Scholastic Corp (SCHL) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Scholastic Reports Fiscal 2015 Results and Fiscal 2016 Outlook Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded.

I would now like to turn this conference over to Gil Dickoff, Senior Vice President, Treasurer, and Head of Investor Relations. Please begin.

Thank you very much, Latoya, and good morning, everyone. Before we begin, I would like to point out that the slides of this presentation are available 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 condition 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 SEC. Actual results could differ materially from those currently anticipated.

Our comments today 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 investor relations website. Again, that's at investor.scholastic.com.

Now I'd like to introduce Dick Robinson, the Chairman, CEO and President of Scholastic, to begin today's presentation.

Welcome, everybody, to our year-end presentation. We're excited to be here with you.

Our results for the year from our continuing operations, which excludes the results of our recently sold EdTech business, now treated as a discontinued operation, were in line with expectations, driven by our revitalized school-based distribution channels and our strong education segment, which includes classroom books, magazines and instructional programs in literacy.

Revenue from continuing operations for the year was $1.64 billion, an increase of 5% over 2014. Operating income from continuing operations, excluding special one-time items, grew by 14%. Earnings per diluted share from continuing operations, excluding special one-time items, were $1.29 versus $1.17 in fiscal 2014, an increase of 10%.

With enthusiasm for independent reading and for books in schools at a high point, our businesses are performing very well and we have a tremendous opportunity to build on the favorable market dynamics and grow both our core print and digital publishing businesses in children's books and education.

As you know, we completed the sale of the EdTech business to Houghton, Mifflin, Harcourt at the end of May. We also repositioned our media operations so they are better aligned with our core children's book publishing. Accordingly, we now report our results in three segments: children's book publishing and distribution; education, formerly called classroom and supplemental materials publishing; and international.

With these actions, while we have a complicated story from a reporting perspective this quarter, our strategy is clear. We are focused on growing our core businesses. Our three segments are all connected by the mission of providing high quality schools and classroom-based books and educational materials to parents, teachers, and schools in support of children's reading and learning. Our new, more simplified structure will improve accountability, create a more nimble operating environment, and allow us to leverage our investments in new products and services across all of our segments.

In fiscal 2015 children's book publishing and distribution, our largest segment, delivered profitable growth, driven by an increase in the number teacher-sponsors' reading clubs in the classroom, as well as higher levels of spending by students and their families. We also achieved growth in book fairs as well as steady revenues in trade.

We expect this momentum to continue in 2016 at a more moderate pace, but still reinforced by the continuing emphasis by educators and parents on independent reading. Industry-wide sales data show children's books to be the most attractive segment of the publishing world, and we clearly lead the market.

We also have an excellent pipeline of trade releases this year, including the 12th book in the Captain Underpants series, the new illustrated edition of Harry Potter and the Sorcerer's Stone, new titles in the acclaimed Goosebumps series in connection with the scheduled October 2015 of the release of the Goosebumps movie, which stars Jack Black as the beloved author, R.L. Stine. And already social media around the Goosebumps movie release is very, very high.

Our continuing education business is on a solid trajectory for continued growth and surpassed the EdTech businesses we just sold this year, with sales this year of more than $275 million and operating margins in the high teens.

Our Scholastic education businesses focuses on pre-K to 12 literacy solutions to improve student achievement at a time when schools are looking for new ways to meet the higher standards in reading and language arts. Our customized curriculum solutions are developed in partnership with schools districts and schools looking for resources that meet their needs for ways to strengthen student motivation and higher-level thinking skills. Our resources are tailored for personalized learning and specific goals that districts want to meet and delivered through high-interest literature and nonfiction aligned with the new standards. Many districts prefer our blended print and digital customized material to the less flexible basal textbook approach.

In addition, schools are also asking for professional development support in pre-K-to-12 literacy, and Scholastic's recognized authors are able to provide the support in combination with consulting services in reading offered by our literacy specialists who support teacher development in reading and language arts.

In fiscal 2015 guided reading and summer reading programs drove sales in this segment, along with classroom magazines, which have seen amazing growth in the past four years. Our magazines provide high quality, engaging nonfiction and informational text aligned with the higher standards, as well as powerful digital content that is easy for teachers and students to use in their own classrooms. In so doing we have successfully reinvented time-honored brands such as Weekly Reader and Scholastic News to ensure increased relevance in today's market.

A quarter of the Company's revenue is generated from sales outside the United States and we are continuing to build our international educational and digital and consumer book businesses. In the UK, Canada, and Australia we continue to see growth opportunities from a locally originated children's publishing program, with popular series like Tom Gates in the UK and Weirdo in Australia.

Our local operations in India, Philippines, Indonesia, Malaysia, Thailand and our international content team developed in South Asia offer exceptional long-term growth prospects and a unique position in Asia. In Asia we are optimizing our publishing and technology platforms to deliver product to Scholastic's global marketplace. We can now take advantage of our publishing capacity both in India and Singapore to create product for global markets, including US operations. We expect the emerging middle class in developing countries to continue to drive demand for our English language books and instructional materials, including PR1ME, our Singapore math-based series, and Literacy Pro, our digital reading assessment program.

Our businesses generate strong recurring revenues and are now more closely unified than ever in terms of customers, content, and market dynamics. Our organization is unified by the mission of developing children's literacy at the classroom and school level, and independent reading at home. Children's books and independent reading are central to literacy and educational development and Scholastic is the brand on which parents and teachers depend.

As we look ahead to 2016 we'll continue to invest in new technology and data analytics that will allow us to unlock more sales at the school level as we execute on our strategy to grow opportunities in our core print and digital publishing businesses around the globe.

We will continue to take a balanced approach on capital allocation, making targeted investments in profitable growth opportunities that are aligned with our core business, while returning capital to shareholders over time through buybacks and quarterly dividends. Yesterday we were pleased to announce that the Scholastic Board increased the Company's open market share repurchase limits by an additional $50 million.

Our financial position is also the strongest it has ever been. Our real estate remains an important asset, with excellent opportunities to unlock value.

We're well positioned to build Scholastic's leadership position and raise student achievement nationwide. We have the best books at affordable prices, quality print and digital instructional programs, and professional development for educators around the world, as well as unparalleled distribution in the markets we serve.

With that, for more detail on this year, I will pass the call to Maureen.

Thank you, Dick.

I will review our full-year results and will refer to our adjusted full-year results from continuing operations only, excluding the EdTech business, which was sold, unless otherwise indicated.

For fiscal 2015, total revenues were $1.64 billion, a 5% increase over 2014. Cost of goods sold as a percent of revenue for the fiscal year ended May 31, 2015, remained constant at 46.3% compared to the prior fiscal year.

SG&A increased versus the prior year primarily driven in equal parts by higher promotional expense in book clubs and higher technology spent on strategic initiatives. Operating income was $79.6 million, up 14% from $69.6 million last year and resulting in earnings per diluted share of $1.29 in fiscal 2015 versus $1.17 in fiscal 2014.

Taking a closer look at our technology spend, the higher technology spend in fiscal 2015 is largely offset in depreciation, as we capitalize less of our spend during the design phase. As you will hear in our outlook, we expect to incur higher capital expenditures in fiscal 2016, as these strategic systems go live.

Overall technology spend increased by only $3 million for the year. As previously reported, over the course of the year we had been strategically investing in enterprise-wide content and customer management systems. These technology enhancements will improve our data analytics capability and drive closer, more efficient customer engagements.

As part of this process we are moving to cloud-based SaaS solutions which will give us flexibility to scale our systems up and down as needed. This should lead to lower technology spend and lower technology risk over time.

The special one-time items impacting our continuing operations totaled $0.83 for the year and included pretax charges related to: unabsorbed overhead associated with the former EdTech business, $15.8 million pretaxed; one-time severance paid in connection with cost reduction and restructuring programs, $8.9 million; the noncash write-down of certain production and programming assets and related good will taken in connection with the repositioning of the Company's media and entertainment businesses, $8.3 million; and the discontinuance of certain outdated technology platforms, $4.6 million.

I should remind you that in the future quarters, now that EdTech transaction has closed, we will be reimbursed for certain costs associated with the unallocated overhead related to the former EdTech business under the terms of a two-year transitional service agreement with HMH. In the interim period we will begin cost savings initiatives to reduce any unabsorbed overhead burden after the transition has been completed.

We also reported charges in connection with the closure of our retail store in SoHo, $2.9 million; a warehouse optimization project in Canada, $1.5 million; as well as noncash pension settlement charge of $4.3 million, all of which we have discussed in previous quarters.

In children's books, revenue was $958.7 million, an increase of 7%, and operating income increased by 74% to $96.2 million. We were very pleased with performance in this segment, which was also a breakout year for book clubs. We had higher level of teacher sponsorship of our reading clubs in the classroom and higher student participation rates, which resulted in higher revenue.

Book fair business also grew as we continued to shift to higher performing fairs. Trade revenues were basically on par with the prior year.

Before I move to education, I want to point out that the children's books segment now includes audio and video books and the associated rights and licensing, which were previously in our media segment.

In our renamed education segment, fiscal year revenues was $275.9 million, an 8% improvement compared to $255.1 million last year. Operating income improved by 26% to $48.4 million. This was the result of continued strength in our guided reading and summer reading programs, as well as in classroom magazines, where circulation is now more than 14 million. As a reminder, Instructor magazine and the digital edition of Parent & Child, as well as the associated advertising, are now incorporated in our education segment.

Like many companies with global operations, our revenue and operating income results were significantly affected by the strengthening US dollar. Foreign currency exchange had a significant impact on our international segment, an unfavorable foreign currency translation impact of $19.7 million in the year. This was the primary factor behind our sales decrease in this segment.

Revenue was $401.2 million compared to $413.4 million in the prior year. Excluding one-time items, segment operating income decreased by $4.7 million, or 15%, due to the higher cost of US-denominated product and increased spending on new products and technology, including a new accounting system.

Corporate overhead expense was $91.3 million in fiscal 2015, excluding special one-time items of $30.4 million. Last year corporate overhead was $55.1 million, excluding $27.2 million of one-time items. The year-over-year difference is mainly attributable to: approximately $25 million in strategic corporate-level technology spend, of which approximately $22 million was offset by lower business-specific technology spend; about $5 million in higher depreciation and facility charges as the result of the purchase of our headquarters building in 2014, which was largely offset by lower interest expense below the operating line; and roughly $5 million in higher salary-related expense.

Free cash flow, which includes both continuing and discontinued operations, was $73.7 million for the year, compared to $63.7 million in fiscal 2014.

At year end cash and cash equivalent exceeded total net debt by $500.8 million compared to net debt position of $114.9 million a year ago. The higher net cash position is primarily due to the proceeds from EdTech sale, but does not include $34.5 million of cash proceeds held in escrow pursuant to the terms of the sale of the EdTech business. These funds are recorded as restricted cash on our balance sheet. We expect our excess cash position to decline as a result of a pending tax payment of approximately $186 million related to the gain on the sale of the EdTech business.

Our balance sheet has never been stronger. The strong financial position will support our focused investment in long-term profitable growth initiatives and enable us to return value to our shareholders through regular dividends and share repurchases.

Turning to the dividend, as previously announced, the Board of Directors declared a quarterly cash dividend of $0.15 per share on the Company's Class A and common stock for the first quarter fiscal 2016. The dividend is payable on September 15, 2015, to shareholders of record as of the close of business on August 31, 2015. And, as Dick mentioned, we just increased our authorization for open market buybacks.

I am sure you all have questions about our real estate assets. But, as we explained in April, we decided to postpone further discussions on any potential monetization of our real estate holdings as we evaluate the appropriate use of proceeds from the sale of the EdTech business. We expect the commercial real estate market in New York City to remain strong, and believe the value of retail space in our headquarters will add significantly to our long-term resources.

Now, turning to outlook, we expect total revenue in fiscal 2016 of approximately $1.7 billion and earnings per diluted share in the range of $1.35 to $1.55 before the impact of one-time items.

Fiscal 2016 free cash flow is expected to be between $35 million and $45 million compared to $73.7 million in fiscal 2015. The $35 million reduction in expected free cash flow is the result of the payment of one-time transaction-related fees and expenses estimated at $20 million; the impact of EdTech sale, estimated at $10 million; and incremental capital spend related to technology spend of $5 million.

Our outlook includes capital expenditures of $40 million to $50 million compared to $30.7 million in fiscal 2015, when most of our technology spend was expensed, not capitalized, and prepublication and production spending of approximately $30 million to $40 million compared to $62.5 million in fiscal 2015, which included $33.5 million in prepublication and production spending from EdTech and other discontinued businesses. I would remind you that EdTech had a significant amount of prepublication expense and very little capital expenditure.

I will take a moment to provide a bit more color on the assumptions that are behind this outlook. We expect steady but moderate growth across the children's book and education segment, driven by students' enthusiasm for reading and based more specifically on the following factors.

Sustained growth in the low-single digits in clubs and fairs will be supported by the emphasis on independent reading and the continued shift to higher performing fairs. In trade we expect to take advantage of market opportunities, particularly in early childhood, middle grade series, and licensing. In addition, we have standout titles scheduled for release in fiscal 2016. Our leadership position in schools for classroom books and classroom magazines will continue to benefit from the higher educational standards.

In education we expect to see continued strong growth as the current educational standards for language arts and literacy will continue to drive profitable growth in children's book, classroom books, classroom magazines, and digital subscription. And as school and districts seek to improve student achievement and teacher effectiveness, our customized curriculum solutions, professional development offerings, and family and community engagement consulting practices will be in high demand.

In the international segment, the emerging middle class in developing countries should continue to drive demand for English language books and instructional material and our Singapore math textbooks which are developed in Asia for the broader marketplace. However, we expect the US dollar to remain strong, which could impact sales growth in US dollar terms.

Overhead is expected to be flat with the prior year.

With that, I'll turn the call back to Dick for closing remarks.

Thanks, Maureen.

In summary, we're executing on a clear strategy that highlights Scholastic's strong core publishing and ongoing education businesses connected to unparalleled distribution channels, with presence in 90% of US schools.

We are expanding Company-wide sales by driving greater collaboration among businesses to build broader relationships with children, parents, teachers, and school administrators.

We're leveraging the use of shared editorial and creative content and titles in print and digital throughout the Company and further developing our international publishing capacity in Asia for the strategic sourcing of educational materials for all of our markets.

And we are also improving our enterprise-wide technology platforms for content and customer relationship management and developing enhanced data analytics to support our sales and marketing strategies for classroom magazines, book clubs, book fairs and classroom books at the school building level and our broader literacy solutions at the district level.

We're excited about all these opportunities and for the opportunity to focus the Scholastic brand and the Scholastic tremendous resources on a clear core mission and will build profitable growth for the future.

Thank you, and we'll open the line to questions.

Thank you. (Operator Instructions) Drew Crum; Stifel.

So, Maureen, I had a question on free cash flow. If you look at where you were in fiscal 2015 and what you're guiding to in fiscal 2016, you've got a number of puts and takes there, kind of one-time items. What is the more normalized free cash flow level that we should expect for the business going forward now that EdTech's not part of the mix?

And then, on a related note, where should we expect your ending cash balance to be at the end of fiscal 2016? Thanks.

Okay. So, Drew, as far as our ongoing cash flow, the transaction-related fees are $20 million. That's a one-time item. And the $10 million of EdTech cash flow contribution, well, that will be out of our numbers. So I think you can expect going forward that our cash flow would be very similar to our historical levels, but $10 million less for Ed Tech.

Okay. And the CapEx that you're guiding to this year is elevated, obviously. What is a more normalized run rate for CapEx going forward?

Also, I should say that our definition of free cash flow in 2016 does not include the $186 million tax payment related to the EdTech sale.

Right.

So that is not included, which would drive down our cash balance at year end.

As far as a normal CapEx, I think the range that we are guiding to today is more normal. If you look at our historical levels, that would be the range we are normally in. Last two years we stopped CapEx, particularly in the technology area as we assessed what our corporate-level needs were. And most of what we spent last year in technology was expense as opposed to capitalized because we were in the design phase. Now we will start capitalizing as we go live with certain systems.

Got it. Okay, that's helpful. And then, just moving over to the international business, do you have an expectation for growth ex foreign currency, in terms of sales? You did some investment spending in fiscal 2015. Does that continue in 2016? And how much of a drag is that on profitability?

So, we do expect to grow ex currency about 4% next year. And this year we grew ex currency about $7.5 million on that $400 million base. So, in real terms the market currencies are -- the local markets are growing. We're seeing strong growth in Asia, continue to see double-digit growth, and then single growth in Australia and the UK. Canada had some headwinds this year, so they didn't see the same level of growth.

Okay. Just one more question. It's unclear to me what your sales expectations are for trade. It looks like you've got a pretty good pipeline of content coming. Can you frame up what you're assuming in terms of growth for the business?

Well, we had great success this year with our Minecraft books and series. And so we have to replace that next year. And so, even though we have a very strong outlook in pipeline of new products coming out in 2016, we need to replace the revenues, similar to what we did this year with Minecraft replacing some of The Hunger Game revenues.

Okay. Thank you.

(Operator Instructions) Barry Lucas; Gabelli & Company.

I've got a host of odds and ends, if you don't mind. Maureen, you touched on some normalized numbers earlier. But what would be the normalized kind of overhead burden that we're looking at going forward?

I think right now the way that we are driving our technology spend, we leave it all in overhead and we're not allocating it out to our divisions. So, in absolute terms, overhead only went up for technology by $3 million. So, overhead -- I'm sorry -- the whole Company's technology spend only went up by $3 million.

Within our overhead, it looks like a $27 million increase. It is offset, primarily in the children's books, with a decrease in spend. So, next year you'll see flat overhead year over year. But, remember, that's about $25 million, $27 million that sits in overhead that used to sit in the divisions.

Okay. And the restricted cash that's sitting on the balance sheet, when does the restrictions get lifted or is it somehow tied to these payments that you'll be reimbursed for by Houghton?

So, the way that the restricted cash works is most of it is tied to our service agreement and meeting certain standards of service. And the money begins to be released in August. It's about $2.4 million will be released in August. And our expectation is that that escrow will be released during the year. Right now we are meeting all service-level requirements and we feel we're in a good place with our service agreement.

Okay. One on the business and then capital allocation. You touched base on Goosebumps and the movie that's coming out. Anything special -- I'm sure you're doing some special stuff. Maybe you can provide a little color as to how you prep for that and what would be the anticipation in terms of revenues or the benefit thereof from the movie?

I think Ellie Berger will answer that question, Barry. Thank you.

Well, we've actually started a pretty ambitious program in anticipation of the movie. As you say, it will come out in the fall. So we already have a big promotion going on in Barnes & Noble, which is off to a great, great start. We have a lot of enthusiasm across the board. In addition to the Backlist, which we've refreshed a lot of the books, we have five tie-in books coming out a few weeks in advance of the movie. And we're also leveraging that across all of our channels, as well as globally. So we have a lot of enthusiasm, a lot of momentum in the market leading up to the movie.

So that's part of what you're banking on to replace Minecraft, I take it?

Yes, that's some of the excitement we have coming into the fall. Yes.

Okay. Maybe more for Dick now. On the capital allocation, you're talking $315 million net cash after taxes. The restricted cash comes back, pulls you up to closer to $350 million. And then you've got the building. And, I don't know, Dick, $50 million repurchase authorization feels a little skinny.

Well, I think the Board wanted to respond to the fact that we do have increased cash and we do want to return cash to shareholders. However, we're going to do this in a measured fashion. And so we chose to do opportunistic stock buybacks as opposed to a plan. But we'll keep looking at this, Barry, and knowing that our shareholders are certainly interested in the whole question.

Okay. I mean, the cash is certainly a drag. With practically zero interest rates, that doesn't help performance. Not that we're asking to rush out. The money shouldn't burn a hole in your pocket. Obviously it's not. But it is a drag.

And on the building, anything further in terms of color? You've certainly mentioned often enough that the SoHo district is on fire. What are some of the issues that are kind of impeding, or slowing the process? I don't want to say impeding.

Well, having just completed the EdTech transaction, Barry, and with the cash, which you say is a drag -- we're not necessarily in a hurry to bring any more drags into our picture. But as we discussed in our last conference call, we've not entered into any agreement on the real estate here in SoHo.

But the commercial real estate market, as you suggest, remains strong for both retail and office space and interest remains high in our real estate, for sure. The purchase of our headquarters location last year was very timely and well executed we think, and we believe our real estate is going to help the Company and our shareholders substantially over the long term. But we're measuring carefully what we want to do with it, and we'll obviously continue to keep you informed when and if we have a plan.

Great. Thanks very much, Dick.

Drew Crum; Stifel.

Just a follow-up to Barry's question on capital allocation. Dick, can you talk about the Board's position on buybacks versus dividends, just philosophically how you approach that? I can appreciate the $50 million addition to the share buyback, but I know in the past you guys have been reluctant to buy back more stock and concerns around reducing your liquidity further given the large buybacks you've done in the past. So, can you just address philosophically how the Board looks at dividends versus buybacks going forward?

Sure. Well, I should remind you that since 2006 we have returned, like, $560 million to the shareholders through a combination of buybacks and dividends. So, we haven't been bashful about this over time.

I think the Board really didn't stop to consider our dividend policy at this point, Barry, for this Board Meeting. I think we're looking to talk about this in our September meeting, figure out for our next year of operation what our dividend policy should be, short and longer term. So the lack of an increase in the dividend is not a statement on our long-term attitude toward dividends.

At the same time, we are -- oh, sorry, Drew. This is in response to your question, not to Barry. In response to the buybacks, I think, again, we will come back to you with a program on stock buybacks that will be clearer over time.

Okay. Thanks, Dick.

Thank you. At this time I'd like to turn the call back over to Richard for any closing remarks.

Thanks very much. We've had a complicated fiscal year to explain. I hope we've done it to your satisfaction. We're focused on our core business operations going forward. We're excited about the changes in our marketplace that are giving us great optimism about our near-term and long-term future. We're focused on our core children's book operation, are expanding education operations, and we are building in our international for the long term.

We thank you for your support and interest and we look forward to talking to you again in September.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.