Scholastic Corp (SCHL) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Scholastic Q4 2012 results.

(Operator Instructions).

As a reminder, today's conference call is being record.

I would now like to turn the conference over to your host, Mr. Jeff Mathews, VP.

of Corporate Strategy, Business Development and Investor Relations.

Please go ahead, sir.

Thanks, Eileen.

Good morning, everyone.

Before we begin I would like to point out that slides to the 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 would 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.

Our comments today also include references to certain non-GAAP financial measures, as defined in Regulation G. The 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, also at Scholastic.com.

Now I would like to introduced 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 year-end Analyst and Investor Conference Call.

For this morning's prepared comments, I am joined by Maureen O'Connell, CFO and CAO, other members of the Executive Team will also be available to answer questions at the end of this call.

With solid results across the Company, Fiscal 2012 was a good year made great by The Hunger Games.

Suzanne Collins wonderful trilogy emerged as yet another Scholastic published global phenomenon, regularly taking the top three spots on print on eBooks Best Seller list across the English speaking world and helping drive record earnings for the Company.

On top of our success for the Hunger Games, good execution delivered strong operating performance across the Company.

At the same time we accelerated major digital initiatives in Children's Books, Educational Technology and International.

Continued financial discipline produced significant free cash flow and we finished the year with our strongest balance sheet in more than a decade.

These great results provide a strong foundation for the future.

Although we will not repeat our record earnings from Fiscal 2012, our goal for Fiscal 2013 is to sustain last year's momentum, while generating strong free cash flow.

We have also taken major steps forward in the fast paced digital transition of our businesses.

We expect our substantial investments in eCommerce, eBooks and new digital programs in education will generate strong profit growth, largely in Fiscal 2014, though earnings in the year ahead will be lower than fiscal 2012's record level.

Now I would like to discuss our results and our plan in more detail.

In Children's Books we had a tremendous year in Fiscal 2012.

Continuing a record of high-quality, best-selling Publishing and Trade and strong results in Fairs.

At the same time we successfully introduced Storia, our e-Reading app and eBook system, which is the central pillar of our digital strategy for this business.

These results and investments, position our Children's Book business well to grow and maintain market share as more schools and families buy eBooks from us.

During Fiscal 2012, The Hunger Games trilogy reached new peaks each Fiscal Quarter driven by tremendous word-of-mouth among fans, supported by smart marketing and social media campaigns.

Later in the year this accelerated with a build-up and release of the movie.

The Hunger Games has emerged as the top eBook in the US in 2012, as the trilogy gains wide spread adult readership.

We also had great results with our other Scholastic Authors and Series, including The Invention of Hugo Cabret and Wonderstruck by Brian Selznick, as well as new and back-list titles in the 39 Clues Series.

With over 50 million copies now in print and digital in the US, and many more millions Internationally, The Hunger Games is a true global phenomenon, the product of remarkable story telling and great publishing.

All three titles in the Series have now been bought by many Customers, and as a result sales have begun to ease in June and July, as Fiscal 2013 begins.

For the year we expect sales to return to pre-movie levels, as The Hunger Games becomes the cornerstone of our back-list.

In the coming year we have a number of exciting new releases, including two new Captain Underpants titles by Dav Pilkey, and a fantastic new Star Wars pop-up book by Matthew Reinhart.

Scholastic Series Publishing continues to expand with The Raven Boys, the first book in a new young adult quartet from Award Winning and Best Selling Author, Maggie Stiefvater.

We also are publishing three new titles in the Best Selling 39 Clues Series.

Building on that Series groundbreaking success, we are launching the Infiniti Ring, a highly anticipated multi-platform series whose lead Author is the popular James Dashner.

In addition, major campaigns are planned for the 20th Anniversary of Goosebumps and the 50th Anniversary of Clifford the Big Red Dog, and of course we look forward to working on future projects with long time Scholastic Author, Suzanne Collins.

School Book Fairs finished 2012 solidly, with continued growth in revenue per Fair, driven by strong participation from parents, grandparents and kids.

In Fiscal 2013 we are expanding our successful programs to drive more family participation in school Book Fair events.

This should result in further growth in revenue per Fair, as well as we also modestly grow Fair count.

In School book clubs last year we continue today pursue a strategy of targeted promotion spending, resulting in higher profitability on lower revenue.

For back-to-school we are increasing incentives and mailings to our most productive customers.

With over 80% of our teachers now online, we continue to make online ordering easier and more rewarding for our customers.

This plan should hold revenue approximately level.

This Spring we introduced Storia, our free e-Reading app and book system, eBook system, designed for children, an important step in our digital distribution strategy.

Storia has already received strong praise from teachers, parents and reviewers of the New York Times and School Library Journal.

Children's Technology Review gave Storia an Editor's Choice Award, noting Scholastic Storia comes out on top.

The free app is available for download in App Store for the iPad, and at Scholastic.com for PCs.

This Fall we will release versions for Android tablets and Smartphones, as well as the iPhone.

As we launch our Back-to-School Program, we have more than 2,000 Storia eBooks available, including 350 enriched titles.

We will also offer Harry Potter eBooks this Fall, while other best selling Scholastic Series are already available on Storia, including The Hunger Games, 39 Clues and Shiver.

For Back-to-School we're introducing Storia more widely, especially to teachers through School Book Clubs.

Teachers have reacted very positively to Storia as a great way to introduce eBooks in their classrooms.

As they build excitement for digital reading among students, teachers are also recommending Storia to parents.

This Fall we're also expanding Storia demonstrations in school Book Fairs where families reacted enthusiastically when given a chance to experience Storia firsthand.

Although eBooks sales to children are still small, compared to adult purchases, schools and families are excited about the impact of eBooks on children's enthusiasm for reading.

Our customers expect Scholastic and our Storia e-Reading app to lead this transition in 2013 we are rapidly building new product and expanded digital distribution as we introduce schools and families to digital reading.

However, we do not expect to drive significant revenue until Fiscal 2014, at the earliest.

Educational Technology and Services had a great Fiscal 2012, with strong growth and significantly higher profits following successful release of READ 180 Next Generation.

The number one reading intervention program used in US schools.

Professional development, technology support, school reform and other services also grew by double digits, reflecting a growing base of customers who turn to us for consulting services to help them solve their toughest educational issues.

The success of READ 180 Next Generation, marks a new phase in the growth and evolution of Scholastic Education, in terms of the power of our products and platform, as well as the sophistication of our sales and service organizations.

Having just returned from our summer sales meeting for Scholastic Education Group, our Educational Technology and Services Division, I'm struck by the growing power, confidence and strength of this new model for education publishing.

It blends innovative technology product, data-driven instructions, research based teaching and learning, and professional services to support school districts as they strive to increase student achievement.

Scholastic Education is redefining the way our industry can support schools by providing great products and continuous consulting support to ensure that student achievement is improving in every school in the classroom.

In addition to our internal momentum, our successfully approach to raising student achievement and teacher effectiveness benefits from key external trends, including the upcoming Common Core State Standards.

Developed by the National Governor's Association and the Counsel of Chief State School Officers, the Common Core introduces rigorous shared standards for Math and English Language Arts.

45 states have already adopted these and testing will begin in 2014-15 school year.

We think teachers and students will benefit from the new standards, but will need significant help to meet them.

This has already created great opportunity for Scholastic.

Our current Math and Literacy programs aligned closely with Common Core.

In fact, many of our Authors had a hand in drafting these new standards.

Targeting this emerging need, we have been investing in extensive pipeline of new products with the following major launches scheduled for Fiscal 2014.

Math 180, a groundbreaking research based math intervention program, and I Read, a new primary grade literacy program developed with top experts in the field and, we will release a major next-generation versions System 44, our foundational reading and phonics program, which is a prequel to READ 180.

We expect these new products to provide substantial revenue and profits, further accelerating growth in Educational Technology and Services.

Scholastic's other education segment, Classroom and Supplemental Materials Publishing, also achieved growth in Fiscal 2012, with new literacy products on high level selling.

In Fiscal 2013, we expect to continue this growth with new Common Core aligned nonfiction guided reading and middle school program.

Turning now to International, these results improved dramatically in Fiscal 2012.

Our children's book business in the UK, Canada and Australia all experienced strong revenue growth, hardly reflecting the success of The Hunger Games trilogy, as well as continued operating improvements, especially in the UK.

Sales in Asia also rose, reflecting the growing demand for educational products in that region.

While in Fiscal 2013, we expect lower sales in The Hunger Games, compared to 2012, revenue and profit in International are expected to rise compared to Fiscal 2011, as we increase market share in Children's Book Publishing in each of these Countries.

To accelerate our growth trajectory in Asia, and emerging market's in our new Singapore based Product Development Team is moving ahead with a comprehensive plan for new print and technology-based curriculum with launches beginning in Fiscal 2014.

The strategy complements our direct to school based selling channels, which are well established in the region.

Maureen O'Connell will now review our financial results for the fourth quarter and full year, and lay out our financial goals for Fiscal 2013.

Thanks, Dick and good morning, everyone.

Let me begin with the Income Statement.

For the full year, revenues rose 14%, primarily driven by strong sales in Children's Books and International.

Especially The Hunger Games Series, as well as growth in Educational Technology and Services.

Cost of goods sold as a percent of sales, decreased slightly, with an increase in (inaudible) reserves for Clubs and Fairs related to changing sales trends, mostly offset by higher eBooks sales in Trade and fewer free book incentives in Clubs.

Selling, General and Administrative expenses increased in absolute dollars, reflecting one time expenses of $9.3 million from the Company's voluntary retirement program.

In addition, the Company had higher sales tax accruals for School Book Clubs, increased Digital investment and higher selling expense in both of our education businesses.

Operating income increased nearly 80% to $201.8 million excluding one-time items.

And operating margins exceeded, reached 9.4%.

The Company's provision for income tax resulted in effective tax rate of 36.3% in Fiscal 2012, compared to 46.1% a year ago.

This decrease was primarily due to the reversal of certain valuation allowances based on higher profitability in the UK and across the Company.

Earnings per diluted share from continuing operations, excluding one-time items, grew to a record $3.70 in Fiscal 2012, compared to $1.62 a year ago.

Overall our results were in line with our raised April Guidance on an operating income basis, but was ahead of Guidance due to the benefit of the reduced tax rate.

Turning to segment results, in the Children's Book Segment, revenue was up significantly for the year, and for the fourth quarter, driven by the growth in Trade and school Book Fairs, partially offset by a decline in Clubs.

Profits increased due to higher sales, partially offset by increased digital spending, sales tax and (inaudible).

In Educational Technology and Services, revenues were up solidly in Fiscal 2012, reflecting strong sales of READ 180 Next Generation, particularly in the first half of the year, revenues from Services also grew by double-digit percentages, ramping up during the course of the school year as is typical, strong segment sales, in particular the higher margin Educational Technology products, drove significantly higher profits for the year.

In the fourth quarter sales and profits declined, reflecting lower sales of READ 180, compared to a year ago when we first launched the new version.

Partially offset by growth in lower margin services.

Classroom and Supplemental Materials Publishing sales grew for the full year, but were also front loaded.

Reflecting the availability of certain Federal funds earlier in the year.

In the segment classroom magazine revenues also grew.

Profits were up slightly due to revenue mix and higher selling expense.

International sales and profits were up strongly for the year and especially in the fourth quarter reflecting the benefit from The Hunger Games series.

In the UK, Australia and Canada.

In addition, Asia experienced strong growth.

In MLA, revenues and profits declined in the fiscal year, primarily as a result of an expected decrease in advertising and sponsor sales, as well as an impairment charge taken on a television property.

Finally, Corporate overhead expense rose in Fiscal 2012, reflecting one time expense of $15.5 million from the Company's voluntary retirement program, as well as a non cash on a sublease arrangement.

In addition, there were higher bonuses related to the improved results.

In fiscal 2012 we generated free cash flow of $147.6 million, significantly above last year's results and exceeding Fiscal 2012 net income.

Reflecting improved operating results and continued working capital discipline.

As a result, cash and cash equivalence at year end exceeded the Company's total debt by $35.6 million, compared to net debt of $98.1 million a year ago.

This fiscal year we have acquired 475,000 shares of common stock on the open market for $13.1 million.

We currently have remaining authorization to repurchase up to 31.4 million shares of stock.

Now I would like to discuss our outlook for 2013.

In Children's Book Publishing and Distribution, we expect strong front list sales and trade an modest growth in Fairs, to partly offset a decline in sales of The Hunger Games to pre movie levels.

As a result, segment profits will decline from Fiscal 2012 levels but exceed Fiscal 2011.

In addition, spending on digital initiatives in the segment will be front end loaded, impacting the segment's seasonal first quarter loss.

In Education Technology and Services, sales are expected to be approximately level for the year with a decline in product sales, especially in the first quarter, relative to last year's launch of READ 180 Next Generation.

Higher service sales and renewals to an expanded customer base are expected to offset these factors later in the year.

Profits are expected to decline some what for the year, reflecting lower product sales as well as spending on major Educational Technology products, which should drive substantial growth in Fiscal 2014 when these products are launched.

In Classroom and Supplemental Materials publishing revenue and profits should increase for the year, driven by launches of new Common Core aligned reading and writing products later in the year.

Relative to last year's front loaded results, however, results for the first half of the year are expected to be down.

In International, continued improvements in the UK and strong growth in Asia are expected to partly offset the expected decline in the sales of The Hunger Games.

Relative to Fiscal 2011 levels, however, revenue and profit in International are expected to rise solidly.

Corporate overhead is expected to decline due to Fiscal 2012 higher bonus accruals, partly offset by higher medical expense.

In Fiscal 2013 we expect effective tax rate more in line with Fiscal 2011.

That is in the mid 40's following last year's tax benefits from the reversal of certain valuation allowances.

On the consolidated basis we expect total revenues of approximately $1.9 billion to $2 billion and earnings per diluted share from continuing operations of $2.20 to $2.40.

This outlook corresponds to operating income of $130 million to $140 million.

Our outlook for EPS and operating income excludes the impact of one-time items.

We expect free cash flow of $120 million to $140 million in Fiscal 2013, and capital expenditures are expected to be between $65 million and $75 million.

We also plan to spend $65 million to $75 million on prepublication and production.

Increases in both areas primarily reflect investment in e-commerce, digital product development including Storia and our new Educational Technology programs.

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

Thank you, Maureen.

Now I will moderate a question-and-answer period, in addition to Maureen and Jeff, I'm joined this morning by Ellie Berger, President of Trade Publishing and Margery Mayer, President of Scholastic Education, Judy Newman, President of Scholastic Book Clubs and eCommerce as well as other members of our Executive Team were here to answer any questions that you might have.

So with that let's open the call for questions.

(Operator Instructions).

Our first question comes from Drew Crum of Stifel Nicolaus.

Please go ahead.

Okay.

Thanks.

Good morning, everyone.

So I want to start with Hunger Games first.

Dick, is there way you can frame-up, you know, what the revenue contributions were, the profit contributions were in Fiscal 2012 or in the fourth quarter, and Maureen, maybe you can talk about what your expectations for Trade would be in Fiscal 2013, excluding one time Hunger Games.

Well, Drew, as you know we're not breaking out individual titles either on revenue or profit side so we are saying that we will return to pre movie levels.

In the meantime, Maureen, can answer your other question on trade.

Yes.

I mean we peaked sales of Hunger Games in the April and May period, and as we said we saw an easing off of those sales in May and June, and so we believe that those sales trends now will be similar to before the movie was launched.

As far as your growth rate on Trade, it will be down double digits because of the decline in The Hunger Game sales.

The core business, however, will have a single digit growth.

Okay.

Okay.

Yes.

That's what I was looking for because I think you made a comment about International.

Your expectation was that International Fiscal 2013, excluding Hunger Games, would be up versus Fiscal 2011.

And that would be the same trade on the base.

Okay.

Fair enough.

And then on digital, I think you mentioned incremental investments in Fiscal 2013.

Can you quantify what that might look like, and then returning to the fiscal fourth quarter of 2012, what was the incremental investment you incurred around digital in that period?

Okay.

Well, our digital investments as you know are core to our business now so they're embedded in a lot of our costs so it would be very hard to just break out separately because if you do a marketing promotion that has both Club promotion and Storia promotion it's very hard to distinguish which is which, but overall our digital business will increase next year and spending as we launch the program for the back-to-school.

So there will be marketing spend, and that's why we said it will be front loaded, because you will see most of that spend occurring in the first half, whereas last year it occurred more or less evenly for the year, a little higher in the fourth quarter.

Mm-hmm.

Are there any other cost reduction programs in place, or you're planning for given the increased spend on digital?

Well, I think since our operating income is up substantially over fiscal 2011 levels, and yet we are spending at a much higher rate on digital, embedded in is that is a cost reduction efficiencies that we have been achieving through out the year.

Okay.

And, Dick, as it relates to Storia, I mean there's been some developments with Apple, alleged collusion, price fixing with various publishers for some reason their business or did this issue go away.

Do you have any plans portfolio make Storia available on Amazon's platforms?

Yes.

We, as you know, we plan to have Storia available in as many places as we possibly can.

I might ask Deborah Forte, who is with us, to talk a little bit about the applications for each of the various distribution devices including Kindle.

Morning.

Good morning.

We, as Dick said our strategy for Storia is to make it ubiquitously available and platform agnostic so we are going out.

Of course we've been on the PC and the iPad, and we expect to be on the Kindle this Fall and on Android tablets and then roll out with phones.

So we will continue to do that like other sellers, just the way Amazon is on the IOS and that's our strategy right now, so we're going to continue with that strategy and hope that we can reach as many of our customers as possible regardless of the device and platform.

Okay.

Good.

That's helpful.

And shifting to publishing the guidance for technology, flattish for Fiscal 2013.

Is it just a tough comparison you're cycling against or is there anything else macro related that you're contemplating in the Guidance there?

Margery, you want to talk about that please.

Yes.

We had such a strong year with the launch of Next Gen, and I mean we had a, we feel we had a phenomenal year and as Dick's comments ahead of the questioning said, we feel like we've really, are continuing in this evolution of our business where we're getting our sales force even stronger than they've been in the past.

We've been hiring some really outstanding people, we've been getting a lot more consistent about how we sell using data to sell.

So we feel like we're doing fantastically.

We have three great products coming out next year.

We just had really high numbers in 2012 and we're continuing to do extremely well in the business.

Okay.

Dick, last question for me.

Can you talk about how you're thinking about uses of cash in Fiscal 2013.

You generated healthy cash flow.

In Fiscal 2012 you mentioned the balance sheet is the strongest it's been in the last decade or so and you're expecting strong cash flow in 2013.

How are you thinking about uses of cash going forward?

Well, first we are of course investing a considerable amount in digital side as Maureen suggested.

That of course is baked into our operating profit numbers.

So we're accommodating that investment in the context of improving our free cash flow.

As we have, you know, in the past five years, Drew, as you know we've had a dividend, we've raised the dividend once, we have had several stock buy backs since 2007.

We have an ongoing program of reaccquiring shares, Maureen noted we have $31 million currently authorized by the Board for that program.

The Board always looks at the question of the use of cash and how we can return cash to shareholders, so that's our theme as long as we're able to manage the investment of our digital transition, which so far we're doing very, very nicely.

So I assume the Board will continue to review this, we are all very pleased about the cash generation from the current year, and we will undoubtedly be discussing this at all of our Board meetings in the future just to determine the best way that we can return cash to shareholders after investing in the business which is growing so nicely right now and especially in the Educational Technology and Digital side.

Okay.

Thanks, guys.

Thank you.

Well, thank you all for tending our Fiscal 2012 Conference Call.

We are very excited about the great achievement of the Company doing this year.

We are thrilled to be the publisher of The Hunger Games trilogy, which really transformed publishing in the past year.

We're making so many strong investments in transitioning our business to digital and we're building our Educational Technology business while maintaining our leadership position in children's book publishing and supplementary publishing for education, so we are, and our international business is just booming, so we're very excited, we thank you for your attention and we will return to talk to you in September.

Thanks so much.

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

You may also disconnect.