Ladies and gentlemen, thank you for standing by, and welcome to the Scholastic First Quarter Fiscal 2021 Results Conference Call. At this time all participant lines are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference maybe recorded. [Operator Instructions] I'd now like to hand the conference over to your host today, Mr. Gil Dickoff, Senior Vice President, Treasurer and Head of Investor Relations. Please go ahead, sir.

Thank you, Liz, and good afternoon, everyone. Welcome to Scholastic's fiscal 2021 first quarter earnings call. Joining me on the call 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 haven't already done so. I would also like to point out that certain statements made today will be forward-looking. Such forward-looking statements are subject to various risks and uncertainties, including those arising from the continuing impact of COVID-19 on the company's business operations. These forward-looking statements by their nature are uncertain and actual results may differ materially from those currently anticipated. 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 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'd like to turn the call over to Dick Robinson.

Good afternoon, everybody, and thank you for joining our call. As you all know from your own lives or from the news, it is a difficult time for U.S. schools, which are grappling with how best to keep their teachers, students and community safe, while also implementing new ways to schedule an organized learning, carry out rigorous distancing and sanitation methods and supporting families who are navigating this new normal with them. Most schools delayed openings this academic year, and while some have started with fully remote learning models, many others have started in-person sessions or hybrid schedules. During this time of readjustment as teachers are beginning to send in book club orders and schools are just now able to schedule book fairs, we remain intently focused on both managing the effect of COVID-19 on our business, and supporting our school and family customers, as they acclimate to their new environment in three important ways. First, we have substantially completed our $100 million cost reduction program and our transition to a more flexible operating model. Ken Cleary will cover the program in detail, but I'll touch on the key initiatives. We took immediate action in March to reduce costs, while also developing a comprehensive program to mitigate the impact of the pandemic on our operating income and cash flow, to strengthen our businesses and positions Scholastic for growth in the years to come. This program reduced the seasonal operating loss this quarter by $38.1 million, excluding onetime items and meaningfully lowered free cash use in the quarter. In the first quarter, most reductions were related to labor, resulting in a onetime pre-tax severance charge of $12 million. We've streamlined all of our U.S. units, and particularly our club and fair organizations, significantly reducing headcount and improving efficiency. As part of…

Thank you, Dick, and good afternoon, everyone. Today I will refer to our adjusted results for the first quarter, excluding onetime items unless otherwise indicated. First quarter revenue was $215.2 million, a decrease of 7% compared to $232.6 million last year, driven by lower sales in school distribution channels due to delay in school openings. The timing of Dav Pilkey's new Dog Man book, which was released on September 1 of this year and will benefit our second quarter, also affected our year-over-year comparison. Last year's Dog Man, For Whom the Ball Rolls and this year's Dog Man Grime and Punishment both went on sale the Tuesday before Labor Day, which fell in August or Q1 in calendar 2019 in September, or the second quarter in 2020. As Dick said, our trade and education businesses are less impacted by the COVID-related disruptions, with strong trade sales, including audiobook sales, and improve results across their education business for digital products subscriptions, teaching resources, summer literacy camps and summer reading programs, which helped to partially offset the revenue declines in clubs and fairs. Operating loss in the first quarter was $45 million, a $38.1 million or 46% improvement from $83.1 million last year. Adjusted EBITDA was a loss of $15.9 million, compared to a loss of $61 million in the first quarter of 2020, an improvement of $45.1 million. Net loss for the current period was $30.9 million compared to a net loss in the prior year period of $55.4 million. We realized the non-operating gain of $6.6 million in the first quarter from the sale of our underutilized Danbury, Connecticut facility. Loss per diluted share was $0.90, compared to $1.59 last year. Turning now to cash. We traditionally have high free cash use in the first fiscal quarter when schools are…

Thanks so much, Ken. Liz, if you would, we are now ready to open the lines for questions.

[Operator Instructions] We have a question from the line of Drew Crum with Stifel. Your line is now open.

Okay, thanks. Hey, guys, good afternoon. So you've given us a sense as to what the shape of fiscal 2Q should look like for Clubs and Fairs. As we think about the second-half your comment that you should see increasing demand, as you progress through the period. Understanding you're not providing guidance at this point, but directionally should or could Clubs and Fairs grow year-on-year in the second-half?

It's a little too soon for us to really know that in detail, Drew. Obviously, we think about it, and we think about the pace of which schools are coming back to fairs and sponsoring clubs. And given their way they're adjusting to what's going on in schools, it's taking them a little longer to organize themselves to avail themselves of the services, and they are changing the nature of what they order. There's a great interest in the virtual online fairs, as other schools come back and want to sponsor in-person fair. So, we believe that the second quarter will be a difficult one with lower revenues clearly than in the prior year, where we had an excellent second quarter, particularly in fairs. But the second-half of the year, we should see continued momentum in fairs, and of course, then clubs. And at the end of the year, of course, we had the pandemic from last year, which reduced significantly our fourth quarter revenue. So we're sort of a reverse pattern this year, with stronger revenues in the second-half.

Okay. Fair enough. And then with the education business 11% growth in the quarter, and then you mentioned that the digital offerings are gaining some traction. How would you characterize the funding environment as you move into the 2020-21 academic year? And then on a related note, you referenced the sales of Scholastic literacy to the LA Unified School District. What's been the receptivity to that product? And can you comment on what your backlog or pipeline looks for the -- like for this product?

Scholastic literacy is one of the number of different solutions that we offer. It's more of a core instructional program. It's used in certain schools districts very effectively. But it's not broad scale in its use. Most of our revenues are really coming from our normal classroom collections, grab and go gold packs, growing digital sales, classroom magazine sales, and we see quite a positive environment. As schools, try to bridge the gap between school and home, obviously, they're turning to some of our online programs. There's also a need for engagement of kids. So getting them back into school, getting the learning loss, or overcoming the learning loss, having access to a wide number of classroom libraries. There are also programs that help teachers understand where the kids stand with their skill development, such as Literacy Pro, or actually teach foundational literacy in phonics and in grades K2, as a core part of the curriculum, which is Scholastic F.I.R.S.T. So the funding picture is I think rosier than many people predict, because people have their budgets from last year. And then there's the state governments have not yet begun to cut back on the school funding, the way I think they probably will, absent a COVID bill from Congress coming in this year. But this year, I don't believe there will be a material impact from school funding. And conversely, there's going to be a demand for materials as kids try to overcome the learning loss from six months of being out of school and the attendant reading drop that many kids are experiencing, that will also help our club and fair business.

Got it. Okay. And then just shifting gears to the trade business. Can you comment on how this year's Dog Man sales performed relative to last year's new release? And then any way to size Ickabog? How big of an opportunity is this for the trade business? I mean, obviously, from one of the best-known authors in the world, but not really sure how to size the opportunity here?

Yes. Well, just starting with Dog Man. It's doing extremely well and is outpacing the Dog Man from the year before. It was the number one as we said in our notes here, was the number one top selling book adult or children's in the U.S. for several weeks at the beginning of September and in Canada similar. And this week, it became the number one best-selling book in Australia, of all books. So it's got a tremendous response and it shows that the Dog Man franchise is even expanding as it goes into its second and third year. Ickabog, we think will be very strong. A new book by J.K. Rowling also aimed at the sweet spot of age group, really between seven and 12 is going to really be an outstanding offering in November, when it comes out. Helping you size it, we definitely are printing an awful lot of Ickabog all around the world. And we're expecting that it will do extremely well in this end of the second quarter.

Okay. And then maybe one last one for me for Ken. The 71% improvement in free cash flow use, it's about an $84 million swing year-on-year. Can you quantify what came from, or what cost savings contributed to that versus the collections for the Hunger Games book?

Yes. Sure. The Hunger Games book collections, I won't give you an absolute number. But as we published our financial statements, you'll see our receivables are down. Also, in terms of the costs, I won't give you an exact number for what the cost savings were, but you can see we're down north of $40 million in SG&A. And that's where the bulk of it came out of. The other big thing moving through there is inventory purchases, which are $35 million better year-on-year, Drew.

Yes. Okay. All right. Thanks, guys.

Drew. I'd like to just amplify a little bit on your first question. Scholastic Literacy continues to sell well, but most of the demand is in other areas of supplementary material. And we continue to be pleased with Scholastic Literacy, but it's only a part of the component of the growth that we experienced this summer from education.

Okay. I appreciate it. Thanks, guys.

Thank you.

Thanks, Drew.

That concludes today's question-and-answer session. I'd like to turn the call back to Mr. Robinson for closing remarks.

Well, thank you all for your support. We had a strong first quarter from a cost point of view. We're very proud of our cost reduction program and of all the wonderful things we're publishing to meet needs of schools, parents, children and teachers as we go into the second quarter of our 2021 fiscal year. Thanks for your attention. We look forward to talking to you in December.

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