Drew Crum - Stifel Nicolaus Peter Appert - Goldman Sachs Catriona Fallon - Citigroup Amy Minella - Cardinal Capital Management

Welcome everyone to the Scholastic quarter four fiscal 2008 earnings conference call. (Operator Instructions). Thank you it is now my pleasure to turn the floor over to your host Jeffrey Matthews, Head of Investor Relations.

Before we begin, I’d like to point out that the slides for this presentation are available for simultaneous viewing by going to our website, scholastic.com, clicking on Investor Relations, and following the links on that page. I would also like to note that this presentation contains certain forward-looking statements which are subject to various risks and uncertainties, including the condition of the children’s book and educational materials market 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. Now I’ll introduce Dick Robinson, the Chairman, CEO, and President of Scholastic to begin our presentation.

Well thank you Jeff. Good morning and thank you everyone for joining us on our fiscal 2008 year-end conference call. I’m joined today by Maureen O'Connell, Chief Administrative Officer and CFO and the President’s of Scholastic club, trade, media and education businesses who will be speaking later. As you know fiscal 2008 was an important turning point for Scholastic, of course we had to insure the successful publication of Harry Porter and the Deathly Hollows which launched just the year ago. This week was a stunning performance, selling 14 million copies efficiently and profitably. We also know that this was the final year of the new Harry Porter release so we took strong actions to attain our goal of 9% to 10% operating margins for fiscal 2010. First we executed our two year $14 million overhead cost production plan. These actions mitigated approximately $15 million in cost increases primarily from postage. Second we excited the unprofitable Direct-to-Home Continuities business, so we can focus on building relationships to the home to our profitable clubs, fares and online businesses. Third we invested across the company in initiatives to drive revenue growth, as I’ll discuss in a moment, and we continue to work on improving our cash and balance sheet. We generated over $188 million in free cash flow exceeding our plan and bringing our cumulative total over the past five years to more than $500 million. This has allowed us to maintain a strong balance sheet and significant liquidity as we repurchased $220 in stock. Additionally this morning we announced the initiation of $0.75 quarterly dividend demonstrating our commitment to returning cash to shareholders. This morning we will focus on what we’re doing to reach our 9% to 10% operating margin goals. First further cost reduction is a key element of our…

For their support of Scholastic Book Clubs, teachers received valuable incentives which they redeemed for books and materials for their class room. By supporting teaching in this way and offering quality, value priced books for 60 years Scholastic Book Clubs has earned tremendous royalty among teachers and parents like few other companies. Based on this solid foundation we are poised for big steps ahead in fiscal 2009. As Dick mentioned, in the upcoming school year we are rolling out new Cool, a completely revamped approach to our online business, and our relationship with teachers, parents and children. As you know, we have been taking orders with our first-generation Cool for seven years, but new Cool is much more than an ordering device. It’s a full grown online marketing system with up to the minute e-commerce functionality and significant additional information about our products. As illustrated on the current slide new Cool also makes it much easier for parents and their children to directly order competitively priced, quality books online and pay for them with the credit card, all the while continuing to benefit the teacher. Teachers have always been the crux of the clubs business and New Cool gives teachers convenient new tools to match children to just the right books for their reading levels and interest. New Cool has functionality also to help parent’s make the best selections and teachers can make customize recommendations to parents based on the child’s individual needs and tie to what she’s teaching in class. As you can see on the next slide new Cool also has compelling new features such as teacher classrooms wish list, whereby a teacher can list books she’d like parents to purchase for the classrooms. A great resource for teachers, and a great direct ways for parents to be…

Thanks Judi. Good morning everyone. Scholastic Trade publishing has earned a reputation as a leader in children’s books, publishing books that are both commercially successful and critically acclaimed. Last year for example, we raised the bar on top of books with Matthew Reinhart’s phenomenally successful Star Wars: A Pop-Up Guide to the Galaxy. It includes intricate paper engineering; battery operated lifesavers, and spent 22-weeks on The New York Times bestseller list. We’ve also published The Invention of Hugo Cabret written and illustrated by Brian Selznick. This 544 page book redefined children’s picture books, winning the very prestigious 2008 Caldecott Medal. It is still in The New York Times bestseller list more than one year after publication. Both books were among our strongest front list revenue drivers for fiscal 2008 and continue to have very strong back-list sales, as we published and introduced exciting new franchises and properties in fiscal 2009. In September, we will publish The Hunger Games by Suzanne Collins, the first in the futuristic trilogy for teens. We’ve done an exhaustive pre-publication launch campaign and in the industry this is now where the most highly anticipated books of the fall. In October, we’ll publish Inkdeath, the anxiously awaited conclusion to Cornillia Funke’s Inkheart trilogy. The two earlier titles in this series spent 60 weeks on The New York Times bestseller and we announced a large initial printing of 350,000 copies for the newest book. The well received Goosebumps Horrorland series just launched in the spring of 2008, is a great example of how we leverage and reinvent Corus Classic franchises. Working with our RL Stein, the author of the original series on a new 12 book arc created an interactive website that accompanies all new Goosebumps book and delivers online games and rich serialized content. We’ve just published…

Thanks Ellie. Good morning I am Deborah Forte, President of Scholastic Media. This year we will build upon our strong track record of creating successful global media franchises which drive books sales and generate incremental production, licensing and merchandising fees by focusing on the 39 Clues and Goosebump’s as our major opportunities. We’re excited about our collaboration with Scholastic Trade Publishing on the web component of the 39 Clues. Our team is energized and focused on developing the creative assets to build the property as a global media franchise for merchandise, interactive and movies. As announced earlier this month, we’re in development on the 39 Clues movie with DreamWorks and Steven Spielberg and have just high to writer to begin scripting the project. Interacted games for the Nintendo DS platform to be followed by the Wii platform are planned for fiscal ’09 and ‘10 respectively. Merchandise will rollout in the fall of ’09. Goosebump’s remains an important priority for us. In September we will unveil our newly designed Goosebump’s website which will provide a home-base for the brand allowing fans an opportunity to interact with all aspects of the franchise. Our Goosebump’s TV series continues to attract audiences. With Cartoon Network this fall we’re planning a Goosebump’s TV marathon featuring new episodes from our library and promoting our books and newly produced Goosebump’s games for the PlayStation II as well as the Nintendo DS and Wii platforms. These games will be released in October just in time for Halloween. In addition to all of this activity we just completed a deal to produce Goosebump’s movie for Sony Picture. Scholastic Media recognizes that children spend a significant amount of time with Screen Media, by aggressively extending our franchises so that they are available online, on television, in games and in movie theaters. We can maximize the value of our intellectual property and ensure that our brands have a strong presence in all segments of the children’s and family market. Now Margery Mayer will discuss Scholastic’s growth opportunity in educational technology.

Thanks Deborah, good morning everyone, as Deborah said I am Margery Mayer, President of Scholastic education. Scholastic’s direct-to-home and educational technology business has been an important source of higher margin growth for the company over the past five year. Our research based products especially READ 180 the countries top reading intervention program and ability to partner with school districts have made us the market leader in technology based instruction. This segment of the education market continues to take a larger shares spending regardless of the economic cycle as dollar are diverted from traditional print materials. The momentum behind the use of technology in schools will continue, fueled by the clerical need to raise achievements. Despite some modest improvement under no child left behind, roughly two out three students stilled do not read at a proficient level. These numbers are magnified in our countries biggest cities, many of which are struggling to graduate even half of their students. The fact is the traditional print programs cannot move the needle at scale and educators largely recognize this. They realize that technology based on research and well implemented is essential for providing students with the individualized learning that meet their needs and engages them. Our focus at Scholastic has been technology that promotes teaching and learning and in Mandarina we are number one with more than $160 million in sales. As the heart of our technology business is READ 180 which has evolved from being a product to a platform for technology based instruction. We are using our strong position with READ 180 to expand our business, through more READ 180 sales to our existing base. Through new products that run on our Proprietary Enterprise Management System and through an enhanced list of service we are offering schools and districts. A great example…

Thank you, Margery and good morning everyone. Fiscal 2008 was a solid year. We made the top half of our guidance with earnings from continuing operations of $2.82 per share. We also significantly exceeded our cash flow guidance, which I will discuss in a moment. Looking first with our segment results; in children’s book publishing and distribution, revenue and profits were up significantly for the year. This primarily reflects tremendous sales of Harry Potter seventh book in the series, mostly in the first quarter. Fourth quarter segment results declined however, primarily due to incremental expenses incurred as a final accounting of the Harry Potter’s series. Overall this was our most profitable Harry Potter launch ever. Very high sell-through, efficient distribution and execution allowed us to achieve incremental margins in the excess of 30%. Of course we obtain such high margins by leveraging Scholastic substantial infrastructure and a unique manufacturing distribution and logistic capabilities. Looking at the rest of our trade business, sales held approximately leveled during the year and we had a number of hits in the New York Times bestsellers, like the Star Wars: Pop-Up book and Hugo Cabret. Turning to School Book sales, revenue and profitability were up last year, driven by modest gains and revenue per fair, which provides the greatest operating leverage and continues to be our growth focus. In Clubs, revenues declined as anticipated as we continued streamlining promotions. Increased spending and the roll-out of new Cool and our marketing test impacted full-year and fourth quarter profits in this business. Turning to the Education Publishing segment, revenues were approximately flat and profits were down to the year in the quarter as we invested in strong sales and service organization and the new product development. However, even as industry-wide supplemental sales declined significantly over last year,…

Well, thanks Maureen and thanks to all of the speakers of this morning. As we have discussed Scholastic is pursuing aggressive cost reduction combined with modest revenue growth and strategic pricing. Our plan for fiscal 2009 is to deliver solid revenue and profit growth excluding Harry Potter in a tight environment. This is a critical step toward attaining 9% to 10% operating margins in fiscal 2010, a goal we remain completely committed to. We look forward to reporting on our progress during the year. I will now moderate a question-and-answer period. In addition to those who spoke on the call we’re joined by Hugh Roome, who can speak to our rapidly growing businesses in Southeast Asia. With that operator let us open the call to questions.

(Operator Instructions) Our first question is coming from Drew Crum with Stifel Nicolaus.

Good morning everyone. I just wanted to get clarification on your revenue guidance for fiscal year ’09 to your educational publishing unit. I think you mentioned in the press release 3% to 5% growth for technology, does that apply for the entire segment?

Thank you, Drew. The 3% to 5% does apply to educational technology. Our print sales are slightly up, but not 3% to 5%.

Okay and Dick maybe just discuss your confidence and your ability to grow that business the next fiscal year just given what appears to be an increasingly more challenging environment and your …

Your education, you mean...

Yes educational publishing. You’re exiting the year with both supplemental technology down. Now understanding that you do have some new products in the pipeline that are coming, but I just want to get some additional color around that?

Well, lets go back to the year ago when we restructured our sales force and redirected our sales operations and split our two sales forces into the educational technology and curriculum on the one hand and supplementary library and classroom and the other. Any change in the sales force organization is going to have some impact on the smoothness of the selling operation in that year and I think we did have a kind of a slow beginning to our the sales force implantation. At this point however, the sales forces are fully engaged in their new missions. Margery has done a traffic job of redirecting and reorganizing some of the sales force right in the last few weeks and they’re just about to have their sales meetings this coming weekend and both of the supplementary class room and library group and Margery’s education technology sales force are very optimistic about the upcoming years. We have good pipelines in both the businesses; we’ve got the coming of system 44, which is highly awaited by our customers, we see a little momentum growing in our non READ 180 business. Some of our programs like Read About which we had for some years are showing real signs of growth as it has our map publishing as Margery mentioned and our feeling about the market is this. In tight time -- I’ll ask Margery to supplement this, because I know it’s a great interest to you Drew and to others. Our feeling is that in tight times people are going to go to those things that have proven results and our educational technology business proven results changes the way those schools operate, changes the way kids improved in team higher reading scores, and our customers know that and their willing to invest money. Some of them are having revenue issues or issues of funding, but we haven’t noticed that they’re stopping their commitment to student achievement and to using the kind of programs that we’re offering. On the supplementary side we held pretty flat this year in a market that decline significantly in other ways. So we feel that if our new sales force is good, we have new products, there’s good pipeline as I mentioned and so we are pretty optimistic about both business in the current educational funding climate. Margery you want to add to that?

No I think you gave a great summary there. I guess just one thing I would add is some of the pressures that are on school funding don’t apply as much to us as they do to some other people that are selling to schools. A lot of our funding comes from federal funds like Special Aid Money and Title One. We are not going to be effected very much by the decline in reading first dollars, we do sell some paper backed books into there but those dollars have largely gone to more traditional kinds of program. So, our goal is to take our sales force, which we think we’ve made some really important strategic changes in how we’re restructured with liner or more agile and go where the money is and as Dick said there is an incredible focus on raising achievement and we just don’t believe that that’s going to dilute, it’s going to continue. Obviously there is a lot of schools that are under pressure on funding, but there is also still 15 million kids going to the school everyday and unfortunately two out of three of them still can’t read well and not to make the kind of choices about their future that we want them to be able to make.

In addition to that Drew the READ 180 is still growing and we are expanding that and we’re rededicating our sales force to expanding READ 180 both where we have strong installations and also in new business and we’re seeing momentum develop in that area.

Thanks for that color. Maybe I can shift gears and just ask about the school-based continuities business. Is your plans operationally for that business, you said you’re shutting it down; is it going to be a sold or you’re just going to wind it down?

It has been shutdown we shut it down during this fourth quarter. So, it has been shutdown, it’s completed.

And then lastly just can you talk about the timing of the $25 million to $35 million cost reduction program. Is it front-end loaded in fiscal year ’09 or is it going to be over the course of the period?

It will be over the course of the year, but we’ve already started taking actions that we have already began renegotiating contracts and as we said we made adjustments in the sales force within education and we’ve already executed against the plan to reduce headcounts in there; so, we’ve already began, but it will occur during the year.

Thank you. Our next question is coming from Peter Appert from Goldman Sachs.

Thanks. Dick a couple of questions, first on the pricing strategy, what’s implied by the $20 million number in terms of percentage increase overall in terms of price points?

Well, we’re referring primarily to our $1 billion children’s book business in the U.S. our average price increase in there is between 3% and 5%. Even if we believe there’ll be some sales follow-up on the higher priced titles we still believe that we can return $20 million profit from those price increases.

And have you done any pricing in fiscal ’08?

Yes, we’ve modestly increased prices in clubs. We did not increase prices in fairs very much.

And just switching to the Cool offering, because if it feels like that, a pretty significant component of strategy to drive the revenue acceleration and the profit margin improvement, obviously over the next couple of years. So, just so I better understand it, do these circulars get eliminated in this process or do they still exist?

They still excite Peter, I’ll let Judy answer that one, but overtime there maybe some reduction of circulars, but that’s going to take while for people to be ordering online directly, but just the chance to see the books come up in color and with your further information that we can give, gives a whole new flavor of experience to online ordering with New Cools. So, Judy do you want to amplify that?

Yes, of course as Dick said the long-term opportunity is for us to trim the number of catalogs that we mail, but initially we do need to send those catalogs out to kind of instigate the order and so we’ve been doing a lot of testing with that particularly in the fourth quarter. The goal would be for Cool to trigger incremental sales, second orders and third orders and of course open up ordering to parents. So that one catalog and that one promotion investment will then really amplifying and deepen and will give us a lot of operating leverage by driving incremental sales. Peter Appert – Goldman Sachs: And can a teacher opt out of the online ordering. Do you have to order online?

No, any classroom can have a combination. It’s a very good question; teachers ask us through our research. Teachers can submit an order that has a Parent Cool order, an online order, a paper order and the phone order all combined and our fulfillment business can support that. Peter Appert – Goldman Sachs: And is your expectation Judy that offering Cool could theoretically cannibalized perhaps sales for the fair and the trade channel and if that were the case would that have negative implications in terms of revenue realization, it’s just given there for price points through the various channels?

We have really no evidence that that’s ever happened. Actually, our books typically rise together. We’ve seen on our big franchises in particular that when a book is selling on one channel it’s really selling well through all channels and I think all of us Ellie and the people down in book fairs and myself, we all say that the day that every child is reading a books, is the day that we’re saturated. so we really don’t see a lot cannibalization, we see a lot of mutual marketing support and we strategically kind of plan that out and we do discount of course but we do it as a great margin. Peter Appert – Goldman Sachs: And then on that point Judy, the as proved to the price increase strategy that Dick was mentioning, any thought of lowering the percentage discounts you’re offering in clubs versus other channels.

Yes we are working on strategic pricing is what we were calling it. So, I would say we’re picking our shots and making our discounts really matter doing it strategically not across the board on every item, but finding really compelling opportunity to do discounting, yes you will see some differentiation.

And then Peter just by the way one of the key profit improvement plans we have is a much more strategic relationship among the pricing in the various channels. We do this somewhat now but we’re making a big effort to improve that and make it more a planned pricing program. Peter Appert – Goldman Sachs: Right and last thing on the call for Judy; any early data to give some crudeness to the theory that order patterns really do improve or order rates do improve as people move to online ordering. Peter Appert – Goldman Sachs: Yes, we have significant testing. I am going back now really almost 18 months. It shows that when teachers and particularly parents order in Cool, we get much higher revenue per order on the parent. Now there’s not a lot of scale on it yet, but in our test market we do see that. Peter Appert – Goldman Sachs: Okay, great thank you and then one other unrelated item, Dick. The international profitability in the fourth quarter, took a hit year-to-year and I know you mentioned this in the past on the calls but it seems noteworthy in the context of the benefit you’re gaining from currency etc; is there anything unusual in the fourth quarter in terms of international profitability? Peter Appert – Goldman Sachs: Well that the export business was primarily where this took place but Hugh Roome is year who operates that business and he can certainly expand on that.

Well Peter, its Hugh Roome. We had a strong quarter overall. We had some weakness where we had in prior year some large sale in the fourth quarter related to educational product to entities in Latin American market; without that this year, the comparison is a bit strong, but we hope that these sales will be completed over the summer.

Thank you. Our next question is coming from Catriona Fallon form Citi.

Can you speak a little bit about the Book Fairs business, its looks like that was an area that actually saw growth year-over-year and I’m wondering was there any change in the seasonality or timing affairs or there are some affairs that were brought forward or back?

We did shift some fairs from case fairs, which are the ones we shipped to the schools in trucks to direct mail fairs, so they are some of the lower revenue fairs we shifted and that seem to have had an impact on our efficiency in delivering our case fairs and help revenue per fair and we also had some merchandising improvements in the fourth quarter. So, we think that that boards well for our next year revenue per fair and we just completed our sales meeting for that group and the General Managers all feel very confident that they can boost revenue per fair next year, which is of course their plan.

Okay and how much was the Golden Compass contribution in the quarter?

Well, in the quarter it would reduce substantially. The Golden Compass was earlier in the year. Maureen do you want to talk about that? It was primarily sales of [Philipoman’s] original novels and the film High-End Books that took place in the second quarter of the year just before Christmas, just before the release of the film in early December and then there were some related licensing and merchandising that came in at that time, so most of that was second quarter. The U.K. did improve its profits ex of Gold Compass this year, but The Golden Compass did help them quite a lot in that quarter. Some of that will not be repeated of course in this year and that’s why we referenced the U.K. as not keeping pace with the other international subsidiaries and profit improvement for ’09.

So, specifically then on the residuals from the movie, where there any residuals from the DVD sales that came through?

Deborah, do you want to answer that one?

We’ll really be seeing that next year, because the rollout is continuing globally of the DVD, so by the time that makes its way back to us we anticipate it will be at the very end of this year or we’ll see it next year.

Okay, and on the education business, I believe it was about a year ago when you talked about the separating of the sales forces and investing in the sales force on the education side for READ 180 and eventually System 44; where we are we at in the size of that sales force now and I guess it seems like the plans there has been reevaluated, maybe the sales force there is being consolidated or shrunk rather than expanded.

Well Margery can answer that. I think but we didn’t make any substantial change in the sales force when we move the education sales force primarily to technology and curriculum and we invested some money in the expanded class room and library sales force; that has worked very well in the class room and library we’ve got an increased sales as result of that. During the year we recognized that we needed to make some improvements in the education technology sales force and Margery will describe what those are and when they happened.

Yes, I mean we really view this coming year as Phase II of our evolution and what we wanted to do last year is we wanted to make sure that we maintained as much stability as we could and changing sales forces is a tricky business and a risky business might be a better way to describe it. So what we’ve done this year is we are streamlining our sales organization. Now what we’ve done is we’ve persevered all of our territories or most of our territories and we’ve maybe combined one or two here or there but we condensed our regions from six to three and we’ve eliminated some of our positions that we felt were not as revenue producing as other positions. At the same time we’re investing our implementation team and our consulting business. So it’s really both savings plan and somewhat a reallocation of resources. We’re going to have some more investment in strategic and high level selling. We’re really aligning our sales force to that kind of business were in which is not just selling products, but talking to districts about their needs, matching their needs with solution products and services, providing services and then being in the district on a regular basis, checking in with them on how its going, helping them understand how to tweak what they’re doing, it’s really put us in a whole different place. Catriona Fallon – Citigroup: Okay and then just kind of one further question; on the guidance, if I’m backing Harry Potter this year and I know that you’ll get some residual Harry Potter next year, but it looks like guidance is looking for about 3.5% to maybe even 8% revenue growth next year and I’m trying to fit that with the fact that we’re seeing some price increases that could have some impact. I know when we saw there were some price increases in the clubs, but in fact some of the clubs were kind of down this year, so I’m just wondering, we’ve seen that price increases don’t necessarily result in revenue increases and I’m wondering how do we get to that kind of growth next year.

We’ll come back to the growth in a second. I think our Club pricing in the current year was -- we did increase some prices in fiscal ’08, we are continuing to have a selective price increase in Clubs in ’09, but as Judy described this is a very strategic pricing plan. The main difference in our Clubs for next year is going to be a very, very strong online component and a revitalized promotion campaign and some different ideas about how we present our product. So, with the combination of online and catalogue selling, we believe that will give some strength to revenue.

Sure, as we mentioned our revenue assumption is at 3% to 5% growth. I think if you do the math on the guidance we gave you regarding the Harry Potter you come in 3% to 8% as you said; however we with our cost saving plans and the initiatives in place we can still achieve the higher end of the guidance with the 3% to 5% growth, which is why guided there and that would represent a 10% to 25% earnings growth. So, what’s a small moderate growth in revenue is a substantial growth in earnings because of the leverage in our businesses and our businesses have substantial fixed cost in terms of marketing promotion and operations and so a small increase in revenue yields are large increase in profitability. As far as the pricing increases, as Dick said we expect about $20 million impact of the pricing against a $1 billion book business and so that does assume certain areas we will increase prices, but not in every area. It will be selective a Judy had said earlier.

Thank you. The next question is coming from Amy Minella with Cardinal Capital Management.

Good morning. Can you give us the dollar amount of the severance that was in the quarter and also the dollar amount of the equity compensation?

In the fourth quarter.?

Yes.

Well just hold on one second for that one.

Yes. I had the $0.11 I have to go find the dollar amount.

Yeah, we have both those numbers.

More detailed than the number itself?

Yes.

It’s primarily related to our education business on the pre-pub spending as well as our media licensing and advertising business, those are the areas that we are investing pre-pub spending and the capital would include our Cool initiatives as well as some aspects of our online initiatives in our 39 Cools initiatives.

And then with the fact that you have two movie deals going on?

No. we do not fund the movie deals, we receive fees related to it, but because we own the property but we do not in anyway fund the movie deals.

Okay, so severance for the full year is about $6 million this year versus $12 million last year and the impact in dollars versus pre-tax dollars of the FAS 123 or the stock comp is $7 million this year and $3.6 last year.

Okay and on the CapEx and pre-pub again would you expect those levels of expenditures to continue into 2010 and 2011?

No, it’s really because of the delay in this year. We delayed about $40 million of anticipated pre-pub spending and CapEx in this year and so when it moved into the year we’re guiding to right now. Generally we would expect our spending to be inline with amortization and depreciation.

Thank you. At this time, there appears to be no further questions. I would like to turn the call back over to Dick Robinson, Chairman and CEO for any closing remarks.

Well, thank you all for your attention, as we tell our story about the ’09 and recap ’08. Obviously we are still working on our deal to sell and exit the home continuity business. We expect that to be completed in the first quarter. The upcoming year which we expect to be in a tight economy is comprised of cost reductions, price increases and modest growth in our core businesses. We are very confident of our plan for ’09 despite the difficult economy and we are very committed to our profit margin improvement and reaching our goal of 9% to 10% in our ‘09 to ‘10 fiscal year. Thank you all for your attention and thank you for your continued support. I hope the shareholders will appreciate the dividend that is coming their way in September. All the best, thank you very much.