Scholastic Corporation Price & Performance (SCHL)

We encourage you to review the disclaimers in the release and investor presentation and to review the risk factors disclosed in the company's annual and quarterly reports filed with the SEC. Should you have any questions after today's call, please send them directly to our IR email address investorrelations@scholastic.com. And now I'd like to turn the call over to Peter Wark to begin this afternoon's presentation. Thanks, Jeff, and good afternoon, everyone. Thank you for joining us.

Scholastic performed solidly in our third quarter.

We achieved modest revenue growth and improved operating results relative to a year ago. Strong performance in our children's book segment and the addition of nine Story Media Group contributed to these positive results. In spite of increasing pressure on spending by families and schools on books and educational materials. Overall, these results reflected Scholastic's unique strengths in engaging kids with great books and quality children's media. We remain committed to our capital allocation priorities, invest investing in our growth initiatives and returning over $35,000,000 to shareholders through share repurchases and dividends last quarter. Scholastic maintains a strong balance sheet with modest debt and significant options to unlock additional liquidity for debt reduction and enhancing shareholder returns. Including through our significant owned real estate assets. Hadju will expand on this topic later. Looking ahead, we now forecast full year adjusted EBITDA of approximately 140,000,000 consistent with the low end of our fiscal twenty twenty five guidance. Revenue is forecast to be up modestly year over year reflecting the intensifying spending headwinds that we saw last quarter and that we expect to continue into the fourth quarter. As we manage these external factors, we've executed cost saving actions that we expect to benefit both this fiscal year and fiscal twenty twenty six.

Before going into our operating results, I'd like to comment on the macro environment and the headwinds that Scholastic and many of our peers are navigating. First, as many major US retailers have recently reported, consumers have begun taking a more cautious approach to spending in today's environment, including in discretionary categories like children's book purchases as seen when analysing Surcana book scan data. Second, recent uncertainty around federal education policy and funding mechanisms is causing some schools and school districts to delay or pause purchases of instructional materials. This has contributed to a further cyclical slowdown in the supplemental curriculum market where Scholastic education business focuses. We expect both trends to continue into our current fourth quarter. Third, we've been actively navigating fast changing US trade policy and global tariffs like many other retailers and manufacturers with global supply chains and footprints. As we outlined last quarter, our supplier diversification flexible sourcing processes give us distinct advantages as we mitigate and hedge against tariffs and other risks today. Where we are not able to avoid tariffs, we have opportunities to protect gross margins through modest and targeted price increases. For the remainder of this fiscal year, and the first half of fiscal twenty twenty six, we still expect minimal tariff related exposure on our inventory costs.

As we have already purchased most inventory needs for this time period. Haji will discuss further the expected impact of tariffs next fiscal year and beyond. With that, I'll turn to the highlights across our business segments. In the children's book publishing and distribution segment, revenues and profits increased, driven by improved results in both book fairs and book clubs within our School Reading Events or SRE division.

Fares benefited from higher fare count in the quarter as we remain on track to meet this year's target of 90,000 fares. Notwithstanding the impact of increasing pressure on consumer spending, which we saw slightly impact transaction volumes, revenue per fare was in line with prior year reflecting higher transaction sizes driven by our strong merchandising capabilities. We were encouraged by increased participation in our new Share the Fair program last quarter. Share the Fair enables schools to collect contributions digitally from the school community to support students who need help buying books. We see this as a long term opportunity to increase student and family participation ultimately contributing to the size and impact of Scholastic book fairs. Looking ahead, we continue to expect modest growth in fiscal twenty twenty five, driven by higher fare counts and new merchandising and sales initiatives, partly offset by modestly lower participation reflecting continued pressure on families discretionary spending in quarter four. In book clubs also within SRE we continued to benefit from new strategies implemented at the start of the school year. In quarter three, student participation and revenue per sponsor as well as order volumes rose year over year demonstrating positive engagement from the teachers and families who participate in our clubs.

We remain focused on continuing this momentum and enhancing our offerings to increase teacher participation the twenty twenty five-twenty six school year. Turning to our trade publishing division which is also within the children's book segment, results were in line with the prior year driven by the global success of new best selling titles offset by a modest decline in backlist sales consistent with industry trends Upon its publication at the beginning of last quarter, the thirteenth book in Dave Pilkey's best selling Dogman series Dogman Big Jim Begins immediately became the number one best selling book across all categories in The US and Canada the number one best selling children's book in The UK and Australia. It has remained at the top of bestseller lists already selling almost two and a half million copies. Globally. Dave Pilkey's Worldwide Author Tour the January release of the Dog Man movie and extensive promotion in school book fairs including specially branded Dogman events boosted sales of Big Jim Begins and earlier titles in the Dogman series as well as Dave's other best selling series captain underpants and cat kid comic club the midst of this global phenomenon we're very excited about the fourteenth Dogman book Big Jim Believes which we will publish globally this coming fall Other newly published Scholastic titles added to our presence on bestseller lists last quarter, including the new Hunger Games Deluxe Editions and box set and our new graphic novel Wings of Fire number eight escaping peril.

Given their ability to engage kids, particularly striving readers, graphic novels are dominating children's publishing and Scholastic dominates graphic novels. Currently holding 12 of the top 15 spots on the New York Times graphic novel bestseller list.

Looking at the quarter ahead, earlier this week Scholastic published the highly anticipated fifth book in Suzanne Collins worldwide best selling Hunger Games series Sunrise on the Reaping which was released simultaneously in The US Canada, UK, Australia and New Zealand. The book was already at the top of bestseller lists based on strong pre orders for print ebook and audio Print preorders alone were up over 65% compared to the fourth Hunger Games book in spring of twenty twenty. We're optimistic that the excitement around this newest title as well as Lions Gate's movie adaptation scheduled to be released in November 2026 will support strong sales of the entire series in the fourth quarter through fiscal twenty twenty seven and beyond. As we continue to bring new fans and readers to the Hunger Games franchise. In the entertainment segment, revenue and adjusted EBITDA benefited from the strategic acquisition of Nine Storey Media Group in June. We're excited about the progress and early successes our combined Scholastic Entertainment team has made. As we've discussed previously, major streaming platforms and studios have slowed production spending in green lights impacting near term demand for production production service work and delaying but not cancelling some promising Scholastic produced projects, though we're encouraged by recent momentum.

Across the industry we expect more productions to be greenlit in the year ahead compared to last. With the benefit of nine storeys capabilities, we've significantly expanded the reach and monetization of Scholastic current media library and IP on streaming platforms, especially through dedicated Scholastic IP channels on YouTube, the top platform for kids media consumption. Across Scholastic channels, Clifford Classic, Goosebumps, The Magic School Bus, and our Scholastic Classic Hub Channel, Scholastic Content had nearly 10,000,000 views on YouTube last month, up almost 40 times from a year ago. And kids and families spent close to three million hours a month watching our high quality beloved stories and animation. In the short time since these channels launched last summer, the strong momentum and engagement has unlocked brand exposure for Scholastic and contributed to incremental advertising revenue and e commerce sales. In addition to our reach on YouTube, we now have seven hundred half hours of Scholastic content on leading video on demand platforms. Including Peacock, the Roku Channel, and Tubi. To serve the tremendous demand for quality content on YouTube, especially among parents for their kids, we've accelerated and development for that platform. Especially excited about a new values and faith based YouTube media property We Believe Kids, based on the We Believe series of young children's books which our talented make believe ideas team created in house.

We look forward to launching this channel with e commerce integration in time for the Easter holiday next month. Turning now to education solutions. As expected third quarter sales and profits declined as lower spending on supplemental curriculum remains a headwind for this business. During the quarter, we continued to be encouraged by the strength of our state and community literacy partners business driven by increased participation in state sponsored programmes as our partners continue investing expand kids access to books outside of school. We remain excited about our product development pipeline of new literacy programs aligned with current reading pedagogies. Reaching the market in time for the twenty twenty five-twenty six school year which we expect to begin to contribute to results next fiscal year. For the remainder of the year we expect schools and districts to continue to delay purchases of supplemental materials impacted further by uncertainty around federal education policy and funding as I discussed earlier. In response to the decline in this segment sales and profitability over the past two years we've begun a strategic review of the education solutions business with a goal of optimising its long term potential. Believe in this business, given our deep focus on reading and literacy, and our commitment to serving teachers and schools as well as a growing number of state philanthropic and community partners seeking to support literacy.

We look forward to providing more details on our year end call. In the International segment, revenues and profits increased driven by our major markets including Canada The UK and New Zealand all of which benefited from strong sales of Dogman Big Jim Begins. We saw success with both print and digital education including a new multi year contract with the Ministry of Education in New Zealand. We continue to pursue opportunities to organise and invest in this business to drive growth including expanding our education and English language offerings in emerging markets. Looking ahead, we continue to expect modest growth in these major markets relative to fiscal twenty twenty four. And now I'll turn the call over to Haji to review our fiscal twenty twenty five third quarter results and provide additional details around our updated outlook and actions to drive shareholder value for the remainder of the year and beyond. Thank you Peter.

And good afternoon, everyone. Today, I will refer to our adjusted results for the third quarter excluding one time items. Please refer to our press release tables and SEC filings for a complete discussion of one time items and a reconciliation with related GAAP figures. As Peter discussed earlier, third quarter revenues increased and operating loss improved from a year ago. In the third quarter, revenues increased 4% to 335,400,000.0 and profitability improved by multiple measures. The company's seasonally adjusted operating loss was 20,900,000.0 an improvement from $30,600,000 in the prior year period. Adjusted EBITDA was 6,000,000 relative to a loss of $7,200,000 a year ago. Net loss improved to $1,300,000 from a loss of 23,300,000.0 in the prior year period. On a per diluted share basis, adjusted loss improved to $05 compared to a loss of $0.80 last year. Turning to our segment results, in children's books publishing and distribution, revenues for the third quarter increased 5% to 203,300,000.0 primarily reflecting growth in both book fairs and book club channels. Segment adjusted operating income 7,600,000.0 up from $2,800,000 in the prior year period. Reflecting higher revenues and school reading events. Within SRE, book fair revenues were 110,700,000.0 in the third quarter, an increase of 8%.

Primarily reflecting the larger number of fares held in December compared to the prior year period. Which contributed to a higher fare count in the third quarter. Revenue per fare was in line with prior year. Close to record levels and significantly higher than pre pandemic levels. We expect fare count to contribute to modest growth in our book fares business this school year. Offsetting the consumer spending headwinds we expect to continue in the fourth quarter. Book club revenues were $15,200,000 in the quarter, an increase of 14%. We're encouraged by higher order volumes and revenue per sponsor in this business after strategically transitioning book clubs to a smaller, more profitable core business in fiscal twenty twenty four. We continue to adapt various offerings to improve teacher engagement for the next school year. In our trade publishing division, revenues were $77,400,000 in the third quarter, in line with prior year. We expect new releases in the fourth quarter, especially Sunrise on the Reaping, to positively impact results in the fourth quarter. In spite of the softness in the retail markets as consumers pull back on discretionary spending. [indiscernible] revenues were 12,800,000.0 reflecting the contribution of 9 Story. Segment adjusted operating loss was 2,400,000.0 compared to $100,000 a year ago.

The current year period includes 2,300,000.0 in incremental amortization expense on intangible assets related to the acquisition. On a pro form a basis, nine story revenues were down relative to prior year period. Primarily driven by anticipated delays in production green lights. As Peter discussed, we remain encouraged by recent momentum we've seen. And are simultaneously focused on production, and development work on video on demand platforms. We continue to expect company wide synergies to benefit this segment fiscal twenty twenty six and beyond. Turning to Education Solutions. Segment revenues were down 16% to $57,200,000 in the third quarter. Primarily reflecting lower spending by schools and school districts on supplemental curriculum products. Segment adjusted operating loss was $6,900,000 in the third quarter. Compared to a loss of $800,000 in the prior year period. Given the high flow through of revenue in this business, lower revenues significantly impacted operating margins and profitability. As Peter noted, our teams are developing new supplemental products for schools. Which we expect to begin to contribute to fiscal twenty twenty six results. Looking at the remainder of the year, we anticipate growth in our state and community partnerships. Driven by expanded participants and state sponsored programs.

We continue to move forward with investments in this important business segment. Given the loss of operating leverage on lower sales, we're focused on accelerating our sales growth. While also aligning spending with our updated top line outlook. Over the long term, we're focused on optimizing the business to reach its potential and position it for success. Finally, International segment revenues were $59,300,000 in the third quarter. Excluding the $2,700,000 year over year impact of unfavorable foreign currency exchange, segment revenues were up 2,900,000.0 reflecting higher revenues in major markets, particularly in Canada and The UK. Segment adjusted operating results improved to a loss of 2,000,000 compared to a loss of $5,900,000 in the prior year period. Reflecting higher revenues and continued optimization of this business to drive growth. We continue to expect modest growth in our major markets and operational efficiencies to drive improvements in operating margins and contribution in the International segment year over year. Unallocated overhead costs of $17,200,000 in the third quarter decreased from $26,600,000 in the prior year period. Primarily driven by lower employee related costs. Now turning to cash flow in the balance sheet. In the quarter, net cash used by operating activities was $12,000,000 compared to net cash provided of $13,100,000 in the prior year period.

This decrease was primarily driven by lower customer remittance, on decreased sales and higher interest payments related to the company's borrowings. Partly offset by lower cash taxes. Free cash used in the third quarter was 30,700,000.0 compared to $7,100,000 in the prior year period. Primarily reflecting lower cash flow from operations. At quarter end, the company had borrowings of $275,000,000 under the recently upsized unsecured revolving credit facility to fund the acquisition of Nine Story Media Group and working capital needs. At the end of the quarter, net debt was 189,400,000.0 compared to a net cash position of 107,700,000.0 at the end of fiscal twenty twenty four. Primarily reflecting the Nine Storey Media Group acquisition and cash returned to shareholders through dividends and share repurchases. We believe our strong balance sheet provides significant flexibility with modest debt and non operating assets that could be monetized and deployed in a accordance with our capital allocation priorities, if and when the company chose to, and market conditions permitted. As disclosed in our quarterly and annual filings with the SEC, Scholastic owns its 355,000 square foot headquarters building in SoHo, New York City. Within that building, there are 20,600 square feet of premium retail space that are currently under lease and expected to generate $11,100,000 in rental revenue in fiscal year twenty twenty six based on currently held lease agreements.

Of the remaining 328,400 square feet of Class A office space, 108,000 square feet are currently being marketed as we consolidate our use of the building. Offsetting gains on potential monetization transactions the New York City headquarters has a sizable tax basis. Reflecting the purchase of 555 Broadway in 2014 for approximately $255,000,000 and subsequent improvements less accumulated depreciation. In addition to the New York City headquarters building, Scholastic owns its distribution facilities, including three warehouses with 1,459,000 square feet of space, 162 acres of related land. Situated in and around Jefferson City, Missouri. These facilities' capacity is approximately 70% at the moment. The tax basis on these assets is low, reflecting many years of accumulated depreciation. We continue to return excess cash to shareholders in the third quarter, through our regular dividend and open market share repurchases. Consistent with our capital allocation priorities. We repurchased 1,450,000.00 shares last quarter for 30,000,000 Together with our regular dividend, we returned over $35,000,000 in the third quarter. Our Board of Directors has authorized an additional 53,400,000.0 for repurchases. Increasing our current share buyback authorization to $100,000,000 The company expects to continue purchasing shares from time to time as conditions allow. On the open market or in negotiated private transactions.

For the foreseeable future. Turning to our outlook, In the fourth quarter, we expect modest revenue growth compared to the prior year period. Supported by the release of the fifth Hunger Games book and solid results in school reading and events. As we navigate increasing spending pressures, in particular for education solutions. As Peter noted, we now anticipate adjusted EBITDA of approximately $140,000,000 at the low end of our original guidance range of $140,000,000 to 150 and modest revenue growth year over year compared to our prior guidance of 4% to 6% growth. The outlook for full year free cash flow remains between $20,000,000 and 30,000,000 reflecting our planned CapEx in this year's larger than usual working capital investments. In the third quarter, largely based on the external factors discussed today, we proactively targeted and executed on cost saving initiatives. As I discussed on December's earnings call, we've reduced discretionary and non revenue generating expenses in consulting and non priority functions and businesses. We also froze hiring in these areas, and executed a series of strategic departmental reorganizations globally. We're taking additional cost actions in the fourth quarter and tightly managing costs as we close out the year. We expect these one time and ongoing cost actions to result in the current fiscal year and going forward in fiscal twenty twenty six.

Beyond this fiscal year, we'll continue to focus on optimizing our business and aligning spending with our long term strategy and growth priorities. And finally, I would like to address the impact of new tariffs on our business. As Peter noted, we continue to expect minimum tariffs related exposure on our inventory costs for the remainder of fiscal twenty twenty five and the first half of fiscal twenty twenty six. Beyond that, we're focused on proactively managing tariff related costs within the current volatile environment. Books are generally excluded from the current tariff increases. Scholastic's primary exposure to these incremental tariffs is on nonbooked products, including novelty items, which we currently source from countries with tariff increases, including China. Like most U. S. Publishers, we also source paper from Canada, which currently is subject to new tariffs. Based on our current sourcing arrangements, and implemented or announced tariffs, we currently expect an incremental impact on our cost of product next year. In the mid single digit millions range. As we've done for the past ten years, we'll continue to work to actively reduce the tariff impact through alternate sourcing arrangements changes to our product specifications, and modest price increases as necessary.

Overall, we remain confident that our global scale, highly optimized supply chain and pricing power will help mitigate against material tariff related exposure. We'll continue to monitor the complex situation around tariffs and provide further updates on our year end call. Thank you for your time today. I'll now hand the call back to Peter for his final remarks.

Thank you, Haji. In conclusion, after achieving solid results in our third quarter, Scholastic is now focused on achieving modest revenue growth in the fourth quarter and managing costs as we navigate short term headwinds for the remainder of the fiscal year. Despite these near term pressures we remain confident in Scholastic s long term growth opportunity and are committed to continuing our plans to grow in our core and adjoining markets where Scholastic's brand IP and distribution channels present compelling growth opportunities to meet kids, families and schools essential needs to educate, inform and engage kids. Thank you very much Now let me turn the call over to Jeff.

Thank you, Peter. With that, we will open the call for questions. Operator? Thank you. To withdraw your question, please press 11 again. Our first question comes from the line of Brendan McCarthy with Sidoti.

You may proceed.

Great. Good afternoon, everybody. Thanks for taking my questions here. I just wanted to start off in the trade channel. Yeah. I know you mentioned your pretty pretty favorable outlook on front list title sales from from the Hunger Games title and and the new [indiscernible] Just kinda wondering how we can think about backlist sales given consumer pressure but also the prospect that some of these front list titles may drive stronger back list sales of earlier titles in the series. Just kind of wondering how we can think about that going forward.

Thank you. It's Peter here. One of the great things about successful front list titles, particularly the Dave Pilkey that we've just published and also the Suzanne Collins. Is that it drives their backlist sales as well. So one of the ways in which we can improve backlist performance is actually through very successful frontlist performance with with titles from key authors. And I think it's something that we will continue to see because the great benefit we've got going forward particularly in the fourth quarter this fourth quarter with Suzanne Collins. And then with a new Dogman book coming in our next financial year, I think that it's that successful front list publishing which can really help to drive backlist backlist sales. And that's really what we're we're focusing on right now.

Got it. Thanks for that insight, Peter, and wanted to turn to Education Solutions It sounds like this quarter was impacted by slowdown in sales at the at the school level and at the state level. Just curious if you've seen has there been a change in the funding level for for school districts and states, or has it simply just been a case of the states and school districts pausing spending for the moment?

I think for the most part, it's it's been a question of of schools and districts being more cautious. As you know, schools funding is 90% of that comes from state and local. Where there's been some concern is about the, you know, the amount of federal funding they might be going forward. I think everybody expects that federal funding for things like Title I and so on is going to continue but I think it is important that a number of these schools are holding on to some of their funds just as a kind of, you know, pausing so they can see what things work out like during the next few months. And one of the factors that we need to take into account is that schools are putting in quite a lot of focus on their core curriculum needs We are primarily a supplemental provider and therefore in keeping with the other supplemental education providers that we know, that has also had some impact on purchasing which has has impacted us. That's a cyclical impact. Because what tends to happen is that once schools get their materials for core curriculum, they then buy in supplemental materials to suit the particular part of the country or the city or whatever it might happen to be so that they've got an overall both curriculum and library resources to support the students that that they're actually educating.

Got it. And and as a follow-up, at funding on the federal level, we've seen headlines around the Department of Education and cutbacks there. I guess going forward, more from a broad level, do you expect any material changes in in funding I guess, more broadly?

Not necessarily, because I think that a lot of funding is congressionally mandated and it's not suddenly gonna be turned off, we don't believe, or anything like that. What we are seeing is a continuing the continuation of a trend that we've seen, which is more spending is actually being done at a state and local level and rather than from federal. So it's it's continuing that. We also see a continuing trend of really more parent choice in the way that [indiscernible] you will see that in charter schools and schools and parochial schools these are opportunities for us going forward because they're more likely to be good good hunting grounds as it were for our for our for our people going forward.

That makes sense. And and in the education solutions business, yeah, I know you mentioned a strategic review is is in the process. Can you provide additional color on what that might entail? Are you considering a sale or maybe something more internally led?

No. At the moment, this is internally led in the sense that that what we want to do is to make sure that we're putting our resources into the right places going forward. We're getting some some some help in doing that. I mean, we've got a tremendously powerful brand. And this is a business where we believe that we've got the right to win. And I think we just want to make sure, given you know, we've had these stresses and strains, alongside some other supplemental publishers as well. But we want to make sure that we're absolutely doing the right thing in order to be, you know, successful in part of the market, which is absolutely core to, Scholastic's history.

Got it. And one more question for me on the real estate side. I appreciate the color on the asset base there. Just curious if you can provide maybe what a collective fair value might be of the warehouse in Missouri as well as the the New York City headquarter buildings.

Yeah. Hey, Brandon. This is Haji Glover. How you doing? Hey, Haji. Good. How are you?

Alright. So on the real estate, we we can't really or we won't provide a an estimate on the number or what the properties are worth. But what we wanted to do is really give our investor base an opportunity to actually have all the information in one place. So that's the reason why we're putting it out there. But I'm sure that any investor with the information we provided can come up with on the rental income and some cap rates, they can come up with evaluation.

Understood. That makes sense. Thanks, Haji. Thanks, Peter. That's all for me.

Thank you, Brandon.

Thanks. Bye bye now.

Thank you. And this concludes our Q and A. Will pass the call back to management for any closing remarks.

Well, it's Peter here. Thank you, everyone, for joining today's call and for your continued support. I'd like to thank all of our Scholastic employees for their great work so far this year and we'd also like to thank our shareholders for their continued support. We look forward to executing on our plan for fiscal twenty twenty five and continuing to make progress towards realizing Scholastic's long term opportunities. Thank you. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.