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Edited Transcript of SCHL.OQ earnings conference call or presentation 23-Jul-20 8:30pm GMT

·33 min read

Q4 2020 Scholastic Corp Earnings Call NEW YORK Jul 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Scholastic Corp earnings conference call or presentation Thursday, July 23, 2020 at 8:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Gil Dickoff Scholastic Corporation - Senior VP, Treasurer & Head of IR * Kenneth J. Cleary Scholastic Corporation - CFO * Richard Robinson Scholastic Corporation - Chairman, President & CEO * Sasha Quinton Scholastic Book Fairs, Inc. - President ================================================================================ Conference Call Participants ================================================================================ * Andrew Edward Crum Stifel, Nicolaus & Company, Incorporated, Research Division - VP ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Scholastic Reports Q4 and 2020 Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference to your speaker today, Gil Dickoff, Senior Vice President and Treasurer. Please go ahead, sir. -------------------------------------------------------------------------------- Gil Dickoff, Scholastic Corporation - Senior VP, Treasurer & Head of IR [2] -------------------------------------------------------------------------------- Thank you so much, Joelle, and good afternoon. I trust everyone is successfully steering clear of harm's way, and we welcome you to Scholastic's fourth quarter and fiscal 2020 earnings call. Joining me 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 haven't already done so. I would also like to point out that certain statements made today will be forward-looking. Such forward-looking statements are subject to various risks and uncertainties, including those arising from the continuing impact of COVID-19 on the company's business operations. These forward-looking statements, by their nature, are uncertain, and actual results may differ materially from those currently anticipated. 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 our 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. -------------------------------------------------------------------------------- Richard Robinson, Scholastic Corporation - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Thank you all for joining our call today. In a quarter when schools and families across the globe were dealing with both the pandemic and a massive economic slowdown, we showed the resilience that has defined our company since our founding 100 years ago. Amidst the challenges from the impact of the coronavirus, including school closures in the U.S. and globally, Scholastic demonstrated our value to our school teacher, parent and child customers, while also taking substantial action to offset the impact of the pandemic on our operating income and cash flow. This disruption coincided with our significant fourth quarter, a period when the company typically records the majority of our earnings and cash flow for the year. In response, for all of our school facing businesses, we have transitioned Scholastic to a more flexible model, redesigning clubs and fairs as well as increasing our focus on digital solutions and education. We also established a rigorous cost reduction program with specific company and divisional targets, aimed at $100 million of savings in fiscal 2021 through reducing labor costs and improving processes. This program will enable us to preserve profitability and to ramp as demand increases. While reducing costs, we also focused on a more streamlined book fair business, simplifying fairs to adjust to the changed school environment. We also took cost out of our Book Club process, while improving online ordering. We expanded digital solutions and education, deepening our connection with parents and children through Scholastic Learn at Home. We answered the need for high-quality books to read at home with our engaging trade offerings, and schools are also asking for more independent -- for more digital curriculum, which we offer through our digital subscription programs for independent reading, foundational phonics and vocabulary. As we look ahead, including a continued impact of COVID-19 in the fall and beyond, it's important to understand that Scholastic remains a well-capitalized company with a strong balance sheet and net cash position, which we enhanced over the past few months. We are confident we have the right plan in place to help teachers, parents and children thrive in a challenging situation that will impact schools and our customers for some time. We are prepared to support schools and families as they grapple with the complex matter of reopening schools in a COVID-safe way, continuing remote learning or implementing various combinations of these models, all of which will need to be adjusted based on evolving local mandates and current infection rates locally. Given our position as partner to schools, Scholastic is known for our ability to adapt quickly to provide new ways of helping teachers, schools and parents in the new circumstances of collaboration between families and schools in support of learning at both school and home. In fiscal 2020, our overall business performed well and ahead of our plan in the first 3 quarters of the fiscal year. However, the overall effect of COVID-19 here and abroad in the fourth quarter caused substantial declines in our full year revenue and led to this year's operating loss. In the fourth quarter, with almost every school, which is 120,000 of them, closed across the U.S. between March and May, there was a corresponding steep decline in the number of school-based book fair events and Book Club sales leading to a $151.7 million reduction in revenue in those school distribution channels in the fourth quarter. As noted, we also saw real bright spots with trade publishing performing well throughout the fiscal 2020 and in the fourth quarter. Domestic trade sales increased $25 million or 45% in the fourth quarter versus the prior year period, even as industry bookstore sales declined as a result of brick-and-mortar store closures in the fourth quarter. We had strong sales of favorite series like The Hunger Games, Dog Man, Bad Guys and Wings of Fire. Our digital connections with parents, teachers and students are stronger than ever and we have received significant positive feedback on the high quality of our digital education resources, such as our new virtual Scholastic Learn at Home hub. The site was an instant success and accumulating nearly 80 million page views from April to June, and we tradition the Learn at Home hub to a paid subscription model as of July 1, so families can continue to use its resources year round. Kids report that the programs are fun and easy to use, and parents are impressed with how much learning children derive from this engaging program. At the same time, our Book Fairs team worked diligently to provide flexible, streamlined solutions to meet the differing needs of individual school return scenarios, including enhanced virtual fairs. With the leadership of new President of Scholastic Book Fairs who started on January 1, we redesigned our Book Fairs group to become a more nimble and efficient organization focused on making deeper, valuable connections within schools. Book Clubs pivoted to redirect book shipments from schools to teachers' homes. And meanwhile, our Education division adopted their take-home book model to support districts and states by making high-quality books and family resources available to children in need during the school closures, most notably, 185,000 kids receiving books at home from the state of Connecticut during the closedown of schools. When Ken reviews our financials in a few moments, he will also review in detail the significant actions we took to curtail operational and capital expenditures in order to mitigate the impact of the school closures while we are also working proactively with families and schools to support them through this period of disruption. In short, we froze nonessential spending, reduced inventory purchases, temporarily closed warehouses and distribution centers in highly impacted regions and implemented difficult but necessary staffing measures including reduced work weeks, furloughs and job eliminations. We also took approximately $19.9 million net in noncash charges as a result of COVID-19, including higher inventory obsolescence reserves, higher customer bad debt, higher return reserves, higher unearned author advances and higher vacation accruals. In addition, we also recognized a onetime severance charge of $13.1 million in the year in connection with ongoing restructuring and staffing decisions made in response to the impact of COVID-19. Excluding onetime items, we recorded an operating loss of $32.3 million in fiscal year 2020 versus operating income positive of $41 million in fiscal year 2019. We also suspended our stock buyback program and had negligible cash burn in the fourth quarter. Out of an abundance of caution, we drew down $200 million on our revolver, and the funds were placed in liquid investments and remain unused at this time. We closed the fiscal year with over $175 million in net cash on the balance sheet and a strong equity base of $1.2 billion. I want to reiterate that our more capital-light model requires very low levels of maintenance capital expenditures. Therefore, we can flex our discretionary capital expenditures as needed during the year. This is not the first time in our 100-year history that Scholastic has faced significant challenges. And each time we have emerged stronger and more resilient. While the scope of this pandemic is unprecedented, we responded swiftly and with purpose. Across the company, our people rose to the occasion to meet the needs of teachers, parents and children as the focus shifted abruptly from schools to home in the fourth quarter. And I'm proud of -- I'm extremely proud of the dedication of our Scholastic staff during this period of professional and personal disruption. As we look to fiscal 2021, we are anticipating a slower start to the year for our school distribution channel. We currently expect most schools to be in session, but following different instruction models from district to district with some schools returning to in-person learning, others continuing distance learning and others operating in a hybrid model. Experts agree that in-person learning is the most effective, especially for younger children, but we also all appreciate the need to ensure that our learning environments are safe for our children and for our communities. Each district is therefore planning for various contingencies that take into account potential changes in infection rates in their local areas. The number of schools planning to open on a remote virtual-only basis is a small but growing minority based mostly in bigger districts where infection rates are increasing. As of now, the large majority of schools have reported that they will have some form of in-person classroom instruction with some planning to open 5 days a week and others opening in a hybrid manner. Given planned social distancing measures, we expect that there will be less extra space in schools, given the need for more classroom space, more limited access to visitors and some restrictions on events on school premises and plans for students to stay clustered in pods during schoolday. We're coordinating with schools to provide events that fit their reopening modes and that make the best use of their available space. The sizable majority of schools that decided not to hold in-person fairs in August have either converted to a virtual fair or rescheduled for later in the school year. And with our more flexible model, we can meet the needs of each school in each district and scale our operations up or down based on demand. We also expect the capacity and event restrictions at brick-and-mortar bookstores to continue, which could impact trade sales. Our trade performance has been strong, and we're confident in our pipeline, but are planning our launches, knowing that circumstances for our retail partners may change if infection rates change. These factors make it difficult to accurately predict the continuing impact of COVID-19 on our business and operations, especially our Book Clubs and Book Fairs in fiscal 2021. Therefore, we will not be providing a fiscal year 2021 outlook at this time. I do think it is important to share the steps that we are taking to ensure that our operations and our product offerings are COVID ready in fiscal 2021. First, we are adjusting our offerings to ensure safe and easy events. Our Book Fairs group is rising to the challenge of being able to provide simplified, safe and easy and essential book fairs that incorporate capacity restrictions, social distancing measures, increased health and safety protocols and further address resource limitations in the school. We're closely following the developments regarding reopening plans for schools and are ready with flexible fares that are in strict compliance with all local health and safety requirements and best practices which -- and will meet the needs of individual schools. For schools that remain closed, we can provide enhanced virtual fairs and community engagement solutions to connect children to the books they love and help schools raise the resources needed now more than ever for fundraising. We are also encouraging teachers and parents to continue to order books online through our clubs ordering platform, which is another safe and easy way to get books directly to kids and should also help the migration of customers to our efficient digital platform. Next, we are meeting the pent-up demand for high-quality books and educational materials as schools contend with the COVID slide. A recent study by NWEA projected that students who lack a steady instruction during the school shutdowns might return this fall, having retained only 70%, and that would be lucky of their annual reading gains compared to a normal year. This compounds the reading skill loss known as the summer slide, experienced by many school age kids. The need for affordable high-quality books will be greater than ever as schools and families help their children regain academic momentum this fall. Scholastic is well positioned as a partner and resource in this effort through our school channels, creating access to affordable books and the opportunity for kids to connect emotionally to the characters and stories that are so meaningful to them. The one thing we hear from all schools and teachers and parents is the social emotional impact of reading and of our book programs. Our Book Clubs are a particularly good solution for getting books into the hands of children in schools and at home, and Scholastic magazines also provide digital solutions, which can be used at home. We're also continuing to fine-tune in our digital offerings and virtual Scholastic Learn at Home hub. We are well positioned to support schools and families with at-home learning programs to supplement in-school curriculum. Our formats have the flexibility to fit with the various schedules and classroom models, which may emerge through the fall. Because of the COVID remote learning experience, there is now a greater focus on digital learning, whether schools are open or remote, and we have a number of digital subscription programs that are in demand, including Lit Pro for K-8 independent reading, F.I.R. S.T. for K2 foundational phonics and W.O.R. D. for vocabulary in elementary schools. School districts, including Los Angeles, are buying these programs and making them available to children for home use for summer school, after-school and periods when school buildings may be closed. We are seeing a rapid increase in interest from schools to buy digital programs for at-home and in-school learning. Finally, we have an exciting trade publishing pipeline. We expect continued strong performance from trade in the coming year, thanks to highly anticipated releases and momentum from the May release of The Ballad of Songbirds and Snakes, the much anticipated fourth book in The Hunger Games series. And as you know, Ballad was an instant #1 best seller around the globe, and continues to top best seller list with more than 1 million English language copies sold in the 2 months since publication. We expect continued strong performance from this book fueled by a new Hunger Games box set that will be released for the holiday season. In addition to strong backlist sales of Ballad and Harry Potter, we look forward to Dav Pilkey's latest installment in the Dog Man series with the release of Grime and Punishment, Dog Man #9 in September, and Cat Kid Comic Club and all new graphic novel series from Dav in December. The enduring popular Dav Pilkey and his characters was evident this spring as millions of young readers logged on to the Dav Pilkey At Home video series to enjoy his drawing demonstrations, read aloud and other activities chosen by Dav to engage his fans as they sheltered in place. This fall also brings the release of The Ickabog, a new fairy tale from J.K. Rowling and her first book for children in 13 years. Our youngest readers will be delighted to meet the newest members of the Wonky Donkey family when Grinny Granny Donkey launches this November. This third title written by Craig Smith and illustrated by Katz Cowley joins last fall's Dinky Donkey and the original viral sensation Wonky Donkey, which now has over 4 million copies in print. We expect an enthusiastic reception too to the publication of 2 new Baby-Sitters Club releases, Logan Likes Mary Anne!, Baby-Sitters Club #8 and Karen's Roller Skates, Baby-Sitters Little Sister #2. The franchise is hotter than ever, thanks to the July 3 premier of the Netflix streaming series based on the Baby-Sitters Club books. We look forward to the November release of the latest Bad Guys title, Dawn of the Underlord, Bad Guys #11 and new titles from best-selling authors, including Tui T. Sutherland, Alan Gratz, Kelly Yang and Varian Johnson. Finally, we are excited to welcome debut talent Leah Johnson, who's YA novel, You Should See Me in a Crown, was published in June and is already exceeding expectations. In summary, while the impact of COVID-19 has been significant, for sure, our curtailment actions have helped to mitigate the impact of the pandemic on our business, and we are executing a targeted plan to reduce $100 million in costs in fiscal 2021. Our business is well capitalized, and we have never been more confident in our iconic brands, our strong partnerships with educators and families across the U.S. and around the world and our ability to provide the books that kids need for education and entertainment. Scholastic is about to go back to school for the 100th time since our first publication was launched in October 1920. For all those years, teachers and schools and parents have looked to Scholastic to help them engage children in reading and learning. Facing the difficulties of this year's return to school, Scholastic's help has never been more necessary than it is right now. With that, I'd like to turn the call over to Ken Cleary. -------------------------------------------------------------------------------- Kenneth J. Cleary, Scholastic Corporation - CFO [4] -------------------------------------------------------------------------------- Thank you, Dick, and good afternoon. Revenues in the important fourth quarter fell by $186.7 million or 40% versus the prior year period, with revenues from clubs and fairs declining $151.7 million as a result of the decrease in school-based Book Clubs and Book Fairs events. Fiscal 2020 revenues declined 10% versus last year to $1.49 billion, also driven by decreased revenues from clubs and fairs. School closings also had an adverse impact on our international school channels and education business. As Dick mentioned, we ended the year with strong global trade publishing sales driven by a solid frontlist, including The Ballad of Songbirds and Snakes. Domestic trade sales increased $25 million or 45% in the fourth quarter and $56.5 million or 20% for the full year. This result was significant given that industry-wide book store sales declined as a result of brick-and-mortar store closures in the fourth quarter. Excluding onetime items for both periods, operating loss for the fourth quarter was $39.4 million versus income of $40.1 million in Q4 of last year. For fiscal year 2020, operating loss, excluding onetime items, was $32.3 million versus operating income of $41 million in fiscal 2019. Adjusted EBITDA for the fourth quarter was a loss of $17.3 million, compared to $61.2 million last year, while adjusted EBITDA for fiscal 2020 was $56.6 million compared to $121.3 million in fiscal 2019. These declines are directly attributable to the impact of the coronavirus pandemic. Fourth quarter loss per diluted share was $0.38 compared to earnings of $0.50 in 2019. Excluding onetime items, fourth quarter loss per diluted share was $0.23 in 2020 versus earnings of $0.84 in 2019. Loss per diluted share for the year was $1.27 compared to earnings of $0.43 last year. Excluding onetime items, loss per diluted share for the year was $0.08 versus earnings of $0.92 last year. Turning now to cash. In fiscal 2020, net cash provided by operating activities was $2.1 million compared to $116.4 million in fiscal 2019. Free cash use was $89.1 million in the current fiscal year compared to a free cash use of $12.4 million in fiscal 2019. During the fourth quarter, we accessed our $375 million committed bank credit facility as a precautionary measure. We took a U.S. dollar LIBOR-based advantage for $200 million which was placed in liquid investments and remains unused at this time. We distributed $20.8 million in dividends during the year and bought back $35.5 million of common stock over the fiscal year through March. As a reminder, we put our local market share buyback program on hold in early March. We ended the fiscal year with a strong balance sheet and over $175 million in net cash. Our working capital management and access to liquidity remains strong. Our ongoing cost reduction programs have lowered our vendor payables as of year-end, while we have substantial trade receivables as a result of the strong sales of Ballad. Lower payables and higher trade channel receivables will benefit our cash position in the first half of fiscal 2021. We will have significantly lower inventory purchases in fiscal 2021, as we repurpose inventory previously procured and implement new procurement procedures. We have $175 million available under our existing credit facility in addition to the $393 million of cash and cash equivalents on hand as of year-end. At fiscal year-end, we had ample room under the 2 financial maintenance covenants contained in the credit agreement, notably debt-to-total capital and interest coverage. As a result of the measures we've taken, and our typical seasonality, we are not expecting pressure on our net cash position in the first quarter. We will continue to assess funding needs in the context of evolving information on COVID-19 reopening plans and banking market conditions. Now turning to our segments, where I'll review drivers of our fourth quarter results. Our fiscal year results are detailed in our tables in our SEC filings. In Children's Book Publishing and Distribution, fourth quarter revenue declined 49% to $132 million. Book Clubs revenue fell 59%, while Book Fairs revenue fell 79% versus the comparable periods in the prior fiscal year. On the other hand, trade revenues grew 45% in the fourth quarter versus the prior year period, highlighted by the strong sales of The Ballad of Songbirds and Snakes. Our Klutz line of book plus activity kits, such as Lego Chain Reactions and Lego Gadgets also performed well in the fourth quarter as they provide fun indoor activities to help children practice team skills in a remote learning environment. While brick-and-mortar stores remained closed, sales to online retailers were strong. Fourth quarter operating loss was $46.5 million versus operating income of $18.2 million in the 2019 quarter. In Education, sales in the important fiscal fourth quarter declined 20% to $94.7 million versus the prior year period. Education results were impacted by the over $124,000 pandemic-related public and private school closings in the U.S. However, in the fourth quarter, our teaching resources Jumbo Workbooks and Summer Express series performed well. These programs offer skill building activities for students learning from home. Fourth quarter operating income was $27.3 million versus operating income of $36.9 million in the 2019 quarter. In our International segment, fourth quarter revenues were down 39% to $57.3 million. We had lower sales in clubs and fairs in our major markets, direct-to-consumer selling operations throughout Asia and our Education business in China, all due to actions taken to curtail the spread of the coronavirus in the last 4 months of the fiscal year. In the fourth quarter, International had an operating loss of $9.1 million versus income of $6.8 million in the 2019 quarter, excluding onetime items in both periods. Corporate overhead expense, excluding onetime items, was $11.1 million in the fourth quarter, which declined by 49% as a result of lower technology-related spending and cost savings actions taken in the quarter. Over the fourth quarter, we took the action to safeguard our employees and revised processes and protocols to ensure that we can effectively and safely execute critical business functions during the crisis without adversely impacting productivity. Cross-functional task force is continuing to closely track school reopening plans for the fall on a district by district basis as well as the coronavirus-related disruptions to our supply chain. We have the data analytics and capabilities (inaudible) quickly, enabling us to react to rapidly changing market conditions. We also accelerated our work to transition to a more efficient, flexible model and reduce our cost base in response to lower anticipated revenues. We eliminated all nonessential business costs and deferred spending on certain long-term projects in order to preserve cash in the near term, reduced our inventory purchases and fixed and administrative costs to preserve cash and focused any necessary expenditures on crisis-specific customer needs, such as at-home learning materials and ensuring adequate access to capital. We had to make some tough but necessary staffing decisions including reduced work weeks, furloughs and job eliminations in response to the school and store closings. In fiscal 2021, we initiated a program target to achieve $100 million in cost savings, including both labor and nonlabor costs and process improvements, and are using specially created weakly dashboards and trackers to identify and monitor the realization of savings and the sustainability of those savings. This plan will enable us to function at a higher operating leverage and scale our resources in response to increasing or decreasing revenues. As a result of the COVID-19 sales decline, we recognized approximately $19 million in noncash charges in the fourth quarter. This includes increases in inventory obsolescence reserves, return reserves, and unearned author advances because some author advances did not earn out due to the sales decline. We increased reserves for customer bad debts as some customers rescheduled payments or could not pay us on time. However, our biggest customers are paying us, and we have not had significant issues with collections. Because most employees were unable to travel, we also had higher vacation accruals. In June, just after the fiscal year-end, we sold our underutilized Danbury, Connecticut facility for approximately $13 million. Because we have relatively low maintenance capital expenditure requirements, we can adjust our discretionary capital expenditures as needed based on school and market conditions. We've strong working capital management practices and additional levers to pull to preserve profitability and cash flows as we approach the second quarter depending on how schools are operating. We are closely coordinating our activities with our customers as they plan their openings and can adjust our offering to fit the needs and requirements of each district. With that, I'll hand the call back to Gil for the Q&A session. -------------------------------------------------------------------------------- Gil Dickoff, Scholastic Corporation - Senior VP, Treasurer & Head of IR [5] -------------------------------------------------------------------------------- Thank you, Ken. Joelle, we are now ready to open the lines for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Drew Crum with Stifel. -------------------------------------------------------------------------------- Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [2] -------------------------------------------------------------------------------- So in the press release, I know you're not giving formal guidance at this point, but there's a comment about expectations for fiscal '21 sales to be slightly lower than fiscal '20, offset by the planned cost reductions. Can we assume based on that the adjusted EBITDA that you reported for fiscal '20 at about $57 million should improve in fiscal '21? And what are your expectations for free cash flow? Should it be positive this fiscal year? -------------------------------------------------------------------------------- Richard Robinson, Scholastic Corporation - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Let me answer this and then turn it over to Ken also, Drew. Yes, we believe our sales will be just a little bit lower than sales recorded for the full 2020 year. You remember that we discussed that at our call in March. And we believe that because of the slow return to schools and the adjustments, that the fall will probably be a little less strong, but that we make it up in the second part of the year. We have focused on a cost reduction plan that is really key to our goal of profitability and cash flow for this coming year and are what we believe will be an increase in EBITDA. But I'll let Ken talk about that. -------------------------------------------------------------------------------- Kenneth J. Cleary, Scholastic Corporation - CFO [4] -------------------------------------------------------------------------------- Drew, so I hope you're well, by the way, likewise. So we do have a major cost reduction program in place right now, as Dick mentioned, $100 million. So should revenues end up being, as we thought, slightly lower than last year, then I would expect to see an improvement certainly in EBITDA. I think the more important thought around this is, is that we're capable of reacting to a landscape that seems to be changing fairly regularly if you just watch the news on school openings. So we are really prepared to meet whatever revenues we can get and scale our costs accordingly up or down. And that's really our objective at this point in time. It's as much a continuum in terms of our management practices right now to be able to adapt to what we see on the horizon. So -- yes, if revenues are as we expect, then I would expect an improvement in EBITDA. -------------------------------------------------------------------------------- Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [5] -------------------------------------------------------------------------------- Okay. Any thoughts on free cash flow? -------------------------------------------------------------------------------- Richard Robinson, Scholastic Corporation - Chairman, President & CEO [6] -------------------------------------------------------------------------------- Go ahead, Ken, yes. -------------------------------------------------------------------------------- Kenneth J. Cleary, Scholastic Corporation - CFO [7] -------------------------------------------------------------------------------- Yes. Just -- yes, I don't want to guide too much on free cash flow, but we -- we're -- just based upon our EBITDA and where we know our reductions in cap spending are as well as our working capital management, free cash flow would be better. And it does it cross over into the positive range at this point in time? I'm not ready to go there yet, Drew. I'm not ready -- I don't want to comment. I really don't want to comment. -------------------------------------------------------------------------------- Richard Robinson, Scholastic Corporation - Chairman, President & CEO [8] -------------------------------------------------------------------------------- But Drew, just to follow-up a little bit. I mean it was clear that we're -- with revenue down dramatically in the fourth quarter, that we had to prepare for a reduced revenue picture for the coming year. We immediately set upon looking at all of our costs and reducing those costs. We have a very structured cost management program with trackers, as Ken referred to in his talk. And we're really -- our whole strategy is, revenue is down a little bit, reduce cost by $100 million, and we will turn the company around. We can't predict the revenue with the uncertain school openings this fall. -------------------------------------------------------------------------------- Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [9] -------------------------------------------------------------------------------- Okay. I have another sales-related question. Not looking for specific numbers, but the trade pipeline that you guys discussed looks quite strong. You're going to be lapping a tough comparison, but it looks like you've got a number of new initiatives planned for fiscal '21. How are you thinking about growth for that business in light of some of the bricks-and-mortar store closures or the potential for more store closures during your fiscal period? -------------------------------------------------------------------------------- Richard Robinson, Scholastic Corporation - Chairman, President & CEO [10] -------------------------------------------------------------------------------- Yes. I think the trade has just had a spectacular year, increasing 20% and 45% in the fourth quarter. Of course, the fourth quarter was helped by the Ballad and the wonderful performance of the Suzanne Collins' fourth book in The Hunger Games series. But the whole trade business is strong, Drew. It's -- every category is clicking and working. Dav Pilkey is very, very strong. We have lots of wonderful new authors. We're winning a lot of auctions for new titles. So -- and we've expanded our revenues considerably over the past 24 months, as you undoubtedly know. So we feel that, that businesses moving ahead will continue to grow. It's supported by our entertainment arm, which is producing television and movies, including the upcoming Clifford movie, which was -- we're still thinking will happen sometime this fall, but that is uncertain as is all movie distribution. But the -- what's going on in that business with the integration with the media also is just very, very strong, and we're looking forward to continued strong performance. And the children's area has been growing more than the industry, for sure. Not too worried about all the bookstore closures because we don't think there'll be as many this coming year, for sure. And I believe also that we're obviously offset that with our performance in the fourth quarter with direct-to-the-home sales and excellent mass market sales. -------------------------------------------------------------------------------- Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [11] -------------------------------------------------------------------------------- Okay. I have a couple more specific questions on trade. Can you just comment on your channel inventory for the business? Is there another print run planned for The Hunger Games book in fiscal '21? And as it relates to the J.K. Rowling book, what publishing rights will Scholastic have? -------------------------------------------------------------------------------- Richard Robinson, Scholastic Corporation - Chairman, President & CEO [12] -------------------------------------------------------------------------------- Well, the J.K., the new Ickabog book, we continue to have North American rights to that book. -------------------------------------------------------------------------------- Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [13] -------------------------------------------------------------------------------- Okay. That's print-only, Dick? -------------------------------------------------------------------------------- Richard Robinson, Scholastic Corporation - Chairman, President & CEO [14] -------------------------------------------------------------------------------- Yes, that's print-only, because she continues to retain the -- we'll be offering an e-book version, however, yes. No. As a matter of fact, we do have an e-Book version, which we're selling, yes. -------------------------------------------------------------------------------- Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [15] -------------------------------------------------------------------------------- Okay. And then another -- is there another print run planned for The Hunger Games book? And any commentary on channel inventory as you entered the fiscal year? -------------------------------------------------------------------------------- Richard Robinson, Scholastic Corporation - Chairman, President & CEO [16] -------------------------------------------------------------------------------- Well, we printed a good number, and we sold most of them. So we're not holding on to a lot of inventory, but we -- there's still some out there, and we -- but we're seeing a very, very good sales rate on the title. It's holding up extremely well. -------------------------------------------------------------------------------- Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [17] -------------------------------------------------------------------------------- Okay. All right. And then I guess separately or shifting gears, understanding your cash flow is seasonal and you're typically in a use of cash mode during the fiscal first quarter. Are you anticipating having to access the $200 million advance that you referenced? -------------------------------------------------------------------------------- Richard Robinson, Scholastic Corporation - Chairman, President & CEO [18] -------------------------------------------------------------------------------- Ken, do you want to handle that one? -------------------------------------------------------------------------------- Kenneth J. Cleary, Scholastic Corporation - CFO [19] -------------------------------------------------------------------------------- At this point in time, Drew, no. -------------------------------------------------------------------------------- Andrew Edward Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [20] -------------------------------------------------------------------------------- No. Okay. All right. Very good. Just one last question, just on clubs and fairs. Any impact -- or can you talk about the impact to profitability for those channels operating in this environment versus normal fee, normal operating conditions? And then just any thoughts on revenue per fair for virtual fair versus normal in-person fair? -------------------------------------------------------------------------------- Richard Robinson, Scholastic Corporation - Chairman, President & CEO [21] -------------------------------------------------------------------------------- Yes. The profitability, as we operate under pandemic and the back-to-school issues, there'll be less people participating in fair. That as the parents will -- and the community won't be quite as involved. We're structuring our fair business to accommodate that. We do have on the phone here, Drew, the new President of our fair business, Sasha Quinton. I think I'll ask her to respond to that question also. Sasha, are you there? -------------------------------------------------------------------------------- Sasha Quinton, Scholastic Book Fairs, Inc. - President [22] -------------------------------------------------------------------------------- I'm here. Good afternoon, Drew. So regarding the virtual fairs and the revenue per fair as compared to the physical, we launched this in the spring in a test mode. And we actually saw a pretty significant range in terms of the performance, some even higher than the physical fair and some lower. So -- but generally, they performed lower from a revenue per fair perspective. So we have a number of enhancements in development, and a lot of them are incredibly exciting for the fall season, which we know will offer a much richer, more comprehensive virtual far experiencing for our students and our teachers and parents like. So we do believe that we can see some improvements there. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- (Operator Instructions) I'm not showing any further questions at this time. I would now like to turn the call back over to Richard Robinson for closing remarks. -------------------------------------------------------------------------------- Richard Robinson, Scholastic Corporation - Chairman, President & CEO [24] -------------------------------------------------------------------------------- Well, thank you all for attending our year-end and fourth quarter call. We obviously had a difficult fourth quarter. We're being very flexible going back to school. We're very confident in Scholastic's ability to help teachers and parents and kids in schools, and we're looking forward to doing the best we can with the situation, but our enduring brand will carry us through as it has for 100 years as well as the skill of all the people in the company who have supported us and our customers and schools so well. Thank you for listening, and we will be back to you in September. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.