Scholastic Corp (SCHL)
FQ4 2010 (Quarter End 6/30/10) Earnings Call
July 22, 2010 8:30 a.m. ET
Richard Robinson – Chairman of the Board, President and Chief Executive Officer
Maureen O’Connell – Chief Financial Officer, Executive VP, Chief Administrative Officer
Judith Newman – Executive Vice President, President – Book Clubs
Margery Mayer – Executive Vice President, President – Scholastic Education
Ellie Berger – President, Trade Publishing
Deborah Forte – Executive Vice President and President, Scholastic Media
Hugh Roome – Executive Vice President
Jeffrey Matthews – Vice President, Corporate Strategy, Business Development, and Investor Relations
Drew Crum - Stifel Nicolaus
Peter Appert - Piper Jaffray
Barry Lucas – Gabelli & Company
Jim McGarry - Neuberger Berman
Previous Statements by SCHL
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Good day, ladies and gentlemen, and welcome to the Scholastic Q4 2010 earnings conference call. (Operator instructions). As a reminder, today’s conference call is being recorded.
I’d now like to introduce your host for today’s conference, Mr. Jeff Matthews, Vice President of Corporate Strategy, Business Development, and Investor Relations. Please go ahead.
Thanks, Ally, and good morning everyone. 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’d also like to note that this presentation contains certain forward-looking statements which are subject to various risks and uncertainties, including the conditions of the Children’s Books and Educational Materials markets, and acceptance of the company’s products in those markets, and other factors and risks identified from time to time in the company’s filings with the Securities and Exchange Commission. Actual results could differ materially from those anticipated.
Now I’d like to introduce Dick Robinson, the Chairman, CEO, and President of Scholastic to begin our presentation.
Thank you, Jeff. Good morning and thank you everyone for joining us on our Fiscal 2010 year end analyst and investor conference call. For this morning’s prepared comments I’m joined by Maureen O’Connell, CFO and CAO; Judy Newman, President of the Scholastic Book Clubs; and Margie Mayer, President of Scholastic Education. Other members of the executive team will also be available to answer questions at the end of this call.
Today I’m pleased to report hat we exceeded the key three financial goals that we laid out for fiscal 2010 a year ago. We grew adjusted operating income from $75 million to almost $185 million. We achieved a long-stated goal by expanding our adjusted operating margins to 9.6%, and we generated $172 million in free cash flow, well above our goal of $90 million to $120 million, with which we reduced net debt to $9 million and funded a total of $22 million in dividends and stock buybacks.
In addition we achieve key strategic goals in fiscal 2010. We dramatically grew Scholastic Education, reflecting strong execution, new products and adoptions, as well as the significant benefit of federal stimulus funding. We had a strong close to the year in Children’s Books with a 6% sales increase in the quarter, and high profits for the quarter and the year. And finally we tightly managed costs and cash while reducing our cost base. These accomplishments place Scholastic in an excellent position to maintain strong performance in fiscal 2011, as we focus on key digital initiatives in Children’s Books - both ecommerce and e-books - reflecting the fast growing opportunities in these areas while consolidating our dramatic gains in Education.
In fiscal 2010 Scholastic Education - our educational technologies, services, and curriculum division – grew by a record 54% to $270 million. Overall educational publishing segment revenue rose 24%, and operating income rose over 80% to $103 million for the year, excluding one-time, non cash charges. A number of factors supported the expansion of Scholastic Education, which is now firing on all cylinders with a strong team and strategy. First, we executed well, particularly in sales and marketing following significant investments in these functions over the past two years. We also gained especially in the first half of the year from the successful introduction of System 44
, the prequel to Read 180®, and an adoption of both products in California.
Second, stimulus funding accelerated our growth as an unprecedented injection of federal money into local school districts helped offset budget deficits. A significant amount of this funding was channeled through federal Title I and Special Ed programs, which are already important drivers of our sales, further benefiting the business. When this legislation was signed into law in early 2009 we anticipated $100 million in incremental sales over two years. Based on the speed with which school districts spent the stimulus funds and the sales growth we experienced in fiscal 2010, we estimate that we captured about 2/3 of our originally anticipated benefit in fiscal 2010, with the rest to come in fiscal ’11.
Together these factors drove an unprecedented expansion of Scholastic Education’s business in fiscal 2010, resulting in significant gains in the installed base of school districts using Scholastic programs and in the depth of our partnerships with those districts. The business also became much more diversified in terms of the breadth of products contributing significant revenue, and in terms of the mix of products and recurring service revenue.
Scholastic’s Classroom and Library Group - the company’s print and supplemental education division – was up 6% in the Q4, finishing the year approximately flat. This market, particularly the library channel, continues to be impacted by tight state and local budgets, and our experience is it is not seeing the same benefit from stimulus funds which have been mostly used to keep schools open and teachers employed, or to address high priority needs, such as reading intervention. In this environment our strategy has been to build market share while carefully managing costs. We are digitizing many of our products for use on the web and interactive whiteboards where we see good growth opportunities, as well as building new supplementary programs in reading and language arts.