SCHL
#Thank you very much, Brian, 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'd also like to note that this presentation contains certain forward-looking statements, which are subject to the various risks and uncertainties, including the condition of the children's book and educational materials' markets and the acceptance of the company's products in those markets, as well as 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 Dick <UNK>, the Chairman, CEO and President of Scholastic, to begin today's presentation.
Good morning, everybody, and thank you for joining us today.
We had a solid year in 2017, helped by strong trade publishing, especially as we had 2 new Harry Potter titles for the first time since the conclusion of the original book series in 2007 as well as the first 2 titles in the successful new graphic novel franchise, Dog Man by Dav Pilkey.
We also continued to build momentum in Scholastic Education with market share growth in Pre-K to 6 core literacy as well as summer reading.
Maureen will review our 2017 year in a few minutes.
I will talk briefly now about our outlook for the future as we reach towards Scholastic's 100th anniversary in October 2020.
To drive our future growth and profitability, we are launching a 3-year plan called Scholastic 2020, the goal of which is to build substantially increased operating income for the company over the 3-year period.
This plan particularly addresses the operations and fulfillment side of our clubs and fair distribution business, which are labor and freight intensive.
The Scholastic 2020 process also directly links our transformational technology work to the operating work of the publishing units, ensuring that the new systems will provide to business leaders expanded and focused information about product, content, customer data and manufacturing and fulfillment costs.
This direct linkage will result in reduced operating costs by simplifying business processes and will result in improved revenue through better-targeted marketing and sales initiatives.
Over time, we will also reduce technology costs through centering on a single-enterprise architecture for the company, and we will drive significant operating efficiencies through lower costs of inventory and distribution, including improved procurement and the optimization of our U.S. clubs and fairs distribution network.
Our new product information systems, for example, will help us to reduce duplicate data and eliminate double handling of product.
This, in turn, will enable us to match inventory with sales data, reduce time for delivery of inventory and improve visibility to product movement leading to operations and fulfillment savings throughout the organization.
At the same time, our technology improvements will include greater use of social media and digital communication as tools to market and sell to current and potential customers.
As you know, Scholastic's greatest strength stems from our powerful brand based on our deep relationship with U.S. schools and teachers and our tremendous reach into the daily life of classrooms and families through our school presence.
The slide on our WebEx shows Scholastic's significant penetration by product line in U.S. schools.
We are doing business with 90% of U.S. schools, and our clubs, magazines, fairs and curriculum materials are each present in more than 60% of U.S. K-12 schools.
Through a new CRM system, which includes salesforce.com, our publishing divisions will have broader and more accessible customer information about each of our school businesses, Book Clubs, Book Fairs, classroom magazines and Pre-K to 6 literacy programs, which will enable more cost efficient and more targeted communications to our customers leading to cross-selling opportunities as well as maximizing the revenue potential of each of our product lines.
We will greatly expand our opportunities to build sales in each school through improved CRM and greater use of analytics to target our products and marketing.
As we move to the next steps of our multiyear transformation plan, we are also introducing new financial and operational ERP systems, utilizing Oracle in North America and NetSuite internationally to provide state-of-the-art financial and operations information.
The secret sauce of the Scholastic 2020 plan is a detailed management process that will connect our systems work to specific improvements in divisional operations, ensuring that the divisions are effectively utilizing the new information and are able to reach our goals for lowering costs and increasing revenue opportunities through targeted sales and marketing.
While we have made significant improvements over the past several years in our Scholastic strategic technology transformation, we're now at the point where we can embed these improvements in our divisional plans for higher revenue and lower costs.
As a result of our Scholastic 2020 plan, we expect significant double-digit operating income improvements in 2019 through 2021.
However, we will record a lower level of operating income in fiscal 2018 than we have achieved in the past 2 years given the increased expenses of our investments in technology and tough comparisons with 2017, when we had a 45% increase in trade sales based largely on the 2 new Harry Potter titles.
As we move into 2018 and look forward to our 100th anniversary in 2020, here is a look at our key businesses.
Based on our 3-year plan for the Education business, we will deliver a complete Pre-K to 6 core literacy program to districts, expanding our sales opportunities in core instruction, growing revenues beyond our current supplementary focus.
We have substantially expanded our curriculum publishing programs and our field organization to grow our market share for guided reading and core literacy.
Our suite of digital subscription programs will deliver more engaging ways to deepen new readers' foundational skills.
Our highly successful classroom magazines provide schools with strong nonfiction publishing both in digital and print and are seen as important supplements to core instruction in reading, social studies and science.
As a result of these expanded services, we see a significant opportunity to take larger market share in the Pre-K to 6 education market in the U.S. In children's books for 2018, Scholastic Book Fairs are growing revenue per fair in our most profitable segments through improved analytics and matching revenue opportunities to school demographics.
Scholastic Book Clubs has simplified its program, eliminating the single grade offers to focus on our traditionally successful multigrade club offerings, which will enable teachers to gain access to a wider range of titles.
We expect trade to return to normal levels in 2018, but we see excellent growth from new authors as well as the remarkable popularity of Dav Pilkey's Dog Man and Captain Underpants series.
We look forward to further publishing our own J.
K.
Rowling's Fantastic Beasts in 2019 as that major franchise continues to build through a total 5 projected films.
We expect flat revenue growth in International in the upcoming years since we will not have new Harry Potter titles in Canada and export.
But we expect increased growth in Asia as we strengthen our management there and expand our key education products while trade continues to grow throughout the region.
Our 3-year trajectory in Asia calls for a high single-digit growth.
Our forward-looking vision for Scholastic is made tangible by the opening of the first 2 new floors in our headquarters building this past few weeks, where our staff is now operating in a bright office environment with new technology and a completely refreshed feeling to the workspace.
As we finish the renovation in December and bring most of our New York staff together in one building, we believe the new workspace redefines Scholastic and complements the Scholastic 2020 plan to provide increased service to schools while we significantly improve operating income in the 3 years through 2020.
We're also pleased to announce that Sephora, our current tenant in 555 Broadway, and one of the world's most successful retailers, is completing an agreement to extend its lease through 2033, taking the new 557 space facing Broadway when it becomes available next year.
I will now ask Maureen to talk more about our 2017 as well as update you on our 2018 outlook.
With that, I'll turn the call over to Maureen.
Thank you, Dick, and good morning, everyone.
In my remarks this morning, I will refer to our adjusted results from continuing operations for the fiscal year, excluding onetime items unless otherwise indicated.
Revenues grew 4% to $1.74 billion.
And excluding the foreign exchange impacts, revenues grew 5% over last year.
Operating income was $109.1 million, up 17% from last year and operating margins improved in all 3 segments.
Earnings per diluted share was $1.83, an increase of 8% over last year.
Nonrecurring items in our pretax results was $20.2 million for the year, including $11.4 million in Q4.
These charges were largely related to restructuring, severance, noncash write-down of legacy website development and prepublication assets and the discontinuation of our software distribution business in Australia.
Over the year, we successfully implemented approximately $20 million in cost savings initiatives to offset the income related to the transitional service agreement with HMH that terminated early in the fiscal year.
As a reminder, these savings are reflected within our business segments' operating income rather than in corporate overhead.
Children's Book Publishing and Distribution segment revenues increased by 5% to $1 billion, driven by strong trade sales, including the successful release of Harry Potter and the Cursed Child, Parts One and Two, 2016's best-selling book in North America; and the original Fantastic Beasts and Where to Find Them, screenplay by J.
K.
Rowling in the first half of the year; as well as Dav Pilkey's backlist Captain Underpants books and new Dog Man titles.
This was partially offset by reduced adult coloring book sales in our trade channel and lower Book Fairs and book club revenues.
Operating income was $143.1 million, an increase of 19%.
We expected Education results to be back-end loaded, and we had a strong finish to the year in this segment.
Revenues were $312.7 million, 4% growth; and operating income was $51.8 million, a 4% improvement.
Performance was driven by higher sales of our balanced literacy programs and classroom magazines and high demand for our summer reading products in Q4.
Other standouts were 2 books in our professional service offering: The Next Step Forward in Guided Reading and Disrupting Thinking: Why How We Read Matters, as well as our Next Step Guided Reading Assessment product.
International revenues were up 1% to $376.8 million, operating income increased $7.8 million or 63%.
Our capital spending for the year included $30.6 million for strategic technology upgrades and initiatives as part of our multiyear transformational technology investment program.
Our technology investments will enable us to better use customer data analytics as we fine tune our go-to-market strategy, simplify and standardize business practices across divisions, communicate more effectively with customers and leverage corporate investment for the benefit of all our business groups.
We also invested capital of $20.6 million of the planned $65 million to $70 million budget to redesign and upgrade our headquarters building, and we expect to spend the remainder of this capital in fiscal 2018.
These upgrades are creating a workplace that integrates scalable technology to increase capacity and improve productivity while freeing up higher-value Broadway-facing retail space.
In addition, the location of our SoHo Building remains a catalyst for attracting the best editorial and creative content teams and technologists.
Net cash from operating activities was $141.4 million compared to net cash use of $78.9 million last year, and we had free cash flow of $48.8 million compared to free cash use of $139.7 million last year, which included the tax payment on the sale of the Education Technology business.
At the end of the year, cash and cash equivalents exceeded total debt by $437.9 million compared to $393.4 million last year, mostly due to our free cash flow.
Now turning to outlook.
Scholastic 2020 will align our investments in strategic technology, facilities, people and content and will create a performance management structure to drive margin growth at all levels within Scholastic.
As Dick said, we expect to drive higher revenues and reduce costs as a result of this plan.
Although we are projecting lower operating income in fiscal 2018 due to the absence of new Harry Potter titles, which helped drive 45% increase in trade revenues in the past year and we expect increased technology and facility spend, we do expect double-digit growth in operating income in 2018, excluding the impact of new Harry Potter titles.
We will continue our planned investment in strategic technology in our headquarters building, and we expect to complete all construction work in the coming year.
Fiscal 2018 free cash flow is expected to be a use of $10 million to $20 million compared to a source of $48.8 million in fiscal 2017.
This outlook includes capital expenditures of $90 million to $100 million compared to $65.7 million in fiscal 2017 and prepublication and production spending of $30 million to $40 million compared to $26.9 million in fiscal 2017.
Construction spend will exceed 2017 levels due in part to the timing of payment, and this has been included in our outlook.
We have also begun to upgrade and substantially expand our Oracle ERP systems for financial management, manufacturing, transportation and logistics.
We therefore expect capital spending on technology projects to be higher in 2018 than it was in 2017, which is also factored into our 2018 guidance.
We expect revenue ---+ total revenue in fiscal 2018 of $1.65 billion to $1.7 billion in the absence of new Harry Potter titles in North American trade and export and a commensurate decline in operating profits under lower projected sales, as well as higher costs associated with strategic technology initiatives and facility upgrades without any anticipated rise in retail rents.
Operating income, excluding the impact of new Harry Potter publishing in the prior year, is expected to grow double digit.
Scholastic expects earnings per diluted share in the range of $1.20 to $1.30, excluding onetime items and a noncash pension curtailment charge we expect to take as a result of the termination of our domestic defined benefit plan.
After fiscal 2018, we expect double-digit operating income growth in each fiscal year: 2019, 2020, 2021, as we celebrate our 100th year anniversary in October 2020.
In Children's Book Publishing and Distribution, we expect trade revenues to return to more normal levels after the strong performance of new Harry Potter titles in 2017.
This year, we will release Cursed Child in paperback as well as 2 new illustrated editions of titles from the original Harry Potter series.
We're also planning to take advantage of exciting market opportunities in connection with Harry Potter's 20th anniversary in the U.S. in the fall of 2018.
And our fiscal 2018 publishing plan will also include upcoming titles, such as Dav Pilkey's Dog Man; A Tale of Two Kitties; Swing It, Sunny, the follow-up to New York Times' bestseller, Sunny Side Up; All the Crooked Saints; The Word Collector, a new picture book by Peter Reynolds; and tie-in books to Netflix's new animated series of Magic School Bus show.
We expect low to mid-single-digit revenue growth in our school-based distribution channels.
Book Clubs will return to growth as a result of a simplified promotion strategy and then return to traditional monthly fliers, which teachers have told us they favor over graded catalogs.
We expect Book Fairs to increase revenue per fair as we apply more robust business analytics to right size its fair segments and more specifically target growth opportunities by demographics.
In Education, we plan to grow revenues by expanding our Pre-K-6 balanced literacy program for school districts and capturing market share for our core literacy curriculum, guided and level reading programs, classroom books and professional services.
We anticipate revenue growth in mid-single digits in fiscal 2018 as we expand the distribution of our comprehensive literacy curriculum for core instruction and build out our service business for educators focused on product aligned professional development and family and community engagement services.
In International, revenue is expected to be level with the past year, with growth in most countries offset by a return to more typical revenue line levels in Canada and export after this year's gains driven by the new Harry Potter titles.
We will focus on growing in both mature and emerging markets by expanding our market presence of our key products and leveraging our position as a global partner with schools as we support research-based instructional literacy and mathematics programs.
We also expect our enhanced sales force in Asia to lead to growth in direct sales in that region.
We are excited by the opportunities ahead of us and as we invest to capitalize our best growth opportunities.
We remain intently focused on improving our profitability as we approach our 100th anniversary in 2020.
Now I'll turn the call over to <UNK> for question and answers.
Thank you, Maureen.
Brian, we are now ready to open the line for questions.
Okay.
Remind us what your expectations are for CapEx beyond fiscal 2018.
Obviously, $66 million in fiscal '17, expected to step up in fiscal '18.
But if you look back prior to fiscal '17, it was kind of in that $25 million to $35 million run rate.
And I guess I'm asking is, we should expect to see that by fiscal '19 or it will be a gradual step down.
So Drew, at this point, we're not giving guidance for capital and prepub into the future, but I can say that we will complete the building construction in 2018, and the building construction is about a use of cash of $50 million in capital.
So that ---+ you can expect that, that will come down for that.
The technology spend now will become more capital as we put technology in services, but I can't give you specific guidance to ---+ for that today.
Okay.
And then on the Children's Book business, any more comment or detail you can provide around your expectations for the trade business.
I think you characterized it as returning to more normalized levels.
Now if you exclude Harry Potter, is this a business that should grow at low to mid-single digits in fiscal '18.
Or any detail or parameters you can give us to work with there.
Okay.
Got it.
And then also with fairs, just any comments you can provide on the fiscal fourth quarter performance in fiscal '17.
It was a year in which sales decline, which ---+ it wasn't a significant decline, but this is a business that's grown, looking at my model in the last 10-plus years every year.
So just wondering if you could offer a little more detail on what happened in fiscal '17 and confidence you can get back to growth in fiscal '18.
Got it.
Okay.
And then just a last question from me, Dick.
Any updated thoughts on returning cash to shareholders, on nearly $440 million of net cash sitting on the balance sheet.
Just any updated thoughts there you can share.
Sure.
I think Maureen is going to tackle that one, Drew.
Thank you.
Well, I think, Drew, as you know, we continue to have discussions each and every quarter with our board about opportunities to return cash to shareholders, and we have been under an open-to-buy program.
We bought $7 million of stock back this year, and it ranges between $38 and $42 a share.
We still have $38 million remaining under that capacity, and we will continue to buy in the open market.
And then we have had conversations every quarter with our board about whether there are more aggressive programs, and we'll continue to have those conversations.
I think with the ---+ our 3-year plan, <UNK>, we definitely have a margin target.
We're not going to announce it, but we're ---+ we have that in mind.
So the reason we're not going to announce it is the 2020 plan is kind of an iterative plan, where we're evolving it over a 3-year period.
But the overall goal is to improve our margin by 2020 significantly.
And we expect, as we said, operating income improvement in double digits in fiscal '19 through '21.
Yes.
They're in a comparable amount of footage, but it's a premium space that's been all redeveloped for them in the front of the 557 building on Broadway.
Facing the back of that space will be our new Scholastic corporate entrance to our building.
Oh, yes.
Absolutely.
We're cleaning out the Sephora space, which enables us to have 20,000 of contiguous ground floor space available for either a significant tenant or for a series of smaller tenants.
And we have lots of interest.
As you know, the retail market right now is under attack by the press, and everybody is talking about the decline of bricks and mortar.
We don't see that on Broadway at all.
We are ---+ Zara, which is a premier retailer just down the block, is having sales records in its building, which is just about 200 yards away from ours.
And we believe that the retail rent will return on Broadway and it will make a comeback in the next few months once some of the negative publicity on bricks and mortar is behind us.
So we're ---+ and we'll have dialogue with lots of valuable tenants about the combined 20,000-foot space in 555 Broadway.
So the building in total is between $65 million and $70 million, of which we spent $20 million in fiscal '17.
So the remainder will be spent in fiscal '18 and will be completed at that point.
So there will be no future spending on the building.
As far as the technology part of the spend, as we said, this year we spent $30 million.
We expect something comparable or a little bit higher next year.
And that will continue until we complete the full Oracle implementation, and we complete the CRM implementation.
And that's part of our Scholastic 2020 plan because these will lead to benefits in the organization, will make our ---+ streamline our distribution and, as Dick said, leverage our school network.
And so it's ---+ at this point, I'm not in a position to give you capital year-by-year.
Obviously, we'll do that as we get to ---+ give guidance in those years.
But I think that the capital that we're spending now is part of the 2020 plan because it will really allow us to get those benefits once it's complete.
So we did exit the software distribution business in Australia, and that was about half of the revenue decline, say, $4 million of the revenue decline when you factor out FX.
And that was a very low-margin business.
It did not impact profitability whatsoever.
That's why we exited the business.
Where we did see an impact in profitability for the year was in Asia.
And so in Asia, it was another decline, and we are ---+ obviously, we're having challenges in the Philippines, where they're in a volatile state, and also in Thailand, and that also led to higher bad debt in that region.
And so we've enhanced our collection efforts and put in more collectors to make sure that, that is not a situation going into '18.
We're starting to see that improvement already.
But the bad debt impact affected profitability.
And then also, we increased our reserves for obsolescence in Canada and the U.K., and that had an impact on profitability.
Part of that was as we launched new titles in the Harry Potter series like the paperback.
We won't be selling the older titles.
And coloring books had an impact on obsolescence as well.
Well, thank you all for listening to our year-end call today, but more important, the announcement of our 2020 plan, which we believe will add significant operating income over the next several years.
And we look forward to updating you on that plan and our progress over the next month.
Thank you.
