international segment revenue rose in Canada, Asia and Australia, excluding foreign exchange, though this was offset by lower sales and results in the UK, including the write-off of goodwill.

In the education segment, we had great momentum with our educational technology business last quarter.

In the last several months, school districts continued to face serious budget pressures with industry-wide sales of textbook down by double-digit percentages relative to a year ago.

In contrast, sales of Scholastic educational technology rose by 20% last quarter, benefiting from solid sales of READ 180, our market leading reading intervention program, and a strong December launch of a companion program, System 44.

Consulting and implementation service revenue also continued to grow.

Sales of educational books declined in the quarter, impacted by the tight school funding but less -- but fell less than the overall market.

Classroom libraries continue to be a pillar of our print based education business with over $100 million in annual sales and attractive margins.

This business has also fared well relative to the industry.

The stimulus package, or ARRA, will have a significant positive impact on US schools and students and on Scholastic's education businesses.

A key element of the legislation is $25 billion in additional funding for disadvantaged school districts and students through Title One and for special education through IDEA.

This money will supplement current spending, not replace it.

Title One and IDEA also represent the majority of funding for READ 180 and System 44 and a significant portion of the monies used by school to purchase classroom libraries, so increased funding in these areas will provide opportunities for expanded use of our technology and print programs.

Our approach to partnering with schools to raise achievement also matches the direction that the Department of Education has given schools on how to use the stimulus funds.

We're moving quickly to help school districts make sustainable investments with this money.

To help the many school districts that are turning to us for information, we have launched a comprehensive online resource at Scholastic.com/economicrecovery.

There school administrators can find extensive information on the stimulus package as well as details on how Scholastic's product and services align with various funding sources.

We have begun presenting to school districts with various comprehensive proposals, including READ 180, System 44, classroom books, professional development and consulting services.

We're relevant.

We also include research based math and supplemental products.

Scholastic's long-lived technology licenses and classroom libraries are also beneficial to school districts who can make investments now without incurring long-term obligations or expenses.

Overall we believe that the stimulus package, or ARRA, will lead to $100 million in incremental sales of Scholastic educational technology, consulting service and classroom books over the next 30 months.

This is another reason, in addition to last quarter's strong technology results, that we are very positive about our education businesses.

Now Maureen O'Connell will discuss our results and progress further reducing costs last quarter, as well as our outlook.

I will then return with some thoughts on next year.

Thanks, Dick, and good morning, everyone.

Before going into our results from continuing operations, I want to detail a number of items in the third quarter that affected the comparison with the prior year, as detailed on this slide.

First, in SG&A we incurred $4.8 million in non-reoccurring severance expense related to our cost reduction program this year.

Second, as a component of operating expense, we recorded a $17 million non-cash charge for impairment of goodwill in the UK, following lower results there for the quarter and year-to-date.

Third, below the operating line we recorded a non-cash unrealized loss on a minority investment in the UK book distribution business of $13.5 million, reflecting the difficult climate in UK publishing.

Comparing results to prior year, revenues rose 1% from higher sales in children's books, excluding $21.8 million in negative foreign exchange impact.

Cost of goods sold increased as a percent of revenue due to sales of Beedle the Bard, where we are contributing profits to J.K.

Rowling's charity.

Selling, general and administrative expenses fell $8 million, showing our progress reducing salaries and benefits, which improved $9 million in the quarter, partially offset by the prior year benefit of bonus reversal.

Excluding the $4.8 million in non-reoccurring severance, corporate overhead, which is the portion of SG&A not allocated to the segment, was slightly higher because of the prior year bonus reversal.

Overall for the quarter, the net loss from continuing operations was $4.4 million or $0.12 per share, compared to a net loss of $1.4 million or $0.03 per share a year earlier, reflecting higher promotion in book clubs and lower results in the UK, as Dick described.

Cost reduction is a top priority as we pursue our goal of 9% to 10% margins and we are pleased with the progress we saw last quarter.

After achieving $35 million in annualized savings and salary reductions in the first half of fiscal 2009, in December we announced incremental effort to reduce spending by $20 million in the second half, which we are on track to achieve.

We eliminated management bonuses and curtailed discretionary spending, including consulting, T&E, training and sales conferences.

Last quarter we also continued to review our portfolio of businesses and exited several unprofitable non-core businesses, which were reclassified as discontinued operations.

As a result, we recorded a $19.6 million in non-cash asset write-downs, in addition to $4.1 million in operating losses from these businesses.

We also sold a non-core school marketing company for $29 million in cash and recorded a $21.9 million gain, mostly offsetting the losses in discontinued operations.

In comparison in the prior year, we wrote off $103 million in assets when we decided to exit the US direct to home continuity business.

Now, turning to cash.

Free cash flow in the quarter was $74 million, compared to $57 million in the prior year period, reflecting favorable working capital management.

Total debt was $315 million, down from $374 million a year ago, reflecting principal payments of the Company's amortizing term loan and repurchases of public debt.

Cash and cash equivalents at the quarter end was $37 million, compared to $192 million a year ago when the Company benefited from the favorable timing of Harry Potter accrued royalties.

As Dick and I have discussed this morning, the Company continues to make progress for the near and long-term.

Based on the current environment, year-to-date results, and spending cuts, we have affirmed our outlook for fiscal 2009 earnings per diluted share from continuing operations of $1.20 to $1.50, excluding severance and one-time expenses related to cost savings, as well as non-cash charges for goodwill impairments and non-operating items.

On an adjusted basis, given effect to additional businesses discontinued last quarter, year-to-date earnings per share, per diluted share from continuing operations are approximately $0.47.

Therefore, our full year outlook equates to approximately $0.75 to $1.05 per share in the fourth quarter, relative to approximately $0.81 from continuing operations a year ago.

Given the benefit of cost savings, a strong outlook in education, and the resilience of our children's book business, we believe we will meet this goal.

Based on this outlook for earnings, we continue to forecast free cash flow of $55 million to $80 million.

Now I'll turn the call back over to Dick.

Thanks, Maureen.

This quarter's results underline several important points.

One, our core children's book and education businesses are sustaining sales in a tough economy.

Our operating results for the quarter are down slightly compared to the prior year.

Second, to reach our goal of 9% to 10% margins in fiscal 2010, we continue to reshape the Company by exiting underperforming businesses, selling a non-core subsidiary, taking goodwill and investment write-downs where appropriate and focusing on cost reductions.

Third, our education businesses will benefit from a doubling of federal aid through Title One and IDEA or special ed funds over the next 30 months as a result of the ARRA stimulus package.

These categories already are used to fund major Scholastic programs.

We are moving quickly to work with our many school partners to help them acquire innovative educational technology and classroom books from Scholastic, which will increase student achievement in their schools.

We believe we can add $100 million in incremental revenue in education over the next 30 months based on the increased funding provided by ARRA or stimulus package.

As we look toward next year, our priority is to reach our margin goals of 9% to 10%.

While much of this gain will come from cost reduction and pricing improvements, we also are focusing on a greater level of integration among our children's book club, fair and trade channels by centralizing product acquisition and product development, consolidating inventory management and reducing overhead costs in this business.

We are also expanding our consumer book and digital eCommerce capability, building on new COOL to expand sales to our club fair and trade parent customers.

We are building our education technology businesses, helped by the ARRA stimulus package, which will boost revenues and profits in the education segment next year.

We have a solid plan for profitability in the UK, primarily through streamlining our book fair business, a step that has already taken place, and strengthening our Club business.

We have a new Managing Director there to carry out this plan.

We are continuing to build our international businesses in China, India and other parts of Asia, while continuing to be strongly profitable in that region.

And we are reducing costs and exiting businesses as we reach our goal of 9% to 10% operating profit.

We look forward to giving you more details of that plan in our July call.

Now I will take questions, moderated question and answer period.

In addition to Maureen, we are joined today by Ellie Berger, President of Scholastic Trade, Margery Mayer, President of Scholastic Education, Judy Newman, President of Scholastic Book Clubs, and Hugh Roome, President of Scholastic International Growth Markets.

With that let's open the call to questions.

(Operator Instructions) We'll go first to Drew Crum with Stifel Nicolaus.

Thanks.

Good morning, everyone.

Couple questions on the guidance for fiscal year '09.

The $0.75 to $1.05 for fourth quarter seems like a pretty wide margin given you're already a month into the quarter.

Can you talk about some of the key variables to hitting that range?

And then on the free cash flow guidance of $55 million to $80 million, you're down $40 million year-to-date.

Looks like the investment in pre-pub CapEx spend is pretty much level with where you were a year ago.

Maybe talk about some of the swing factors in hitting your free cash flow guidance for the year.

Thanks.

Maureen, will you take both of those questions?

Sure.

Good morning, Drew.

Good morning.

I'll start with cash flow first and then I'll answer your question regarding our guidance.

Our cash flow range of $55 million to $80 million, we've been very aggressive in reviewing all our working capital accounts and we've made progress in terms of managing down our inventories, as well as improving our terms with vendors on the payables side.

So we've been able to renegotiate terms with vendors and so you're seeing positive results in working capital from accounts payable.

And the range is really just a matter of earnings, the range of earnings, as well as how much more progress we can make in the fourth quarter in working capital on the cash flow.

Maureen, did the deferred tax asset related to the divestiture of the continuities business flow in the third quarter?

Is that something that hits fourth quarter?

It actually is going to benefit us for the full year.

Okay.

Because what's happening is, we are not going to be a US taxpayer on a federal basis this year because of the benefit of the at-home losses.

We do pay some foreign taxes and some local taxes, but we will not be paying the majority of federal taxes.

So that's the benefit in cash flow.

So even though we recorded a reserve for taxes, it won't be in cash.

Okay.

And then on the earnings guidance of the $0.75 to $1.05, at the lower end it's comparable to the prior year period, which was about $0.81, and at the higher end it really is the reason we still have a wide range is because of the stimulus package that Dick described.

Really how quickly that money gets into the system and how quickly we can benefit from it will depend on where we are in the range.

Okay.

That's fair.

And maybe related to that or to follow on to that point, can you share with us any indications, feedback you're getting from your sales force in response to the stimulus package?

Any change in behavior on the part of school districts in terms of plans to ramp up purchasing?

And then I guess also related to the $100 million in incremental sales, what does that assume as far as state and local budget conditions are concerned?

Understanding that things are really going to kick up at the federal level, but the state and local level we're still looking at some pretty sizable budget deficits.

Margery has laryngitis.

I'm going to ask her to answer some of this question.

But in terms of how the $100 million and how we got there, mainly is by looking at the increases in Title One and IDEA related to the use of those funds by schools now to purchase our materials and those funds are not affected by state budgets.

They flow directly from the Federal Government to the school districts.

The state budgets will be somewhat helped by the stabilization money and so we're seeing some aspects of stabilization money going into helping local school budgets.

One thing the schools do not seem to be doing is dramatically adding to staff.

They've reduced their staff over the past months, knowing that they're going to have -- they were going to have budget shortfalls and we don't see them dramatically adding to staff, based on the stabilization money or any of the other funds coming through the ARRA.

We are seeing a little bit of activity in the loosening up of school budgets that have been carefully managed or hoarded over the past six months.

The arrival of the stimulus money seems to have loosened up spending of funds that they already had planned to commit but were cautious about spending.

Now, in respect to our sales force and what we are doing, I will ask Margery to comment and also any further comments on anything that I've just said.

Hi, Drew.

This is Margery.

Hi, Margery.

So our sales force is really feeling the effect of the stimulus money, even though the stimulus money hasn't hit the schools yet and even though there is still some working out, state by state, of how that money is going to make it to schools, at least in terms of the -- at least in terms of the stabilization money.

So, as Dick said, the Title One and IDEA money is pretty much supposed to be distributed the same way it was distributed all along.

It's just twice as much of it.

So we are already -- that is already our main source of funding for what we do.

It's already the money that's going into READ 180 and 44 and being used to employ our consultants, et cetera.

So we feel that there's just a lot more funding out there.

The other thing, and Dick alluded to this, is Arne Duncan, the Secretary of Education, the President, all the guidelines that are coming out of the Department of Ed are pretty clear that they want school districts to invest in sustainable improvement.

They do not want school districts to add a lot of ongoing expense that they will be saddled with after the money is no longer there.

And our products, which are purchased for ownership by school districts, fit beautifully into the guidelines of how schools are supposed to invest.

They also fit well into the language that the -- is surrounding this money, which is about innovation, effectiveness, and these are the kinds of things that we've been out promoting for Scholastic for the past several years.

So our pipeline feels more robust.

Our field feels very busy.

The fact that a lot of our funding skews federal rather than to state and local, all of these things are good indicators for our business.

Okay.

Great.

Get well soon.

Thank you.

Last question on a couple of housekeeping items here.

Your updated expectations for the non-recurring severance charge, or charges in fiscal year '09 and then is there a recurring or ongoing number you can share?

Maureen, will you tackle Drew's question about severance?

Sure.

It's about $0.26 to $0.27 year-to-date that we have incurred severance and we expect about $0.28 impact for the full year.

Okay.

In severance.

And then the one-time items, the non-cash items are about $0.73 for the quarter.

Maureen, is there an ongoing severance cost that's embedded in the numbers?

Well, this is the one-time severance.

Right.

So this is the severance that are related to these special programs we put in place like the voluntary retirement.

Right.

And the actions related to the $35 million reduction and $20 million reduction.

We have approximately $8 million of ongoing severance.

Okay.

That's annualized?

Yes, annual.

Okay.

And then last question, you guys quantified the impact of foreign currency on top-line in the quarter.

What was the impact on earnings?

It was minimal on earnings.

We really took action last quarter when we had an impact and really put in place new process and procedure for getting inventory to our international subs and settling accounts so we wouldn't have a currency impact.

Okay.

Thanks, guys.

Thank you, Drew.

I believe there the are no other questions at this time.

So I will thank you all for your attention in our third quarter call.

And thank you for your support.

We'll look forward to talking to you in July.

Thank you.

Again, thank you, everyone, for your participation on today's call.

This will conclude today's call.

You may disconnect at any time.