Dick Robinson - Chairman, President, Chief Executive Officer Ken Cleary - Chief Financial Officer Gil Dickoff - Senior Vice President, Treasurer, Head of Investor Relations

Ladies and gentlemen, thank you for standing by and welcome to the Scholastic Report, Q3 Fiscal 2020 Results Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference call is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Gil Dickoff, Senior Vice President, Treasurer and Head of Investor Relations. Sir, please go ahead.

Thank you very much Valerie, and good afternoon everyone, and thank you all for participating on today’s call. Welcome to Scholastic’s third quarter 2020 earnings call. With me here 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 have not already done so. I would like to point out that certain statements made today will be forward-looking. These forward-looking statements by their nature are uncertain and may differ materially from actual results. 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 a 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.

Good afternoon, everyone and thank you for joining our third quarter call. What a difference 20 days has made, especially in our outlook for the year. As we finished our strong third quarter just three weeks ago, our results showed continued strength in trade and Book Fairs, excellent growth in education, putting us ahead of our adjusted EBITDA targets for the third quarter and the nine months year-to-date. Now, millions of students in many states are at home due to sweeping school closures to help curtail the spread of coronavirus, with their parents and teachers’ doing their best to ensure that learning continues remotely. ‘: Though it is too early to know the magnitude, we will have less revenue in the quarter and therefore we need to withdraw our guidance. While we are finding new sources of revenue as schools turn to us to help them to provide better home learning and we continue to provide services to schools, we have simultaneously focused the company on reducing costs, preserving cash and ensuring the safety of our employees and customers throughout the U.S. and globally. I’ll share with you now a number of ways we are doing so. We are making hard, but necessary decisions to aggressively reduce costs throughout the organization. Our first action weeks ago with the safety of employees as a priority was to cease all non-essential business travel and functions. As the situation has evolved and intensified, we expanded efforts, including increased telecommuting. We also now have a high level rapid response team in place to take action implementing mitigation plans as possible. In this unprecedented moment, we have temporarily closed up to half of our Book Fair branches in the most highly affected areas of the country, as numerous scheduled school Book Fairs have been canceled…

Thank you, Dick and good afternoon. I would like to reiterate Dick’s thoughts in hoping that you and your families are all safe. Today, I will refer to our adjusted results for the third quarter excluding one-time items, unless otherwise indicated. The full scope of the impact of the coronavirus in terms of magnitude, timing and duration with the daily notices of school closings remains to be seen and we are not able to meaningfully project their impact on our important clubs, fairs and education businesses at this time. We have a cross-functional task force setup throughout the company to: one, track both school closings and any disruptions to our supply chain; two, communicate effectively with our staff and customers; and three, seek quickly actionable solutions to mitigate the effects of lower sales and profits on our financial position. These actions include safeguarding our employees, building processes and protocols to ensure that we can effectively execute critical business functions during the current crisis, eliminating all non-essential business costs and delaying certain long-term projects to preserve cash, scaling our operations to meet near-term business needs, including reducing our inventory purchases, reducing fixed and administrative costs again to preserve cash, repointing our assets to meet crisis-specific customer needs such as at-home learning materials, and ensuring adequate access to capital resources. We ended the quarter with almost $265 million of cash-on-hand and unfettered access to a committed $375 million revolving credit facility, which is currently unused. In the current quarter, the company recognized a $40 million non-cash charge for inventory, resulting from lower anticipated inventory requirements in the company’s school channels. In the current fiscal year, the company implemented new systems, processes and centralized management structure to better coordinate our demand planning and procurement activities across the company and to optimize our inventory…

Thank you, Ken, and Valerie, we are now ready to open up the lines for questions.

Thank you. [Operator Instructions] We have a question from Drew Crum of Stifel. Your line is open.

Okay, thanks. Hey guys, good afternoon. First question maybe for Dick, just trying to frame or understand how clubs and fairs performs in fiscal 4Q. Obviously several variables here, it’s a very fluid situation, but is it unreasonable to think it could be comparable to fiscal 1Q from a sales perspective?

Well, as you know, in the fourth quarter – are we speaking about the fourth quarter at this point?

Yeah, just sales for clubs and fairs in fiscal 4Q here, thinking about it relative to fiscal 1Q, which you know clubs and fairs aren’t really open for business.

So I see, no - well, right now schools are closing every day, some are planning to reopen. We’ve scheduled fairs – we’ve rescheduled fairs for later in the year in case the schools reopen. I think it would be – I would think we would still do better in this quarter than we would do in summer in clubs and fairs, but clearly we’re going to be impacted by the school closings across the United States.

Understood, okay and then I was a little surprised that you’re sticking with the release date for Hunger Games. Just kind of walk us through that process and do you have the ability to move that release date if necessary?

Yes, we do, yeah, and our trade group is really on top of this. They’re studying it every day, they are talking to booksellers. We probably have another month before we have to really decide that question, but they’re thinking every day ‘okay, what is going to happen, will the stores be open? What’s going to be the case?’ They are considering various options, but right now, they feel strongly that they want to hold to the date for now, but we do have the option of changing it a little bit later. Sorry, a good question that’s very much on our minds of course.

Okay, and I think as expected, you mentioned some weakness in Asia during fiscal 3Q. It seems that, at least through the press, the conditions are perhaps starting to improve there or at least stabilize. Are you seeing any uptick or any stabilization with your business in Asia?

Yes.

In the fiscal 4Q?

We’re getting right now – right now we are getting sales in there which we did not get from the January 20th to now, so – and we’re seeing people are shifting inventory. I mean some of it was just the fact that nobody was doing anything, right, everybody was confined to their quarters and there was no activity going on. That’s picking up now and we are forecasting some sales in April and May in China and Asia.

Okay, good. Have you guys had to access your credit facility in the fiscal 4Q? I think you guys have a $375 million limit on that facility if I’m not mistaken.

I think it’s $375 million and normally we do access that facility in the summer and we probably will do so again this summer, but as we’ve tried to project for you Drew in this call, we’ve looked forward on the liquidity side and we are confident that we have resources that will bridge us well and through the summer and into early next year or beyond.

Okay, and then kind of on a related note, just in terms of uses of cash, I see the Board authorized another $50 million in share buybacks. Given where the stock is trading at currently, is there an increased appetite to do share repo or are you in more of a capital preservation mode through the…

Yes, we are - our first order of business is preserving capital.

Got it.

We’ve had two previous $50 million authorization in 2015 and 2018. The Board wanted to schedule another one at this time, but the whole point is it’s dry powder in the event that things change and we move from a capital preservation mode we will be able to have that available, but our first order of business is preserving liquidity and focusing on reducing our cash needs in the company, so that we can preserve our liquidity over the longer period.

Okay and then just one last one for me. Just looking ahead to fiscal ‘21, any sense that we could see some type of stimulus package for schools and education similar to what we saw back in 2009 which helped your education business?

Yes, I think there probably will be, I mean I think schools are obviously – only 10% of the funding of schools comes from the federal government. The rest is divided pretty equally between states and local real estate taxes, but there obviously is going to be some disruption in the both state taxes and local taxes, probably sometime in the next 12 months. So I would expect that these bailout packages or the relief packages would focus on that need, because I think people understand that schools are our future, kids need education, they’re not getting it right now and this will become a major focus for our whole society I believe in the next 18 months. So I think your guess on that one, I would second guess you saying yes, there will be some form of stimulus from the federal government to states and local districts.

Okay, best of luck guys.

Thank you so much Drew.

Thanks Drew.

Thank you. I’m showing no further questions at this time. I’d like to turn the conference back over to Mr. Robinson for any closing remarks.

Well, thank you for listening to our third quarter call and of course our focus on the impact of school closings on Scholastic and how we’re overcoming the challenges and mitigating the revenue picture. We’re looking forward to talking with you again in July when we’re at our year-end. Meantime, thank you very much for joining us this afternoon. I trust that you, your colleagues and your families are all safe and well and will stay that way and thank you for the support you’ve shown to Scholastic in these difficult times, but we know that we’re going to prevail and we’ll get our society back together again and overcome this temporary problem. Thank you all, and good day!

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may all disconnect.