Scholastic Corp (SCHL) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Scholastic Q3 FY 2012 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 would now like to turn the conference over to your host, Mr.

Jeffrey Matthews, Vice President of Corporate Strategy, Business Development and Investor Relations.

Please go ahead.

Good morning, everyone.

Before we begin, I would like to point out that the slides for this presentation are available for simultaneous viewing on our investor relations website at investor.Scholastic.com.

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 markets 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.

Also our comments today include references to certain non-GAAP financial measures as defined in Regulation G.

Reconciliation of these non-GAAP financial measures with the relevant GAAP financial information and other information required by Regulation G is provided in the Company's earnings release which is posted on the Company's investor relations website at investor.Scholastic.com.

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

Thanks, Jeff.

Good morning and thank you for joining our fiscal 2012 third-quarter analyst and investor conference call.

For this morning's prepared comments, I am joined by Maureen O'Connell, CFO and Chief Administrative Officer.

Other members of the executive team will also be available to answer questions at the end of this call.

Obviously we are delighted by the very strong third quarter and by year-to-year gains across our business.

In particular last quarter, we achieved significant improvements in Children's Trade Publishing with buoyant sales of The Hunger Games trilogy in the run up to next week's movie release.

School Book Fairs also achieved double-digit sales and along with Club saw improved operating profits.

Taking a major step in our digital strategy for Children's Book, last week we introduced Storia, our new children's ereading app and ebook store and began the first stage of the rollout to teachers, parents, and kids through our Book Club and Fair channels.

Meanwhile our year-to-date results in Education have continued strong based on new products backed up by increased sales and service capacity.

With substantial help from The Hunger Games trilogy in English-speaking markets and in our growing Education business in Asia, we boosted revenues and profits in international.

Based on this strong momentum, we raised our outlook for profits and for free cash flow in fiscal 2012 as Maureen will discuss in a moment.

Now let's take a look at last quarter's results in more detail.

Revenue in the Children's Book Publishing and Distribution segment increased by $73 million last quarter, producing a $33 million gain in operating income.

The Trade channel delivered $69 million of this sales growth and a substantial portion of the higher profits.

We also achieved a $9 million or 12% revenue increase in School Book Fairs and profits were up in both Fairs and Clubs as well.

We were especially proud of the success of Suzanne Collins, The Hunger Games trilogy, yet another Scholastic published global phenomenon with a large crossover readership by adults.

Sales of the series reached a high point in the quarter, ahead of next week's highly anticipated movie release.

This was the primary cause of higher Trade results but other bestsellers also contributed growth including The Invention of Hugo Cabret by Brian Selznick and War Horse by Michael Morpurgo, both of which had critically acclaimed film adaptations released in the quarter.

Brian Selznick's second novel, Wonderstruck, performed strongly too as did new and backlist titles in the 39 Clues series.

Like Scholastics' previous record-breaking book series including Harry Potter and Goosebumps, The Hunger Games has become a global sensation reflecting the incredible talent of Suzanne Collins whom we have nurtured, published and believed in since her first major book project with Scholastic eight years ago.

Scholastic's marketing and promotion has further fueled anticipation and word-of-mouth support for Hunger Games especially through the social media.

The Hunger Games regularly trends as a leading topic on Twitter worldwide.

Effective marketing in traditional channels has been critical too through point of sale displays, promotion in our Clubs and Fairs and support in the press and in the bookseller education and library and communities.

The Hunger Games has also benefited from the growing market for adult ebooks.

A new cross-over selling opportunity has emerged with adult readers who might previously not have visited the young adult section of a bookstore or carried a YA novel around with them.

Since all three titles in the series have already been published and have already been bought by many customers, we expect sales to stabilize over the next several quarters compared to last quarter's movie related spike.

We are pleased that The Hunger Games trilogy has become another classic and best seller on Scholastics' publishing list.

Its success has helped expand the overall market for young adult fiction while further underlying Scholastic's reputation as a consistent creator of best sellers.

On the distribution side of the Children's Book segment, we also experienced strength last quarter.

In School Book Fairs, we substantially increased both fair count and revenue per fair.

In School Book Clubs, we continued to pursue a strategy of targeted promotion spending resulting in higher profits.

In addition now, over 80% of teacher orders are placed online and many online teachers have been able direct ordering for parents, both key signs of progress.

Last week we took a big step toward our digital distribution strategy officially introducing Storia, the free ereading app and ebooks store designed for children.

Storia is easy and intuitive helping kids learn and love to read in a fun, educational and engaging way.

The free app is currently available for iPads in Apple's app store and for PCs on Scholastic.com.

Later this year we will release versions for Android tablets, Android smartphones and iPhones.

Each Storia download comes with five free ebooks with access to an ebookstore with over 1300 quality children's ebooks including approximately 250 enriched titles.

By next fall we will offer more than 2000 ebooks including 350 enriched titles.

We have begun a staged rollout of Storia to a quarter, 25% of Book Club teachers, sponsors and parents this spring and we will also demonstrate the application at approximately 1000 Book Fair events.

This phased approach will allow us to further test and hone the end-to-end customer experience in preparation for a full launch across our network of clubs, fairs and online sites next fall for back to school.

While we don't expect a material amount of revenue this fiscal year, initial reactions to Storia in the press and by teachers have been very positive.

Teacher support is critical to our strategy and many teachers are already planning to use Storia to introduce ebooks in their classrooms.

The third quarter is the seasonally smallest period for our two education segments.

In Educational Technology and Services, year-to-date sales are up nearly 20% with significantly higher margins reflecting strong demand for READ 180 Next Generation which we launched last May.

Sales of services have also risen by double-digit percentages driven by an expanding customer base and high renewals.

In the third quarter, these trends continued, partially offset by a decline in sales of other products.

As anticipated, the seasonal change in mix of service and product sales affected margins.

In classroom and supplemental materials publishing, year-to-date revenue has also risen and margins have improved as a result of strong high level selling and new products.

Given the shift of federal funding toward the first half of this year compared to a year ago, sales of classroom libraries declined in the third quarter versus the prior year.

This was partly offset by increases in classroom magazine revenue.

In the international segment, profits grew last quarter.

In Canada, the UK and Australia, sales and profits rose benefiting largely from The Hunger Games trilogy.

Sales also improved in Asia partly due to strength in Singapore and in India where we are focused on education as a growth opportunity as well as in Children's Books.

As we have stated before, we are building out an educational publishing operation in Singapore whose world-renowned school success provides a strong foundation.

To enhance this strategy, last we acquired Learners Publishing, a small Singapore-based developer of supplemental learning materials for English language learners.

In addition to broadening our product offering, the acquisition adds a talented team to our product development hub in Singapore.

Maureen O'Connell will now review our financial results for the third quarter.

Thank you, Dick, and good morning, everyone.

Looking at third-quarter results, revenues increased over 20% relative to a year ago primarily reflecting higher sales in Children's Books and international both of which benefited from The Hunger Games trilogy.

Cost of goods sold as a percent of sales improved significantly by over 300 basis points reflecting favorable product mix including higher ebook sales as well as lower spending on incentives in Clubs.

SG&A rose last quarter as a result of sales tax accrual, higher benefit costs and increased bonus accruals relative to higher year-to-date results as well as the planned increases in spending on digital initiatives.

Overall the seasonal loss per share from continuing operations improved to a loss of $0.09 including $0.05 in one-time items compared to a loss of $0.77 a year ago which included $0.13 in one-time items.

Turning to segment results, in the Children's Books segment, revenue was up significantly driven by growth in Trade and School Book Fairs partially offset by decline in Clubs.

Higher results in all three channels partially offset by increased digital spending yielded a substantial improvement in profitability.

In Educational Technology, revenue was up slightly in the quarter but profits declined reflecting the higher portion of service revenue relative to product sales in the quarter compared to a year ago as well as increased prepublication amortization following new product launches.

Classroom and supplemental material publishing revenues declined last quarter reflecting the earlier timing of federal funding.

Year to date, revenues were up strongly.

In MLA, revenues and profits rose due to higher sales of interactive products as well increased production revenue.

Finally, corporate overhead rose by $4.8 million versus a year ago.

The difference primarily reflects one-time expenses related to voluntary retirement plan of $2.5 million or $0.05 per diluted share as well as higher incentive and accruals as I just described.

Looking at cash on the balance sheet, free cash used in the quarter was $1.5 million compared to free cash flow of $49.2 million last year.

This difference primarily reflects an increase in inventory and accounts receivable related to higher third-quarter Trade sales.

In the quarter, we completed our plan to bring all trade collections and customer service in house implementing a comprehensive enterprise order to cash system.

This is already generating margin and customer benefits but has impacted the timing of collections and trade.

Cash and cash equivalents rose to $111.8 million from $90.7 million a year earlier as a result of strong free cash flow over the past 12 months while at the same time, we also repaid debt and returned cash to shareholders through dividends and share buybacks.

We maintain a strong balance sheet with total debt of $165.3 million at quarter end compared to $220.1 million a year ago.

This fiscal year we have acquired 220,166 shares of common stock on the open market for $5.6 million.

We currently have remaining authorization to repurchase up to 38.9 million of common stock.

Based on our significant profit gains in the third quarter as well as solid results in the first half of fiscal 2012, we have raised our outlook.

For the fiscal year ending May, we now expect revenue of approximately $2 billion and EPS of $2.60 to $2.90.

This corresponds to operating income of $160 million to $175 million relative to our prior guidance of $120 million to $140 million.

Year-to-date gains in profitability put us in a good position to achieve this guidance even as we face a difficult comparison against last year's strong fourth-quarter results in Educational Technology and Services when we launched READ 180 Next Generation.

A year ago, we also recorded strong sales of Harry Potter in advance of the last movie in the series.

This year in the fourth quarter, we anticipate higher expenses associated with the launch of Storia, an increased incentive expense compared to a year ago.

As a result of these factors, we continue to forecast fourth-quarter operating income to be level or somewhat below the prior year.

Based on higher full-year earnings, we now expect free cash flow to exceed $120 million for the year exceeding net income.

We anticipate collecting higher third-quarter accounts receivable in late May or early June.

The exact timing of collections relative to our May fiscal year-end could result in potential upside or downside to this free cash flow forecast with an offsetting impact on next year's free cash flow.

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

Thanks, Maureen.

As you all have heard, we are excited and proud to have produced good third-quarter results buoyed by The Hunger Games but also showing continued strength throughout the business.

Now I will moderate a question-and-answer period.

In addition to Maureen, I am joined this morning by these Division Presidents, Shane Armstrong of International; Ellie Berger of Trade Publishing; Deborah Forte of Media; Margery Mayer of Education; Judy Newman of Scholastic Book Clubs and e-Commerce; and Hugh Roome, with Consumer and Professional Publishing.

With that, let's open the call to questions.

(Operator Instructions).

Drew Crum, Stifel Nicolaus.

Thanks, good morning, everyone.

My first question, Dick, I wonder if you could quantify the contributions you have seen from The Hunger Games either in the third quarter or year to date?

Just trying to understand how that is going to impact your business going forward.

As you mentioned, Trade you expect to stabilize going forward.

Maureen will answer that one, Drew.

Thank you for the question.

The majority of our gains in Trade this quarter was Hunger Games as well as other bestsellers.

We do expect that not to be as significant in the fourth quarter because the movie will be released and as we said on the call, all three books sold ahead of the movie, so we have seen very strong sales in the third quarter ahead of the movie.

So we expect that to come down.

We do expect though the sales will continue to be strong but not as strong as the third quarter.

Offsetting that will be Next Generation which was launched last year in the fourth quarter as well as higher spending on Storia and Hunger Games which was also strong last year in the fourth quarter due to the movie series release.

Okay, Maureen, I think you kind of answered this already but to just maybe expound on your response to Storia and the investment spending there.

Where are you with that?

Should we anticipate sequential increases in the fourth quarter and beyond?

Just want to understand how you are thinking about digital investing for the business going forward?

About half of our spending for this year is in the fourth quarter for Storia because that is when we are rolling out to our teacher base as well as testing in the Fairs and our marketing plan supporting that is in the fourth quarter.

So there has been some increase in the first nine months of the year but the fourth quarter has a substantial increase.

Okay, very helpful.

Thank you.

And then maybe for Margery if you can talk about, we are in a new calendar year here just your outlook for the funding environment, what you're seeing in terms of the sales cycle for your product.

A lot of your competitors albeit on the basal side have suggested calendar 2012 is going to be a tough year but wonder if you could comment on that?

Hi, Drew.

It is Margery.

Yes, we have heard from other people that they are finding it difficult.

But we have been doing okay.

We grew in the quarter.

It is a small quarter for us because we rely more on Title I money and Special Ed which are more stable.

We have been seeing funding out there.

I think you know that some states are actually bringing some funding up.

It is not at the 2008 levels but it is showing some signs of life.

We are seeing very strong demand for services.

With the common core coming down the road and new assessments, people are really anxious to get their professional staffs ready for this.

So we are cautiously optimistic that we are going to be able to weather and grow over the coming months and years.

Thanks.

My last question, guys, any reason there was no buyback during the period?

As we were watching The Hunger Games sales increasing, we didn't think it was prudent to go out in the market and buy until we updated our guidance.

Also we raised our dividend in the quarter.

Okay.

Thanks, guys.

(Operator Instructions).

Barry Lucas, Gabelli & Co.

Thanks and good morning.

Drew covered most of the areas.

But, Dick, maybe you could talk about the response that you have seen so far to Storia, what are teachers, what are employees who have been on the site saying and what has worked and what hasn't worked?

Teachers love this app.

They are excited about the opportunity to bring something new to their students.

When we talk to them, we have talked to hundreds and hundreds of teachers about Storia.

They glow with enthusiasm about the app itself but also the opportunity to introduce their kids to something that everybody is interested in and talking about.

And it gives them a new kind of a new way to talk about reading which is so important to build the enthusiasm and the love and the support for reading among their students.

So I think that characterizes it a lot.

The app itself is easy to use, the connection to the bookstores.

You have to work at it a little bit but that has been working too for the great majority of our people who have tried it so far.

The employees have liked it and we are just feeling very good buzz about Storia all around and a great excitement particularly among teachers and the people supporting the Book Fair events.

So it is a good omen, Barry, and there is something new that people want to get a hold of to bring new ways of reading and thinking about reading to their kids.

Great.

And it is available today -- I mean having been on the website for desktop, laptop, iPad, but not for Android powered tablets, is that the case?

That is coming later this month or early next month.

Great.

Thank you, Dick.

(Operator Instructions).

I am showing no further questions at this time.

I would now like to turn the conference back over to Mr.

Richard Robinson for any closing remarks.

Thank you all.

We had a great quarter.

We are very excited about the support for The Hunger Games from all parts of the world from adults, from young people.

It is just a reaffirmation of what a great story can do to lift people's spirits and give them a new feeling about reading.

Similarly with Storia, we are very excited about Storia.

All of the parts of our Company did well in the quarter and we are very, very proud of that fact and look forward to talking to you again in July.

Thank you very much.

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

You may all disconnect and have a wonderful day.