Scholastic Corporation Aktie

Good day, and thank you for standing by. Welcome to the Scholastic Reports Third Quarter Fiscal Year 2026 Results. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Jeffrey Mathews, Executive Vice President, Chief Growth Officer and President, Scholastic Education.

Hello, and welcome, everyone, to Scholastic's Fiscal 2026 Third 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'll 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.

Should you have any questions after today's call, please send them directly to our IR e-mail address, [email protected]. And now I would like to turn the call over to Peter Warwick to begin this afternoon's presentation.

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us. In the third quarter, Scholastic advanced our strategy to support long-term growth and enhance shareholder value. A key milestone was the successful completion of our sale-leaseback transactions involving our New York City headquarters and Jefferson City distribution facility. Last December, this unlocked more than $400 million in net proceeds and represented an important step in optimizing Scholastic's balance sheet.

Consistent with our disciplined approach to capital allocation and our belief that the company's shares represent a highly accretive investment, we moved quickly to return cash to shareholders under an upsized $150 million share repurchase authorization, which we have nearly exhausted. We've already bought back more than 4.4 million shares for approximately $147 million in the open market or $33.30 per share on average with a view towards further optimizing our balance sheet and enhancing shareholder value, today, we're announcing long-term net leverage targets for the company, as Haji will discuss.

As a next step, the Board has authorized a $300 million share repurchase authorization comprising of a $200 million modified Dutch Auction tender offer with the remaining $100 million to be used for repurchases in the open market. The offer price range has been set to $36 to $40 per share. Assuming it's fully subscribed, the tender offer would represent approximately 25% of Scholastic shares outstanding as of quarter end. This is yet another step in the capital allocation strategy we've been executing since fiscal 2022, already returning over $650 million to shareholders through share repurchases and dividends while continuing to invest in initiatives that support long-term growth. Haji will provide additional details later in the call.

Turning to our operating performance. Third quarter results were in line with expectations as we continued executing on initiatives supporting long-term growth and margin expansion. As a reminder, this is typically one of our smaller quarters for revenue and profitability given the seasonality of our business. Based on our performance to date and outlook for the remainder of the year, we're reaffirming our fiscal 2026 adjusted EBITDA and free cash flow guidance. We expect full year revenue to be approximately flat compared to the prior year, reflecting year-to-date softness in Education and very strong comps in Trade a year ago.

Let me now turn to our segment performance, beginning with Children's Book Publishing and Distribution. Last quarter, Children's Book Group combined powerful publishing and beloved franchises with unique school-based distribution channels. Through Book Fairs, Trade publishing and our proprietary school network, all working together, we reach children and families and connect them with stories in ways no other company can replicate. Book Fairs once again demonstrated the strength of Scholastic's unique school-based channels. Fair counts continue to grow year-to-date, and we're benefiting from higher revenue per fair, strategic merchandising and pricing initiatives, lower cancellations and greater adoption of e-wallet. That's a digital payment account that allows families to preload funds for students to spend at the fair, increasing participation and simplifying transactions.

We've also experienced strong redemption of Scholastic Dollars, the reward currency schools receive for hosting book fairs. The key innovation this year is the launch of Discovery Fairs, the first new format we've introduced in more than a decade. These fairs feature curated collections that focus on science, technology, engineering, arts and math alongside hands-on science and art kits designed to bring discovery-based reading and learning into the fair experience. Early pilots have already shown robust demand.

Building on the partnership we announced last quarter with YouTube sensation, Mark Rober, which reaches more than 70 million subscribers, we're beginning to bring his highly popular science and engineering brand, CrunchLabs, to students through Scholastic's publishing and school channels, including new books, activity guides and clubs branded products. As we look ahead, Book Fairs remain one of Scholastic's most powerful channels to reach children and families and represent a meaningful long-term growth opportunity for the company.

In Book Clubs, our other school-based channel, results continue to reflect evolving classroom and teacher engagement patterns. The program is expected to reach nearly 300,000 teacher sponsors nationwide this year, providing Scholastic with a direct connection to classrooms across the country. We saw sequential improvement from the fall as recent program improvements, including updated flyers, improved digital ordering and targeted promotions strengthened teacher engagement and participation.

In Trade Publishing, Scholastic's publishing portfolio and global franchises continued to resonate strongly with kids around the world. Third quarter results were solid, though down relative to the prior year, reflecting shifts in the publishing calendar compared to a year ago, along with the impact of adverse winter weather and other short-term factors on the retail book market. Following the successful launch of Dav Pilkey's Dog Man: Big Jim Believes in quarter 2, momentum across Pilkey's publishing universe remains strong. The latest title in the series held the #1 children's title for 7 consecutive weeks and was the #1 overall title across the industry in both November and December, while backlist titles also continued to perform strongly on bestseller lists.

Looking ahead at quarter 4, Pilkey's universe expands into the fast-growing category of children's Manga with Captain Underpants: The First Epic Manga publishing in April. The Hunger Games franchise continued to generate strong global demand with the latest title in the series, Sunrise on the Reaping. This book has now sold approximately 5.4 million copies and remained on bestseller lists since its release last March, including 50 consecutive weeks on the young adult bestseller list and currently ranking #3 nearly a year after its initial release. More recent special editions as well as the award-winning audio book have helped sustain momentum across the series. We expect continued Hunger Games momentum from paperback and movie tie-in editions ahead of the Lionsgate film adaptation of Sunrise on the Reaping this fall.

Our Wings of Fire series also continued to engage readers globally with the recent release of the Graphic Novel edition of Talons of Power, which debuted at #1 overall in December and currently holds the #3 position on the New York Times Graphic Books and Manga Best Seller list. Furthermore, in the first week of the new quarter, we published Wings of Fire #16, The Hybrid Prince, the highly anticipated new installment in the series and the first in several years. The book debuted as the #1 title overall across both children's and adult categories, already captivating avid fans and new readers of this thrilling Dragon series around the world.

Turning now to Scholastic Entertainment. In the third quarter, this division continued expanding the reach of our IP across digital platforms and new audiences. We advanced our pipeline of media development and production as we begin work on major new projects expected to be announced in the coming months. Greenlight activity also is improving and with it, the strength of our development slate, supported by our in-house production and animation capabilities. We grew viewership and reach across our digital platforms, particularly YouTube and ScholasticTV as families continue discovering Scholastic stories and characters in new ways.

Our Scholastic branded YouTube channels generated more than 85 million views in the quarter, up over 200% year-over-year, with audiences spending over 21 million hours watching our content. On YouTube last quarter, we expanded our network of Scholastic branded channels with 2 new curated hubs, Scholastic STEAM and Scholastic International, surfacing our content to a larger global audience.

At the same time, our Scholastic branded set-top TV app continued to scale as a trusted destination for families seeking high-quality children's programming in an increasingly crowded digital media landscape. The platform now offers more than 800 episodes across Scholastic properties and is available across major streaming ecosystems, including Roku, Apple TV, Fire TV and Android platforms. Since launching this fall, the app has already generated nearly 100 million minutes watched and more than 5 million views with engagement averaging about 30,000 views per day.

Growing audiences across our digital platforms create new opportunities to extend our stories and characters across books, digital platforms, television and consumer products. One example of this is our Clifford the Big Red Dog franchise, where increased engagement across digital platforms and media is helping introduce the character to a new generation of kids and reinforcing demand for the books. Book sales across all Clifford titles have grown meaningfully this financial year compared to the prior year.

Turning now to Scholastic Education, where we're making meaningful progress executing our strategy to transform the business for growth. Revenues were down 2%, representing a significant deceleration of the declines we saw in the first and second quarters of the year. Importantly, profitability improved year-over-year. In January, we appointed Jeff Mathews as the permanent President of the division after stepping in to lead this division on an interim basis last June. Jeff also continues in his role as Chief Growth Officer. Under his leadership over the last 9 months, the team has refined the go-to-market strategy and streamlined the product portfolio to align more closely with district and school needs.

We've also taken significant steps to sharpen our focus on the areas where Scholastic is best positioned to help children achieve their full potential through literacy, partnering with districts, schools, teachers, families and communities while improving the cost structure and operating discipline of the segment. District and school spending on supplemental curriculum and resources, including our instructional programs, classroom libraries, literacy resources and professional services remains tight given continued funding uncertainty and the ongoing transition of the U.S. education system to science-based approaches to literacy instruction.

As seen in last quarter's results, more effective and efficient go-to-market execution and stronger product alignment with the science of reading are having a positive impact. We continue to close the gap with the prior year as we stabilize this portion of the business and position ourselves for growth in a recovering market. It's important to remember, however, that as a product category, supplemental curriculum and resources represented only approximately 25% of Scholastic Education's revenues last year. Unlike most educational publishers that primarily compete in the instructional space, Scholastic Education also has significant business lines dedicated to serving teachers, families and community partners, building on the power of our trusted brand.

Our solutions give children access to engaging books and magazines and enable their development as readers while empowering teachers and families through evidence-based tools and support. Funding here is significantly more diverse than for instructional sales, spanning district and school budgets, state and philanthropic grants and teacher and parent purchases. It's not surprising this portion of the division is less volatile and has consistently outperformed relative to the school and district focused segment. In fact, teacher, family and community-focused sales here have grown significantly relative to pre-pandemic levels.

With modest investment in our nonschool channels and in our existing product offering, this segment of our business represents a significant growth opportunity in the years ahead. Looking ahead, we believe Education is well positioned to continue stabilizing performance in fiscal 2026 with a goal of returning to growth in fiscal 2027.

Turning now to our International segment. Our major markets continue to benefit from the strength of Scholastic's global publishing franchises in quarter 3, even as year-over-year comparisons reflected the timing of this year's publishing compared to last fiscal. During the quarter, we saw strong contributions from markets, including Australia and the United Kingdom, where we continue to benefit from operational improvements across the business. Demand for English language learning materials continues to expand globally, representing a long-term opportunity as schools and families increasingly seek high-quality literacy materials. Looking ahead, we remain focused on growth and margin improvement in our international operations.

In summary, our third quarter results reflect progress executing the strategy we put in place to strengthen Scholastic's operating performance and create long-term value. The actions we're announcing today, including leverage targets and the new share repurchase authorization, including the tender offer, reflect our continued commitment to disciplined balance sheet management and shareholder value creation while investing to drive sustainable growth.

So with that, I'll turn the call over to Haji.

Thank you, Peter, and good afternoon, everyone. As usual, I'll refer to our adjusted results for the third quarter, excluding onetime items, unless otherwise indicated. Please refer to the tables in today's earnings press release and SEC filings for a complete discussion on onetime items.

As Peter discussed earlier, during the quarter, we completed the sale-leaseback transactions related to our New York City headquarters and the Jefferson City distribution facilities. This generated over $400 million in net proceeds to be used in line with our capital allocation priorities. As noted last quarter, these highly accretive transactions will reduce adjusted EBITDA by approximately $14 million on a partial year basis in fiscal 2026, primarily reflecting incremental lease expense and the elimination of rental income previously recognized on these assets. Please see last quarter's earnings presentation for a reconciliation of the estimated partial year and pro forma full year P&L impact of the sale-leaseback transactions.

Let me begin with our consolidated financial results. In the third quarter, revenues were $329.1 million compared to $335.4 million in the prior year period. Adjusted operating loss was $24.3 million compared to $20.9 million in the prior year period. Adjusted EBITDA was approximately breakeven compared to $6 million in the prior year period, primarily reflecting the partial year impact of the sale-leaseback transactions, offset by higher gross profits in Children's Book Group, reflecting company-wide cost discipline.

Excluding the sale-leaseback transaction partial quarter impact of $3 million on an adjusted operating loss and $6.7 million on an adjusted EBITDA, adjusted operating loss was $21.3 million and adjusted EBITDA was $6.7 million, approximately in line with prior year. Net loss was $3.5 million compared to a net loss of $1.3 million in the prior year period. On a per diluted share basis, adjusted loss increased to $0.15 compared to a loss of $0.05 last year.

Turning to our segment results. In the Children's Book Publishing and Distribution, revenues for the third quarter decreased 3% to $197.6 million, reflecting timing of major publishing releases compared to the prior year, partly offset by continued strength in Book Fairs. Segment adjusted operating profit improved to $8.9 million from $7.6 million in the prior year period, reflecting the benefit of higher Book Fair revenues and continued cost discipline. Book Fairs revenue increased 2% to $113.3 million in the quarter, primarily driven by higher revenue per fair. We expect higher fair count and revenue per fair to contribute to revenue growth in our Book Fairs business this fiscal year. Book Club revenues were $14.6 million in the quarter, relatively flat compared to $15.2 million a year ago, reflecting lower teacher participation at the start of the school year, partly offset by recent program improvements that have increased participation sequentially from the fall period as teacher sponsor counts stabilize. We anticipate these trends continuing into the remainder of the year.

In our Trade Publishing division, revenues were $69.7 million in the third quarter compared to $77.4 million in the prior year, a decrease of 10%. These results reflect the timing of this year's publishing calendar compared to the prior year when the third quarter benefited from a major Dog Man release. Looking ahead, we remain optimistic about sustained momentum across our major global franchises. Given the timing of this year's publishing plan, coupled with short-term disruption on retail purchasing patterns, including the impact from severe winter weather, we expect trade to be slightly below the prior year on a full year basis.

Turning to our Entertainment segment. Revenues increased by $3.2 million to $16 million compared to $12.8 million in the prior year, primarily driven by increased episodic deliveries and higher production services revenues. We remain positioned for growth in the fourth quarter and into fiscal 2027, reflecting recent greenlight momentum and revenue recognition typical for media development and production. Segment adjusted operating loss was $2.5 million compared to $2.4 million a year ago.

Turning to our Education segment. Revenues were $56.1 million in the third quarter compared to $57.2 million a year ago, a decrease of 2%, reflecting lower spending on supplemental curriculum products as schools and district spending continues to experience near-term funding uncertainty. We have seen moderating declines throughout the fiscal year as the transformation of this business begins to take hold. Segment adjusted operating loss improved to $5.2 million compared to a loss of $6.9 million in the prior year period, reflecting a lower cost structure, improved operating discipline and the benefits of reorganization initiatives implemented over the last several quarters. Ahead of what we expect will be a gradual market recovery, we expect profitability in the fourth quarter ahead of growth in fiscal 2027.

Turning to our International segment. Revenues were $58.7 million in the third quarter compared to $59.3 million a year ago. Excluding the $3.5 million year-over-year impact of favorable foreign currency exchange, segment revenues declined $4.1 million, primarily driven by the publication timing of Dog Man compared to the prior year. Segment adjusted operating loss was $4.7 million compared to $2 million in the prior year period, reflecting lower revenues. We continue to expect modest declines in revenues and profitability in this segment following strong trade performance in fiscal 2025.

Unallocated overhead costs increased by $3.6 million to $20.8 million in the third quarter, primarily reflecting $3 million of higher rent expense and lower rental income previously recognized on the New York City headquarters property, all related to the sale-leaseback transactions.

Now turning to cash flow and the balance sheet. In the quarter, net cash used by operating activities was $30.5 million compared to $12 million in the prior year period, primarily driven by higher tax payments related to the sale-leaseback transactions, partially offset by lower royalty payments. Free cash flow in the third quarter was $407 million compared to free cash use of $30.7 million in the prior year period, reflecting approximately $400 million in net proceeds from the sale-leaseback transactions completed during the quarter. The company fully repaid the outstanding balance on its unsecured revolving credit facility and ended the quarter with net cash of $90.6 million compared to net debt of $136.6 million at the end of fiscal 2025. As a result, interest expense in the quarter was significantly lower year-over-year.

As part of our broader capital allocation strategy, we are establishing long-term net leverage target of 2 to 2.5x adjusted EBITDA for the company. We believe this target range effectively balances balance sheet strength and our ability to continue investing in long-term growth opportunities on the one hand with the balance sheet efficiency and our ability to enhance shareholder returns on the other hand. I want to emphasize that this is a long-term target. As we move toward these leverage levels over time, we've already taken near-term steps to accelerate capital returns to shareholders, supported by the significant liquidity unlocked in December.

We have already returned approximately $147 million to shareholders through open market share repurchases, representing the repurchase of more than 4.4 million shares since completing the sale-leaseback transactions in December. In the third quarter, the company also distributed $5.1 million through its regular dividend. As announced earlier today, the Board has authorized a new $300 million share repurchase authorization, comprising of a $200 million modified Dutch Auction tender offer at $36 to $40 per share, with the remainder available for open market repurchases. This is another disciplined step to return excess cash to shareholders. We expect the tender offer to commence on Monday, March 23, 2026, and to remain open until Monday, April 20, subject to customary conditions.

This transaction is expected to be funded through a combination of available cash on hand and borrowings under our credit facility. Following the completion of the tender offer, we expect to maintain substantial liquidity to pursue our capital allocation priorities. Full details regarding the tender offer will be included in the tender offer statement to be filed with the SEC. With these actions in place, the company has taken measured steps to return excess capital to shareholders while maintaining a strong balance sheet and supporting long-term growth initiatives.

Now for our outlook. In the fourth quarter, we continue to anticipate revenue growth in our school reading events and Entertainment divisions, partly offset by lower year-over-year revenues in our Trade and International divisions, reflecting strong prior year comparisons when the publishing schedule benefited from the major hunger game release in the fourth quarter of fiscal 2025. We expect fiscal 2026 revenue to be approximately in line with prior year, reflecting strength in book fairs, offset by year-to-date softness in Education and strong prior year comps in Trade, as I just discussed.

On a full year basis, we have reaffirmed our outlook for fiscal 2026 adjusted EBITDA of $146 million to $156 million, which includes a partial year impact of approximately $14 million from the sale-leaseback transactions. As typical for our seasonal business, we expect a return to profitability in the fourth quarter following the seasonal operating loss in the third quarter. We remain focused on driving favorable operating margins as we continue to benefit from our lower cost structure. We have also reaffirmed our fiscal 2026 free cash flow outlook to exceed $430 million, reflecting the proceeds from the sale of our real estate assets as well as operating cash flow in excess of our CapEx and prepub needs.

As for the impact of tariffs, we continue to expect approximately $10 million of incremental tariff expense in our cost of product this fiscal year. We are closely following changes in policy and we'll provide additional details as needed once greater clarity emerges. Thank you for your time today.

I'll now turn the call back to Peter for his final remarks.

Thank you, Haji. In conclusion, we're pleased with our team's progress during the quarter to advance our strategic plan and execute another step in our capital allocation strategy, including quickly and efficiently returning excess cash to shareholders. As we look to quarter 4 and beyond, we continue to benefit from the strength of our global franchises, trusted brand and unique school-based channels while expanding the reach of our stories and characters to audiences. At the same time, we'll continue to reposition our education business for growth.

I'd like to thank our employees, authors, illustrators and creators for their dedication and hard work as well as our shareholders for their continued support. Thank you very much.

Let me now turn the call over to Jeff.

Thank you, Peter. With that, we will open the call for questions. Operator?

[Operator Instructions] And our first question comes from Brendan McCarthy with Sidoti & Company.

Just wanted to start off looking at the rest of the fiscal year and specifically the fourth quarter. Just achieving the flat revenue target for the full fiscal year, it looks like it implies roughly 2% growth in the fourth fiscal quarter compared to the prior year period. Just wanted to walk through some of the different factors at play there. I know that will exclude about $3 million in rental income in the quarter and also a challenging comparison in trade channel sales from the Hunger Games release in the fourth quarter of fiscal 2025. Just curious as to your confidence in achieving that 2% growth target for the quarter.

Brendan, it's Peter here. I think Book Fairs are the major factor that we see in the fourth quarter in terms of revenue growth. It's a big quarter for Book Fairs, and we've been doing very well. And all the initial indications that we've got so far are positive. So that's one of the key factors. We also, of course, have to take into account, as you mentioned, the trade timing issue that we do have to deal. So trade is not going to -- trade won't exceed the revenues that we got in the fourth quarter last year because of the big success of Sunrise on the Reaping.

The other factor is really in Education because we've been progressively closing the gap in Education against prior year. And we're anticipating that, that reduction that we have been seeing will be much less of an impact in the fourth quarter. And it's a big quarter for education. And it's been encouraging to see that in that segment that we've been doing progressively better each quarter. We actually performed on the bottom line better in the third quarter than we did in the same third quarter last year. And so we're anticipating that all the work that Jeff and everybody has been doing in education will begin to yield some results in the fourth quarter. So that's why we're feeling that we can be there or thereabouts on our revenues in for the year.

Understood. I appreciate the detail there. And in the Education Solutions business, I think it is great to see the magnitude of top line declines has been improving. It looks like in each quarter of this fiscal year. Can you talk about the sales pipeline in -- or for the fourth quarter as it relates to the different products being Summer Reading packages, supplemental materials and maybe the state or the state-sponsored programs as well?

Well, the -- I mean, in terms of the actual sales pipeline, we're obviously expecting to do well with Summer Reading because this is the quarter when a lot of that happens. And one of the great things that we've seen with our sales pipeline is that it's been improving each quarter. Quarter 2 is better than 1, 3 better than 2 and 4 looking better than 3. So we're -- that's where we expect to -- it's the Summer Reading. We're also expecting to do well with the knowledge library and with the book packs that we've been putting together that support signs of reading. And we've also got the usual -- for the fourth quarter, we've got good stuff in line for the books to home through the programs that we do with the various states.

Understood. And a similar question on the adjusted EBITDA guidance. It looks like you'll need about $80 million in adjusted EBITDA in Q4 to hit the guidance range for the full fiscal year. Again, I know there's an impact from the sale-leaseback transaction, $14 million for the full second half of the fiscal year. Any other factors there that give you confidence that you'll hit the guidance range?

Brendan, this is Haji. Yes. As we've noted in the script today, we definitely are seeing some favorability from our cost mitigation actions as we've been taking throughout the year. So that's why we feel very confident in the fourth quarter. And plus, as you know from watching us over the years, the fourth quarter is our second biggest performing quarter, and it's just a little bit more profitable because of all the cost actions that we've made throughout the year. So that's really why we're very confident about the fourth quarter from a profitability standpoint.

That's great. And looking at the Entertainment segment, it looks like solid revenue growth there year-over-year in the third fiscal quarter. Are you really starting to see the pickup in greenlighting activity flow through to preproduction and ultimately, the revenue?

Yes, we are. I mean we've had a number of, as it were, green lights, as we say, that have happened in the third quarter. We've just had a fairly significant one as it were green lit at the beginning of this week, sort of post closing for the third quarter. And that is -- that's looking good. I mean -- well, it's looking better than it was, put it that way. I think that we've seen the bottom of that sort of that entertainment market. We've talked to 1 or 2 other companies who are involved in entertainment. They're seeing pretty much the same sort of thing.

So I think we've turned -- that entertainment has turned the corner. It's not going to grow -- I mean, it's going to be a steady growth, but I think that the growth that we see now in that marketplace will sustain the revenues and activities and bottom line that we've baked into our fourth quarter and also set us up well for our financial year 2027.

That's great. And from an operating income perspective there in the Entertainment segment, are you looking for positive operating income in Q4? Or will that flow through in fiscal '27 maybe?

This is me again. We should see a little bit of profitability in the fourth quarter from them from an EBITDA basis.

Our next question comes from Drew Crum with B. Riley Securities.

Peter, just on the Book Fairs business, maybe to start, a few weeks into the current quarter, it sounds like you're pretty encouraged by what you're seeing, how the business is tracking. Any specific KPIs you can point to behind the confidence in the outlook?

Well, we've been -- I mean, we can -- first of all, the number of fairs, which is up. So that's good. Also, the revenue per fair is looking in line or better with what we were anticipating. And we've also been -- we've also had less cancellations than prior year. So those are all -- those are really the big 3 actually in terms of performance. So we're feeling good about that. And thankfully, this year, we -- any bad weather was during the time when there weren't very many Book Fairs. So compared to some other years, that's been a factor, but we've not really had that in our fairs this year. So things are looking promising.

Got it. Okay. And then maybe for Jeff or Haji, you guys narrowed the revenue guidance range for the year. It looks like, I don't know, $15 million to $25 million downgrade to the top end. Our interpretation is this is specific to the Education segment. Was it a shortfall in fiscal 3Q relative to your internal model? Is the business not tracking to your previous plan for fiscal 4Q? Or is it a combination of both factors? I thought you guys did a pretty nice job of narrowing the year-on-year decline. So that's the first part of the question. And then did I hear correctly that you expect that business to grow top line in fiscal '27?

Drew, it's Jeff Mathews here. Great question. So on the adjustment in the top line outlook, I want to be clear that we addressed -- we mentioned year-to-date Education results. The change in outlook was really more related to some of the dynamics we saw last quarter in trade. I'll let Haji talk about that. The -- we haven't -- as far as the fiscal '27 outlook for education, of course, we haven't provided guidance for next year. Our goal very much from the beginning has been to return this business to growth. We know that's its opportunity, and it's the mandate we have, the team and I have.

The -- we'll provide more outlook on that. But clearly, we're encouraged by the sequential improvements in the business. The cost savings that we've taken and restructuring very strategically have given us the runway to make some investment in the growth that we'll need to do for next year.

Haji, do you want to take the first part on guidance?

Yes. Yes. So on the trade business, as we mentioned before, we had a very strong fourth quarter with the Sunrise on the Reaping that came out. So we're dealing with that. But at the end of the day, we see other groups like Entertainment performing well in the fourth quarter. So that's why we are expecting some good news. And then you take the impact of the sale leaseback, if you back that out from an adjustment basis, I think that's about $6 million on the top line as well. The other organizations in terms of like Peter had mentioned earlier, we definitely see some strong performance in the CBG group, mainly fairs and I guess, a leveling off in the clubs business within that group.

Got it. Okay. And then maybe, Haji, one last one for you. I'm not sure you're going to answer this, but I'll try. The language you used for the 2 to 2.5x net leverage target being "longer term," how soon could we see the business reach that threshold?

Well, like I said before, we're definitely not going to jump in and go right up to day 2 or 2.5 on day 1. Right now, as you know, we were in a net cash position. But once we go into the tender, if we fully execute the tender, that would only put us right around a little bit under 1 on a net leverage turn. So we feel very comfortable with that number. Like I said, this is a very historical moment for Scholastic by just setting out targets in general. So I'm confident in our future and just making sure we continue to manage our balance sheet effectively.

One point I do want to mention just on that. We'll be seeing some working capital draw as well on our debt because the summary, as you know, we don't have a lot of revenue coming in because of our seasonality. So we would have to draw on that. So that would increase the leverage, but that's seasonal.

And this concludes our question-and-answer session. I will pass the call back to Peter Warwick for any closing remarks.

Well, thank you very much, and thank you to all of you for joining our call today. We appreciate your support. We'll continue to execute on our strategy to strengthen Scholastic's operating performance and create long-term value as we move through the end of fiscal 2026. So again, thank you all for your support, and goodbye.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Scholastic reports, Second Quarter, Fiscal Year 2026 Results. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jeffrey Mathews, Executive Vice President and Chief Growth Officer.

Hello, and welcome, everyone, to Scholastic's Fiscal 2026 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 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 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. Should you have any questions after today's call, please send them directly to our IR e-mail address, investor [email protected].

And now I'd like to turn the call over to Peter to begin this afternoon's presentation.

Thank you, Jeff. Good afternoon, everyone. Scholastic performed strongly in our important back-to-school season. We delivered 13% adjusted EBITDA growth in the second quarter and have affirmed our FY '26 earnings guidance after adjustments for the sale leasebacks that we closed yesterday, which were not assumed in our original guidance. I'll discuss this further in a moment, as well Hagi, who will provide the adjusted view based on these highly accretive transactions. In quarter 2, we also sustained our momentum with key strategic and financial initiatives, achieving major goals in our transformation to a more growth-focused shareholder-oriented company.

Before discussing quarter 2 results, I want to take a moment to review Scholastic's journey over the last 4 years.

Since the start of fiscal 2022, I've had the privilege of working with our new Board Chair, Iole Lucchese, to remake Scholastic with a singular purpose, realizing the power of our unmatched brand, IP channels and balance sheet for long-term growth and value creation. While significant opportunity and work remain I'm proud of the progress that we've made.

So first, we've refreshed our Board and leadership team. We've added 7 new independent directors with deep expertise in education, digital media and capital allocation. We've also appointed new leaders in each of our major segments and in key corporate functions, including Chief Financial Officer. These changes ensure the Board has the experience and perspectives needed to maximize Scholastic's long-term opportunity and value while bringing innovative thinking, sharper strategic focus, operating discipline and renewed accountability to our management.

Second, we've reorganized and reengineered our core businesses and overhead functions to better align with Scholastic's long-term growth opportunities, improve execution of our plan and unlock operational efficiencies. We unified our children's book group, bringing together our publishing and proprietary distribution channels to fully capitalize on Scholastic scale as the world's largest and only vertically integrated children's book publisher and distributor. We restructured education solutions to focus our product portfolio, strengthen go-to-market capabilities and reset our cost structure. We've also reorganized our international segment. At the same time, we significantly reduced costs in our shared services and overhead functions by eliminating redundancies, improving processes and reducing our real estate footprint.

Third, we've invested and expanded into highly strategic growth opportunities. The acquisition and integration of 9 Story Media Group further differentiates Scholastic as a global children's media, book and IP company with the ability to reach kids and families where they are today on screens as well as on the page. In addition, we've significantly scaled models and channels to tap new sources of corporate, philanthropic and state and local government funding for literacy generating over $300 million in revenue for our books and literacy solutions since fiscal 2022.

And fourth, we've implemented a disciplined and shareholder-focused approach to capital allocation. Since fiscal 2022, we have returned almost $500 million to shareholders through share repurchases and dividends, reducing our share count by approximately 25% at the same time, as we have invested in the opportunities that I've just described. This month, we crossed another major milestone with the closing of 2 successful sale leasebacks that have unlocked more than $400 million in net proceeds from our major nonoperating real estate assets. As a first step to deploy this incremental liquidity, our Board has increased our open market share repurchase authorization to $150 million.

Haji will speak later in the call about the financial impact of these highly accretive transactions and uses of proceeds. I want to be clear, though, the Board and I are absolutely committed to deploying this incremental cash in ways that create value for our shareholders, and our top opportunity is returning it efficiently to shareholders. In summary, carefully executed comprehensive changes over the past 4 years, positions Scholastic's organization, strategy and finances to better realize the value of its unique strengths that were built over the past century. That is our brand, our IP and our channels by growing profitably, delivering impact and value for our customers and driving returns for our owners. As we enter the second half of fiscal 2026, we remain focused on continuing this work.

Turning now to the second quarter results. The performance of our Children's Book Publishing and Distribution segment demonstrates the strength of Scholastic's proprietary school-based channels and the power of our major global franchises. School Book Fairs delivered another strong back-to-school season and remain a cornerstone of Scholastic's reach and engagement with kids, growth across key performance metrics that's fair counts, revenue per fair and e-wallet usage and lower cancellations underscore the unique strength and relevance of this beloved event-focused channel and its ability to spark excitement among students, families and educators. We continue to execute on initiatives to profitably grow fairs, expanding the addressable market, improving selling and marketing effectiveness, introducing new fair formats and advancing merchandising with strategic pricing optimization. These efforts are contributing to revenue per fair growth. We expect these positive trends to continue into the spring season as we build on the strong engagement we saw in the first half.

In Book Clubs, our smaller school channel, softer results reflect the continued evolution of classroom and teacher engagement patterns. We remain focused on key strategies, improving teacher engagement and increasing student participation to ensure clubs remain an accessible entry point into reading for kids and families. Trade Publishing delivered another strong quarter, underscoring the power of Scholastic's global franchises and our continued ability to bring compelling new content to readers across channels. Dave Pilkey's Dog Man: Big Jim Believes, the 14th book in the global phenomenon, debuted as the #1 best-selling title across adult and children's categories in the U.S. on November 11 and has already sold over 2 million copies in print. The book currently holds the #1 spot on the New York Times Graphic Books and Manga Best Seller list where titles from the series hold 3 of the top 5 positions. And per Circana Bookscan, 9 out of the top 10 kids graphic novels in November were Scholastic titles.

This spring, Pilkey's universe is expanding into the growing category of children's Manga with Captain Underpants: The First Epic Manga, illustrated by the acclaimed Manga artist, Motojiro. The new title and series capitalize on Scholastic's long-standing leadership in graphic novels and our role in helping children discover and deepen their love of reading. A new addition of Sunrise on the Reaping sustained momentum of the latest title in the Hunger Games series, which has sold almost 5 million copies since its March release, with anticipation building ahead of a film release next fall. Similarly, sales of the Harry Potter series benefited from the new interactive illustrated edition of The Goblet of Fire with fans gushing on social media about a new upcoming Harry Potter series on HBO currently expected in spring 2027.

The Wings of Fire series also delivered a breakout moment with Darkstalker, the first prequel, which became an instant bestseller. We're excited to build on this momentum with the 16th Wings of Fire book, the hybrid print in March, the first new installment in 4 years. And then later this month, with the graphic novel edition of the ninth book in the series Talons of Power. Our consistently high-performing series highlights Scholastic's unique ability to build enduring children stories, characters and franchises that grow with readers and extend across formats, channels and generations. We're moving forward to realize the strategic potential of the newly combined Children's Book Group which unifies editorial, marketing, distribution and merchandising to reach more kids through a programmatic and coordinated approach. As an example of what's now uniquely possible at Scholastic with this integrated approach, we just announced a comprehensive branding, publishing and distribution partnership with Mark Rober. The former NASA engineer who's highly popular CrunchLabs brand and YouTube channel reach more than 70 million subscribers, mostly kids. We look forward to sharing more about this partnership on future calls.

In Scholastic Entertainment, we continue to strengthen our position as a leading producer of high-quality children's content, expanding the reach and value of our IP. During the quarter, we began production on 3 premium animated series with major media partners, an encouraging sign of improving greenlight activity which we expect to continue to build into next year and to contribute to growth. We also see momentum across our development slate with a major project based on a long-standing Scholastic brand slated to launch in fiscal 2027. We hope to be able to announce more details of this soon.

Our digital channels, particularly YouTube and Scholastic TV also continued to scale, meeting kids where they are and expanding the discoverability and value of Scholastic IP. Across YouTube channels, engagement remains strong as kids and families discover and consume more and more stories on digital platforms. Since its September launch, Paris & Pups our new animated series in partnership with Paris Hilton has surpassed over 23 million views across all channels on the platform with steady weekly engagement as new episodes debut. We expect the potential of this franchise engagement to continue to grow ahead of the full 2026 launch of a global tie-in publishing program and of Playmates Toys, as well as emerging opportunities for long-form content.

One of the clearest proof points of our 360-degree strategy has been data on the impact of the iconic Scholastic red bar and branding. Since updating our YouTube channels at the end of August with the Scholastic brand identity, we have seen an immediate lift in visibility and audience engagement and now have more than 253 million views and over 2 million subscribers across all Scholastic channels. These results reinforce that the Scholastic red bar continues to be a meaningful differentiator of quality and reliability as families navigate an increasingly crowded digital landscape.

September's launch of Scholastic TV, our first Scholastic branded streaming platform has further demonstrated the power of our trusted brand and content. The app provides a curated kid-friendly destination for our shows. Early performance has been extremely strong with over 350,000 downloads, 3.5 million views and over 64 million minutes watched to date. This momentum reinforces Scholastic Entertainment outlook as an increasingly meaningful contributor to Scholastic's long-term earnings driven by both production revenue and our expanding digital footprint.

Now turning to Scholastic Education, where the strategic value of our reading, learning and literacy offerings, not only align with Scholastic's core strengths, but are essential to helping kids read and learn, which is at the center of Scholastic's mission and brand. As we discussed last quarter, we continue to navigate a challenging funding environment, again, in the second quarter as delayed federal disbursements and slower district decision cycles impacted near-term sales across the industry. That said, we've made meaningful progress focusing our product portfolio and refining our go-to-market approach. In quarter 2, our state and local literacy partnerships continue to perform solidly. Sales to schools and districts accelerated quarter-over-quarter.

Our magazines have outperformed other categories, reflecting their strong value and customer loyalty. We're also beginning to see growth in the sales pipeline for our second half. With our actions to restructure the organization and improve efficiencies, we were able to offset most of the impact of lower sales again last quarter. Looking ahead, especially at our important spring selling season, we remain cautiously optimistic the better execution, new products like knowledge library and spring disbursements of some federal funds will stabilize the top line while we benefit from lower costs. As I've said on prior calls, despite a challenging near-term environment, we remain very optimistic about the long-term strategic value and opportunity presented by this business.

In our International segment, we saw a strong performance across global markets from key franchises, including Dog Man. We continue to see opportunities in emerging markets like India and in other Asian countries and to capitalize on the growing demand for materials for English as a second language. Under refreshed leadership, the team remains focused on improving margins and positioning the business for long-term growth.

In summary, as we enter the second half of fiscal 2026, we're operating from a position of strength. The closing of our sale leaseback transactions and the resulting $400 million in liquidity reflect our commitment to disciplined shareholder-focused capital allocation. Combined with continued momentum across our core businesses and progress on our strategic initiatives, we believe Scholastic is well positioned to accelerate profitability, deliver long-term growth and deepen our impact on children, families and educators while creating lasting value for our shareholders. Thank you. I'll now turn the call over to Haji.

Thank you, Peter, and good afternoon, everyone. As usual, I will refer to our adjusted results for the second quarter, excluding onetime items unless otherwise indicated. Please refer to our press release tables and SEC filings for a complete discussion of onetime items. As Peter discussed earlier, second quarter results were solid reflecting strength and book fairs and momentum across our major global franchises. As a reminder, the second quarter represents one of Scholastic's seasonally more profitable periods as kids return to school and our school-based channels ramp up again.

Beginning with our consolidated financial results. In the second quarter, revenues increased 1% to $551.1 million Operating income improved to $95 million from $78.9 million in the prior year period, reflecting the company's cost-saving initiatives. Adjusted EBITDA was $122.5 million a significant improvement from $108.7 million a year ago. Net income was $66.3 million compared to $52 million in the prior year period. On a per diluted share basis, adjusted earnings increased to $2.57 compared to $1.82 last year.

Turning to our segment results. In the Children's Book Publishing and Distribution revenues for the second quarter increased 4% to $380.9 million, reflecting strong performance in book fairs and the strength of our major global franchises and trade. Segment adjusted operating profit improved to $108.8 million from $102.1 million in the prior year period. Book fair revenues were $242 million in the quarter, an increase of 5% driven by higher fair count and increased revenue per fair. We continue to expect higher fair count and revenue per fair to contribute to revenue growth in our Book Fairs business this fiscal year. Book Clubs revenue were $28.5 million in the quarter compared to $33.2 million a year ago, reflecting lower teacher sponsors. As a reminder, clubs is our smaller school-based channel. We anticipate these trends continuing in the spring season.

In our Trade Publishing division, revenues were $110.4 million in the second quarter, an increase of 7%. These results reflect strong performance of new publishing releases across our major global franchises, led by the 14th Dog Man title, which published in November, as Peter discussed. We remain optimistic about sustained momentum across our major global franchises and continue to expect trade to be in line with prior year on a full year basis. As a reminder, this year's publishing schedule is weighted more towards Q2 compared to last fiscal year, which benefited from a major Dog Man and Hunger Games releases in Q3 and in Q4.

Turning to our Entertainment segment. Revenues increased by $1.7 million to $15.1 million compared to $16.8 million in the prior year, primarily driven by fewer episode deliveries in line with expectations. As Peter discussed, we remain encouraged by recent green light momentum and are positioned for renewed growth in the second half of fiscal 2026. And in fiscal 2027, particularly, reflecting revenue recognition typical of media development and production. Segment adjusted operating loss was $3.6 million, an improvement of $0.3 million from prior year quarter.

Turning to Scholastic Education, segment revenues were $62.2 million in the second quarter versus $71.2 million in the prior year period, reflecting lower spending on supplemental curriculum products. Segment adjusted operating loss was $1.3 million in the second quarter compared to a loss of $0.5 million in the prior year period, reflecting lower gross profit mostly offset by cost reductions from reorganization initiatives and ongoing cost management. As Peter discussed, we continue to experience near-term funding volatility in this segment though we expect year-over-year declines to moderate in the second half based on an improving sales pipeline, new products and improved execution. Ahead of an expected market recovery we continue to target improved profitability in the second half of the year.

International segment revenues were $89.5 million in the second quarter, up from $86.7 million a year ago. Excluding the $0.5 million year-over-year impact of favorable foreign currency exchange, segment revenues were up $3.3 million, primarily driven by the new Dog Man title as well as new additions across other major franchises. Segment adjusted operating income improved to $12.8 million compared to $7.1 million in the prior year period, reflecting higher revenues and operational efficiencies. We continue to expect modest declines in revenues and profitability in this segment following strong trade performance in fiscal 2025, as I just discussed. Unallocated overhead costs decreased by $4.2 million to $21.7 million in the second quarter, primarily driven by lower employee expenses from cost reduction initiatives.

Now turning to cash flow and the balance sheet. As a reminder, our free cash flow and net debt at the quarter end do not reflect the cash proceeds from the sale-leaseback transactions, which closed in our third quarter and that I will discuss momentarily. In the quarter, net cash provided by operating activities were $73.2 million compared to $71.2 million in the prior year period primarily related to lower operating expenditures and timing of payments, partially offset by higher severance-related payments as part of the cost-saving initiatives. Free cash flow in the second quarter was $59.2 million compared to $42.4 million in the prior year period, reflecting lower payments of film-related obligations and higher cash flows from operations in the current period.

At the quarter end, the company had borrowings of $235 million under its unsecured revolving credit facility. Net debt was $186.6 million compared to net debt of $136.6 million at the end of fiscal 2025, primarily driven by operational working capital needs. Consistent with our capital allocation priorities, we continue to return excess cash to shareholders. Through our regular dividend, the company distributed $5.1 million in the second quarter. As announced earlier today, we closed 2 sale leaseback transactions of our owned real estate in New York City and our Jefferson City distribution centers. We expect the net cash proceeds of over $400 million to be used in line with our capital allocation priorities, which includes share repurchases.

As Peter noted, our top priority is returning incremental cash to shareholders, something we've demonstrated a strong track record of doing over the last 4 years. Our first step to return excess capital to shareholders is reflected in the Board's decision to expand our open market share repurchase authorization to $150 million. The company expects to continue purchasing shares from time to time as conditions allow on the open market or negotiated private transactions for the foreseeable future. Beyond initially paying down the credit facility, and moving forward with our current $150 million open market repurchase authorization, we are exploring additional means to efficiently return excess cash to shareholders and to return to moderate leverage levels. consistent with our recent levels while preserving a strong and flexible balance sheet.

Now for our outlook for the remainder of the year. Looking ahead to the second half of the year, we anticipate revenue growth in School Reading Events and Entertainment divisions, partly offset by modestly lower year-over-year revenues in Trade and in International versus a strong prior year comparison when the publishing schedule benefited from major releases in the second half of fiscal 2025. Reflecting strength in children's book group, partially offset by lower sales in Education Solutions in the first half of fiscal 2026, we now expect fiscal 2026 revenues to be level with or slightly above the prior year.

More broadly, we remain focused on driving favorable operating margins as we benefit from our lower cost structure. As for the impact of tariffs, we are closely following changes in policy and continue to expect approximately $10 million of incremental tariff expense and our cost of product this fiscal year. On a full year basis, we have affirmed our outlook for fiscal 2026 adjusted EBITDA and free cash flow before the impact of the sale-leaseback transactions, which closed in our third quarter.

Adjusting for partial year impact of the highly accretive transactions, our outlook for adjusted EBITDA is now $146 million to $156 million, which includes a partial year impact of approximately $14 million. In our smaller third quarter, we anticipate a higher seasonal operating loss followed by profitable gains in Q4. For our fiscal 2026 free cash flow outlook, which was previously $30 million to $40 million, we now forecast free cash flow to exceed $430 million, reflecting the proceeds from the sale of our real estate assets. Please see today's earnings presentation for a reconciliation of the estimated partial year and pro forma full year impact of the sale leaseback transaction on the company's guidance. Thank you for your time today. I'll now hand the call back to Peter for his final remarks.

Thank you, Haji. In fiscal 2026, Scholastic continues to make good progress. Building on the momentum we've generated since fiscal 2022 to reinforce our foundations for growth, value and shareholder returns. As I said at the start of the call, we've refreshed our Board and leadership team. We've reorganized and reengineered our core businesses and functions while advancing strategic growth opportunities, and we've carefully allocated capital with a view toward driving shareholder returns, including returning nearly $500 million to our shareholders.

We're optimistic about the outlook for our portfolio of businesses for the remainder of the year and over the long term. We also have a very attractive opportunity to repurchase shares using proceeds from our successful sale-leaseback transactions, beginning with $150 million open market authorization. We look forward to updating you on additional actions as we implement them. I'd like to close by thanking Scholastic's employees for their dedication and passion serving kids and customers as well as our shareholders for their continued support. Thank you all very much. Let me now turn the call over to Jeff.

Thank you, Peter. With that, we will open the call for questions. Operator?

[Operator Instructions] And our first question comes from Brendan McCarthy with Sidoti & Company.

Congratulations on the quarter and the real estate transaction closing.

Thank you, Brendan.

Yes, just wanted to start on the use of proceeds. Can you provide any color or timing around how we can think about that $80 million increase in the buyback authorization. I know it looks like historically, you've taken out about 8% of shares outstanding on a fiscal year basis. What might that look like going forward?

Well, I mean, we -- the first -- what we've announced is the first step. I mean, because of the very successful and highly accretive sale leaseback transaction, the first thing which we have done and which the Board is authorized is to increase our open market share buyback. That's first step. Let me hand over to Haji and he can talk a little bit more about how we're thinking about it going forward.

Thanks, Peter. So roughly, what we're seeing right now is that the sale -- the share repurchase program that we currently have will allow us to get into the market soon to continue to focus on returning cash to shareholders. As we mentioned in the call, over the last 4 years, we did over $500 million return to our shareholders, and we're going to continue to do that. We definitely feel that our shares are undervalued right now. And so we're definitely going to go into the market. And we're contemplating things with our Board to figure out other ways of doing things to help bring more money to our shareholders. Hopefully, that answers your question.

That's helpful. And I believe you mentioned you are targeting paying down a large portion of the credit facility?

Yes. I mean -- yes, exactly since it is an open line of credit for us, we can pay that down. We have to -- it's repriced every month, so we'll probably most likely pay that down. And then if we need it, we'll definitely continue to do what we need to do as an organization from a short-term repayment. Our goal is to return to more moderate levels of debt or moderate levels of leverage like we've done over the last few years.

And as far as debt-to-EBITDA target, what's the moderate level of leverage?

I mean, historically, we've been right around 1.75, roughly.

Got it. That's helpful. And on the new guidance, specifically the top line revenue, can you walk us through the changes there. So that obviously excludes the rental income at this point. Are there any other changes baked into that lower revenue number?

Yes. And Peter mentioned this earlier on in his part of the discussion today. We're seeing the education business continuing to deal with the softness because of funding while we also know that in the second half, we're going to see some uplift based on funds being released in the second half. And our sales pipeline is starting to be a lot better. But that was one of the reasons we saw the softness from the education group. We still expect to see growth in fairs to help offset that as we are looking at our fair count. We're projecting to do 92,000 fairs this year compared to almost 90,000 last year. And then also RPS continues to be strong. But those are the things that are causing us to deal with the second half uptick in our numbers. A bunch of puts and takes.

Understood. Yes, understood. And regarding trade channel sales, obviously a really strong year for content last fiscal year, tough comparison this year. Is it still expected to be flat to moderately lower for fiscal '26 trade channel sales?

Yes. Trade channel sales absolutely is going to be in line with last year as we anticipated. We did -- as you know, last year, we had the launch of the Dog Man in Q3 versus this year in Q2. And on top of that, we did have the Hunger Games in Q4 last year. So -- but ultimately, we're still getting the nice tailwinds from all of those major franchises, as you can see from our results in the first half of the year.

Absolutely, absolutely. And looking at book fairs, were you surprised at all to see the strong results there or are you seeing anything regarding consumer spending that might give you pause for the rest of the year?

Yes, I'm going to turn that over to Peter, if you don't mind.

No, it's been -- I mean, really, it's -- the trends that we saw last year are really pretty much continuing, which is to say that bookings are good. Cancellations are down and revenue per fair is up. What we're seeing is that in some of the fairs that there -- as we saw last year, that there is a somewhat smaller number of kids who are actually buying but those kids that are buying significantly more, and that's what's driving up the revenue per fair. So I think that's the -- we're not seeing anything that's in any way different, actually, from what we saw last year. We're assuming that there is some sort of reflection of the overall economy here. But I -- but thankfully, we've been able to manage that pretty well through just been, I think, very effective, very efficient. We've got great book selection and marketing and those kinds of things. So we're actually -- the book fair people are feeling pretty good about the spring. So that's very encouraging.

That's good and moving to Education Solutions, obviously, it's been a tough year so far for that segment. But it looks like despite the revenue decline, I think I saw segment adjusted EBITDA was about flat year-over-year in the second quarter. So you've obviously done well taking costs out of that business. And do you still see much more room there to take cost out of that segment?

Well, we've taken significant costs out, which really is reflective of what the current state of the market is. What we now need to be able to do is to prepare for regrowing that business to the size that it has been in the past. That's something which almost all educational publishers and especially those who are involved in supplementary publishing like ourselves are having to do. I mean I think we've done a really good job, I think, and very quickly adjusting to what we can do. And I think as the market recovers, what it means is that more of the -- more cents per dollar is actually going to land on our bottom line.

That makes sense. And with one -- the first -- the fall season of the school year behind us is there -- yes, are you more optimistic heading into the spring season? How can we kind of think about that education season resumes?

Yes, I think I'm more optimistic in the sense that I think we've stabilized the business. We've got it rightsized. We can see that we're dealing with a tough situation just like everybody else as well. But I mean the quarter 4 is -- and the spring tends to be a time when there's significant spending ahead of summer for summer reading and for materials for the next academic year. So our whole approach has been to get this behind us, deal with this thing as quickly as possible so that we can get to a good situation so that as the season -- just the seasonal market, i.e., with purchasing in the spring.

And as we hope there's more opportunities, more federal funding being dispersed as well, we expect in the spring that we'll be able to benefit from that. We'll see that our overall educational as it were sales are going to be more second half loaded than we originally anticipated in our first budget. And that will -- we've got ourselves in a good position to build and grow and move forward as the market improves. I think the stronger margins is something which are -- which is really good for us at the moment.

Our next question comes from Drew Crum with B. Riley Securities.

Okay. I want to go back to the question on uses of cash. I think you addressed this on several occasions in your preamble is of top priority in terms of deploying the cash. Can you address how dividends play into that? I don't think you guys have paid a special dividend through the years and the quarterly dividend payout has been relatively flat over the last several years. So I just want to get some additional color around that. And then I have a follow-up.

Yes. Our goal is to return capital as efficiently as possible. And as you mentioned, the dividend, yes we have been consistent with our dividend payout, which is about $0.20 per share over the last few years. On an average quarter, that's about $5 million, so around an average of $20 million per year. We're continuing to build enduring more value from the organization. But ultimately, it's about investing in our shares.

Okay. And then Haji, just looking at the second half guidance, if I back out the SLB transactions, it would suggest at least using the midpoint of the ranges would suggest that adjusted EBITDA declines year-on-year. Just want to make sure that's correct. And if so, what is driving the decline?

No, I think -- I don't think there's a decline. If you adjust prior year FY '25 with the numbers you will still show growth provided that -- we provided that in the press release.

This concludes our Q&A. I will pass the call back to management for any closing remarks.

Well, thank you very much, operator. And look, I'd just like to thank our employees and shareholders as well as our authors, illustrators, educators, all those who are essential to our success. And of course, all of us here wish you all a very happy and healthy holiday season. Goodbye.

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

Good day, and thank you for standing by. Welcome to the Scholastic reports First Quarter Fiscal Year 2026 Results. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jeffrey Matthews, Executive Vice President and Chief Growth Officer.

Hello, and welcome, everyone, to Scholastic's Fiscal 2026 First 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 posted this call's 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. Should you have any questions after today's call, please send them directly to our IR e-mail address, [email protected].

And now I'd like to turn the call over to Peter Warwick to begin this afternoon's presentation.

Thank you, Jeff, and good afternoon, everyone. Scholastic had a productive summer as we prepared for the back-to-school season and advanced important initiatives. As expected, our first quarter reflected the normal seasonality of our business with an operating loss in line with previous years. We continue to make strong progress on our previously announced real estate monetization process with significant investor interest in both our SoHo headquarters and our Jefferson City distribution center. We remain on track with the time line we outlined in July. Hajit will share further details in his remarks. At the same time, we're driving greater financial discipline and operational leverage across the company while affirming our full year guidance. These actions position us well for profitable growth in the quarters and years ahead. In our Children's Book Publishing and Distribution segment last quarter, trade sales were solid, strong continued demand for our global franchises drove unit sales in excess of the overall growth in the children's and young adult markets.

Suzanne Collins Sunrise on the reaping has now sold 3.7 million copies worldwide since its March release. Looking ahead, in October, we're excited to release the 25th title in Lauren [indiscernible] I Survived series, another middle-grade best seller along with the illustrated addition of Catching Fire and the interactive illustrated edition of Harry Potter and the Goblet of fire.

In November, we will publish a collector's edition of Sunrise on the reaping to sustain momentum ahead of Lionsgate's feature film adaptation in 2026. We're also building towards another major global release with Dave Pilkis Dogman, big Jim believes, preorders are tracking in line with the last dogman, positioning this newest title for a strong on sale. The Dog Man franchise has more than 70 million copies in print across 48 languages. And next spring, Dave Pilkis Captain Underpants returns in an entirely new format with the first Epic manga illustrated by Motojero.

In book fairs, quarter 1 represents only a small portion of annual revenue, given the school summer vacations, but early indicators are encouraging. Fall bookings are strong and ahead of last year's bookings. Redemption of Scholastic dollars, our reward currency and book fairs is high indicating good engagement with book fair hosts. We're also making progress in booking more large fairs and reducing churn. In book clubs, quarter 1 also represents a small portion of annual revenue with year-over-year change reflecting the timing of mailings. With the integration of trade fairs and clubs into the new Children's Book group, we now have one aligned organization coordinating editorial, merchandising, marketing and distribution to maximize the reach and value of our publishing across both our proprietary and retail channels.

Our initial priority has been streamlining operations and infrastructure, enhancing data analytics, optimizing inventory and overhead and driving early cost savings while building a foundation for long-term profitable growth. Turning to Scholastic Entertainment. We're positioned for renewed growth as industry greenlighting accelerates and our 360-degree IP strategy gains traction. Now with the capabilities and assets of 9-story Media Group fully integrated into our strategy and organization. We're using YouTube as a launch pap for new properties after integrating all 9 story branded channels under the Scholastic banner.

Clifford remains a cornerstone franchise, both in traditional linear and on digital platforms. We expect to surpass 10 million monthly views by calendar year-end of classic Clifford content on YouTube and we're supporting this with new publishing consumer products and promotional partnerships to lay the groundwork for Clifford's next phase of growth. The trailer for Paris Hilton's Paris & Pups dropped on all social media platforms and has been viewed more than 1.8 million times. The Series YouTube launch is coming September 23, with episodes releasing weekly and toys launching in fall 2026 with Playmates Toys, as they announced this morning.

Scholastic holds global publishing rights with tin books also scheduled for fall 2026. This approach, pairing digital-first content with publishing is central to our strategy. It not only expands the reach of our IP but also builds brand affinity that flows back into book sales. As just announced, we've also launched the first ever Scholastic branded streaming app in partnership with Future today. The app offers families a free, safe and trusted destination to enjoy beloved scholastic programming on demand with nearly 400 half hours of content and will scale to more than 1,300 half hours by fiscal 2027, a significant marketing campaign begins this month to build awareness and adoption.

Together, these initiatives are expanding the reach of Scholastic's IP creating high-margin digital revenue streams and strengthening our position at the intersection of Publishing and media. In Scholastic Education, sales were pressured in the quarter by a volatile funding environment, reflecting the delay of some federal education grants and cancellation of others. Further, several states are facing budget impasses. In this challenging environment, we continue taking steps to strengthen this business for the long term. Under new leadership, the team is refocusing our go-to-market functions on our core strengths, rationalizing the product portfolio and prioritizing investments in high-impact offerings like Knowledge library.

While near-term results remain constrained by the market, education continues to be central to Scholastic's mission, we remain confident in its long-term potential. International results reflected continued portfolio rationalization and a focus on margin improvement. We see growth opportunities in expanding English as a second language programs and in growing markets like India and the Philippines. Overall, Scholastic delivered a solid start to fiscal 2026. We advanced our strategy, including recent reorganizations, investing in some of our strongest franchises and IP, made progress on our potential real estate monetization and prepared for the important back-to-school season. With these actions, we're affirming our full year guidance and remain confident in our ability to deliver meaningful profit growth while continuing to create long-term value for our shareholders and lasting impact for children worldwide. Thank you. And I'll now turn it over to Haji.

Thank you, Peter, and good afternoon, everyone. As usual, I will refer to our adjusted results for the first quarter, excluding onetime items unless otherwise indicated. Please refer to our press release tables and SEC filings for a complete discussion of onetime items. As Peter discussed earlier, our first quarter reflected the normal seasonality of our business during the quiet summer months. I'm proud of our team's hard work preparing for the back-to-school season and we are well positioned to achieve our plan this fiscal year and beyond, beginning with our consolidated financial results and our typically small summer first quarter, when our school reading events division had minimum sales, revenues decreased 5% to $225.6 million.

Our seasonally adjusted operating loss improved to $81.9 million from $85.6 million in the prior year period, reflecting cost-saving initiatives. Adjusted EBITDA was a loss of $55.7 million, an improvement from a loss of $60.5 million a year ago. Net loss was $63.3 million compared to $60.3 million in the prior year period. On a per diluted share basis, adjusted loss increased to $2.52 compared to a loss of $2.13 last year, primarily reflecting lower shares outstanding due to share buybacks. As a reminder, Scholastic results are highly seasonal. In addition to first quarter, we also generally recorded an operating loss in our third quarter with profitable second and fourth quarters.

Turning to our segment results. In Children's Book Publishing and Distribution, revenues for the first quarter increased 4% to $109.4 million, reflecting growth in school book fares. Segment adjusted operating loss improved to $34.3 million from $36.6 million in the prior year period. Book fair revenue were $34.1 million in the quarter, an increase of 18%, driven by higher Scholastic dollar redemptions. Book Clubs revenue were $1.8 million in the quarter compared to $2.7 million a year ago, reflecting the timing of mailings, as Peter discussed.

In our Trade Publishing division, revenues were $73.5 million in the first quarter, essentially flat with prior year period, reflecting continued strong demand for Hunger Games and Harry Potter titles. We are optimistic in our publishing plan for this fiscal year, which features many exciting new titles in upcoming quarters. Turning to Scholastic Education, Segment revenues were $40.1 million in the first quarter versus $55.7 million in the prior year period, reflecting lower spending on supplemental curriculum products and the timing of state sponsored program revenues. Segment adjusted operating loss was $21.2 million in the first quarter compared to a loss of $17 million in the prior year period, reflecting lower gross profit, partly offset by cost cuts and careful expense control. Turning to our Entertainment segment. Revenues decreased by $3 million to $13.6 million compared to $16.6 million in the prior year, primarily driven by fewer episodic deliveries as anticipated. Segment adjusted operating loss was $4 million, a decline of $5.2 million from the prior year quarter. The current year period includes $700,000 in incremental amortization expense on intangible assets related to the timing of the acquisition in the prior year period.

As Peter discussed, we remain encouraged by recent momentum and are positioned for renewed growth as industry green lighting accelerates. International segment revenues were $59.4 million in the first quarter, up from $56.8 million a year ago. Excluding the $0.2 million year-over-year impact of favorable foreign currency exchange, segment revenues were up $2.4 million primarily driven by higher revenues in Australia, the U.K. and Asia. Segment adjusted operating results improved to a loss of $4.1 million compared to a loss of $8.3 million in the prior year period, reflecting higher revenues and continued optimization of this business. Unallocated overhead costs decreased by $6.6 million to $18.3 million in the first quarter primarily driven by lower employee expenses from cost reduction initiatives.

Now turning to cash flow and the balance sheet. In the quarter, seasonal net cash used by operating activities was $81.8 million compared to net cash used of $41.9 million in the prior year period. This increase in cash use was primarily driven by fluctuations in net working capital with higher inventory purchases, including tariff charges, the timing of general operating expense payments, higher interest, partially offset by higher customer remittance. Severance payments were also higher as part of the cost-saving initiatives. Free cash used in the first quarter was $100.2 million compared to $68.7 million in the prior year period, reflecting lower cash flow from operations partially offset by lower capital expenditures. At quarter end, the company had borrowings of $325 million under its unsecured revolving credit facility. Net debt was $242.8 million compared to net debt of $136.6 million at the end of fiscal 2025, which was due to the working capital requirements.

In the first quarter, we continued to return excess cash to shareholders through our regular dividends of $5.2 million. We currently have $70 million remaining on our share buyback authorization. The company expects to continue purchasing shares time to time as conditions allow on the open market or a negotiated private transactions for the foreseeable future. As we previously announced, the company retained Newmark Group to identify investment partners for potential sale-leaseback transactions of all or part of its own office and retail real estate in New York City and its Jefferson City distribution centers. These processes have generated significant interest and are progressing. We expect both to conclude this fall. While there can be no guarantees of transactions of either or both properties, we remain optimistic about both in the context of our capital allocation priorities, which include debt reduction and share repurchases. Now for our outlook for the remainder of the year. Our strategic efforts to align spending with long-term goals are driving favorable operating margins, supported by our ongoing SG&A optimization. Our goal for these actions is to sustainably lower our cost structure, especially with respect to nonrevenue-generating and consulting expenses.

As for the impact of tariffs, we are closely following changes in policy and continue to expect approximately $10 million of incremental tariff expenses this fiscal year in our cost of product. We expect a strong second quarter benefiting from major trade releases. As Peter previously indicated, we are affirming our fiscal year 2026 guidance for revenue growth of 2% to 4%. Adjusted EBITDA of $160 million to $170 million and full year free cash flow between $30 million and $40 million. Thank you for your time today. I'll hand the call back to Peter for his final remarks.

Thank you, Haji. In conclusion, after a solid start to the fiscal year and the return of students to schools, Scholastic is positioned well to continue its momentum and execute its plan for substantial earnings growth in fiscal 2026. As I laid out in July, our plan is focused on building Scholastic's long-term opportunity as a global leader in the children's publishing, media and education spaces meeting kids, families and schools essential needs to educate, inform and engage kids. In support of that, we continue to reduce costs, strengthen our organization, return capital to shareholders and take steps to optimize our capital structure and balance sheet. We look forward to providing our next update in December after a big second quarter. Thank you all very much. Let me now turn the call over to Jeff.

Thank you, Peter. With that, we will open the call for questions. Operator?

[Operator Instructions] Our first question comes from Brendan McCarthy with Sidoti.

I just wanted to start off looking at the Education Solutions business. I know we just wrapped up the summer months. But I'm curious if you've had any early feedback on some of the new products that you brought to the market and maybe how they've have been resonating with schools or students.

Brendan, this is Jeff here. I'll step in as the head of this interim head of this business. Look, we were getting great feedback from customers around some of the new products. Of course, it's a difficult selling situation as Peter described, there are some delays and cancellations of some federal funds. So I think in that environment, we are very encouraged by the -- what we're hearing particularly with knowledge library and as well as our core products, our class from libraries and our class for magazines.

Got it. I appreciate the color, Jeff. And I guess, at this point, what do you think -- so I understand there's been the pause in spending from states and school districts. What do you think are key variables to keep an eye on that would ultimately turn this trend around.

It's a good question. And it's important to understand it's not -- there hasn't -- the schools are continuing to spend money. It's an environment when the certainty of future funds is is low, they are more likely to hold back on anything but the most necessary must-have purchases. What we're doing -- our strategy is very much focused on helping our customers understand why Scholastic products align with their most critical needs. Of course, as there's greater funding certainty, and we've seen that some of the federal programs that had been paused or some federal grants have been paused were released in late August. .

As there becomes more certainty, we expect that school district and school and district leaders will be more forthcoming with and more confident in their ability to purchase because there's no question schools continue to need materials in the classroom. In many cases, they've made significant investments in their core curricula over the last year or -- this is a time when they start to need to fill out their classrooms with additional materials to support their teachers and support their students. So with that respect, the cycle is favorable, it's just getting through this moment of uncertainty that that has been caused by volatility largely in Washington.

That makes sense. Jeff, certainly something to keep an eye on there. I wanted to turn to the Entertainment segment. I know your priority has really been focused on getting some content up on to YouTube, where there's the advertising revenue share model. I guess what's the -- when can we expect to really see that kind of flow through into the financial statements into the P&L? And I guess more of a long-term perspective to what does long-term success really look like with the 9-story media business?

It's Peter here, Brendan. Look, the digital model that we now have and the digital income that we're getting is high margin and it's going to grow. So that's really -- that's a really good thing for us. It's about -- we will see the major benefits going progressively out into the future. It's not -- there's not going to be some sort of like sudden change this quarter or next quarter, if you know what I mean. But there's a lot of -- what's going on is the benefits of what we're doing with things like YouTube and so on. Is that it's not just a source of high-value revenue. It's also exposing our brand and it's driving kids to buy books about Clifford or whatever as well. I mean, we now have 1.2 million subscribers to Scholastic channels on YouTube. We didn't have those before. And so this is a major thing. And we are pretty confident that over time, this is going to be a major source of high -- it's high margin revenue because it's the revenue share from the advertising that comes with it. And it's also -- it's part of this 360-degree strategy that we've talked to you and others about that we are able to -- what we're really doing is integrating as closely as possible, both a publishing and media strategy and seeing the interrelationships between the 2 and gaining benefits from both our media and book properties.

Right. That makes sense. Peter. I guess just in terms of scale, are you able to maybe quantify what the revenue opportunity might look like as it relates to 9 story. And I guess, strictly speaking from the perspective of monetizing the digital content side. .

This is Haji. Just taking that question from you. So right now, we're really in early stages of this, and we're going to try to really see -- right now, we're only on 2 platforms with the opportunity to increase that to another 6 or 7 platforms. And I think when we look at it, this has been both an opportunity for us to get our content in front of new viewership and really build on the success of what we already have. But being able to actually quantify this impact, it's not going to take us a few months as we see the viewership grow. And then once again, we're dealing with a partner in this and sharing the share of that revenue. And most likely, we'll see this opportunity or upside in 2027.

Understood. One question for me on the cost structure side, looking at SG&A. Just curious as to where you're taking cost out of the business and where -- maybe where you see additional room for expense reduction there.

Well, I can say this that we really go deep into the restructuring of the organization and this fiscal year -- early part of this fiscal year. And we continue to define areas or where those opportunities for us to reduce spend, we will do. But we did -- we definitely took a really good look at it prior to actually given our guidance, and our guidance reflects the majority of our spend reductions. I think we announced somewhere between $15 million and $20 million of price cost reductions. And we're right now seeing the fruition of that come through in our financials.

Got it. Got it. One more question for me just on the guidance affirmation. I guess at this point, I know we're only at the start of the school year. But at this point, what variables might cause a material underperformance or outperformance of the full year fiscal guide?

For us, it's all about understanding where the retail market is. As you know, we're experiencing a lot of things in the marketplace. Consumer and school spending is somewhat in question. But we feel very confident in the plan we put out from an organization perspective. I don't foresee any major concerns from my side, what's going on. But there could potentially be some upside and downside, and we're going to manage it as an organization. And that's why we leave the opportunity to be very conservative on how we approach things. But at the end of the day, we want to continue to invest in growth, which is in our revenue side of the business and fall back on things that do not generate revenue and the most important thing for us is the concerns of tariffs as it reflects our business because we are a retail business. And those expenses, which we've already planned for, which is about $10 million this year, we're continuing to monitor all the things that are going on with the government down in D.C.

I don't think it's -- Brandon, the other thing is that, as I mentioned, school book fairs are the number of fairs that we have are up -- and it's too early to tell. But clearly, a key thing that matters to us is things like revenues fair, the average revenue is far we haven't had enough fares yet to be able to be able to calculate that yet. But I think we're -- we'll see about that. No reason to think that we're not on track with what our planning is. And it's good having a number of fares book being up. So that's also a good thing.

Our next question comes from [indiscernible] with B. Riley Securities. .

I want to go back to the Education Solutions business. You flagged the funding uncertainty as an impact on spending for supplemental materials. I think in the recent past, you've also indicated you expect market conditions to get better over the next 12 to 24 months. How do we reconcile those 2? Should we anticipate a similar trajectory for the business as we observed in 1Q as you move through fiscal '26? Or do you think things stabilize as an opportunity to improve profitability as you move through the year?

Drew, this is Jeff again. We are expecting, based on the current patterns that this year will be more back-end loaded than previously. -- it's been inside baseball, but we have shifted our selling year to be aligned with our fiscal year. that can give us -- which will mean we'll go into Q4 with a very full pipeline. We didn't start Q1. This summer, we started with an empty pipeline. We also expect that as we you've seen this as I'm sure you were doing monitoring the headlines around federal education policy in the states that some of these -- the delays over the summer and in the spring, which, of course, have -- there's a long lead time with part purchases given selling cycles. Those were particularly heart [indiscernible] over the summer, we expect we're hopeful that that will -- those headwinds will moderate over the fall and into the spring. And we're doing everything we can to be very well positioned, of course, to lean into the market now, stopping up money is available and then make sure we're ready for a very big spring selling season. .

Also on top of that, Drew, just to be clear that we are very diligent about our fagality and what we spend and how we we continue to look at our expenses within that business. So I just want to make sure you're clear on that.

Okay. All right. Helpful. Maybe looking at fiscal 2Q, Peter, I think you characterized your expectations for the quarter or that it will be big. I'm curious if you can expound upon that and kind of what the puts and takes are for the quarter.

Well, I think I mean, first of all, there's the trade -- just looking through the segments, really. If you look at trade publishing, we've got a big quarter 2. And we've got some really good stuff coming, including a new Dog Man. And all the indications that we're seeing with advanced sales in and all the rest of it are in giving us good good feelings that that's going to be significantly higher than we had in quarter 2 last year. And we're feeling pretty good about the year as a whole as well. The other areas such as book fairs, I mean, as we mentioned before, the fair count in quarter 2 -- in our quarter 2 will be higher than the fair count in the prior year. And that's -- the bookings are up and everything is looking pretty good at the moment, but it's -- I can't give you any more information than that because we really need to have more fares actually done sorted out and all the rest of it. But what I can tell you is that I think the folks doing it psychologically are feeling pretty good. So that's -- I'll take that.

The other thing that we're seeing in terms of puts and takes is actually our cost base. I mean you'd see even in education that we had -- there was a significant reduction in year-over-year revenues, but the difference in revenues was pulled very significantly down when you actually look at the -- when you look at your sales were down $15 million, but OI was only down by $4 million. And that's because of the cost savings that we've been making. The other benefit that we've had just on the cost side is our operating expenses generally and the things that we've been doing. And those will -- some -- a lot of that was created in quarter 1, but a lot of it is also a flow-through from the benefits that we had in costs in the second half of the prior financial year. They're flowing through now.

So I'm feeling good about all of those things. I think the other thing that we've seen is we've had a good pickup in international markets as well, particularly U.K. and Australia and New Zealand. I mean Australia, the whole education year and school book fairs is the other way around as you are to [indiscernible]. So they're busy and active at the moment, and we had a good quarter 2 from quarter 1, sorry, from them. The other thing we've seen is that our book business, particularly in the U.K. has been doing very well, especially with some of these key titles like Sunrise on the repaying, Suzanne Collins is Hunger Games series, Dog Man, et cetera, et cetera. So those are -- they're all making me feel pretty good about quarter 2 at the moment. And they give me a strong sense that we're the guidance that we've given for the year is we're absolutely on track for that.

And in terms of our internal expectations, we were happy with what we were doing in quarter 1. They were that from an internal -- the way we've been targeting and we'd be expecting that was -- that's good.

Great. And then maybe one last one for me for Haji. You outlined the drivers behind the negative variance for cash flow and free cash flow, specifically in your preamble versus the year ago period. It sounds like you believe you can make that up over the balance of the fiscal year. What are the swing factors to achieving that?

So the majority of it is actually around our revenue and how we sort of forecast our revenue for the year. So receipts are going to come in a little bit stronger first half -- excuse me, second half versus first half. That's number one. Number 2 is we're we're really tightly watching. And actually, our forecast for spending on capital expense is a different profile than last year. We made significant investments last year on our [indiscernible] fulfillment center, those are actually coming down year-on-year. So that's number one. And then number two, just the things that we're looking at to invest in from a growth perspective, a slightly different profile this year than last year. So I'm extremely excited about where we are. And then last thing I want to say is we both had the Dav Pilkey and Suzanne Collins to pay last year, whereas this year, we only have to pay just Dave Silke in terms of the new titles that are being released. So that's another thing. So I'm very excited and confident about where we are from a capital perspective and where we're spending our money this year.

And this concludes our Q&A. I will pass the call back to management for any closing remarks. .

Well, thank you very much. And also thank you to our authors and illustrators, educators, employees. It's their hard work and creativity that drives our success. And I'd also like to thank our shareholders and all who joined us this afternoon live or on the recorded call later. We appreciate very much your support. Bye.

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

Good day, and thank you for standing by, and welcome to the Scholastic Reports Fourth Quarter and Fiscal Year 2025 Results. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Jeffrey Mathews. Executive Vice President and Chief Growth Officer. Please go ahead.

Hello, and welcome, everyone, to Scholastic's Fiscal 2025 Fourth 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.

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'll be discussing some non-GAAP financial measures as defined in Regulation G. A reconciliation of these measures to the most directly comparable GAAP measures can 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. Should you have any questions after today's call, please send them directly to our IR e-mail address, investor underscore [email protected].

And now I'd like to turn the call over to Peter Warwick to begin this afternoon's presentation.

Thank you, Jeff, and good afternoon, everyone. Thank you for joining us. Scholastic delivered strong financial and strategic results in the fourth quarter of fiscal 2025. We -- adjusted EBITDA grew robustly in line with our original guidance range. Effective cost controls and a sustained focus on operational efficiency allowed us to overcome continued pressure on consumer and school spending while positioning us for earnings growth in fiscal 2026. Revenue growth was also in line with expectations driven by a strong performance in our Children's Book Publishing and Distribution segment and the strategic acquisition of 9 Story Media Group early in the financial year. This strong finish reflects the collective efforts of our teams.

Amid a challenging macroeconomic environment, we made meaningful progress on the priorities we set at the start of the year, strengthening our core businesses, unlocking value from our iconic IP and positioning Scholastic for long-term profitable growth. We continue to return capital to shareholders investing over $35 million in dividends and share repurchases in the fourth quarter for a total of $92 million in fiscal 2025 while advancing efforts to unlock value from our significant real estate assets.

At the same time, we began executing on a set of significant organizational changes, work that's continued into quarter 1 and that we believe will strengthen leadership, enhance growth and improve efficiencies. These actions set the stage for continued earnings growth and increased shareholder value in fiscal 2026 while deepening Scholastic's impact in schools, homes and communities around the world.

Let me now walk through our quarter 4 and fiscal 2025 segment performance. Children's Book Publishing and Distribution segment, revenue and profit increased last quarter, driven by strength across both publishing and book fairs. In trade publishing, we launched Sunrise on the Reaping, the newest installment in Suzanne Collins' Hunger Games series, which became the biggest publishing event yet this year. Released simultaneously in the U.S. Canada, U.K., Australia and New Zealand, it top best seller list globally across print, e-book and audio formats, driving significant revenue growth. In the U.S. alone, the book sold over 2 million copies in its first month. Nearly 20 years after the first Hunger Games book was published, the franchise continues to resonate across generations and geographies.

This launch followed the success of Dave Pilkes dogman, Big gym begins, another global phenomenon, which helped drive second half results and remains 1 of the world's top-selling titles. These best sellers more than offset headwinds in consumer spending and softness in the broader retail book market.

In book fairs, we saw higher fare counts in quarter 4 and with combined case and shippable fares rising 4% to over 100,000 fares for the year. This reflects continued improvements in our selling and marketing strategies and customer experience. Revenue per fare declined slightly but remained near record levels, supported by improvements in merchandising and strategies that grew transaction sizes. Slightly lower transaction volumes tied to consumer pressures offset these gains.

In book clubs, revenue declined in quarter 4 due to fewer participating teachers, partly offset by larger order sizes and higher student participation per class. For the full year, engagement strategies implemented at the start of the school year paid off, driving growth in student participation and revenue per sponsor. Notably, profit contribution from clubs rose again this year.

In our Entertainment segment, fourth quarter revenue increased with the addition of 9 Story Media Group whose successful integration has greatly enhanced our reach and monetization of Scholastic's content, especially on streaming platforms, where kids are consuming the majority of media content today.

We continue to see strong engagement on YouTube across Scholastic channels like Clifford Classic, Goosebumps, the Magic School Bus and Ascolastic Classic hub. In May, average view duration exceeded 20 minutes, 3x the norm for children's content. This robust engagement is fueling digital revenue growth and increasing the value of our IP. Momentum is also building in development and production, which I'll return to shortly.

Turning to our Education segment. Revenue and profit declined in quarter 4 as the broader supplemental curriculum market remained pressured. However, areas less reliant on district budgets such as state and community literacy partnerships showed strength, driven by increased participation in state-sponsored programs that expand kids access to books outside of school. We're encouraged by the growing number of state philanthropic and community partners focused on literacy and see long-term potential in this segment.

Finally, International segment revenue and profit increased in quarter 4, reflecting strong trade channel performance, particularly for Hunger Games and Dogmen titles. We also realigned International Education business under a new structure, which improved operating efficiency and profitability. In fiscal 2026, we expect to significantly grow profit building on the momentum of strong year-end results and multiple strategic initiatives. Adjusted EBITDA is targeted to grow strongly.

The benefit of last year's cost reductions and recent reorganizations in addition to further cost management and initiatives to improve efficiencies are expected to more than offset the incremental impact of tariffs from the current historically high rates. At the midpoint of guidance, adjusted EBITDA is expected to grow 20%, excluding $10 million in incremental tariff expense currently anticipated from implemented or announced tariffs. Reflecting continued pressure on consumer and specialty school spending, revenue is expected to grow modestly. Haji will discuss our financial outlook in more detail shortly.

In our Children's Book Publishing and Distribution segment, we have an exciting trade publishing schedule, including Dog Man, Big gym believes in November, the latest in Dave Pilkey's blockbuster series following the success of Big gym begins and the dogma movie, which debuted at #1 at the box office and is now streaming on Peacock. We're also publishing the full color edition of Dave's first evographic novel the adventures of Super Dieter Baby, rereleasing his dragon books for early readers in a new collection and planning a major Captain Underpants publishing moment. March brings Wings of Fire #16, the hybrid print, the first new book in the series in 4 years, which kicks off a new Trilogy. We'll also publish Wings of Fire #9 Talons of Power in graphic novel format in January, supported by an enthusiastic global fan base the original and graphic novel series have sold a combined 40 million copies and remain steady performers on the New York Times Best Sellers list.

After March's huge global release of Sunrise on the Reaping we expect the Hunger Games series to continue as a key pillar of our catalog driven by ongoing sales of Sunrise as well as new heart cover box sets, collectors editions and illustrated additions of Hunger Games titles publishing in the year ahead. We're optimistic that the upcoming Lionsgate movie and adaptation of the title expected in November 2026 and as well as our publishing plan for movie tie-in additions will also continue to engage current fans and attract new ones to the hunger games.

Other major releases this year include the interactive addition of Harry Potter and the Goblet of Fire and new works from best-selling outers, Alan Gratz, Rainer Telgemeier; Tiffany D. Jackson and promising debut authors. The breadth of Scholastic's best-selling series and authors across formats highlight the company's singular position and track record in building beloved enduring brands.

We expect growth in school book fair counts supported by strategic improvements in selling, marketing and fare formats. We also remain focused on merchandising optimization and strategic pricing initiatives, which are expected to benefit modest revenue per fair growth. We continue to expand the addressable market for book fairs targeting new types of schools like parochial, charter and independent while executing on multiple initiatives to increase participation and share of wallet during the fair and throughout the year. Leveraging Scholastic's trusted relationship and high-quality books and products.

Some examples include share the fair, which allows communities to help students in need participate in book fairs. Our sponsored fairs program, where local and national partners fund fairs in high-need communities not currently served and new fair types like Discovery fares which create new themed opportunities for schools to host additional fairs during the year.

In Book Clubs, we'll continue executing revitalization strategies to sustain the profitable revenue gains achieved last year, focusing on teacher engagement and student participation. We're particularly excited about the strategic integration of trade publishing, book fairs and book clubs into our new Children's Book group under Sasha Quintin's leadership. Sasha has had tremendous impact of Scholastic since joining in 2019, first, leading the book fairs to significant profitable growth through her focus on kid first marketing and merchandising. More recently, she led the integration of our fairs and clubs into a combined school reading events division.

With the addition of Jackie delay, a 25-year industry leader who most recently helped lead Barnes & Noble's transformation efforts, we're better positioned than ever to align editorial, merchandising and distribution to expand our reach and deliver exceptional experiences for kids. This collaborative structure is uniquely possible at Scholastic. We expect it to unlock further efficiencies and potential in our vertically integrated children's book publishing and distribution. It will also facilitate more productive collaboration between our book and media businesses and the ability of Scholastic IP to reach kids on both screens and the page. We expect this change will progressively drive revenue growth and increase profitability in fiscal 2026 and beyond.

Next, our Scholastic Entertainment segment. We expect to return to revenue growth in entertainment as green lighting activity picks up and our 360-degree IP strategy gains traction accelerated by our integration of the Children's Book Group. Recent greenlights include DASH, a full-length holiday special for Disney, Samwich, a preschool animated series and Daniel Tiger's Neighborhood renewed for Season 8 by PBS Kids. We also anticipate 2 more multi-episode production soon, including 1 based on a venerable Scholastic brand.

A note about Daniel Tiger. Scholastic owns 9 Story Media Group, has coproduced the series since 2012 and also holds worldwide licensing and distribution rights. This animated preschool series has become a classic with kids and parents alike for its meaningful stories and ability to help young children learn life skills. By far, the biggest platform to kids media consumption, YouTube remains a priority. There's not only a new source of high-margin revenue but greater reach for our IP where kids are today, 2 new series are launching in October, 1 with the toy partnership already secured and a goal for more by fiscal year-end.

We're also developing a new series for YouTube based on Bob books. Scholastic's hugely popular and trusted fornix book series for young children among several planned IP collaborations between our entertainment and Children's Book group. We expect this series to drop in fall of 2026. Our digital distribution continues to grow with over 15,000 half hours of advertising video on demand or AVOD content now available on various platforms, including 11 free ad-supported streaming TV channels.

These platforms represent both a new revenue stream and expanded global reach for our content. Our brand IP, distribution platforms, customer base and audience, combined with our best-in-class capabilities, afford Scholastic premium placement in the landscape of children's media and IP. We remain confident in our opportunity as we continue to build a robust pipeline of IP-based content to screen and streaming platforms around the world.

Now on to our Education segment. We are repositioning this business for sustainable, profitable growth following a strategic reorganization under new leadership. Jeff Matthews, Scholastic's Chief Growth Officer, has stepped in as interim President in addition to his current responsibilities. With 2 decades of education experience, including as an ed tech founder, Jeff brings a deep understanding of the market and is already implementing the next phase of our strategy. Extensive market and customer research confirms our belief in the relevance and strategic value of our supplemental literacy offerings.

It also strengthens our commitment to this business. These trusted products, magazines, book collections and classroom resources align with Scholastic's core strengths and have clear upside potential. The supplemental curriculum market has faced a perfect storm, volatile federal funding, instructional shifts and state adoption cycles. But these trends are cyclical and we expect conditions to begin improving over the next 12 to 24 months. In the meantime, we're moving forward immediately to refocus our go-to-market strategy around core strengths and customer segments, rationalize our product portfolio, prioritize investments in high-impact offerings, simplify legacy operations and organizational structures and recruit a long-term leader for the division. We're targeting flat revenue in FY '26 while repositioning the business for improved profitability this year and beyond.

Now on to our International segment. Revenue and profit are expected to decline modestly following last year's major curriculum sale in New Zealand and strong Hunger Game and Dogman sales across English-speaking markets. Going forward, we're focused on growing our education and English language footprint in emerging markets and expanding global reach for Scholastic stories.

Before I turn the call over to Raj, I want to briefly touch on Board governance. Last week, we announced the appointment of 2 new independent directors: Milena Alberti and Anne Clark Wolfe, following a proactive refresh process initiated by our Nominating and Governance Committee. Both of these highly qualified individuals will support the Board's focus on business transformation growth strategies and capital allocation as well as other initiatives to maximize shareholder value. With these additions, we've now appointed 7 new independent directors over the past 4 years. I want to sincerely thank Jack Davis and David Young for their combined 35 years of service to Scholastic and to our shareholders. As we begin fiscal 2026 and prepare for the back-to-school season, we're operating from a position of strength with a revitalized operating model, delivered content and IP and a deep commitment to children's literacy and learning.

And with that, I'll turn it over to Haji.

Thank you, Peter, and good afternoon, everyone. Before discussing our outlook, let me begin with our consolidated financial results for the quarter and full fiscal year. As usual, I will refer to our adjusted results, excluding onetime items. Please refer to our press release tables and SEC filings for a complete discussion of onetime items and a reconciliation with related GAAP figures.

Revenue increased 7% to $508.3 million in the fourth quarter and was up 2% to $1.625,5 billion for the fiscal year. Adjusted operating income decreased to $63.4 million in the fourth quarter from $66.8 million in the prior year period. For the full year, adjusted operating income was $35.8 million compared to $44.7 million lower adjusted operating income in both periods versus a year ago was primarily caused by incremental amortization expenses on intangible assets related to the acquisition of Nine story in the first quarter of fiscal 2025. Adjusted EBITDA increased 1% to $91.2 million in the fourth quarter and was up 6% to $145.4 million for the fiscal year.

Turning to our segment results. In Children's Book Publishing and Distribution, revenue for the fourth quarter increased 9% to $288.2 million driven by strong performance in book fairs and our Trade Publishing division following the publication of Sunrise on the Reaping. For the full fiscal year, revenue increased 1% to $963.9 million, Segment adjusted operating income was $58.2 million, up $7.8 million from the prior year period, reflecting higher revenue in our consolidated trade and school reading events divisions.

For the full fiscal year, adjusted operating income for the Children's Book segment increased $7.5 million to $131.3 million. Within school reading events, book fair revenue increased 5% in the fourth quarter to $177.8 million and 1% for the full year to $548.3 million. These results benefited from higher fare count, partially offset by modestly lower revenue per fare. Book Clubs revenue was $13.1 million in the fourth quarter, a decrease of 9% as a result of lower orders in the quarter. Full year revenue increased 2% to $64.2 million, reflecting higher revenue per sponsor and an increase in orders during the year. As Peter noted, club's contribution margin improved in both periods.

In our Trade Publishing division, revenue in the fourth quarter increased 19% to $97.3 million in increased sales driven by the latest Hunger Games title, Sunrise on the Reaping. Full year revenue increased 1% to $351.4 million, primarily due to increased sales for new titles in our global best-selling franchises Hunger Games and Dog Man, which more than offset the impact of consumer spending headwinds on backlist sales. In the Education segment, fourth quarter revenue was $125.7 million, down 7% from the prior year period and full year revenue was $309.8 million, down 12% compared to prior year period.

Continuing headwinds in the supplemental curriculum market was seen in lower spending by schools and districts. This was partially offset by growth in sales to nonschool state and community literacy partners. Segment adjusted operating income was $31.3 million in the fourth quarter compared to $35.6 million in the prior year period. Full year adjusted operating income for the segment was $6.9 million compared to $21.9 million in the prior year period. lower revenue impacted operating margins in both periods.

In the Entertainment segment, fourth quarter revenue was $14.8 million compared to $0.6 million in the prior year period. and full year revenue was $61 million compared to $1.9 million in the prior year period.

Gains in both periods reflected the contribution of the Nine store Media Group, which the company acquired in June of 2024. The Segment adjusted operating loss was $2.1 million in the fourth quarter compared to a loss of $0.5 million a year ago. Segment adjusted operating loss was $7.2 million for the full year compared to a loss of $1.9 million a year ago. The fourth quarter includes $2.7 million and the full year includes $9.2 million of incremental amortization expense on intangible assets related to the acquisition.

On a pro forma basis, Nine story revenue was down relative to the prior year period, primarily reflecting lower production across the industry, which has begun to accelerate, as I'll discuss later on. In the International segment, revenue increased 8% to $76.8 million in the fourth quarter. For the full year, International segment revenue increased 2% to $279.6 million Year-over-year, foreign exchange had an unfavorable impact of $600,000 in the fourth quarter and $1.6 million in the full year fiscal 2025.

Revenue growth was driven primarily by strong trade channel performance across all major markets. Segment adjusted operating income improved to $6.1 million in the fourth quarter compared to $1.8 million in the prior year period. For fiscal 2025, segment adjusted operating income was $2.9 million compared to a loss of $3.1 million in the prior year, reflecting higher revenue and operational efficiencies. Adjusted unallocated overhead costs were $30.1 million in the fourth quarter, increasing from $20.5 million in the prior year period, reflecting the timing of employee-related expenses.

For the full year, adjusted unallocated overhead costs of $98.1 million increased slightly from $96 million last year, primarily related to higher employee-related expenses. Now turning to cash flow and the balance sheet. For the full year, net cash provided by operating activities was $124.2 million compared to $154.6 million in the prior year period. This decrease was primarily driven by lower cash earnings and increased inventory purchases.

Free cash flow was $29.2 million in fiscal 2025 compared to $73.4 million in the prior year period. This primarily reflects lower cash flow from operations and repayment of production loans, driven by working capital timing in our entertainment division. At year-end, the company had borrowings of $250 million under its unsecured revolving credit facility. At the end of fiscal 2025, net debt was $136.6 million compared to a net cash position of $107.7 million at the end of fiscal 2024, and primarily reflecting cash used to fund the 9 Story Media Group acquisition and cash returned to shareholders through dividends and share repurchases.

During the year, we continued to return excess cash to shareholders. through our regular dividend and open market share repurchases, consistent with our capital allocation priorities. We returned over $92 million to shareholders in fiscal 2025, including over $35 million in the fourth quarter. In total, we repurchased nearly 3.5 million shares, which net of approximately 300,000 shares issued related to stock compensation, represented 11% of the company's shares outstanding. Our current share buyback authorization is $70 million. The company expects to continue purchasing shares from time to time as conditions allow on the open market or in negotiated private transactions for the foreseeable future.

As we discussed last quarter, we believe our strong balance sheet provides significant flexibility. We have modest debt. We also have nonoperating assets that could be monetized for significant valuations when appropriate and market conditions allow, which could be deployed in accordance with our capital allocation priorities, including debt reduction. Over the past 6 months, as the commercial real estate market has improved, we've begun a process to explore potential monetization opportunities to unlock value from these substantial real estate assets.

In June, we retained Newmark Group to identify investment partners for a potential sale leaseback transaction of all or part of Scholastic's office and retail real estate in New York City. Earlier this month, we also retained Newmark for a similar process with respect to our distribution center in Jefferson City, Missouri. As we move forward with these processes over the next 90 to 120 days, we are optimistic about the significant opportunity for value accretion, although there can be no guarantee that these processes will result in transactions within the coming months.

Regardless, we remain committed to maximizing value of our real estate assets for the benefit of our shareholders. I look forward to providing further updates on this process as needed and on our next earnings call.

Turning to our fiscal 2026 outlook. Scholastic is targeting solid earnings growth in fiscal 2026 with adjusted EBITDA of $160 million to $170 million. An increase of approximately $20 million over fiscal 2025 at the midpoint, mainly driven by disciplined cost management and restructuring initiatives. Based on the current tariff policy, our guidance includes approximately $10 million of expected incremental tariff expense and our cost of product. We expect higher tariffs to primarily impact the cost of nonbook and novelty items sold in our children's book business, which we currently source from countries with tariff increases, including China.

Overall, we remain confident that our global scale, highly optimized supply chain and pricing power will help mitigate against any further material tariff-related exposure this year. Fiscal 2026 revenue is expected to grow 2% to 4%, reflecting strength in our core businesses, partially offset by continuing headwinds on consumer spending.

Our outlook for free cash flow in fiscal 2026 and is $30 million to $40 million, reflecting higher expected earnings, improved working capital and lower cash tax, partially offset by higher capital investments and other accrued expenses. Over the last several months, we have taken strategic steps to position our organization to operate more efficiently, aligning spending with our long-term strategy and permanently lowering our cost structure by reducing nonrevenue-generating and consulting expenses. We expect the restructuring actions across all segments to further benefit this fiscal year's results.

Each business segment has contributed significantly to our sustained cost management and execution strategies. In fiscal 2025, these actions resulted in cost savings of approximately $25 million on an annualized basis, of which $15 million was realized during the year with $10 million of additional benefit expected in fiscal 2026. In addition, we expect an incremental $15 million to $20 million in cost savings, plus actions to improve gross profit, including through pricing, to contribute to higher profitability. Together, we expect these actions to more than offset the impact of current tariffs and inflation.

Turning to our segment outlook. In the Children's Book and Distribution segment, we expect revenue growth and school reading events. Given its high operating leverage, anticipated revenue growth will have a positive impact on operating margins and profitability. Revenue in trade publishing is expected to be solid. Given the strength of the publishing calendar and approximately level with fiscal 2025, which benefited from 2 global hits. In addition, we expect the strategic integration and reorganization of children's book group to drive long-term revenue growth and increase profitability in fiscal 2026 and beyond through operational efficiencies and alignment of our editorial, merchandising and distribution teams.

In the Entertainment segment, we expect to benefit from recent production and green light momentum, as Peter discussed. These productions will contribute to revenue growth primarily in the second half of this fiscal year. with the majority of the benefit in fiscal 2027, reflecting revenue recognition typical for developments and productions. We anticipate adjusted EBITDA in line with prior year.

In the Education segment, we are targeting revenue approximately in line with prior year. As Peter noted, following our strategic reorganization under new leadership, we are repositioning this business for long-term growth. As we execute on several key initiatives, we anticipate improved profitability in fiscal 2026 and beyond. In

the International segment, we anticipate a modest decrease in revenue and profits. Following the strong performance in trade channels in fiscal 2025. Unallocated overhead costs are expected to decrease next year as we continue to improve efficiencies and benefit from cost reductions in our overhead functions, as I discussed earlier.

As a reminder, Scholastic's results are highly seasonal. We generally record an operating loss in our first and third quarters with profitable second and fourth quarters. In the fiscal first quarter, we expect a seasonal loss approximately in line with the prior year period. Thank you for your time today.

And I will now hand the call back to Peter for his final remarks.

Thank you, Haji. We are very pleased with the meaningful progress our team has made over the past 6 months, executing strongly, reducing significant costs, strengthening our organization and organizational structures returning capital to shareholders and taking steps to optimize our capital structure and balance sheet. Thanks to this work, which continues, we're well positioned for profitable strategic growth in fiscal 2026. We continue to focus on our long-term opportunity as a global leader in the children's publishing, media and education space where Scholastics brand, IP and distribution channels present compelling growth opportunities to meet kids, families and schools essential needs to educate, inform and engage kids.

I want to thank our employees, authors, illustrators and creators for their tremendous dedication and hard work and our shareholders for their continued support. We all look forward to continuing our momentum to create value and impact in the year ahead. Thank you very much. And now let me turn the call over to Jeff.

Thank you, Peter. With that, we will open the call for questions. Operator?

[Operator Instructions] Our first question will come from the line of Brendan McCarthy from Sidoti.

I wanted to start off on the cost side. I know you pointed to potential cost savings in fiscal '26. Curious as to what are the sources of those cost savings going forward?

So a majority of the cost actions are coming out of non -- more discretionary functions, things that we can cut back on as we're looking to be more frugal as an organization. Things that are not really revenue-driven. Those are the major areas that we're looking at from our perspective right now. .

Got it. So you expect that will flow through to overhead ultimately stepping down in fiscal 2016 compared to fiscal '25?

Exactly. So we're getting the full year impact of the stuff right in FY '26. So the FY '25 as we showed in -- we talked about in the script, we're experiencing -- we saw $15 million of that in FY '25, and we're going to see another $10 million in FY '20.

Great. Great. Got it. And turning to the Education Solutions business. I think you mentioned you're looking for maybe flat revenue there in fiscal '26. Curious as to what are the kind of driving factors behind that expectation? And is that different from what you had expected for fiscal '26 a couple of quarters ago?

Yes. It's Peter here. Yes, we -- when we actually look at our overall education business, we do have parts which actually have been going well. And therefore, a lot of the state-sponsored work that we do, for example, and some of the supported work that we get, I mean, are going well. So we could -- we would certainly see those increasing.

I mean, the market continues to be cyclically difficult, especially with districts and schools but we do expect the situation to progressively improve just because of the normal cyclicality of the education business. So we think that we'll be in a good position to at least have flat revenues in what we do in education.

But allied to that is the fact that we see growth in the more profitable parts of the business that we are conducting -- and also, we've taken some major steps to make sure that we are operating as efficiently as possible and repositioning the business for medium- to longer-term growth.

Great. I appreciate the color there. And when you look at how states or school districts are approaching literacy instruction, are you still seeing a pretty large shift towards the science-based reading approach? And do you ultimately still anticipate to launch products geared towards the science of reading in fiscal '20?

Yes. I mean, science of reading is certainly continuing. It's sort of growth and the importance across states. We've already got some materials which we have, which are ready for it, the knowledge library, for example, is strongly aligned with the signs of reading. And has had very we expect it to have a very positive feedback. So that's all looking good.

I think the other thing which is happening around literacy though, which is worth saying, is this increasing realization that having books in the home is 1 of the really key things for helping kids. And of course, that's where our state sponsored and some of our other activities are based. So I think what we're doing is very, very much in line with the way in which literacy is being tackled in all states.

Understood there. And on the state-sponsored programs, what's the pipeline look like there? I know that there's a handful of states in the Southeast that you're -- but you have a partnership with, just wondering what the pipeline looks there for additional key partnerships?

Are the pipeline, we have multiple conversations which are going on with state governments. And I just had a full -- as it were a review of this actually this week. I'm pretty optimistic that things are going well, both in terms of being able to expand what we do in those states, which are, generally speaking, are in the Southeast. We also have to acknowledge that the sales cycles are quite long. And we've been in discussions for quite some time. But I think there's a growing realization that the literacy is a problem that really needs to be tackled. And people understand that that's what parents and electors and everybody else wants. And I think that we're seeing that there's very, very good progress being made in a number of states now. And it's also that we're very uniquely positioned here.

Our brand, our books, our distribution channels, we can really offer a tremendous service here, and that's recognized by the way, we've been able to build our business here over the last 4 years.

Understood. I appreciate the detail there, Peter. And I wanted to talk about the trade channel combination with the school channels. I guess are you seeing or hearing any initial feedback from customers just related to that combination or maybe any internal feedback on kind of how that -- or I guess, what impact that combination has made so far?

Well, the main impact at the moment is really internal rather than external. And it's been tremendous, actually. I mean I've been super pleased with the way in which people feel that this creates an environment whereby both the publishing and the distribution channels can work more effectively together going forward. And there is tremendous excitement about that internally. And we're going to see that externally as well. I'm sure.

I mean we have the opportunity to be able to link what we're selling in schools through the book fairs and book club channels in a much more integrated way than we've done before with the trade publishing. And we'll see that because they're working on short-term gains which we can leverage and benefit from in FY '26, particularly in book fairs in the spring, for example, and we have this secret sauce, which is that we are both a publisher and a distributor. And that gives us a lot of knowledge. It gives us a lot of leverage, and it's very, very powerful. And I think that bringing this together has been something that I think is really going to make a difference. And it's even going to make a difference in the short term.

It's going to have a much bigger impact, I think, during the once you go forward into the next 2 financial years beyond FY '26.

Great. That makes sense. One more question for me just on the entertainment business. It looks like revenues stepped down there in fiscal '25, but you're looking for the return to revenue growth in fiscal '26. I guess from a profitability standpoint, what's your expectation there for the entertainment business for fiscal '26?

Brendan, this is Haji again. We expect it to be slightly lower but only this year. We have the headwinds of course, inflation that is impacting that organization. but we're guiding to see basically flat profitability.

Understood. And is that just -- just to provide more detail there. Is that just inflationary impacts on the production side, on the cost side? Or are there other cost trends in play? SP-6 Yes. So .

From an entertainment perspective, we're actually seeing the production activity pick up a little bit with more green lights coming in, but that's usually on -- like I said in my talk earlier, it's going to mainly impact us in FY '27. We're going to see some stuff on the end of FY '26, but mainly in FY '27 on the revenue side.

Got it. Got it. And Raj, I know you mentioned the real estate assets and the potential monetization there. Are you able to provide any color on the timing of a potential sale leaseback transaction and looking at -- I know you mentioned potentially buying back shares or paying down debt. But are you confident or are you confident in buying back shares at this level? Or how do you -- how can we kind of think about the capital allocation priorities?

Well, first of all, I'll talk about the timing. The team is working really hard right now to get things out. New market has been a really good partner with us so far. And we're hoping, as I mentioned earlier, to have something within the next 90 to 120 days. In terms of our capital allocation priorities, we're going to remain consistent with returning capital to shareholders as possible when we can. But we did a lot of share repurchasing in the fourth quarter which is shown in our numbers already. So we were ahead of the game because the share price was a good opportunity for us that really buys back.

And this concludes our Q&A. I will now pass the call back to management for any closing remarks.

Yes. No, I'm excited it's Peter here. I'm excited about the new fiscal year ahead. I mean, I think we're in good momentum. We've got a positive outlook, and we continue to focus on creating shareholder value and impact, that's so important to us. And we look forward to providing more updates including on our first quarter call in a couple of months' time. So thank you to all who joined us this afternoon live or if you're listening to the recorded call later, we very much appreciate your support. So thank you all very much, and goodbye.

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