Good day and welcome to the Barnes & Noble Education Third Quarter 2017 Earnings Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Mr. Thomas Donohue. Please go ahead, sir.

Thank you. Good morning and welcome to the call. As you have seen, in addition to our third quarter 2017 earnings, today we also announced the acquisition of MBS Textbook Exchange, LLC. On today’s call, we will be referring to presentation that has been posted to our Investor Relations website at bned.com/investor. At the end of the presentation, we will be happy to take your questions. Joining us today are Mike Huseby, our Executive Chairman; Max Roberts, our CEO; Patrick Maloney, our Chief Operating Officer, Barnes & Noble Education and President of Barnes & Noble College; Barry Brover, our CFO; Kanuj Malhotra, our Chief Operating Officer of Digital Education, as well as other members of senior management. Before we begin, I would remind you that the statements we will make on today’s call are covered by our Safe Harbor disclaimer contained in our press release, presentation and public documents. The contents of this call are for the property of Barnes & Noble Education and are not for rebroadcast or used by any other party without prior written consent of Barnes & Noble Education. During this call, we will be making forward-looking statements with predictions, projections and other statements about future events. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any forward-looking statements that maybe made or discussed during this call. We will also be presenting certain non-GAAP measures, including EBITDA from both MBS and the company. Please refer to the information and reconciliation of non-GAAP measures included in the Investor Presentation. At this time, I would like to turn the call over to Mike Huseby.

Thanks, Tom and good morning, everyone. To us, this is a very good morning as we are very pleased to have consummated our acquisition of MBS Textbook Exchange, LLC yesterday. With this combination, we gained substantial operating scale and capabilities that should result in improved outcomes for our customers, shareholders, employees and our other stakeholders. MBS is truly a unique asset that we are very fortunate to be able to acquire. When we became an independent public company in August of 2015, we talked about our plans to grow both organically and through strategic actions. Despite the challenging retail environment, we have grown our total sales steadily through the addition of quality new partner schools. We have also thoroughly examined a variety of strategic acquisitions and other opportunities in order to expand our offering and enhance our platform to growth. We expanded our digital platform with the acquisition of LoudCloud then enhanced our merchandise offering through the acquisition of Promoversity. While both are relatively recent acquisitions, thus far we are very pleased with their performance. With the acquisition of MBS, we are significantly enhancing our competitive positioning. We are expanding our addressable market, broadening our reach and deepening our institutional partnerships. Barnes & Noble Education has worked closely with MBS for over 30 years. As the largest contract operator of virtual bookstores in the higher rent space, MBS’ scale and competency in the virtual world immediately fills one of our highest strategic imperatives. Additionally, MBS is one of our largest sources for used textbooks with supply and now integrated management of which are also crucial to our long-term success. Our close working relationship with MBS over the past three decades gives us the high level of confidence in the competitive effectiveness of our new integrated business model. This complementary acquisition…

Thank you, Mike. Let me begin by saying I share Mike’s and the entire BNED and MBS team’s enthusiasm for this transaction. Combining these industry leaders will enhance our ability to deliver on our mission of providing affordable, complete solutions that empowers students and faculty and drives success in the classroom and beyond. It is clear to me that MBS shares the same passion for this mission. For those of you unfamiliar with MBS, they are the largest contract operator of virtual bookstores and one of the largest used book wholesalers in the U.S. Through its MBS Direct business, MBS serves more than 700 virtual bookstores with a comprehensive e-commerce experience and a broad suite of affordable, new, used and digital course materials. MBS sources and sells new and used textbooks to over 3,700 physical college bookstores, including colleges, 770 campus bookstores and provides inventory management, hardware and point-of-sale software to approximately 485 college bookstores. This acquisition of MBS will enable us, one, to generate more value from the textbook marketplace; two, increase our addressable market for products and services; and, three, expand revenue opportunities for our digital courseware and LoudCloud products. This transaction will also deliver scale benefits and improve cash generation, which will provide flexibility to explore future growth opportunities. In today’s dynamic market, this improves competitive positioning, lowers cost of supply and an improved platform are critical for growth. Now, let me discuss our third quarter. As reported this morning, our total sales for the third quarter increased 0.6% to $521.6 million and comparable store sales declined 4.9%. Our third quarter results reflects the new business we signed in 2016 and ‘17 and the partial results of the Spring Rush, which consistent with last year extended into the fourth quarter. Our results also reflect a continuation of…

Thank you, Max. Please note that the third quarter ended January 28, 2017 consisted of 13 weeks and is presented on a standalone basis. All comparisons will be to the third quarter of fiscal 2016, which is also presented on a standalone basis. Total sales for the quarter were $521.6 million compared with $518.4 million from the prior year. This increase of $3.2 million or 0.6% was driven by an increase in sales from new stores of $34.2 million and partially offset by a decrease in sales from closed stores of $8 million, along with a comparable store sales decrease of $25 million or 4.9% for the quarter. The third quarter includes our spring back-to-school rush sales. We continue to see the students purchasing their textbooks later in the semester, thus extending the rush sales period past the end of the quarter and into February. After factoring in the first three weeks of February that contributed to the Spring Rush, the comp sales decline for the period was 4% and 3.3% for fiscal year-to-date. In addition, during the quarter, sales at comparable community colleges decreased by approximately 8.9% with continued enrollment decreases and funding issues impacting sales. Excluding community colleges, comparable store sales decreased by 3.3% for the quarter. Comparable store textbook sales declined 6.1% or $23.1 million in the quarter compared with a 5.4% decline in the same period last year. Textbook sales were impacted by the delayed rush and the community college trends as well as increased consumer purchases directly from publishers and other online providers. We rolled out our Price Match program to the majority of our campuses and received positive feedback from our customers. For the quarter, our general merchandise sales were $134 million, which includes new stores. General merchandise accounted for approximately 25% of comparable…

Thanks Barry. In summary, the combination of MBS and Barnes & Noble Education will create a true powerhouse in higher education. We will be the leader in the delivery of affordable books and course materials and driving student academic success. Looking ahead, our new business pipeline continues to be very strong, driven by the continuing trend of outsourcing bookstores, a focus on affordability and the evolution towards digital solutions. We also expect general merchandise sales to improve as the general retail environment rebounds. We remain confident in our ability to expand our market share as also we focus on expense management. Our two companies remain intently focused on being a true strategic partner to the colleges and universities we serve. We are uniquely able to provide new products and services to the schools through complete solutions of affordable, accessible textbooks and course materials, including digital content and through our ability to serve as an academic and social hub on campuses nationwide. We will now open up the call for questions. Operator, please provide the instructions for those interested in asking a question.

[Operator Instructions] And we will take our first question, caller please go ahead.

Great, thanks for taking my question guys. This is Alex Fuhrman with Craig-Hallum. Wanted to ask of few just sort of clarifications on the MBS acquisition, it looks like from the slides given some of the debt you are going to be paying down and some closing fees that the total enterprise value of the transaction is $205 million, is there any other debt that’s being acquired on the balance sheet as part of this transaction or any other substantial assets, like inventory, that we should be aware of. And then thinking about the EBITDA that MBS has generated over the last couple of years, I mean is there any reason to think, I know Max you indicated that the business in Europe Union is largely stabilized here, is there any reason to think that MBS wouldn’t be contributing somewhere in that ballpark of $50 million to $60 million of EBITDA, once it’s folded into two [ph] Barnes & Noble?

Great, thanks Alex. This is Barry. I will respond to the first half of your questions. So MBS has seasonal credit lines that were approximately $24 million of borrowings that will be paid as part of the closing process. That was the only debt that they had with seasonal working capital lines that they get into during the year. As you would expect, one of their largest assets is inventory and we will provide as part of their audited financial statements and the pro formas you will be able to see a complete view of their balance – of their historical balance sheets.

With respect to your second half – this is Mike. With respect to the second half of your question on the EBITDA contribution and what you should expect going forward, what we have said is that MBS’ contribution will be accretive to the cash flow, earnings and EBITDA in fiscal ‘18. We have also laid out kind of the level of CapEx they have, which is fairly nominal relative to their revenue and EBITDA base. We also talked about the fact that we had a tax step-up is restructured to the purchase of assets and that we will have some operating synergies. So if you throw those things in as an impact of the transaction in terms of contributing cash flow and some of that’s EBITDA, we are not going to give guidance on their EBITDA number, but the fact that we said we think the business will stabilize should give you that answer.

Great, that’s very helpful. Thank you very much.

And we will move on to our next question, caller please go ahead.

Hi, Vahid Khorsand, BWS Financial. Question on store count, it look like the trend is going down, is that something to expect going into next year as well?

Hi, this is Barry, Vahid. No, the opening of stores is very seasonal in nature. And as we talked about, we have signed contracts, opened two additional stores, expected to open during the fourth quarter, in addition to that we continue to have a strong pipeline of proposals and people that we are talking to. We are confident that the product offering of outsourcing to institutional schools will remain strong as I said in my part of my closing remarks.

Okay. And on the MBS acquisition, what is their employee count and do you expect to retain all of that employees, you can or can’t provide some guidance on what that’s going to look like?

They have currently 1,100 employees. This is Patrick. And we plan to operate them as a standalone subsidiary. So we don’t anticipate any changes there.

Okay. And on the schools side for them, is there any overlap with competition for you on the wholesale side?

No.

Okay. So...

We would – as I said in my remarks, they operate virtual bookstores and hybrid bookstores. This will give us the enhanced ability to go to schools and offer the hybrid solution that we don’t currently have the capability on. We are not competing on. There is not a competition in contract managed bookstores by MBS.

Okay. And all I meant was on the wholesale side, are they providing books to your competition?

Yes.

Yes, they do. And this is as usual, yes.

Okay. And then another question I had with regards to the for-profit schools is that going to be an area that you are going to look to have physical stores in or are you just going to leave it as a standalone and let them run the virtual stores for those schools?

Well, that will be determined by how the institution wants to operate, but as I said for-profits are approximately 5% of total sales. The decision of hybrid versus online solely is really how the institution wants to operate depending on size, scale and their actual existing physical locations.

Okay. And finally on gross margins, will this kind of help pause the decline in gross margin or is that something with more of a price match element something to be more just being more present going forward, I mean?

We are not going to make any guidance on future gross margin, but it provides us scale and opportunities and expansion of, for example, Promoversity into the MBS schools and other opportunities that we will be able to grow our margins over time. But other than the synergies, we are not making a comment as to the ability of acquisition of inventory at this point in time or forecasting it.

Okay, thank you.

[Operator Instructions] And we will take our next question. Caller, please go ahead.

Yes, hi there. It’s Nick Dempsey from Barclays. I have got two questions please. So, you have talked about inventory optimization and procurement savings as benefits of this deal. I wonder if you can drill down a bit there. So specifically I mean, do you expect your increased scale to allow you to negotiate clearly better wholesale prices with textbook publishers? And then secondly, I guess do you expect to be able to make your stock management considerably more efficient in the way perhaps [indiscernible] have done the last couple of years leading to more destocking and less inventory hanging around? And then just final parts, will MBS allow you to expand or change your print rental programs?

We have always been partners with the publishers and deals that have been achieved through MBS and other wholesalers have always been worked out mutually favorable terms. Also this gives us the better – we now have a better ability to manage our inventories as one virtual – eventually one virtual inventory for all of our stores and MBS wholesale and cycle the used books through both companies.

But do you – sorry, do you think you will be able to get a better wholesale price to get back to that question?

We have all – MBS has always worked with the publishers and determined their wholesale price together. So, what the publishers have offered based on their ability of inventory.

Yes, I think to answer the question another way is that we built our business model of which was done the discount capital around devaluation. We are not assuming that. As was said, the synergies that were built into the model were primarily those that were described having to do with procurement, inventory management and that type of thing. So, we are not building in large volume leverage price declines in our wholesale business is another way of answering your question.

Yes, perfect. Thank you.

[Operator Instructions] And we will take our next question. Caller, please go ahead.

Hi. It’s Greg Pendy at Sidoti. Thanks for taking my call. Just from a modeling perspective, can you guys kind of – I mean, should we expect to be thinking about MBS Textbook probably the same type of seasonality that we see in product sales?

Hi, Greg, this is Barry. No, their seasonality is actually different than ours. As you would expect, their largest selling season is a lot prior to our selling season. To give you a sense for this fiscal year, March and April are their lowest sales periods and represent less than 10% of the year. Their largest selling periods are June through August before the traditional college retail selling season and December and January. So, you will see it’s complementary as it feeds into the channel.

Got it. That’s helpful. And then also could you guys just comment, I mean not to lose sight on the stuff you are doing on the digital front. I believe you have piloted about 10 digital courses at select universities. Is there any update on how that’s going, what type of traction you are seeing and kind of what the feedback from some of the universities such as Penn State might be?

Yes. We have had great response, where currently have some adoptions for the fall, but we will make no comment as to the level outside of Kanuj to add any comments and color.

We are in the midst of selling season. We see increased demand for affordable solutions like OER. So, the general trend in demand is being – is more vocal out there, but we are in the midst of the selling season. The pilot piece are largely expected to continue into the fall. So we are pleased thus far, but it’s pretty short remarkably.

Okay, thank you. That’s helpful. Thanks a lot.

[Operator Instructions] And there appear to be no other questions at this time.

Thanks, Adam. Thank you for joining today’s call. As a reminder, our next scheduled financial release will be our fourth quarter full year results which will be on or about July 12. Thank you.