Good day everyone and welcome to the Barnes & Noble Education First Quarter Earnings 2018 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Thomas Donohue. Please go ahead, sir.

Thank you. Good morning and welcome to our first quarter 2018 earnings call. Joining us today are Mike Huseby, Executive Chairman; Patrick Maloney, Chief Operating Officer of Barnes & Noble Education and President of Barnes & Noble College; Barry Brover, CFO; and Kanuj Malhotra, Chief Operating Officer of Digital Education, as well as other members of our senior management team. 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 and public documents. The contents of this call are for the property of Barnes & Noble Education, and are not for rebroadcast or use 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 may be made or discussed during this call. At this time, I'll turn the call over to Mike Huseby.

Thanks Tom and good morning everyone. As we reported this morning, consolidated sales for the first quarter increased 49% to $355.7 million, with BN College or BNC contributing $250 million and MBS contributing $140 million before intercompany eliminations of $34 million. This elimination primarily represents wholesale sales by MBS to BNC. We expect the gross profit of approximately $12 million from those sales to be recognized as BNC sells through the inventory during the fall rush. The competitive wins posted of our College business together with MBS contributing its first full quarter of operating results, Student Brands acquisition and the significant momentum we are gaining with our LoudCloud based digital offerings, are all strong evidence they were -- that we are executing on our stated strategy. We are continuing to develop BNED as a growth platform, both organically and through complementary accretive acquisitions that are significantly increasing the revenue, adjusted EBITDA, and free cash flow of our company. We define free cash flow as our adjusted EBITDA less CapEx, cash taxes, and net interest paid. While we focus on revenue and adjusted EBITDA measures as our key performance measures for reporting and incentive compensation purposes, our decisions are heavily influenced by free cash flow considerations given its importance to our financial and operating flexibility. Maintaining such flexibility is vital to our ability to make and execute strategic and operating decisions that build value in a competitive and changing market we are operating in. When considering companies to acquire and the acquisitions we have made, free cash flow generation ability is one of the main considerations. Both MBS and Student Brands had very favorable adjusted EBITDA to free cash flow conversion ratios. We've used a combination of cash and debt to finance these vital additions to our asset base. With low…

Thank you, Mike. Please note that the first quarter ended on July 29th, 2017, consisted of 13 weeks and is presented on a standalone basis. Full comparisons will be to the first quarter of fiscal 2017, which excludes MBS. Total sales for the quarter were $355.7 million compared with $239.2 million from the prior year. The increase of $116.5 million or 48.7% was primarily driven by revenue increases of $139.8 million from the MBS segment with $10.7 million from the BNC segment for intercompany eliminations of $34 million. Sales at BNC increased by $10.7 million or 4.5% as increases from net new stores and service revenue exceeded the comp store sales decline. Comp store sales decreased by 2.5% compared to a decrease of 2.8% in the prior year period. The improvement in overall comp sales decline rate was due to the improved results of general merchandise sales despite the large decline in comparable textbook sales. Textbook sales for the first quarter declined 8.5% compared to a prior year period decline of 6.8%. The textbook sales in the quarter as a result of school offerings, fewer summer courses, which we do not expect to be indicative of the fall trend. Sales for MBS wholesale in the first quarter, which historically has been wholesale's largest sales quarter were $92.5 million and in line with expectations. Similar to the timing of the sales trends at BNC, we're seeing later sales at MBS wholesale and expect Q2 sales to be a greater percentage of the year as compared to prior years. First quarter sales for MBS Direct, which historically has been a second largest sales quarter was $47.3 million and also in line with our expectations. All this is the large sales month both MBS wholesale and Direct and based upon the sales results…

[Operator Instructions] We'll go first to our first caller.

Hey everyone, this is Mark Rosenkranz, Craig-Hallum.

Hi Mark.

Just want to start -- you mentioned some of the synergies you saw between MBS and BNC during the quarter. I wondered if you could expand a little bit on that, will that be kind of near-term gains that you see just from the overall initial steps of the integration or do you kind of see that as a potential long-term for beyond just this year's enrollment?

Hi, Mark, this is Patrick Maloney. No the synergies that we're realizing are long-term. This is primarily the utilization of the inventory between MBS and Barnes & Noble College. We took underutilized inventory after our needs were met for sourcing over the summer and transferred that inventory over to MBS, who was subsequently able to sell a large amount of that inventory out into the industry to other wholesale customers. In addition, we have been able to start to monetize the student base at MBS with our marketing channel partners and have been able to drive revenue in that stream also, both of those would be reoccurring as time goes on.

The other thing I would say, it's Mike Huseby, is that the monetization of the student base is really just starting. The integration of MBS is coming along nicely, both these management teams have worked together with each other for a long time and under Patrick's leadership and then Dave Henderson at MBS working together so well and so closely. We would expect to have more revenue synergies as we get deeper into the integrated -- integration and as we pick in on new assets like Student Brands for example, and as we start to get more traction as we indicated on our analytics platform and some of our digital offerings and OER. So, the idea here is to take this distribution platform above our market focus on both direct to student and institutions, develop these products, and then spread them to the extent that we can through effective marketing and sales effort, and that really hasn't started in any kind of scale yet Mark.

Okay. Thanks. That's helpful. And then switching gears a little bit, you had a nice a general merchandise on the quarter. Would you attribute some of that performances are you seeing better enrollment trends? Or is that just a kind of some of the improvements in marketing you've discussed in previous quarters? Just wondering your thoughts on the current competitive environment when it comes to general merchandise?

I think, Mark this is Patrick again, I think the 3.3% increase that we posted, which was greater than the increase that we had in the prior quarter for the same quarter last year was attributable basically to a rebounding in the general retail market that existed, but also we had a lot of success and continue to have a lot of success in driving our sales online through our promotional calendar, which was very successful. We had a very strong graduation season with parents coming to campuses and celebrating graduation of their students as well as we have had very strong results from our True Spirit websites, which are geared towards athletic and alumni in particular. So all of those segments we believe contributed to the 3.3% increase in general merchandise sales.

And those True Spirit websites that we mentioned are in 70 schools, which is probably about twice as many as last year.

Yes, yes. And most of our larger campuses Penn State as Mike had mentioned, before University of South Carolina, Georgetown, they’re all gaining a lot of tractions with the alums and the athletic departments.

Okay, that's helpful. Thanks for taking my questions.

We will go to our next caller.

It's Vahid from BWS Financial. First question, if you could talk a little bit about the Target relationship and what kind of revenue contributions you could see from that?

Yes, we can't talk specifically about what our financial arrangements are with Target, what we can say is that we have a number of those types of relationships with other marketing partners and have had although I think that now we have a better larger increased base over which to sell those partnerships into the company. The Target itself mentioned this relationship on their earnings call about a week or so ago, and that should speak to the relative significance of the company that size is singling that out. So, we can't really talk about our confidential arrangements in terms of what we get paid or how that helps us drive traffic to our stores and what that means, but it's a very positive relationship and is one that we enjoy with other companies as well.

Okay. And then, on the MBS side. You had previously disclosed that for MBS Q1, it was about 31% of their sales. And now you're saying Q2 is going to be slightly higher than Q1, is there a percentage number you could provide of your expectations of that?

No. This is Barry Brover. We do know based on the sales to date, the flow of inventory as well as the sales trends, we expect that the Q2 sales that wholesale to be a higher percentage than the previous years. So, there is a little bit of a shift from Q1 to Q2 in the marketplace. But overall, we're seeing for both wholesale and Direct, the overall sales in line with our expectations.

Okay. So, -- just using that math and then, I mean if we are going with expectations. I have now a significant drop in total MBS sales and I don't know if that's what you're seeing right now?

Well, I think based on guidance, that we overall sales guidance that we had put out the range of MBS sales within the guidance assuming BNC flat was in the range of $400 million to $500 million of annual sales for MBS.

And we're not changing that guidance.

And we're not -- we haven't changed that guidance, as we have stated the MBS sales are in line with our expectations.

Okay. And then, just going to same-store sales. I mean the declines, it's been a pretty much a year. So, is it going to be something where we see in Q2 same-store sales are flat compared to last year? Or they is it even a further continue decline that you're experiencing?

No, first of, we're giving guidance on there, we are giving on our annual basis, we disclosed what it is each quarter. And we're not going to project it on a quarterly basis. The other thing I wanted to say is with respect to your target question, if you look in the earnings release sales information in the tables, you will see that there is a, under BNC sales, there is a line service revenue. And there is a footnote there, anyway it describes what that service revenue is, which includes the brand partnerships. You can see that it's up to $1.9 million for the quarter versus $100,000 last year. That doesn't need, we have received cash of $1.9 million, the deals that are entered into, we received payments and earnings in different quarters. But it's just to give you a flavor for the relative significance in the quarter. I just wanted to come back to that one question.

Of the increase.

Yes the increase. Yes.

Okay. Thank you very much.

And we'll proceed to our next caller.

Hi, it's Greg Pendy at Sidoti calling in.

Hey Greg.

Hey guys. Just can you give a little bit, I know you mentioned that there were less courses offered over the summer, which is helpful. But can you kind of tell us how we should be thinking about that playing out? I guess, is that something that's going to be a trend as long as unemployment right now just kind of remains very low, is that something? How does that play into the upcoming quarter? Our students behind on credits right now, do you think there is a catchup. How should we think about that?

Okay. This is Patrick. As Mike prefaced, this is a trend that we've seen over the last few years as schools look to reduce their expenses, their offering, less course offerings over the summer semester. And as Barry said in his comments, we do not think that this is indicative of what we expect for the full semester. But we definitely have seen this over the last three years, whether schools reverse that trend in the future we can't really speak to. But that's just what we had seen in the last few years and our sales declined, I think 8.5% compared to 6.8%. So, not a huge difference, but again, we saw a drop and we measure number of adoptions that we received as well as the number of books that faculty are requesting as well as the number of books that our store managers request the country order. So, again, we don't think that's indicative of the quarter that we're in right now in the fall rush.

Okay. That's helpful. And then -- sorry, if I missed it, but -- can you, and I know it's not a seasonally big quarter, but can you give us any color on kind of what the breakdown is of community colleges where they outsized weakness within that number?

Yes. Overall, our community college sales were down in the quarter more significant decrease then the other categories of stores. Enrollment at the community colleges and obviously as you can imagine, a community college doesn't benefit from the strong sales that we have with graduation, the True Spirit in, all the strong general merchandise and apparel for the programs that we are doing in our State and private schools. The traditional community college does not have that type of attraction.

Okay. That's helpful. Thanks a lot.

[Operator Instructions]

Excuse me, Barry comment in the question, bring up an interesting point, really which is kind of the demographic of college students and how that is really shifted, especially with the economy and community colleges. And I think one of the interesting things about that is, there is a press release we put out on Eastern Gateway today. It talked about additional serving students at the two campus locations they have were also offering online courses to 5,000 union members. As unions look to retool the skill sets within their workforce and that type of thing, this is another -- this is kind of unique deal and then unique opportunity within this deal. And I think in the future for education that we offer to expand outside our footprint, and what we traditionally do into more skills base delivery. I'm sorry, go ahead operator.

[Operator Instructions] We'll proceed to our next caller.

Yes. Hi there, it's Nick Dempsey from Barclays. I've have got two questions. First of all, we've seen several publishers Pearson getting involved in entering the rental markets. I guess they are dipping their toes in for now. But is there potential risk for you overtime and how does that change your relationship with the publishers? And my second question, I understand it's always difficult to speculate about a rough season sitting here at the end of August. I'm just wondering how your setup ahead of that rough season in terms of your thinking and making your textbook from publishers. Are you planning for significant same-store textbook declines in September again, in the way that you have managed your stock going into that period?

Well, I'll speak to Pearson, this is Patrick again. Pearson and rental, it's a very small selection of titles compared to what we offer the breadth of titles for renting our stores, the peer titles are less than 50 titles. We're in a pilot program with Pearson, we have churns that always governed this semester with them. And we'll reevaluate it at the end, if it's a profitable business truck for the [Indiscernible] continue it, but we're not going to be interested in participating and distributing their rental at a non-competitive or non-profitable type of arrangement. So, we'll evaluate as we go forward. We have -- most of our stores have one or two adoptions of these Pearson title. So, we kind of good feel forward after the fall rush. And as far as the question about our stock levels, we really don't have that information right now, it's ongoing right now. We are still getting a lot of adoption. We're in the middle of it and we won't have any of that type of information probably till sometime in October, when we pull all the information back from our stores.

And one thing I would add to that is with the addition of MBS and as Patrick mentioned before, we have better -- as we go forward, we have better visibility into and how we manage inventory, and we're controlling the wholesales as well as the retail buying. And so the process, for example, whereby textbooks are returned from BNC to MBS, et cetera, the efficiencies that we gained in managing are fairly significant.

As well as at the end of Q1 our inventory levels being down as we continue to look to be more efficient in our net purchases optimizing.

So, your inventory levels are down versus the same time last year, can you just explain that comment?

Yes, I think we talked about it. This is Barry Brover, in my comments while overall inventory levels are up, they are primarily up because in the inclusion of MBS. And our inventory levels in our BNC stores are down.

Got it.

We have no further questions in the queue at this time. I'll turn the conference back over to Barnes & Noble Education management for additional or closing remarks.

Thank you for joining us on today's call. Please note that our next scheduled financial release will be fiscal 2018 second quarter earnings on or about December 5th. Have a great day. Thank you.

That does conclude today's conference. Thank you for your participation. You may now disconnect.