Ladies and gentlemen, thank you for standing by, and welcome to the Scholastic First Quarter Fiscal 2021 Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions]

I'd now like to hand the conference over to your host today, Mr. Gil Dickoff, Senior Vice President and Treasurer. Please go ahead, sir.

Gil Dickoff - Investor Relations

Thank you, Liz and good afternoon everyone. Welcome to Scholastic's fiscal 2021 first quarter earnings call. Joining me on the call 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 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 our 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 - Chairman of the Board, President and Chief Executive Officer

Good afternoon, everybody and thank you for joining our call. As you all know from your own lives or from the news, it is a difficult time for U.S. schools, which are grappling with how best to keep their teachers, students and communities safe while also implementing new ways to schedule an organized learning, carry out rigorous distancing and sanitation methods and supporting families who are navigating this new normal with them. Most schools delayed openings this academic year and while some have started with fully remote learning models, many others have started in-person sessions or hybrid schedules. During this time of readjustment as teachers are beginning to send in Book Clubs orders and schools are just now able to schedule Book Fairs, we remain intently focused on both managing the effect of COVID-19 on our business and supporting our school and family customers as they acclimate to their new environment in three important ways.

First, we have substantially completed our $100 million cost reduction program and our transition to more flexible operating model. Ken Cleary will cover the program in detail, but I'll touch on the key initiatives. We took immediate action in March to reduce costs, while also developing a comprehensive program to mitigate the impact of the pandemic on our operating income and cash flow to strengthen our businesses and position Scholastic for growth in the years to come. This program reduced the seasonal operating loss this quarter by $38.1 million, excluding one-time items and meaningfully lowered free cash use in the quarter. In the first quarter, most reductions were related to labor, resulting in a one-time pretax severance charge of $12 million. We have streamlined all of our U.S. units and particularly our Club and Fair organizations significantly reducing head count and improving efficiency.

As part of these cost focus measures, we sold our underutilized Danbury, Connecticut facility and we continue to pursue other cost saving actions in response to the changing circumstances of our school customers. This program is designed to enable us to reach our goals of preserving profitability and positioning ourselves to ramp operations efficiently as demand increases during the year. Longer term, we believe that our efforts will improve Scholastic's operating leverage, streamline financial processes and significantly lower cost base. At the same time, we're positioning the parts of our business that are less sensitive to COVID, trade and education for continued success for the rest of the year and beyond. We're proud of our strong frontlist and portfolio of popular IP and have accelerated our work to deepen our digital connections with our customers.

COVID-19 has fast tracked the digital revolution that was already underway and our blended traditional and digital solutions allows us to meet the customer current needs and anticipate how to best solve the challenges. Third, we are flexing the makeup of our products and services and the timing of delivery to meet customers where they are. Because of our transition to more flexible model, we're able to match our offering and therefore our costs with our best revenue potential. For example, we are now giving parents and schools the choice of shifting Club and Fair orders to homes as well as schools as many have requested. We've already seen a strong response to home shipments from parents ordering from Book Clubs. For schools operating in a tradition in-person manner, we are beginning to schedule in-person fairs for delivery later this fall.

For schools that opt for online fairs, we are enhancing our model to improve revenue per virtual fair with the new animated promotion website directed to virtually - to parent and child customers ordering from home. Teachers and administrators are quickly settling into their new environments and we are beginning to see momentum. Now turning to Q1 performance in more detail, largely as a result of the challenges presented by COVID-19, Scholastic's first quarter revenue of $215.2 million was 7% lower than Q1 of last year. Excluding one-time items, the operating loss in the first quarter was $45 million, a 46% improvement from the prior year's operating loss of $83.1 million, also excluding one-time items due to our aggressive actions to reduce costs and transition to a more flexible and responsive model to meet new needs of schools and classrooms.

In trade, in the first quarter, our strong sales continued with The Ballad of Songbirds and Snakes, which as you know is Hunger Games Number 4 staying strong on bestseller list throughout the summer. The Baby-Sitters Club Graphix, Captain Underpants, The Bad Guys, and Nat Enough series all performed very well You Should See Me in a Crown by best-selling author Leah Johnson, which is the first young adult novel picked by Reese Witherspoon's Book Club. We're also seeing more and more parents turning to our workbooks for early learners. Dav Pilkey's Dog Man: Grime and Punishment, the ninth book in the series launched on September 1 just as we entered the second quarter. This critically acclaimed book remains the number 1 bestselling book overall in the U.S., Australia and Canada over the past several weeks and has topped every bestseller list.

We are thrilled with this performance, which was exceptional in a busy summer publishing season. We are planning also for the important November release of J.K. Rowling's first new children's book in 13 years called The Ickabog along with other exciting new releases. We are also gaining more traction for our entertainment unit based on strong demand for our characters and IP with recent development deals for live-action feature films of Caster, Goosebumps, Animorphs, and The Magic School Bus, famous Scholastic brands. These media deals will help to engage a new generation of fans and also pay off in a backlist boost marketing opportunities in our school channels and international sales lift. Fairs; in turning to Clubs and Fairs what we're seeing this academic year so far as the teachers and administrators are focused on getting their in-person and remote classrooms up and running and helping students and families settle into new routines and this has slowed down Fairs bookings.

We had anticipated a lower fair count this fall due to the delayed openings and we expect the pace of Club and Fair activity to increase towards the end of the second quarter and in the second half of the year. We know the schools are motivated to host fairs which are crucial fundraisers for the schools and give kids the sense of normalcy that they miss and we've converted many physical fairs to a virtual online model and we are working with schools to schedule safe and easy physical fairs that solve for space, time and people limitations. These can be set up by - in hallways or outdoors and are easy to move from one location to another and all fairs offer an online extension. We are also offering drive through options in certain districts, as well as our full fair model with our strict safety precautions in place.

We're seeing interest in our new shippable fair option and we are ready to scale up as schools become ready to schedule physical fairs. As schools across the country implement and adjust their learning models to accommodate local infection rates in their area or school, we can provide solutions that fit each school's individual needs. Similarly, in our Clubs business, we are currently seeing significant engagement from teachers and higher revenue per event. But we are currently lagging in orders from teachers as a result of delayed openings and changes to their classroom environments. However, across the board, we're hearing that teachers, students, and families want books and they want the kind of engaging entertaining books that they can get from us and our clubs. We are bringing costs down by reducing SKUs and encouraging migration to our digital platform while also efficiently distributing re-imagine flyers that are designed to help teacher spark discussion, teach understanding and tolerance and engage young readers.

Teachers appear to be about three weeks behind normal ordering patterns. So we expect that order volume will increase over the next several weeks, but will not catch up fully during the quarter to last year's pace. In our Education business our transition to digital is gaining traction and we expect to pay long-term dividends for our company and we expect digital education programs to be an essential part of classroom instruction long after the pandemic is behind us. We are in a strong position as schools' trusted professional learning partner and our summer programs performed well across the segment as we are able to provide digital print or blended solutions. We are continuing to strengthen our digital platforms as our programs become part of the school curriculum, which are the bedrock of modern education models and digital subscription billing showed promising 15% growth in the first quarter.

As is typical for digital and subscription revenue streams, we're seeing a higher steady volume of smaller transactions for our digital components. Schools look to us to help keep kids engaged and fight against the summer slide with offerings like our take home Grab and Go reading packs, which were ordered by schools for delivery by us to children's homes. We transformed our Scholastic lit camp at home to digital in time for this summer and New York City used it for its summer program for kids. The digital reading programs have resonated right away because we are offering the books kids want to read from authors they love and recognize. We had new engagement for Scholastic F.I.R.S.T. and Literacy Pro, our digital independent reading tool through a district-wide order from LAUSD serving most of the population of kids in schools in Los Angeles.

We are encouraged by the response to and engagement with our innovative and award winning digital literacy programs such as Scholastic F.I.R.S.T. and W.O.R.D. as well as digital companions to our classroom magazines and our recently launched digital-only classroom magazine subscription, which is very popular and has generated new sales for the Education segment. To pair with successful platforms like our Scholastic Learn at Home hub we have launched new initiatives like Scholastic Bookshelf on Instagram, which gives parents and teachers free access to excerpts from over 60 Scholastic stories accessible with a few simple slides [Phonetic]. In our International business, we are seeing similar trends as in the U.S., lower book fair volumes particularly caused by - primarily caused by school closings in Australia, Canada and the UK and lower direct sales in Asia were partially offset by stronger trade publishing globally and strong Book Club performance in Australia.

Profits grew substantially in the quarter for international. Looking ahead, we continue to believe we will improve Scholastic's operating results in the second half of our fiscal year. But because of the continued uncertainty surrounding the impact of COVID, given the delayed school openings and new methods of scheduling and organizing learning, we will not be providing an outlook for fiscal year 2021. As noted, we expect Club and Fair sales to increase towards the end of the second fiscal quarter and to continue to strengthen in the second half of the year. We have not only completed our $100 million cost program but we're taking additional action to lower cost and be more efficient and this will continue to be a key focus of the company.

We are also supporting our revenue streams by submitting our position as a trusted partner to our customers, providing a wide range of bestselling books, best-in-class solutions in the form of flexible school distribution channel solutions and engaging digital education platforms and literacy solutions. This is the essence of our work to nourish and support kids as well as their teachers and parents and schools on their personal learning journeys through the year. As more than 55 million children return to a mixture of in-person hybrid and remote classrooms across the country, learning models and school needs vary from school-to-school and district-to-district. The one thing that has not wavered in this challenging time is our dedication to helping children learn and grow and our ability to deliver value to our school, teacher, parent and child customers. This dedication has driven us every day for the past century and will continue to drive us forward for years to come.

With that, I will turn the call over to Ken Cleary, our Chief Financial Officer.

Kenneth J. Cleary - Chief Financial Officer

Thank you, Dick and good afternoon everyone. Today, I will refer to our adjusted results for the first quarter excluding one-time items unless otherwise indicated. First quarter revenue was $215.2 million, a decrease of 7% compared to $232.6 million last year, driven by lower sales in our school distribution channels due delay in school openings. The timing of Dav Pilkey's new Dog Man book, which was released on September 1 of this year and will benefit our second quarter also affected our year-over-year comparison. Last year's Dog Man: For Whom the Ball Rolls and this year's Dog Man: Grime and Punishment both went on sale the Tuesday before Labor Day, which fell on August or Q1 in calendar 2019 and September or the second quarter in 2020.

As Dick said, our Trade and Education businesses are less impacted by the COVID-related disruptions and with strong trade sales including audio book sales and improved results across our education business for digital product subscriptions, teaching resources, summer literacy camps and summer reading programs, which helped to partially offset the revenue declines in Clubs and Fairs. Operating loss in the first quarter was $45 million, a $38.1 million or 46% improvement from $83.1 million last year. Adjusted EBITDA was a loss of $15.9 million compared to a loss of $61 million in the first quarter of 2020, an improvement of $45.1 million. Net loss for the current period was $30.9 million compared to a net loss in the prior-year period of $55.4 million. We realized a non-operating gain of $6.6 million in the first quarter from the sale of our underutilized Danbury, Connecticut facility. Loss per diluted share was $0.90 compared to $1.59 last year.

Turning now to cash; we traditionally have high free cash use in the first fiscal quarter when schools are closed and we are procuring inventory and making other preparations for the back-to-school selling season. We continue to carefully manage our cash use including executing our labor cost savings program, restricting non-essential spending, reducing inventory purchases to match expected sales volumes and implementing our new procurement model designed to drive more accurate orders, which are placed closer to the timing of customer demand. As a result of our successful cost savings initiatives and cash preservation efforts net cash used in operating activities was $26 million compared to $97.6 million last year. Free cash use was $34.9 million compared to $118.5 million last year. And at the end of the quarter, cash and cash equivalents exceeded total debt by $135.6 million compared to $186.4 million a year ago.

Capital expenditures in the first quarter was $60 million, just slightly higher than depreciation and amortization. We realized net proceeds of $12.3 million from the Danbury facility sale and we distributed $5.1 million in dividends in the first fiscal quarter. Our balance sheet is solid. Our working capital management and access to liquidity remains strong. We have $175 million available under our existing credit facility in addition to the cash and equivalents on hand at quarter end. We will continue to assess funding needs in the context of evolving information on school reopenings and banking market conditions. Turning now to our segment results; in Children's Book Publishing and Distribution first quarter revenues decreased 17% to $90.9 million, primarily in our School, Club and Fair channels as a result of delayed school reopenings and other COVID-related disruptions.

Much of our cost savings initiatives were achieved in operations supporting our school channels. We had excellent trade frontlist sales in Q1 and our Scholastic Early Learners workbooks and BOB Books lines were also very popular with parents looking for materials for their kids learning at home. Segment operating loss improved by $12.5 million compared to last year as a result of the aggressive actions taken to effectively manage labor and operating costs to near-term revenue opportunities and the temporary closure of fair distribution facilities. In Education, segment revenue was $53.6 million, an 11% increase over last year driven by sales of our core instruction programs such as Summer LitCamp and After the Bell and our Grab and Go summer reading packs.

Digital revenues increased significantly driven by successful moves to deepen digital connections and offer schools the digital solutions they need in a remote learning environment. We also had higher volume sales across our Teaching Resources business including our First Little Readers packs and teaching guides, Jumbo and Summer Express activity books and Teachables lesson plans and activity sheets, where we increased our subscriber base by 21% over last year. Segment operating loss was $2.2 million, an $11.2 million improvement over last year's loss of $13.4 million as a result of our strong revenues and effective cost savings measures. In International, first quarter revenues were $70.7 million, down 5% compared to last year as a result of lower Book Fairs volumes in Canada, Australia and the UK due to school closings as well as lower direct sales in Asia.

These declines were partially offset by stronger trade publishing globally and good performance for book clubs in Australia. Many of our international operations in Australia and Asia are beginning to see increased activity as the pandemic has eased in these regions. Operating income of $6.2 million was a $9.9 million improvement over the prior year period due to our cost containment measures largely in labor and operations costs. Our cross-functional COVID taskforce substantially completed work to achieve $100 million in cost savings this year, as you can see from this quarter's results. We took action to streamline and improve procurement and rationalize our inventory purchases. We consolidated our Book Fairs distribution function, made difficult staffing decisions that reduced our workforce including the temporary closure of our distribution facilities and the elimination of redundant functions.

We have focused our Book Fair sales team on activities deemed critical to our customers while de-emphasizing low value add activities. We have streamlined our Book Clubs distribution function to achieve greater efficiencies and lower costs. We have consolidated certain corporate functions and permanently reduced costs as a result. We have halted all travel and entertainment spend and our more recent technology investments are enabling us to work effectively while many of our employees work remotely. We have identified areas of additional cost savings that we will continue to pursue throughout the fiscal year. Our program to reduce costs to mitigate the impact of lower COVID-related sales helped to reduce our selling, general and administrative expenses by $41.5 million in the current quarter compared to the first fiscal quarter last year, excluding one-time items.

A substantial portion of these costs are permanent and will not return as the pandemic eases. The lower overhead expense was primarily due to lower labor expenses and operational savings across multiple cost centers as well as lower technology-related spend in the current quarter. Our labor reductions and restructuring programs resulted in one-time pretax severance charge of $12 million this quarter, including $11 million in overhead. Looking ahead, we're not relenting in our focus on our goals of preserving profitability and maintain liquidity because we know we face a tough second quarter in our school channels while teachers and students adjust to new schedules and therefore slower to sponsor clubs and host fairs as the school year begins.

When teachers and book fair hosts are ready to order, Scholastic will meet their needs including virtual fairs, better digital tools to engage students and parents and more flexible distribution methods such a ship to home options. Our outlook for our trade and education businesses remain positive and we have robust frontlist of best-selling series and authors scheduled for release over the course of the fiscal year and our digital education programs are steadily gaining traction as we are able to provide schools the blended learning solutions they need for students in the classroom and at home. Additionally, we have broadened the usage of our magazines by offering digital only subscriptions for schools that prefer online learning. As administrators teachers, parents and students become more acclimated to operating in their new learning models, teachers and parents will continue to seek books and other educational resources for their children, which will support learning both in school and at home.

We have new offerings to meet the needs of this new environment by virtual fairs, which provide panoramic walk-throughs of our top selling books and collections and connects seamlessly to our online fair point of sale. Additionally, many schools who are resuming traditional in-person learning are asking for the in-person book fair options that they expect from Scholastic and we have a variety of formats to offer them. As more people resume these favorite choices, we expect improved results for the second half of our fiscal year, but we are not providing financial outlook for this fiscal year. As we look ahead, we remain focused, disciplined and driven to reduce costs while we navigate this disruptive period. We're carefully monitoring the data on a daily basis, especially in the crucial second quarter and we continue to leverage this period to reduce our costs in the near term. Longer term, we believe our efforts to streamline processes and implement a more flexible operating platform will improve operating leverage and lower our relative cost base, which will provide long-term benefits to our company and customers.

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

Gil Dickoff - Investor Relations

Thanks so much Ken. Liz, if you would, we are now ready to open the lines for questions.

Question & Answers

Operator

[Operator Instructions] We have a question from the line of Drew Crum with Stifel. Your line is now open.

Drew Crum - Stifel Nicolaus & Company - Analyst

Okay, thanks. Hey guys, good afternoon. So you've given us a sense as to what the shape of fiscal 2Q should look like for clubs and fairs. As we think about the second half your comment that you should see increasing demand as you progress through the period. Understanding you're not providing guidance at this point, but directionally should or could clubs and fairs grow year-on-year in the second half?

Richard Robinson - Chairman of the Board, President and Chief Executive Officer

It's a little too soon for us to really know that in detail Drew. Obviously, we think about it and we think about the pace of which schools are coming back to fairs and sponsoring clubs and given the way they're adjusting to what's going on in schools, it's taking them a little longer to organize themselves to avail themselves of these services and they are changing the nature of what they order, their integrated interest and the virtual online fairs as other schools can come back and want to sponsor in-person fairs. So we believe that the second quarter will be a difficult one with lower revenues clearly than in the prior year, where we had an excellent second quarter particularly in fairs. But the second half of the year, we should see continued momentum in fairs and of course and clubs and at the end of the year of course we had the pandemic from last year, which reduced significantly our fourth quarter revenues. So we see a sort of a reverse pattern this year with stronger revenues in the second half.

Drew Crum - Stifel Nicolaus & Company - Analyst

Okay, okay. Fair enough. And then with the Education business 11% growth in the quarter and then you mentioned that the digital offerings are gaining some traction. How would you characterize the funding environment as you move into the 2020-'21 academic year? And then on a related note you referenced the sales of Scholastic Literacy to the LA Unified School District. What's been the receptivity to that product? And can you comment on what your backlog or pipeline looks like for this product?

Richard Robinson - Chairman of the Board, President and Chief Executive Officer

Scholastic Literacy is one of the number of different solutions that we offer. It's more of a core instructional program. It's used in certain schools, districts very effectively. But it's not broad scale in its use. Most of our revenues are really coming from our normal classroom collections, Grab and Go packs, growing digital sales, classroom magazine sales, and we see quite a positive environment. As schools try to bridge the gap between school and home obviously they're turning to some of our online programs. There is also a need for engagement of kids of getting them back into school, getting the learning loss - overcoming the learning loss, having access to a wide number of classroom libraries but also programs that help teachers understand where the kid stand with their skill development such as Literacy Pro or actually teach foundational literacy and phonics and grades K-2 as a core part of the curriculum, which is Scholastic F.I.R.S.T.

So the funding picture is I think rosier than many people predict because people have their budgets from last year and the state governments have not yet begun to cut back on the school funding the way they - I think they probably will absent a COVID bill from Congress coming in - in this year. But this year, I don't believe there will be a material impact from school funding. And conversely, there is going to be a demand for materials as kids try to overcome their learning loss from six months of being out of school and the attendant reading drop that many kids are experiencing, that will also help our Club and Fair business.

Drew Crum - Stifel Nicolaus & Company - Analyst

Got it, okay. And then just shifting gears to the trade business, can you comment on how this year's Dog Man sales performed relative to last year's new release? And then, any way to size Ickabog - how big of an opportunity is this for the trade business? I mean obviously from one of the best-known authors in the world, but not really sure how to size the opportunity here?

Richard Robinson - Chairman of the Board, President and Chief Executive Officer

Yeah, well, just starting with Dog Man, it's doing extremely well and is outpacing the Dog Man from the year before. It's the number 1 as we said in our notes here it was the number one top-selling book, adult or children in the U.S. for several weeks at the beginning of September and in Canada similar and this week it became the number 1 best-selling book in Australia of all books. So it's got a tremendous response and it shows that the Dog Man franchise is even expanding as it goes into its second and third year. Ickabog we think will be very strong. A new book by J.K. Rowling also aimed at the sweet spot of age group, really between 7 and 12 is going to really be an outstanding offering in November when it comes out. Helping you size it, we definitely are printing an awful lot of Ickabogs all around the world. And we're expecting that it will do extremely well in this end of the second quarter.

Drew Crum - Stifel Nicolaus & Company - Analyst

Okay. And then maybe one last one from me for Ken. The 71% improvement in free cash flow used, it's about $84 million swing year-on-year. Can you quantify what came or what cost savings contributed to that versus the collections for The Hunger Games book?

Kenneth J. Cleary - Chief Financial Officer

Sure, sure. The Hunger Games book collections, I won't give you an absolute number but as we publish our financial statements, you'll see our receivables are down. Also in terms of the costs, I won't give you an exact number for what the cost savings were, but you can see we're down north of $40 million in SG&A, and that's where the bulk of bulk of it came out of. The other big thing moving through there is inventory purchases, which are $35 million better year-on-year Drew.

Drew Crum - Stifel Nicolaus & Company - Analyst

Yeah, okay. Okay, all right, thanks guys.

Richard Robinson - Chairman of the Board, President and Chief Executive Officer

Drew, I'd like to just amplify a little bit on your first question. Scholastic Literacy continues to sell well. But most of the demand is in other areas of supplementary material and we continue to be pleased with Scholastic Literacy. But it's only a part of the component of the growth that we experienced this summer from education.

Drew Crum - Stifel Nicolaus & Company - Analyst

Okay. Appreciate it. Thanks guys.

Richard Robinson - Chairman of the Board, President and Chief Executive Officer

Thank you.

Kenneth J. Cleary - Chief Financial Officer

Thanks Drew.

Operator

And that concludes today's question-and-answer session. I'd like to turn the call back to Mr. Robinson for closing remarks.

Richard Robinson - Chairman of the Board, President and Chief Executive Officer

Well, thank you all for your support. We had a strong first quarter from a cost point of view. We're very proud of our cost reduction program. And of all the wonderful things we're publishing to meet needs of schools, parents and children and teachers as we go into the second quarter of 2021 fiscal year. Thanks for your attention. We look forward to talking to you in December.

Operator

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