SCHL
#Thank you so much, Karen, and good morning, everyone.
Before we begin, I would like to point out that the slides for this presentation are available on our investor relations website at investor.
scholastic.com.
I'd 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 SEC.
Actual results can 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 also posted on the investor relations website at investor.
Now I'd like to introduce <UNK> <UNK>, the Chairman, CEO, and President of Scholastic, to begin today's presentation.
Good morning, and welcome to our FY16 year-end call.
Last year at this time, just after we had sold our Educational Technology Business to HMH, we shared our plans to focus on our significant growth opportunities in children's book publishing and distribution and the education segment, where our magazines and our comprehension literacy solutions business was growing dynamically.
Our fiscal year results demonstrate the success of the strategy, with revenue growth at 2% to $1.67 billion, or 5% when excluding foreign exchange; double-digit operating income growth and earnings from continued operations of $1.26 per share, or $1.70, after one-time items, which exceeded our guidance of approximately $1.35 per share.
With our focus on just three segments ---+ children's' book publishing and distribution; education; and, we are a nimbler company with teams who are deeply connected by the mission of providing high-quality book and educational materials in support of children's reading and learning, and our opportunities continue to expand.
In children's book publishing, we saw 14% growth in trade revenues from the renewed strength of Harry Potter, as well a solid performance from our core front list and backlist titles.
We expect another year of double-digit growth in 2017, largely driven by the upcoming Harry Potter releases, as well as new multi-platform series such as Horizon, with the story arc and first book written by Scott Westerfeld; Dav Pilkey's new series Dog Man; and Raina Telgemeier's Ghost.
We are expanding our list in strong niches, such as early childhood, global licenses, and continued series publishing, and we've entered into a multi-year agreement with American Girl, giving us the rights to publish books based on their characters starting in January 2017.
In book clubs and book fairs, we expect to maintain our current levels of revenue while focusing on more profitable execution.
We are intensifying a strategy to more precisely match our promotion and operational resources to each school's, size, interest, and ability to conduct book clubs and book fairs.
Through more targeted marketing and carefully managing the number and type of fairs held, we can ensure that we are optimizing our resources by providing the right reading experience to each school.
In the education segment, annual revenue growth of 8% was a standout in an educational materials market that was down 4% in the last 12 months.
This growth was driven by our comprehensive literacy solutions program in grades pre-K to 8.
Schools are telling us they are interested in customized solutions matched to their own student learning needs, and prefer to use outstanding literature as a core instructional resource, as an alternative to basal reader textbooks.
We are gaining market share by providing customized curriculum, including guided reading and leveled book rooms, and associated consulting services and professional learning and family community engagement.
In addition, our classroom magazines continue to deliver strong growth, and there are now over 15 million subscribers to our 32 print and digital magazines.
In the international segment, we're continuing our strategy to grow local currency consumer book sales in Asia while building trading education revenues around the world through shared global product development and marketing strategies.
Although the strength of the US dollar reduced FY16 international revenues and profits in dollar terms, we saw trade growth in most countries, along with across-the-board strength in clubs, fairs, trade and education in India.
We expect increased trade sales in Australia, Canada, Asia, and the UK this year, while we're expanding our education product sales, especially in Asia.
We are also continuing to explore opportunities to provide meaningful returns to shareholders over time, balanced with our long-term operating needs and our other strategic investments.
In FY16, we paid $20.5 million in dividends and repurchased $14.4 million of our shares in the open market since resuming our buyback program at the end of the third quarter.
We will continue to review opportunities to return capital to shareholders.
Looking ahead to FY17, we expect our strategy to streamline our businesses and focus on core growth opportunities to deliver another year of strong results, with total revenue of $1.7 billion to $1.8 billion, and earnings per share in the range of $1.60 to $1.70, excluding one-time items.
As we begin the new fiscal year, we're implementing a wage improvement program for our employees in our US distribution centers, both to attract, retain, motivate, and support our employees and to strengthen our operations and drive higher levels of productivity.
This program will increase wages by approximately $10 million to $15 million on an annualized basis.
We're also continuing to develop our technology systems and operations functions to help provide our business units with better information systems and processes to serve our US and international customers even more efficiently and at lower cost.
With the expected long-term benefits from these investments and our people and our platforms; the continued synergies from the close alignment of our businesses and intensified strategies for improving clubs and fairs; the continued development of our education segment; and our new Harry Potter publishing, make us excited about our prospects for continuing growth as we deliver on our mission to support literacy and learning in school and at home.
With that, I will ask Maureen O'Connell, CFO and CAO, to review our year-end results and FY17 outlook in more detail.
Thank you, <UNK>, and good morning everyone.
I will refer to fiscal year results from continuing operations, excluding one-time items, in my remarks unless otherwise indicated.
Total fiscal year revenues were $1.67 billion, an increase of 2% from 2015, due to higher children's book publishing and distribution and education sales, but partially offset by the impact of foreign currency in our international segment.
The adverse FX impact on revenues was $43.2 million for the year.
Operating income was $93.4 million, a 17% increase over last year, and earnings per diluted share increased over last year by 32%, to $1.70.
Turning now to segment results, in Children's Book Publishing and Distribution, annual revenue was $1 billion, an increase of 5%, and operating income increased by 20% to $115.8 million.
Performance was driven in part by double-digit increase in trade sales.
In our book club channels, we improved margins and revenue per sponsor, with a particularly good spring performance.
In education, annual revenue was $298.1 million, an increase of 8% over FY15, and operating income increased by 16% to $56 million.
We're seeing continued strength in classroom books and classroom magazines, and we increased investment in our sales force to capitalize on favorable trends and our strong positioning to continue to grow market share.
And international revenues was $372.2 million compared to $401.2 million in 2015.
And operating income fell $14 million, primarily due to high US dollar product costs; the labor action in Ontario schools earlier in the year; higher bad debt in Asia; and an insurance recovery for a warehouse fire in India in the prior year, as well as the impact of foreign exchange.
Fiscal year corporate overhead was $90.7 million, approximately even with $91.3 million in the prior year.
Incremental facility costs and our multi-year strategic technology investments were offset by our cost savings initiative.
We recently completed a comprehensive Company-wide review of our overhead and operating cost.
The cost actions we are taking will offset the loss of fees associated with the TSA with HMH.
The expected savings for FY17 are included in our outlook.
We are scheduled to terminate our transitional service agreement with HMH on August 1, 2016.
Our strategic technology investments remain on track and will continue through 2018.
These investments in e-commerce, CRM, content management, and consolidating platforms are expected to bring widespread benefits, including better customer information and improving product inventory and content management.
We expect to be able to better target our markets, improve processes, and lower cost.
Turning now to our real estate strategy.
Our plans to upgrade the office component of our Soho location are on track.
We have begun construction to create premium retail space on the first two floors of 555 and 557 Broadway building in Soho, and upgrade the office space in the rest of the building.
This will enable us to maximize rental income and minimize our use of outside office space by having almost all our New York employees in one building.
As we vacate floors to remodel, we expect to have a non-cash impairment charge of $20 million over a three-year period for legacy leasehold and other building improvements, approximately $7.5 million in FY16 and another $12 million in FY18.
These non-cash charges are not included in guidance.
We're currently in discussion with several premium retailers in order to take full advantage of our opportunities for our retail space.
Our expectations for cumulative incremental retail rents over a 10-year period remain unchanged, but we now expect these increases to be more heavily weighted towards the latter part of the period.
In FY16, we had free cash use of $139.7 million, compared to free cash flow of $73.7 million in FY15.
Our 2016 results include approximately $200 million in tax and other payments related to Ed Tech sale in 2015.
Excluding the tax payment, free cash flow in FY16 was $46.3 million, exceeding our outlook because certain planned investments to support our frontlist were deferred until FY17.
At year-end, cash and cash equivalents exceeded total debt by $393.4 million, compared to $500.8 million a year ago.
Again, the lower net cash position is primarily due to the taxes paid on the sale of Ed Tech business.
Note that our reported net cash position does not include $9.9 million of cash proceeds remaining in escrow pursuant to the terms of the Ed Tech sale.
Now turning to outlook.
We expect total revenues in FY17 of $1.7 billion to $1.8 billion.
In Children's Book Publishing and Distribution, we anticipate substantial growth in trade as a result of the summer's release of Harry Potter and the Cursed Child Parts One and Two, and from our new licensed publishing program for the Fantastic Beasts and Where to Find Them movie and its sequel, including movie handbooks; coloring and creative books; cinematic guides; papercraft, poster, and sticker books, as well as other highly anticipated new release.
We expect to maintain our current level of revenue in our school-based clubs and fairs, while focusing on more profitable execution.
In the Education segment, we expect revenue growth to be led by classroom books and classroom magazines, which will benefit from new product introductions, such as Storyworks Junior and the sale of our 2016 Presidential Elections Skills workbooks.
In the International segment, we re planning for growth in Trade Publishing and Education, and we expect significant local currency gains across Asia.
In Australia, we see a strong market in trade, and the UK's book fair division is expected to benefit from last year's acquisition of a complementary fair business.
We also expect that Canada, which was adversely impacted by an Ontario labor action in schools in early FY16, should benefit from a stronger start to the school year in its book clubs and book fair businesses, as well as sales of the new Harry Potter publishing in the fiscal year.
We are implementing new global shared services and procurement programs that we expect to generate profit and process enhancements across the International group in future years.
There are a number of initiatives underway to reduce exposure and create greater operating efficiencies in Asia.
A recent opportunity to introduce direct debit as a payment option to our direct sales customers in Malaysia has resulted in improvements in customer qualification and lower bad debt, as well as lowering our cost of operations and shortening our cash collections cycle over the life of each transaction.
Taking these factors into account, earnings per diluted share is expected to be in the range of $1.60 to $1.70, excluding one-time items.
We expect increased operating profits from trade to be offset by three factors.
First is the $10 million to $15 million annualized impact of an employee wage improvement program in our US distribution centers, as <UNK> already discussed.
Second, we are projecting increases in medical cost.
Finally, we expect an increase in income tax, as we return to our typical tax rate of 42%, following the tax settlement last year, which had a $0.15 positive impact on EPS in FY16.
FY17 free cash flow is expected be between $40 million and $50 million.
This includes capital expenditures of $70 million to $80 million, and pre-publication and production spending of $30 million to $40 million.
As anticipated, the increase in capital spending is primarily related to our headquarters construction plan, as well as higher strategic technology spend, as part of our three-year initiative to upgrade our enterprise-wide platforms for content and customer management, and to migrate to SAS and cloud-based technology solutions.
In summary, as <UNK> said, we expect another strong year, driven by new publishing in the Harry Potter franchise; our book clubs and book fairs; channels where we are focused on improving profitability; and our customized education solutions, including classroom book collections and classroom magazines.
I will now turn the call over to <UNK> to moderate a question-and-answer session.
Karen, we are now ready to open the line for questions.
As you see, our capital expenditure is expected be between $70 million and $80 million this year.
We believe that will be for a two-year period as we remodel and construct our office building and retail space.
You should expect that level for FY17 and FY18.
And then go back to normalized levels after that.
Yes, pre-pub is in line with our ongoing rate of the spend.
Let me start off with that, <UNK>, this is <UNK>.
The margin has not changed.
In terms of print runs and so forth, I'm going to ask <UNK> <UNK>, President of Trade, to answer those questions.
Hi.
Our initial lay down for Cursed Child, North America, is going to be roughly $4.5 million.
We are working very closely with our accounts.
We had a very short production schedule, so we're very excited to be delivering those books to them right now.
And our rights are North American at this point, <UNK>.
Before they were just US, now we have US and Canada for the new publishing.
Well, it is generally about 10% of the US market.
Thank you.
We still expect the same cumulative rental increase that we talked about on previous calls.
However, as we are talking to these premium retailers, it depends on what type of configuration they want, and how expensive their capital changes are going to be.
That's why we said it we feel it will be more back-end loaded.
We had initially thought we would start to see that incremental rent in FY17 or FY18, and now we think it will be a little bit later than that, but we won't know for sure until we sign those leases, and we narrow down to the premium retailer that we will rent to.
No.
There are multiple versions of configurations.
It depends on whether you have one very large retailer that wants a lot of space, or some smaller retailers, and we are talking to both types.
Once we've signed a lease, we can be more specific, the exact amount of rent increase and when it will occur.
But we are very confident that the numbers that we said, an incremental $10 million a year over 10 years is still going to be realized on a cumulative basis.
That's going to depend on who we sign a lease with, and what construction they want, and what they're going to do to the space.
It could be smaller retailers who have multiple spaces, or it could be one large retailer.
We're talking to both types of tenants.
We're very excited about 2017; it's off to a good start.
We're delighted for your support.
And we'll hope to have good news for you in September.
All best.
Thank you.
