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Participants

Jeffrey Mathews; Executive Vice President and Chief Growth Officer; Scholastic Corp

Peter Warwick; President, Chief Executive Officer, Director; Scholastic Corp

Haji Glover; Chief Financial Officer, Executive Vice President; Scholastic Corp

Brendan McCarthy; Analyst; Sidoti & Company

Presentation

Operator

Hello, everyone, and welcome to Scholastic Reports second quarter fiscal year 2025 results. (Operator Instructions) Please be advised that today's conference is being recorded. Now I will pass the call over to the Chief Growth Officer and Executive Vice President, Jeffrey Matthews. Please proceed.

Jeffrey Mathews

Hello, and welcome, everyone to Scholastic's fiscal 2025 second quarter earnings call. Today, on the call, I'm joined by Peter Warwick, our President and Chief Executive Officer; and Haji Glover, our Chief Financial Officer and Executive Vice President.
As usual, we have posted the accompanying investor presentation on our IR website at investor.scholastic.com, which you may download now if you've not already done so. We would like to point out that certain statements made today will be forward-looking. These forward-looking statements, by their nature, are subject to various risks and uncertainties, 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. The reconciliations of those measures to the most directly comparable GAAP measures may be found in the company's earnings release and accompanying financial tables filed this afternoon on a Form 8-K. This earnings release has also been posted to our Investor Relations website.
We encourage you to review the disclaimers in the release and investor presentation and to review the risk factors disclosed in the company's annual and quarterly reports filed with the SEC. So, if you have any questions after today's call, please send them directly to our IR e-mail address, investor_relations@scholastic.com.
Now I'd like to turn the call over to Peter Warwick to begin this afternoon's presentation.

Peter Warwick

Thanks, Jeff, and good afternoon, everyone. Thank you for joining us. In the second quarter, Scholastic Book Fairs and Clubs continue delivering the joint excitement of books and reading to millions of kids. While our global children's publishing and entertainment teams moved ahead with exciting plans for this fiscal year and next.
As we discussed on our earnings call in September, second quarter results came in lower than the prior year, primarily reflecting the timing of this year's publishing plan. During the back-to-school season, we pursued multiple opportunities to drive long-term growth in our core markets and expand beyond them with new models, channels and products, all leveraging Scholastic's trusted brand, iconic IP, global scale and differentiated channels.
We built upon Scholastic's unique capability to give kids access to engaging high-quality books year after year through our school reading events and education businesses. We advanced our strategy as a global children's media and content company through our trade and entertainment division, preparing best-selling books and award-winning media for distribution through our own channels as well as through third-party retailers, sellers, and platforms. To support this growth, we successfully upsized our unsecured revolving credit facility to $400 million last month.
With our strong balance sheet and the history of robust free cash flow conversion, we remain committed to investing in our future while returning excess cash to enhance shareholder returns. We've reaffirmed our fiscal 2025 guidance. This reflects our results in the first half of the year and confidence in the outlook for the second half.
Haji and I will both discuss this further shortly. I'd like to start by discussing our market outlook and how after significant preparations over the past several years, Scholastic is positioned to navigate potential changes in US policy as the administration changes.
First, we're closely monitoring US trade policy, including towards China, Mexico, and Canada. With respect to our outlook for the second half of fiscal 2025, we forecast little exposure as we've already purchased almost all of our inventory needs. We similarly see little impact on our inventory costs in the first half of fiscal 2026, given those purchases will be mostly sitting in our warehouses by early summer.
Scholastic's global scale and highly optimized supply chain has long provided substantial product cost advantages especially for our school channels. The global pandemic four years ago presented an opportunity to diversify our supplier relationships and make sourcing processes more flexible. As a result, today, we're better able to mitigate and hedge against tariff, shipping, out of stock and other risks.
Longer term, we remain confident that our supply chain team can mitigate exposure to potential tariffs just as they navigated the disruptions of the pandemic. Second, with respect to education policy, we're monitoring potential changes in legislation and funding.
The vast majority of educational publisher sales occur at the state and local district level with money from a combination of funding from local, state, and federal sources. Consequently, policy and funding trends at the state and local level are most relevant to students, families, and classrooms and to our business.
Among these trends, we remain focused on school choice and voucher programs which are driving enrollment in charter, parochial and independent schools in many states. New educational savings account programs, which give families funds to pay for tuition, home schooling, enrichment, and remediation activities in a growing number of states, and the shift to science-based approaches to literacy instructions, which we've seen adopted across the country over the past two to three years. All three of these trends may accelerate over the next four years. We don't expect this to materially impact our outlook for fiscal 2025 or in the near term.
But over the longer term, we believe Scholastic is uniquely positioned to meet the growing markets needs created by these trends. and to support families and kids wherever they are. Five ways we are doing this already are as follows: first, we're tapping into new sources of state, corporate and philanthropic funding, all independent of federal funding and policy to provide kids and families access to books and literacy.
Second, we're designing new go-to-market strategies and offerings in our school reading events and Education Solutions divisions to serve charter independent and parochial schools where we have significant growth opportunities.
Third, we're developing new supplemental instructional programs aligned with the science of reading and the growing nationwide consensus on how best to tease literacy.
Fourth, we're testing new direct to family offerings to support parents and kids with reading and learning at home as we explore the larger direct-to-consumer opportunity for our brand and IP. And lastly, we continue to lean into the importance of literacy, something that people and politicians across the country can wholeheartedly agree on, especially in the face of declining reading scores in the US enabling kids to read is something that Scholastic is uniquely known for. Indeed, it lies at the core of our purpose.
With respect to the impact of these potential policy changes and others, we're confident in our ability to operate nimbly and navigate changes that may occur in the future. But we're also proactively taking steps to target cost actions and ensure our investments and resources are aligned with our growth priorities, which Haji will elaborate on further.
With that, I'll turn to the highlights across our business segments. In the Children's Book Publishing and Distribution segment, execution was solid. However, results declined, primarily reflecting year-over-year timing factors in our trade publishing and school reading events divisions.
In the school reading events or SRE, schools booked the largest number of fall fares since the pandemic, and we remain on track to achieve our target of 90,000 shares in fiscal 2025. Looking ahead, the investments we're making in Book fast to grow our fare counts and implement new merchandising and sales initiatives, as I have discussed on prior calls, having a positive impact and should contribute to our performance this year and beyond, including modest growth in fiscal 2025.
Also, within SRE, updated offerings in our school book clubs business drove higher student participation and revenue per sponsor. As the business continues to rebuild a profitable core, we're reengaging loyal customers and revitalizing the strategic channel to teachers and families. Turning to our Trade Publishing division within the Children's Books segment, revenues were down in the second quarter, in line with expectations based on this year's publishing schedule relative to a year ago when we recorded strong sales of multiple new titles from major scholastic authors and franchises.
In quarter two, new Scholastic releases maintained our presence on best seller lists. Top-selling titles last quarter included Christmas at Hogwarts by JK Rowling, which debuted at number one on the New York Times picture book bestseller list and held a spot for seven straight weeks. The Christmas Pig in paperback also by JK Rowling, which debuted at number one on the New York Times paperback bestseller list.
And the final title in our on Blades Bad guy series, The Bad Guys in One Last Thing. New titles in our long-time best-selling global franchises, including the Harry Pot Interactive Edition, a special addition of Harry Potter and the Sorcerer's Stone and the Hunger Games Illustrated Edition, which was a USA today best seller, they also performed strongly.
Earlier this month, as we began our third quarter, Scholastic published the 13 book in Dav Pilkey's global best-selling series, Dog Man, Big Gym Begins, which instantly became the number one best-selling book overall in the US and Canada, beating out every other adult and children's title on sale and the number one best-selling children's book in the UK and Australia.
The global excitement behind big gym begins is a testament to the prodigious creativity of Dav Pilkey, the unmatched editorial marketing, sales, distribution and supply chain expertise of Scholastic employees around the globe and the enduring power of a great story to engage and capture the imagination of kids of all ages.
We're optimistic that the title's incredible popularity will also contribute to backlist sales as new readers discover earlier Dog Man titles and Dave's other series, Cat Kid Comic Club and Captain Underpants. The release of the Dog Man movie in January 2025 supported by extensive media and a worldwide author tour should also support excitement and the virtuous circle from page to screen and back to page.
Looking ahead, we're excited about our spring publishing schedule, which includes the highly anticipated fifth book in Suzanne Collins' worldwide best-selling Hunger Games series, Sunrise on the Reaping. Next March, the title will be released simultaneously in the US, Canada, UK, Australia, and New Zealand.
Turning to the Entertainment segment. Revenue and adjusted EBITDA rose from the strategic acquisition of 9 Story Media Group in June as we continue to make progress on our integration and a promising joint development and production slate of major projects. As we've discussed previously, after the glut of spending on content production from approximately 2020 to 2022, the major streaming platforms and studios pulled back on production budgets and delayed green lights for series, feature films and longer-form content in general.
This has temporarily slowed but not stopped demand for production service work as well as green lights for multiple promising projects on our shared development slate. Nevertheless, last quarter, we were able to go to market with a new Magic School Bus series for preschool, Mighty Explorers, an updated Clifford animated series as well as others. These shows were met with great excitement among broadcasters and streamers.
We also look forward to the second season of the animated kid’s series Eva the Owlet based on the best-selling Scholastic book series, Owl Diaries by Rebecca Elliott, premiering on Apple TV+ next month. The share was produced by Scholastic Entertainment with production services and animation by 9 Story. There's also great enthusiasm externally and in the industry around the second season of our Goosebumps live-action series airing on Disney+ on January 10, 2025.
Based upon R.L. Stine's worldwide best-selling Scholastic book series and co-produced by Scholastic Entertainment, this core Scholastic brand has significant upside for us. We continue to publish new titles in the franchise, including the first Goosebumps Graphix title, The Haunted Mask which debuted earlier this fall.
We're especially proud that earlier this month, Scholastic Entertainment and 9 story received a total of 16 Children's & Family Emmy nominations, including nine nominations for Goosebumps. These nominations bring well-deserved recognition to the high-quality and engaging content that our talented creators and teams create for children everywhere. YouTube continues to grow as the leading platform to reach kids with short-form content.
To meet this demand, we're accelerating our digital first production and development growth opportunities with multiple new projects based on Scholastic IP. We also continue to expand our reach and monetization on YouTube and other advertising-supported platforms, leveraging 9 Stories' distribution capabilities. Last quarter, we added to our content available on digital platforms, including classic Scholastic franchises such as Goosebumps, which is driving increased viewership and revenues.
In summary, we remain very optimistic about Scholastic's long-term opportunity to build and grow beloved children's franchises on page and on screen, supported by our integrated Scholastic Entertainment team, which is nimbly navigating a dynamic entertainment sector. Turning to Education Solutions.
Second quarter sales declined year-over-year. This was in line with the expectations we outlined on our last two earnings calls and reflected lower curriculum and book collection sales. Lower spending on supplemental curriculum products continues to be a headwind for this business. In anticipation of a recovery in supplemental curriculum spending in fiscal 2026, we continue to move forward with the development of updated and new literacy programs that leverage Scholastic's content and align with the shift to the signs of reading.
We're very excited about Explore ELA, a new digital supplemental research-based program for grades six through eight that gives the middle school educators instant access to the highest quality standards aligned content and instructional materials.
With exciting units and more than 1,000 engaging text and multimedia resources, which leverage content from our classroom magazines, Explore ELA develops the knowledge and literacy students need to read grade level and increasingly complex texts. Also in final stages of development, the new Scholastic knowledge library is a small group solution that integrates knowledge acquisition with instruction in essential literacy skills to build strong readers in grades K through five.
The evidence-based program boost for vocabulary and knowledge to enable students to read complex text across disciplines with differentiated instruction for teachers to ensure all students can access grade level tests. Both programs will be in the market for the 2025-26 school year and are expected to contribute to next fiscal year results. We continue to be optimistic about our state and community literacy partner business in the second half of fiscal 2025, driven by expanded participation in state-sponsored programs as our partners continue investing to improve kids' access to books outside of school.
Overall, we remain positive about the opportunity for Scholastic's uniquely differentiated education business. As we move forward with our investments in new products and partnerships, as I just discussed. In the International segment, revenues were in line with prior year. We continue to make progress optimizing the business to drive growth.
Last quarter, we took steps to reorganize and realign our international education portfolio to improve coordination and decision-making across our various growth markets. We've now consolidated our product and marketing teams so we can better leverage our on-the-ground market knowledge and go-to-market capabilities.
We continue to expect modest growth in major markets relative to fiscal 2024. As I laid out at the start of this year, Scholastic is focused on execution and achieving modest growth in fiscal 2025 as we navigate near-term headwinds in some of our markets. At the same time, we're continuing our investments to grow in our core and adjoining markets where favorable trends in Scholastic's brand, IP and channels present compelling opportunities.
The appointment last quarter of Jeff Matthews as our first Chief Growth Officer, is helping to accelerate these cross-company growth initiatives as we prioritized three key areas. First, developing direct-to-consumer offerings and channels that leverage our brand and IP.
Second, expanding our partnerships with public and private funders to increase kids and family’s access to books. And third, creating stories and characters that leverage Scholastic's unique editorial, book distribution and entertainment capabilities to engage more kids and create more valuable global franchises. We're already seeing more momentum in these areas, and I look forward to providing continued updates.
And now I'll turn the call over to Haji to review our fiscal 2025 second quarter results and outlook for the remainder of the year.