1q04 earnings presentation scholastic corporation september 24, 2003
TRANSCRIPT
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1Q04 Earnings PresentationScholastic Corporation
September 24, 2003
Building Value through Leadership inChildren’s Brands and Distribution
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ForwardForward--Looking StatementsLooking Statements
This presentation contains certain forward-looking statements, which are subject to various risks and uncertainties, including the conditions of the children’s book and educational materials markets and acceptance of the Company’s products in those markets, and other risks and factors identified from time to time in the Company’s filings with the Securities and Exchange Commission. Actual results could differ materially from those currently anticipated.
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A Stronger QuarterA Stronger Quarter
44%(44.6)(24.8)Net Loss*
($1.14)
(62.1)
$306.9
1Q03
52%(29.8)Operating Loss*
55%$475.4Revenue
45%
∆
($0.63)
1Q04
EPS*
$M, except per share
Scholastic 1Q04 Consolidated Results
*Includes a pre-tax non-recurring charge of $1.9M relating to a litigation settlement in 1Q03 (after-tax EPS impact of $0.03).
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Quarter HighlightsQuarter Highlights
11M copies of Harry Potter and the Order of the Phoenix sold, boosting Children’s Book revenues and results
20% revenue growth and increased margins in Educational Publishing, despite tough environment
$26M decrease in capital expenditures improved cash flow
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Outlook for Q2 and FY04Outlook for Q2 and FY04
Management focused on Q2 results
– Changes in clubs and fairs to be reflected in largest quarter – early club results encouraging and fair bookings on plan
– Captain Underpants®; Goosebumps® relaunch
– Difficult prior year comparison
On plan for FY04: earnings, cash flow
– Harry Potter sales have met internal estimates; limited additional expected in FY04
– Cost savings begin having effect in Q2
Maintaining earnings guidance range of $1.95 – 2.35 for FY04
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1Q04 Income Analysis1Q04 Income Analysis
–2.0Special severance charge
25.113.9Tax benefit
($1.14)($0.63)Per diluted share
1.9–Litigation & other charges
Other operating costs:
18.320.7Bad debt expense
160.2281.4Cost of sales
178.0188.1Sales, general & administrative
10.613.0Depreciation & amortization
7.68.9Interest expense
(44.6)(24.8)Net loss
(62.1)(29.8)Operating loss
$306.9$475.4Revenue
1Q031Q04$M
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1Q04 Segment Results1Q04 Segment Results
Media, Licensing and Advertising
(4%)1716Revenue
13%(7)(6)Operating loss*
International
6%6265Revenue
(20%)(3)(4)Operating loss*
Educational Publishing
20%88106Revenue
42%1115Operating income*
9%(21)(19)Overhead
Children’s Book Publishing & Distribution
(42)
$140
1Q03
61%
105%
∆
(16)Operating loss*
$288Revenue
1Q04$M
*All segment results reflect previously announced reclassification of operating results associated with Scholastic.com. FY04 segments include pre-tax $2.0M severance charge and FY03 overhead includes pre-tax $1.9M litigation charge.
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1Q04 Cash Flow Analysis1Q04 Cash Flow Analysis
(127.5)(111.4)Free cash flow (cash use)1
(34.6)(8.3)Capital expenditures
(10.4)(17.2)Pre-publication & production costs
(7.2)(6.1)Royalty advances
($75.3)($79.8)Net cash used in operating activities
1Q031Q04$M
1Free cash flow is defined by the Company as net cash provided by operating activities, less spending on PP&E, pre-publication and production costs, and royalty advances.
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FY04 Cost Savings PlanFY04 Cost Savings Plan
On track for $40M in cost savings this year
– $15M from May reduction in force
Savings to benefit Q2 and rest of year
– Reduced product costs in clubs and fairs
FY05 cost savings plan under development
– Focus on margin improvement in core business
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Trade Publishing and Harry PotterTrade Publishing and Harry Potter
Vast majority of FY04 Harry Potter 5 sales occurred in Q1
Booksellers’ inventories of Harry Potter 1 to 5 at end of Q1 to meet much of holiday demand
Q2 trade highlights:
– Second Captain Underpants – first title on best-seller lists
– Relaunch of Goosebumps®
– Lego’s Bionicle
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School Book ClubsSchool Book Clubs
Improved and simplified teacher benefits
– Boosting appeal to new and returning sponsors
Simplified product selection and offer promotion
– Making it easier for parents and their kids
Refined mailing strategy to better target and to drive on-line orders with COOL
Combined Troll and Carnival clubs to reach value segment
Early results consistent with mid to upper single-digit growth target
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School Book FairsSchool Book Fairs
Addressed last year’s availability issues
– Advertised titles in stock, ready for fairs
Sales reps are focused on revenue building
– Targeting higher-revenue schools for 1st and 2nd fairs
Working with fair sponsors to better recruit
– Ensure sufficient volunteers to sell, merchandise
Fair bookings on plan; revenue per fair impact to be seen in Q2
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DirectDirect--toto--HomeHome
Back to Basics Toys acquired from Amazon
– Unique opportunity to add catalog business
– Complementary channel into home
Continuities focused on new means of customer acquisition
– Direct mail, partner upselling, third-party promotions
On plan for announced FY04 target
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Educational PublishingEducational Publishing
Revenues and margins up
– Curriculum and supplemental materials up $19M
– Decline in library publishing due to tough funding
Strategic focus on educators’ #1 need: raising reading scores
– Aligned with key trends, No Child Left Behind
‘Reading solutions’ that build on key Scholastic strengths
– Reading intervention, literacy, teaching technology
– Consultative relationship with educators, service capability
– Children’s book publishing and distribution assets
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Reading SolutionsReading Solutions
Sales of Read 180® reading intervention program up 42%
– Growth in new and existing school customers
Classroom library sales up, on purchases by NYC, LA, etc.
– Custom book selections to promote reading
– Leveraging service, distribution, publishing advantages
Scholastic Early Childhood Program Featuring Clifford adopted by Texas
– Building on education expertise, strong franchise
– Opportunities in multiple states and with private providers
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SummarySummary
Earnings significantly improved in Q1, benefiting from Harry Potter and reading solution sales
Cash flow improved from lower capital expenditures
Q2 results to show changes in clubs and fairs, though difficult prior year comparison
On plan for year with Q1 results, cost and capex reduction progress
Maintaining FY04 target of $1.95 – 2.35 per share
Identifying FY05 opportunities to improve margin in core business