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Edited Transcript of SCHL earnings conference call or presentation 25-Jul-19 8:30pm GMT

Q4 2019 Scholastic Corp Earnings Call

NEW YORK Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Scholastic Corp earnings conference call or presentation Thursday, July 25, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gil Dickoff

Scholastic Corporation - SVP of IR, Business Development and treasury

* Kenneth J. Cleary

Scholastic Corporation - CFO

* Richard Robinson

Scholastic Corporation - Chairman, President & CEO

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Conference Call Participants

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* Andrew Edward Crum

Stifel, Nicolaus & Company, Incorporated, Research Division - VP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for your patience. You've joined the Scholastic Reports Q4 of Fiscal 2019 Results and Fiscal 2020 Outlook. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Senior Vice President, Treasurer and Head of Investor Relations Gil Dickoff. Sir, you may begin.

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Gil Dickoff, Scholastic Corporation - SVP of IR, Business Development and treasury [2]

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Thank you very much, and good afternoon, everyone. Welcome to Scholastic's Fourth Quarter 2019 Earnings Call. With me here today are Dick Robinson, our Chairman, President and Chief Executive Officer; and Ken Cleary, the company's Chief Financial Officer. We have posted an investor presentation on our IR website at investor.scholastic.com, which we encourage you to download if you have not already done so.

I would like to point out that certain statements made today will be forward-looking. These forward-looking statements, by their nature, are uncertain and may differ materially from actual results. In addition, we will be discussing some non-GAAP financial measures as defined in Regulation G, and the reconciliations of those measures to the most directly comparable GAAP measures can be found in the company's earnings release filed this afternoon on a Form 8-K, which has also been posted to our Investor Relations website. We encourage you to review the disclaimers in the press release and investor presentation and to review the risk factors contained in our annual and quarterly reports filed with the SEC.

And now I would like to turn the call over to Dick Robinson.

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Richard Robinson, Scholastic Corporation - Chairman, President & CEO [3]

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Good afternoon, everyone, and thank you for joining our call. In fiscal 2019, after 3 quarters of performance similar to fiscal 2018, operating income dropped nearly 40% in the fourth quarter, primarily due to the impact of state sales tax collection efforts in our Book Clubs business and in Book Fairs largely because of increased spending for incentives. We also continue to have increased costs for paper printing and labor.

While 2019 saw a 2% revenue increase on strong trade performance and other important gains for the business, our focus for 2020 is on increasing operating income through targeted pricing initiatives and cost management. Our comments today will detail our plan to improve operating income, but first I will provide some detail on the fourth quarter.

In Clubs, responding to the Supreme Court's Wayfair ruling, we implemented a program to collect and remit state sales tax for Book Club customers in every state. This was a significant change in the way teachers had to manage their classroom orders and led to revenue loss as well as higher expenses. We anticipate some continued impact in fiscal year 2020; however, we believe this will abate as the new process becomes familiar to our customers as has happened outside the United States when we have had similar tax collection transitions.

In Book Fairs, to counter competition from a new national book fair provider, we increased incentives, including Scholastic Dollars to our customers leading to higher expenses in the fourth quarter. In terms of GAAP reporting, we also had a change in accounting, ASC 606, which Ken will explain more fully.

Scholastic has proven time and again that we know what captures the hearts and minds of young readers around the world. Fiscal 2019 was no exception with our front and backlist titles on iconic brands leading to great year for trade publishing globally. Likewise, our school channels offer access at low prices to the best books for young people to support independent reading, which has a significant impact on the skills and motivation of all children.

In Education, we're introducing new supplemental programs in print and digital as well as bringing Scholastic Literacy to the $1 billion core reading market. And we are expanding in Asia through English language learning products and services, which are growing rapidly to meet market needs throughout the region.

To improve margins, we are selectively increasing prices, reducing costs and leveraging new technologies for operating efficiencies. As a result of our efforts to improve margins in 2020, while increasing revenues, we expect fiscal year 2020 revenues in the range of $1.60 -- $1.67 billion to $1.70 billion, up from $1.65 billion in fiscal year 2019 and adjusted EBITDA is expected to be $140 million to $160 million, up from $121.3 million in 2019.

Here are some of the key initiatives for 2020 and beyond. First, the focus on clear strategy is to strengthen our largest business, our market-leading school distribution channels in the U.S. While we expect slightly lower revenues in fiscal year 2020 for Clubs and Fairs, we are making changes to prepare them for the future through improved technology and simplicity of use. These channels remain key to our sale of children's books direct to students and families beloved by their teachers and schools they support.

Research studies in education show the importance of independent reading to the social, emotional and academic growth of kids, and Scholastic Book Clubs and Book Fairs are by far the most important channels for promoting independent reading in school, enabling children to choose and buy books they want to read from a wide range of quality books at favorable prices.

In Fairs, we have grown our position significantly over a 20-year period, becoming the marketing leader by far. We deliver more than 110,000 fairs in more than 60,000 schools each year from our 58 regional distribution centers. In 2019, we have maintained revenues even as we faced increased competition.

We are confident in our ability to preserve and extend this position over the long term, viewing competition as a healthy stimulus to offer the best customer experience. While managing our cost even more effectively through better targeting of these incentives, we also will focus on these value propositions.

First, improve the experience for fair chairperson, students and parents, the full rollout of new POS devices enables better connectivity and broader parent use of an eWallet to deposit money in their children's book fair account. Second, increased fair participation through marketing and promotional activities. Third, provide personalized support services for volunteers hosting fairs. Fourth, expand our roster of high-value fairs through targeted incentives. And fifth, offering streamlined fairs, which can be set up quickly.

In Clubs, we will be focusing on transitioning a greater portion of parents to purchasing online, which supports our customer-first goals by simplifying sales tax collection while we continue to improve our e-commerce experience to meet today's expectations. Our more than 750,000 teacher customers tell us that more than ever in these times of tight school budgets, our Book Club Rewards Program enables them to get free and inexpensive books to build their classroom libraries and stimulate independent reading among their students. This is of critical importance to our nation's students as the recent Kids & Family Reading Report showed us only 1/3 of school age children have classroom libraries with books that they want to read.

In both of these channels, which carry the Scholastic brand into every school every day, we have built deep relationships with publishers across the globe, who make or license products to us and continue to be viewed as the must-have school partner who can engage children and family, celebrate reading and bring the most popular and diverse titles from all publishers to kids at affordable prices.

Next, unquestionable strength in children's book publishing across age ranges. This coming year, we have highly anticipated titles for every age group. In middle grade, the Dog Man series continues to dominate bestseller list and draw unprecedented numbers of new readers. Dav Pilkey's seventh book in the series Dog Man: For Whom the Ball Rolls will be released in August of this year and the eighth Dog Man: Fetch-22 will come out this December. Through this period, Dav will be packing stadiums as part of his remarkable Do Good Campaign, which includes a transcontinental tour and charitable components. The power of this series as well as his landmark, Captain Underpants series, drives home the ever increasing popularity of graphic novels as well as the importance of book choice based on what kids want to read.

In November, young readers will enjoy being introduced to Dinky Donkey, the daughter and sequel to Wonky Donkey, which was a viral sensation out of New Zealand last year. Our beloved Clifford The Big Red Dog will make new friends this winter with the premiere of the rebooted animated series on Amazon Prime and PBS KIDS with an accompanying publishing plan and robust licensing program. And right now, as we speak in this very day in New York City, Clifford is taking Manhattan with production in New York City over the live-action feature coming in fall 2020 from Paramount. We are thrilled to see the renewed success of Scholastic Entertainment as a creative engine that leverages platforms and media to bring new life to Scholastic content that has captivated young people for generations.

Trade sales in fiscal 2020 will also benefit from a recent purchase of the majority interest in Make Believe Ideas, a U.K. publisher of creative books for young children. And in the YA area or Young Adult, the world caught fire once again with the announcement recently of a new novel in the worldwide best-selling The Hunger Games series by Suzanne Collins to come in May. This crossover hit promises to capture new audiences as well as renew interest in the series, which dominated bestseller list earlier this decade and sold more than 70 million copies worldwide.

Turning to Education. New market strategies advance while our supplemental business remained strong. We have a two-pronged strategy now that our new core offering is available. Our strength in supplemental material such as Guided Reading and Leveled Bookroom will continue to drive sales, ceding the marketplace for our core K-6 reading program, Scholastic Literacy, while we simultaneously pursue large-scale adoption opportunities for both.

Fiscal 2020 will serve as a foundational year to build the opportunity pipeline for Scholastic Literacy. Customer response remains very positive, and we anticipate initial revenues in the first quarter of fiscal 2020, with several districts across the country beginning to use this core program in the fall. We expect significant revenue and profit gains over the next several years related to Scholastic Literacy as well as our growing list of supplemental programs.

Our Scholastic Digital offerings, including Literacy Pro's Scholastic F.I.R. S.T., W.O.R. D. and BookFlix, total of 4 there, are an important part of this strategy both as independent subscriptions and as part of Scholastic Literacy. The overall market is taking note of our digital offerings as we earn awards and have moved up 8 spots in Ed Week market brief's ranking of digital tools accessed most by students and educators across the U.S.

Finally, we are seeing significant growth and momentum in International businesses, particularly in Asia. As I mentioned, our strength in trade is a global story, U.S.-based properties from Dav Pilkey series to news of the forthcoming Hunger Games novel resonate through the market and many markets. And in turn, we are having increasing success bringing titles and authors from our international markets to new audiences everywhere, including Aaron Blabey's Pig the Grub and Anh Do's Weirdo: Splashy Weird! from Australia. We anticipate strong revenue and profit growth in our Asia business as we build upon our already strong brand in response to our English language learning programs targeted to meet the needs of a growing middle class of consumers. Whether the students we reach -- we aim to reach are in school or home or online, Scholastic can offer engaging and effective tools that are proven to work in building English language proficiency. There is great enthusiasm for the existing digital education products, especially Lit Pro and Scholastic F.I.R. S.T., our foundational English language learning program for children 4 to 8. These programs were sold to families through our local Internet sales partners or directly through our Scholastic Early English franchises. Building on our global resources of both print and digital content, we will adapt for local market needs where necessary and can reach these consumers throughout Asia.

In conclusion for my remarks, our 2020 focus will be on improving operating income and cost management, while developing Scholastic's leading market position globally.

With that, I will turn the call over to Ken Cleary, CFO.

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Kenneth J. Cleary, Scholastic Corporation - CFO [4]

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Thank you, Dick, and good afternoon. Today, I will refer to our adjusted results for the fourth quarter and full year, excluding onetime items unless otherwise indicated. As you know, we adopted the new revenue recognition guidelines under ASC 606 in fiscal 2019. Since the prior year's results have not been restated, I will highlight the impact of these new standards on the current year's revenues and operating profits. Note that we will not need to make these accounting comparisons in future periods.

The net effect from the application of ASC 606 on overall results in fiscal 2019 was a deferral of $12.8 million in revenues into the next fiscal year and a $7.7 million deferral of operating income, mainly affecting our Book Fairs business. The impact was more significant on our fourth quarter results, which had a $23.9 million in deferred revenues and a $14.8 million reduction in operating income.

Fiscal 2019 revenues were $1.65 billion versus $1.63 billion last year. Operating income was $41 million compared to $75 million in fiscal 2018. As we guided on May 30, earnings per diluted share, excluding onetime items were $0.92 and adjusted EBITDA was $121.3 million. Both of these are non-GAAP measures, which we defined in the financial tables accompanying this afternoon's release.

Excluding onetime items and the impact of ASC 606 in the current year, pro forma earnings per share were $1.08 versus $1.43 last year. The year-over-year shortfall versus our original fiscal 2019 outlook was predominantly a fourth quarter event highlighted by 3 main factors: one, we transitioned to a new sales tax collection program in our Book Clubs operation in March in response to the Supreme Court's Wayfair decision and subsequent state registration requirements. This transition significantly impacted Book Club revenues and operating income in the fourth quarter. Results had largely been in line with the prior year until that time.

Two, we had higher promotional and marketing spending, including the use of more Scholastic Dollars in our Book Fairs business as we work more closely with our customers to create and deliver the incentives and services they desire in order to reinforce our market leadership in Fairs, which help fair revenues in the fourth quarter as sales were 1% higher, excluding the impact of ASC 606.

Three, we had a greater impact from the application of ASC 606 on sales and profits in the fourth quarter as we issued more promotional Scholastic Dollar incentives in Book Fairs during that period. Full year results were also affected by higher depreciation and amortization expense as expected of $14.7 million and a strong U.S. dollar, which resulted in a $15.4 million reduction in revenues and a $1.1 million reduction in operating income.

Onetime items reflected in our pretax results above the operating line for the fiscal year totaled $16 million and included $8.1 million for the settlement of our legacy sales tax assessment and $6.5 million in severance as well as a $900,000 impairment recognized in connection with our New York City headquarters renovation and a $500,000 charge related to branch consolidation in our international operations. For comparison, the prior year period saw a $19.4 million of onetime items above the operating line.

Now turning to our segment results. In Children's Book Publishing and Distribution, segment revenues for the fiscal year increased $20.1 million or 2% to $990.3 million as compared to the prior year, driven by a 20% sales improvement in trade on the strength of a strong frontlist, including 2 new Dav Pilkey's Dog Man releases in the year and J.K. Rowling's Fantastic Beasts: The Crimes of Grindelwald, along with strong graphics and paperback series and the viral sensation, The Wonky Donkey. Operating income for the year was $82.9 million, a decrease of $23.1 million or 22% as compared to the prior year, driven by lower sales and higher costs in Book Clubs as we rolled out new sales tax collection program and differentiated online and paper-based offers and higher costs in Book Fairs associated with expanded services and increased promotional activity as well as the accounting impact of ASC 606.

In the fourth quarter, the Children's Book segment sales were down $27.3 million versus the fourth quarter of 2018 with higher trade sales more than offset by a decline in club revenues related to the new sales tax collection program as well as the impact of ASC 606, which caused $24 million of fair revenues to be deferred on the balance sheet. Segment operating income in the fourth quarter declined $32.7 million as compared to the prior year. $16.7 million resulting from the impact of ASC 606 and the remainder due to the lower sales volumes in Clubs and higher marketing promotion spend in Fairs in response to competitive pressures, in addition to higher depreciation expense associated with the new Book Fairs point-of-sale system now in service.

The deferred revenues and profits associated with Scholastic Dollars will be recognized largely in the first half of fiscal year 2020 with an equivalent amount of revenue deferred in the second half of fiscal year 2020. Accordingly, in fiscal year 2020 on a full year basis, we expect recognized revenues and profits associated with Scholastic Dollars to be flat year-over-year.

In Education, for the fiscal year, segment revenue was $297.4 million, up 3% compared to $288.6 million a year ago, with higher sales of our instructional products and programs, including Guided Reading, Leveled Bookroom, and LitCamp, our summer reading program. Segment operating income was $30.6 million in fiscal 2019 down $3.3 million from the prior fiscal year, with higher costs in the current year with the launch of Scholastic Literacy and the higher amortization of new digital subscription products now in the market.

Education segment revenues in the fourth quarter was $117.7 million, slightly ahead of last year's $117.2 million in recorded revenues. Segment operating income for the quarter was $36.9 million, a $5.7 million drop versus the $42.6 million recorded in the fourth quarter of fiscal 2018.

In International, segment revenues for the fiscal year fell $3.4 million or 1% to $366.2 million compared to $369.6 million in the prior year. Higher trade publishing results in all of our major markets and increased education sales in the U.K., Australia and Asia were more than offset by a $15.4 million adverse impact from foreign exchange. In constant currency terms, revenues were up 3% year-over-year.

Segment operating income fell $3.2 million or 17% to $15.3 million versus last year, mainly as a result of higher operating expenses on lower revenues in Canadian book clubs and education in addition to a $1.1 million hit from foreign exchange. Sales in the fourth quarter rose $1.3 million or 1% to $94.3 million versus the prior year period driven by strong trade channels in all international markets. International finished on an upbeat note with operating income in the fourth quarter of 15% compared to the fourth quarter of 2018, largely driven by trade.

Unallocated corporate overhead expense for the fiscal year was $87.8 million, slightly higher than $83.4 million last year. The increase was primarily due to increased costs linked to the ongoing rollout of a new cloud-based ERP system as we expected as well as higher depreciation expense related to our recently completed headquarters renovation and new technology platforms now in service.

Net cash provided by operating activities was $116.4 million compared to $141.5 million last year. And free cash flow, as defined by us, was a net use of $12.4 million versus a net use of $16.1 million last year. Capital expenditures, the main driver of our free cash used in the year, was $95 million versus $121.5 million in fiscal 2018.

As we discussed last quarter, we utilized our strong balance sheet to optimize our procurement opportunities throughout the year, which help to address industry-wide capacity constraints and longer lead times with our strategic printers -- paper suppliers. The higher inventory levels and quicker payment terms taken together had a significant impact on our working capital utilization and result in free cash use for the year.

We distributed $21.1 million in dividends and repurchased $8.5 million of our common stock during the year. We continued our open markets buyback -- stock buyback program into the new fiscal year with an incremental $8.7 million in repurchases. After giving effect to these additional purchases of stock in the new fiscal year, we have $44.2 million remaining under our current authorization. Under this program, which will continue to be funded with available cash, we may repurchase our shares from time-to-time as conditions allow.

At fiscal year-end, our net cash position was $326.8 million, down from $384 million a year ago. The lower net cash balance is primarily due to planned capital spending programs on technology investments aligned with our Scholastic 2020 long-term margin improvement plan as well as the completion of our headquarters renovation. We also made $18.5 million in acquisitions and other investments, including our purchase of the majority interest in Make Believe Ideas Limited in the U.K. and a 4.62% investment in PictureStory LLC, a financing and production company working with top distributors and content partners to make film, television and digital programming for the youth market.

Now briefly on cost-reduction plans. In the past fiscal year, we realized $10.8 million in sustainable savings from Scholastic 2020 plan initiatives and our recent investment in data and technology, although much of these savings were offset by wage inflation in distribution, transportation and some higher costs incurred with our paper and printing vendors due to capacity constraints.

As we talked about previously, our Scholastic 2020 deployment is championed by an integrated cross disciplinary team from operations, logistics, manufacturing, technology, data analytics and finance underlying proactive efforts to drive down spend.

In fiscal 2020, we are targeting even higher net bottom line benefit from these efforts and we'll report on these initiatives and resulting savings throughout the fiscal year.

Now to address our outlook and guidance ranges for fiscal year 2020. We are projecting fiscal year 2020 revenues to be in the range of $1.67 billion to $1.7 billion, up from $1.65 billion in fiscal 2019 and we are setting an adjusted EBITDA target of $140 million to $160 million, up from $121.3 million in fiscal 2019.

We are no longer providing annual EPS guidance as we believe the adjusted EBITDA is a more meaningful measure of operating profitability and returns on capital investments made without distortion from unusual items and share repurchases.

Revenue growth will be led by trade publishing, including new releases in our important Hunger Games, Captain Underpants, Dog Man, Wings of Fire and I Survived franchises as well as growth in licensing. The new Hunger Games novel, set to release in May 2020, allows the positive impact on sales and operating profits in the fourth fiscal quarter. However, there will be meaningful cash outlays made throughout the fiscal year for author advances, publishing costs, marketing and promotion.

Trade sales will also see a boost from the recent majority acquisition of Make Believe Ideas. Clubs and Fairs will continue to be important channels to engage students and their parents and ensure kids have access to the best books at affordable prices. We expect the marketplace to remain competitive. And as discussed earlier, we're executing a plan to reinforce our market leadership. We expect lower clubs and fairs revenues in fiscal 2020 as we work to transition more customers to our Clubs' online ordering platform and away from paper-based order forms and simplify our Book Fairs for organizer and volunteers to run with more company-provide support services, including setup and fair replenishment. We are working diligently to streamline our cost structure in Clubs and develop more focused marketing and promotions in Fairs and should see improvement in operating results in the new fiscal year.

As Dick mentioned, we also expect targeted growth in Education in both our supplemental business and our newly available core offering. We believe this Scholastic Literacy contains a number of key features that differentiates it from other available products that will lead to initial market penetration in fiscal 2020.

In International, we expect accelerated revenue growth in trade and education, particularly in China through both Internet stores and our own channels. We expect to achieve greater efficiencies as we leverage our new Scholastic EDGE's shared services operation.

International will also benefit from the upcoming Hunger Games novel, we have publishing rights in Canada, U.K., Australia and India as well as audio world rights. In fiscal 2020, we planned to: one, drive additional sustainable operational efficiencies throughout our supply chain; two, target cost savings to help alleviate inflationary pressures in labor, fuel, postage as well as any impact from tariffs; and three, implement selective pricing increases.

As we move further into our Scholastic 2020 transformation plan, we will achieve greater benefits from the new technology platforms in data analytics programs, including salesforce.com, integrated analytics, ERP deployment, POS and eWallet, e-commerce enablement and the infrastructure upgrades we have placed in the service, although we will continue to see higher levels of depreciation and amortization from these capital investments. We also expect to receive higher rental income as we begin to lease out available space here in SoHo as a result of the investments we've made to create new high-value retail and multipurpose mixed-use space over the past 2 years.

Our fiscal year 2020 outlook includes capital expenditures of $75 million to $85 million compared to $95 million in fiscal 2019. Prepublication and production spend is projected to trend slightly higher in fiscal 2020, inclusive of an expanded development slate of children's entertainment programming to maximize our creative content and characters.

And with that, I will hand the call back to Gil for the Q&A session.

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Gil Dickoff, Scholastic Corporation - SVP of IR, Business Development and treasury [5]

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Thanks very much, Ken. We are ready to now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Drew Crum of Stifel.

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Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [2]

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Talk a little bit more about your experience with the programs you've put into place to address the competition in Fairs? And then, I guess, on a related note, the 3 issues that impacted fiscal 4Q, you kind of addressed this in your preamble, but could you maybe discuss in more detail when you expect these to stabilize? I guess, I'm speaking specifically to the sales tax collection issues for Clubs, the competition in Fairs and then the higher input costs.

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Richard Robinson, Scholastic Corporation - Chairman, President & CEO [3]

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I'll answer a couple of these myself, Drew, and then ask Ken to supplement my comments. In terms of Book Fairs, we -- you asked about the incentive plans and other operating costs. We did -- as Ken alluded, we did give out some extra Scholastic Dollars to ensure that we got renewals of Fairs that we thought might be vulnerable, but we probably extended that program a little further than we needed to. And we gave away a little bit more Scholastic Dollars than we expected. We also had cost increases in certain core areas of shipping, labor -- particularly, driver labor costs and areas like that, but the principal effect was through the Scholastic incentives, Scholastic Dollars.

On the Clubs, we began collecting sales tax in the third quarter, March through May. We expect that we'll have some additional sales tax impact from September 2019 through January 2020. After that it should recalibrate to what people did in the spring. We have improved the offerings that we have made through our collection processes. And so we're not expecting a dramatic impact the way we got in the fourth quarter, and we've corrected some of the issues that caused that revenue decline. So we're -- but we do feel we're going to get some impact from sales tax during the year that will be offset by the fact that, as you know, we did pay -- we self-assessed some sales tax historically in the business. And as we collect full sales tax from our customers, that will -- it will -- that will drop off.

I'll turn to Ken for the other answers.

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Kenneth J. Cleary, Scholastic Corporation - CFO [4]

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Sure, Drew. Just to build on Dick's comments on Scholastic Dollars, there were higher incentives in Q4 and we also did some work to improve fair quality and really provide the fairs that our customers want. So there were some labor and warehouse costs associated with that as well. As far as sales tax goes, it really isn't a cost issue going forward the way it was. It's now -- what's going to be the impact on the business in terms of the top line. So the work has been done to implement what we're doing in terms of the collection of sales tax. And we also had to lap some costs in terms of -- before we implemented sales tax last year, we had to register in certain states and, obviously, we couldn't collect in some states, and although that's with our program, we launched in March and we started collecting in March. So let's say, a state went online with their registration earlier as early as October in some instances, we were responsible for that sales tax. So we bore that burden, and we talked a little bit about that earlier in the year. What was the -- can someone remind me the third question again?

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Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [5]

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No, you made -- yes, you made reference to higher paper, printing and labor costs. Is that something that you see as ongoing? Or does that abate? Can you offset it with pricing and other initiatives?

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Kenneth J. Cleary, Scholastic Corporation - CFO [6]

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So sure. So we are actively working on pricing and other initiatives. In Dick's comments, you heard about margin improvement. So we're not predicting substantial revenue pickups, particularly in Clubs and Fairs next year, but we are expecting margin improvement and some of that comes through pricing. Now we do have some elasticity in those markets. So it's somewhat targeted. It's not across the board, but we are doing other things to -- without giving you too many details, we do have some cross channel initiatives where procurement should be better targeted and stronger and we should be able to leverage our inventory across the organization better. So there are things in play. Some of our systems implementations are designed to address some of this as well and support this. So it's really around some of the procurement efforts and making sure that we are doing our demand planning appropriately and on the other side selective pricing.

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Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [7]

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Okay.

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Richard Robinson, Scholastic Corporation - Chairman, President & CEO [8]

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I do think we did -- we lagged a little in meeting the cost increases. We knew they were coming. But because of the lead times that we have in our businesses, we weren't able to quite catch up with them last year and we are doing a much better job going forward on that topic. So we should see some, as Ken pointed out, margin improvement next year offsetting the cost increases.

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Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [9]

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Okay. Shifting gears to the trade business. Can you talk about your expectations for this new Hunger Games book, maybe relative to what you experienced with the first 3 books? And is there a way to size this Make Believe Ideas franchise or book program that you've acquired?

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Richard Robinson, Scholastic Corporation - Chairman, President & CEO [10]

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Yes. I think Make Believe Ideas is -- runs into the -- between $35 million and $40 million. Last year, we owned a portion of that. So we got a equity pickup of some of the operating income, but no revenues. This year, we will get the revenues and we will also get the full benefit of the operating income.

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Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [11]

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And Dick, is it growing -- is it a growing franchise?

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Richard Robinson, Scholastic Corporation - Chairman, President & CEO [12]

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Yes. No, no, it's wonderful. Yes, it's grown -- it's -- we acquired a minority interest 4 years ago and it's grown, it doubled at least in that time, yes. It's an early childhood business, absolutely remarkable. It goes through mass market channels, primarily for reader linked to Walmart, Costco, Target and so forth and so on. So a great business.

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Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [13]

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Okay. And then on Hunger Games?

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Richard Robinson, Scholastic Corporation - Chairman, President & CEO [14]

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Hunger Games, it's hard to tell. We're coming -- it's the last week of the fiscal year virtually that this thing comes out. So we'll put out a certain number of copies based on past performance, but we've -- it's been some years since the last one came out. And we're confident that the program is as strong as ever, but we're not sure what's going to happen until we put some copies out in the market and see what happens. So we'll be taking some reserves against the -- that whatever expected revenue we might get, but it's certainly been a great series over time.

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Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [15]

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Okay. And then on the Education business, there's been some investments made ahead of the Scholastic Literacy launch. Should we -- now that's behind you or we think the majority of that spend is behind you, should we expect to see OI improve? And I'm sorry, if I missed this. I think you cut out during your prepared remarks, but was there any sales impact from Scholastic Literacy during the quarter? And on the press release, you made reference to participating in state adoptions and open territories spaces. Is that calendar '19 or is that calendar '20?

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Richard Robinson, Scholastic Corporation - Chairman, President & CEO [16]

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Most of the revenues going to be fiscal '21. We're getting some -- this summer a little bit through, but we introduced the program somewhat late in the year, we were sending out samples in February and March. And so we got some revenues for the summer quarter. It’s being a core textbook product, the summer quarter is when you would expect the highest level of revenues. But because of the late introduction, it's going to be fairly minimal for this summer, but we are big -- there's several adoption opportunities, which I'm sure you're aware of in '21, and we expect to be participating that. But I think the main thing is going to be, it just adds another way for us to go into talk to the Literacy Coordinator or the Chief Academic Officer, and we're offering a comprehensive literacy solution, including core supplemental, digital so forth and so on. It just complements our offering and it gives us expanded revenue opportunities, but that's going to take a while to show up in the operating statement.

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Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [17]

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Okay. And just one more question, can you comment on what your expectations are around incremental rental income for fiscal '20?

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Richard Robinson, Scholastic Corporation - Chairman, President & CEO [18]

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We'll have some. So we have several people who are actively engaged in competing for some space that we have, not all of it, but some of it. And unfortunately, I predicted that we would be able to announce the signed lease at the end of this quarterly call, but the market being what it is, it's slipped a little bit and so we will probably have something to announce fairly soon, and then the -- but the market is still there. You should know the retail market is not that great overall, but for this position in SoHo that we have and the amount of space we have, we're pretty strong competitor for all the major brands that want to be in SoHo.

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Operator [19]

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At this time, I'd like to turn the call back over to Chairman, President and Chief Executive Officer Richard Robinson, for any closing remarks. Sir?

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Richard Robinson, Scholastic Corporation - Chairman, President & CEO [20]

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Well, thank you very much all for your attention. This is a relatively long call for us as we had an important quarter and we had an important year. We're very disappointed at our fourth quarter performance, as you know. We're taking intense steps throughout the company to improve that. We've got commitment from everybody that we're going to have a better year in 2020 and get back toward our better operating income as the year goes on. We thank you for your support, and we'll do our best to make good on our promises. Thank you very much, and we'll see you in September.

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Operator [21]

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Thank you, sir. Ladies and gentlemen, that concludes today's conference. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.