Scholastic Corp (SCHL) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Scholastic fiscal 2011 first quarter earnings conference call.

At this time, all participants are in a listen only mode.

Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions) As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to your host, Mr.

Jeff Mathews, Vice President of Corporate Strategy, Business Development, and Investor Relations.

Please go ahead.

Thank you, Ally 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 links on that page.

I'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 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'll introduce Dick Robinson, the Chairman, CEO and President of Scholastic to begin our call.

Thank you, Jeff.

Good morning and thank you everyone for joining us on our fiscal 2011 first quarter conference call.

This morning I'm joined by Maureen O'Connell, Chief Administrative Officer and CFO and other members of the executive team are available to answer questions at the end of the prepared comments.

Scholastic had a solid start to fiscal 2011 as we move forward with our plan to sustain last years strong performance.

Though it's still early in the year, we remain confident that we will achieve our goals for the year based on the stimulus funding outlook for Scholastic Education, early positive indicators in our School Book Club channels and a strong start for trade.

At the same time, we've taken significant steps to leverage our strong free cash flow and balance sheet to drive long term shareholder value.

We increased internal investments in the key eCommerce and eBook capabilities for children's books.

We accelerated development of new technology programs and also made a small but highly strategic acquisition of Math Solutions, the leading brand in K-12 math instruction and professional development, and in addition we continue to return value to shareholders.

This morning we announced that the Scholastic Board has authorized the repurchase of up to $150 million of the Company's common stock through a modified Dutch auction tender offer.

After exploring possible ways of returning cash to shareholders in addition to our current dividend, we concluded that a cash tender offer is an efficient mechanism for stockholders who seek liquidity at a premium over current trading prices.

At the same time, stockholders who do not participate in the tender offer will share in a greater portion of Scholastic's future potential.

We intend to commence the tender offer during the week of September 27.

Additional information is available in this mornings announcement and in the tender offer statement including the offer to purchase, letter of transmittal, and related tender offer documents when it becomes available on investorscholastic.com and sec.gov.

Now, turning to the quarters results.

In Scholastic Education where we benefited significantly from the initial disbursement of federal stimulus funds a year ago, first quarter revenue declined this year, but we continue to target full year revenue in line with last years record breaking levels.

Though the federal funding landscape has changed somewhat, we expect that federal race to the top and school improvement grants in addition to higher service sales to our expanded customer base will help drive growth later this fiscal year.

In addition to last years flow of federal funding which particularly benefited sales from new districts, two other factors affected the first quarter comparison.

Last year, we recorded strong sales from a major adoption of READ 180 in California as well as a significant sale in the classroom and library group which was not repeated in the current quarter.

Offsetting these factors we recorded strong growth in services last quarter reflecting a larger install base of school districts using READ 180 and System 44.

Higher service sales, much of it already under contract, will also help the remainder of the year.

In upcoming quarters we expect sales to also benefit from a pick up in federal funding which has changed from a year ago.

This fiscal year in addition to formula based title I and IDEA funding, more stimulus dollars are being directed through competitive programs including race to the top and school improvement grants.

As widely reported, the competitive programs have delayed the flow of dollars to schools since states must apply and be approved before they can award dollars to local districts.

In addition to our strong partnerships at the local district level, we're working with state level decision makers who are directing race to the top and SIG grants.

As a result we are listed in multiple states as an improved external provider.

While executing our plan to consolidate last years record growth, we continue developing new products and services to drive long term growth.

Two weeks ago we announced the acquisition of Math Solutions a leading authority on K-12 math instruction and professional development.

Math Solutions and its founder Marilyn Burns, a renowned math educator and author of major Scholastic programs including Do the Math, are closely aligned with our current strategy of helping districts implement turnaround strategies, helping teachers become more effective and helping children achieve their full potential.

As part of Scholastic Education, Math Solutions will help us expand our professional development and services in math and to accelerate the development of the upcoming Math 180 suite of programs which should benefit revenue and profit in fiscal 2012 and beyond.

In the children's book segment last quarter results were very positive.

In terms of the Summer's trade sales the outlook for clubs and fairs and our progress on key digital initiatives.

In trade we beat a strong comparison a year ago with help of Mockingjay, the final book in Suzanne Collins' Hunger Games trilogy.

Mockingjay was a global phenomenon debuting at the top of all National Best Seller Lists in the US, Canada and Australia driving strong sales of the Hunger Game backlist.

The tenth book in the 39 Clue series also hit children's best seller lists and this morning we're announcing Part 2 of the 39 Clues to include six more titles from best selling authors including David Baldacci.

In clubs and fairs which are ramping up with a new school year, we are optimistic based on some important early indicators.

In clubs we're seeing positive customer response since the start of school several weeks ago, with the total number of teachers sponsoring clubs and order volumes both up from a year ago.

In fairs, which perform solidly last year, fair bookings are on plan and we continue to project a slight increase in total fair count.

Now, all fairs this year, will have new point-of-sale devices which helped to lift revenue per fair in tests last year.

Overall, based on our first quarter results and positive customer metrics we expect to continue solid growth from children's books in fiscal 2011.

This year, we are also accelerating key digital initiatives in children's books where we have a unique opportunity to leverage our position as the world's largest children's book publisher and distributer into a leading position online where we already have a significant presence and in eBooks.

In many ways this parallels the transition we successfully and profitably have made in Scholastic Education starting 10 years ago and where we are now the market leader in educational technology.

In children's books we have already hit significant milestones this year in our digital development.

In August, we fully rolled out our new online ordering platform, also known as new COOL, to all book club teachers and parents.

This is a key achievement for our fiscal 2011 plan and our longer term strategy to grow online.

New COOL makes Scholastic's unique school based distribution model and value proposition accessible directly to parents and kids online, as well as to teachers.

We are already seeing a significant increase in the percentage of orders coming in online from parents this year.

In addition, we are moving forward with our plans to begin selling children's eBooks later this fiscal year.

In the first quarter we saw a strong increase in ebook revenue for our Hunger Game series where ebooks approximated 10% of total sales and we believe that these sales are primarily incremental.

They also indicate potential for significant long term demand for children's ebooks which could represent more than 25% of the children's book market in 2015 or before.

For this to happen we are addressing three critical needs in the marketplace.

First, we are leveraging the Scholastic brand and reputation and our marketing scale and book channels including new COOL to reach kids, parents and teachers who drive book purchases today.

Second, we are developing a robust selection of ebooks and enhanced ebooks using our own content and working with other publishers too to offer a large carefully curated selection of quality children's titles at launch.

Third, with our deep knowledge of kids and reading, we are developing a compelling children's ereading experience that also involves their parents and teachers.

This will be delivered through a downloaded software application distributed through COOL and available on multiple platforms.

There's still much to be learned about how children's ebooks will evolve.

As part of our strategy to lead and understand this market, we are moving aggressively toward launching a robust ebook offering later this fiscal year.

As you know these digital initiatives will involve $20 million of increased operating expense in 2011, an investment that will generate growth for Scholastic and market share and in driving demand for children's print and electronic books over the next several years.

Now, I'll ask Maureen O'Connell to review our first quarter financial results and the outlook for fiscal 2011.

Thanks, Dick, and good morning everyone.

Looking at first quarter results, revenues declined relative to a year ago primarily reflecting lower educational sales.

This was partially offset by strong results in international and trade.

Cost of goods sold increased slightly as a percent of sales compared to a year ago due to a decline in educational technology product sales this quarter.

SG&A was down compared to a year ago reflecting lower salary related expenses, as well as lower commissions related to the educational technology sales.

This was partially offset by approximately $5 million in incremental spending on digital initiatives in the quarter, most of which was recorded in SG&A.

We also incurred $1.2 million in one-time costs in the UK.

This completes our restructuring, reducing our footprint in the UK by 40%.

Operating income declined by $11.5 million related to lower educational sales and increased spending on digital initiatives.

Overall, the loss per share from continuing operations was $0.95 a share, compared to $0.68 a year ago.

Looking at the balance sheet and the cash flow, free cash flow in the quarter was a use of $96.9 million, compared to a use of $74.8 million last year.

Scholastic typically uses cash during the Summer with schools out of session and the need to build inventory before the Fall.

The year-over-year increase was primarily driven by the timing of inventory purchases and lower text payments, as compared to a year ago, as well as investments in POS technology and fairs and new COOL and clubs.

Accounts receivable declined reflecting lower educational sales.

Accounts payable increased partly reflecting the early inventory purchases.

As a result of improved free cash flow during the prior 12 months, total debt and net debt continued to decline.

As of August 31, 2010, net debt was $118.1 million improving from $236.4 million a year ago, as a result of strong free cash flow over the last 12 months.

We also completed share repurchases of 9.7 million this quarter and at quarter end remain undrawn on our committed $325 million revolving credit facility.

We are affirming our fiscal 2011 outlook for revenue of the $1.9 billion to $2 billion and EPS of $1.95 to $2.20 which corresponds to operating income of $150 million to $165 million.

Excluding $20 million of strategic spend and digital initiatives, this is in line with fiscal 2010 results.

We continue to expect free cash flow of $90 million to $100 million for the year.

Note our outlook is prior to any impact which could result from the proposed tender offer and excludes the impact of one-time items associated with non-cash, non-operating items.

Now I'd like to turn the call back over to Dick.

Well thank you, Maureen.

Financially and strategic following a strong fiscal 2010 both financially and strategically, we are committed to holding on those gains in fiscal 2011.

For Scholastic Education, despite a decline in the first quarter, we continue to target revenue in line with last year based on the outlook for federal stimulus funding and growth in services and follow on sales to our expanded customer base.

In children's books we had a great quarter in trade and are positive about the outlook for clubs and fairs and our progress with eCommerce ebook initiatives, and across the Company we're holding our cost base and maintaining strong free cash flow conversion.

Together we feel these elements will deliver strong results in fiscal 2011 and position Scholastic well for long term growth and we look forward to reporting on further progress on next quarters investor call.

Now I will moderate the question and answer period in addition to Maureen, I'm joined this morning by Ellie Berger, President of Scholastic Trade, Deborah Forte, President of Scholastic Media, Margery Mayer, President of Scholastic Education who will be joining us from the airport where she's on route to a sales call and Judy Newman, President of Scholastic Book Clubs and eCommerce and Hugh Roome, President of Scholastic Consumer and Professional Publishing.

With that let's open the call to questions.

(Operator Instructions) Our first question comes from Drew Crum of Stifel Nicolaus.

Please go ahead.

Okay, good morning everyone.

Thanks.

I want to start with the new COOL launch.

Can you talk about metrics you'll be keying on in terms of evaluating or measuring the success of this initiative and in addition to that, I think last year you experienced some weakness owing to some teacher displacement, but it sounds like you're encouraged by the early trends you're seeing.

Can you just comment there, you're anticipating an impact from teacher displacement?

Thanks, Drew.

I'll ask Judy to answer those questions.

Good morning, Drew.

So, as you know going into this year, we had really a two prong strategy and one was to get back those teachers who we knew were displaced last year for various reasons and so we had an aggressive promotion and of course it's early, but indicators are that, that plan is really working to bring those teachers back in the fold.

And the second big part of the strategy as you know is to launch new COOL fully and we did that successfully on August 1.

We've rolled it out to all teachers and all parents and the metrics that we're looking at are of course the responsiveness to the site and we're constantly monitoring satisfaction, as well as the number of teachers and parents using it and how the teachers are spending across all of the different clubs that are open to them as well as the number of parents that are coming online.

And again, it's early, but we're very encouraged by what we're seeing with this great new site.

Okay, and somewhat related to digital and eBooks, any comment on the profitability of the eBooks in the quarter?

I think you mentioned it was about 10% of the mix.

Well, no, eBook sales for just the Hunger Games we said was 10% of the total sale of the Hunger Games trilogy including Mockingjay and the other two books that have already been published, but eBooks really are highly dependent on the best seller status and eBook sales for other books were far, far lower than 10% of total.

Now as we develop our eBook initiative and launch our Scholastic store for eBooks, which is coming later in this fiscal year, we will give an opportunity to our COOL customers in particular to order a wide range of eBooks and that will really begin to tell what the demand will be like when we ourselves are beginning to promote these eBooks as opposed to accepting EBook orders via largely Kindle and Nook and the other platforms which is what we are recognizing for trade in the quarter that we just discussed.

Dick, are you changing your approach with your retail partners given some of the challenges and changes notably at Borders and Barnes & Noble which is an important part of your trade channel?

I'll ask Elle to answer that.

We obviously continue to have very good relations with all of the major trade retail chains including the two you mentioned, but let her give some color to your question.

Yes, I would say that we do continue to have and cultivate our relationships with all of our major customers and as they have eBook initiatives we're learning about it and cautiously entering that market.

Okay, and shifting gears to educational publishing, you're reaffirming the guidance for essentially flattish revenue.

Just given the mix of revenues, what are you assuming for profitability or margins for that segment?

Maureen, why don't you tackle that and then Margery if you're able to hear all of this and can talk from the airport, we'll --

Yes, yes.

Oh, we hear you fine.

That's great.

We're delighted.

So, Maureen will tackle the profitability and margin question.

Drew you're correct.

We aren't changing our guidance for the educational and publishing division and guidance is flat revenue with some pressure on margins because there will be a larger proportion of service sales this year because we grew the install base so much last year, those people continue to buy more tech services, more implementation services.

So, our service revenues are very strong as they are this quarter and that will put a little bit of pressure on margin.

Okay, Margery we can hear a little background from the airport.

I'm sorry.

Do you want to tackle that question from Drew?

Drew, you want me to talk about the profitability, is that the part you want me to speak about Drew?

That was the jist of the question.

Well one of the things that we are going to have a little less profitability, as Maureen said, because of the mix of services, but one of the things that we're doing is we've created a really effective flex organization where we can flex up and flex down our service deliverers because that's always a risk when your service business is growing as fast as ours is.

So, we have an eye on profits.

It's really important to our business model to have that service business not only because it's very in line with what the initiatives are that are coming out of a race for the top, the Obama administrations improvement, but also because it really reinforces the strength of our materials in district through we are supporting teachers and nothing how best to use them.

But Margery while you're on the line, you might want to talk a little bit about your view of the funding and how it's flowing and what you believe will happen for the rest of the year simply to assure Drew and others on the line of our committment and outlook that we will reach our budget plan for last years sales, or approximating last years sales.

Okay.

So, we had a very strong pipeline this Summer, but we saw some delays in purchasing because of the timing on school improvement grants and I think as people watch the market know that the race to the top is likely to come in our last three quarters and we didn't expect any in our first quarter.

So, just to give you an example, a material example of how this has been working, we had a very large order this week from Tulsa, Oklahoma.

It was school improvement funds that were used for that order and that was something that we had expected to get in this Summer, but instead it came in this week and we have a lot of that kind of business lined up and we are very much hoping that it's going to materialize in the second quarter.

We think that we're extremely well positioned for school improvement grant money and we are doing I think a lot of good work around race to the top.

Our acquisition of ICLE a few years ago was fortunate.

They're doing quite a bit of work with the SEA's, which are the State Education Agencies, and we're optimistic that we're going to do well.

Just a quick comment on Math Solutions.

Math Solutions really boosts our ability to expand our service business and get contracts for school districts and states that are looking for more stem and we think that this brings important talent and intellectual property into our mix for expanding our overall math business.

Thank you, Margery.

I guess just two follow-ups related to your comments, Margery.

One is what is the total pot of money from the school improvement grant and secondly, I guess for anyone, is there any assumed accretion or revenue generation from your Math Solutions acquisition for fiscal 2011?

So, on school improvement grants, there is $3.5 billion being awarded and those funds can be used over a couple of years and there's another $4 billion in race to the top.

Also, one of the nice infusions in the schools that came late in August until we weren't able to see much effect in the Summer was the jobs bill that provided another $10 billion for job preservation in schools.

What was the second part of your question Drew?

Oh, about revenue for Math Solutions.

I think those revenues will be fairly modest and they're somewhat seasonal like we are, so our acquisitions occurred a couple weeks ago, so we missed the first quarter.

Fairly modest, but growing.

Okay, and then two just last housekeeping questions for me.

Just the timing of the launch of the six 39 Clues books and the rollout of your point-of-sale technology in the fairs business.

Well on point-of-sale, now every fair will have a point-of-sale device in the fair.

So, we have those in all regions and all fairs, all case fairs as we call them which go into schools will be accompanied by a point-of-sale device which is like an automated cash register, but it also keeps -- takes credit cards, gives receipts and keeps inventory information and its been very, very helpful to the people who run the fairs, but also helpful to us in keeping track of information and knowing what people are ordering.

Ellie, do you want to talk about the 39 Clues series?

Sure.

We have two new Bridge books to be published this year.

We have the Big Black Book coming out in October and the following next Bridge book which really sets up the new launch comes out in April of this fiscal, and then we will launch the new series in August next year.

Ellie, the new series you alluded to is the additional six books?

Correct.

Yes, that's fiscal 2012.

Got it.

Okay, thanks.

Thank you, Drew.

Next question?

Our next question comes from Barry Lucas of Gabelli Company.

Please go ahead.

Good morning, Barry.

Good morning, Dick.

Let me congratulate you first on the tender and returning value to shareholders, but maybe you could just touch base on the decision-making process since you've been active in the open market, buying back stock, the dividend remains unchanged so just sort of what went into your or the Boards decision to go with the tender which we loved.

Barry, our General Counsel is sitting here looking at me with very dark looks because he's been -- we've been told that because we're about to make an offer for shares that we are not really able to comment on any of the background going into the decision-making process or the offer itself.

So, I'll have to bow out of answering that question for you, sorry about that.

That's okay.

I think in the past you have shared some discussion of improvement in either average ticket size or number of books ordered through new COOL or with POS system at the book fairs.

Could you sort of refresh our memories on what sales did with the new technology?

Well the POS sales there's a slight increase with credit card use in revenue per fair.

However, it's really too early to comment on that for this year, but it was a relatively small increase.

Its customer satisfaction has improved and some softer metrics and of course our information about inventory is substantially clearer because we know every day what's selling in those fairs where people are using credit cards and point-of-sale data.

So, in terms of impact from credit cards and from the new COOL, I'll ask Judy if she will answer that question.

Yes, hi, Barry.

The thing about new COOL is with parent COOL we have the potential to get many more parents directly online and of course it's too early.

School is just opening, but that is the intent of new COOL and of course what our early results are showing is that parents are coming online and the more parents that order of course there's the potential for more revenue with each teacher order.

Great.

Last time and I'll come back with something we've talked about before.

The speculation is Research in Motion will have a new reader announcement next week.

I think Dell announced something in the tablet this week and the Korean Samsung and others will probably be in the market.

So, how important is a kids tablet to really driving both front list and back list sales of children's titles?

Well we're really looking forward to the large number of Android tablets that we expect will come out -- some will come out and some will be announced early next year.

At this moment our eReader software which I'll ask Deborah Forte to describe to you, will function on COOL and will connect with many devices.

Not ours, that is we don't have a kids device, but we will -- I'll ask Deborah to speculate a little bit on what -- how kids might react to the new Android tablets and what a kids tablet might look like.

Well, as you know, our business is children's books and so we've concentrated and focused on software that will power children's books well and to do that across all platforms.

So, we're looking forward to launching our software which will power our books on all the new devices because we want to be where the kids are.

And the jury is still out on whether or not kids are going to embrace the new tablets coming out, exactly how they are going to access their books which is why since we don't know that yet and there is no true kids dedicated device, we need to evaluate whether that is the right option for us at the same time making our software available everywhere.

Terrific.

Thanks very much and congratulations.

Thanks, Barry.

I'd like to turn the conference back over to Dick Robinson.

Please go ahead.

Thank you all for joining us today.

We had good out look for the year.

We're delighted to be able to return value to shareholders.

We thank you for your continued support and we'll look forward to telling you more about our eCommerce, eBooks, book fairs and eReader in subsequent calls.

Thank you all.

Ladies and gentlemen, that does conclude today's conference.

You may all disconnect and have a wonderful day.