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Edited Transcript of SCOO earnings conference call or presentation 7-Apr-20 1:00pm GMT

Q4 2019 School Specialty Inc Earnings Call

Humble Apr 10, 2020 (Thomson StreetEvents) -- Edited Transcript of School Specialty Inc earnings conference call or presentation Tuesday, April 7, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael C. Buenzow

School Specialty, Inc. - Interim CEO & Director

* Ryan M. Bohr

School Specialty, Inc. - Executive VP & COO

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Conference Call Participants

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* Kenneth Maciora;Empire Relations Group;Chief Executive Officer

* Christopher McIlwaine;FTI Consulting;Senior Consultant

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the School Specialty's Fiscal 2019 Fourth Quarter Results Conference Call. (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, Chris McIlwaine at FTI Consulting. Please go ahead, sir.

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Christopher McIlwaine;FTI Consulting;Senior Consultant, [2]

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Thank you, operator. Good morning, everyone, and welcome to School Specialty's Fiscal 2019 Year-end Conference Call. On our website under the Investor Relations section, you'll see our press release and the updated investor presentation. Joining us today are Michael Buenzow, School Specialty's Interim President and Chief Executive Officer; Ryan Bohr, Chief -- Executive Vice President and Chief Operating Officer; and Kevin Baehler, Executive Vice President and Chief Financial Officer.

Following Michael and Ryan's prepared remarks, they will be available for Q&A. Additionally, our call today is being webcast on the website in the Investor Relations section, and we have a replay available for those who are unable to join.

Before I turn the call over to Michael, I'd like to remind everyone that except for historical information contained herein, statements made on today's call and webcast about School Specialty's future financial condition, results of operations, expectations, plans or prospects constitute forward-looking statements. Forward-looking statements also include those preceded or followed by the words anticipate, believes, could, estimates, expects, intends, made, plans, projects, should, target and/or similar expressions.

These forward-looking statements are based on School Specialty's current estimates and assumptions and as such, involve uncertainty and risk. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those contemplated by the forward-looking statements because of a number of factors, including those described in the company's Form 10-K.

Any forward-looking statements on today's call and webcast speak only as of the date on which it is made. Except to the extent required under federal securities law, School Specialty does not intend to update or review the forward-looking statements.

With these formalities out of the way, I'd like to turn the call over to Michael Buenzow. Please go ahead, Michael.

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Michael C. Buenzow, School Specialty, Inc. - Interim CEO & Director [3]

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Thanks, Chris. Given the importance of where our efforts currently stand with respect to addressing our capital structure, we're going to keep our comments this morning regarding our 2019 performance fairly limited. We will also provide an update on the impact of COVID-19 on our business based on the information we have at this time. This said, we will address questions following our remarks and encourage all parties to review our detailed Q4 investor update that has been posted on our website.

Now I would like to comment on our key operational priorities and business objectives in 2019. First, one of our primary goals is to improve penetration and drive organic growth with our existing customers in both large and smaller school districts. We continue to drive our selling model and the expansion of our inside sales team to increase the effectiveness of our go-to-market strategies. This helps us leverage our key supplier relationships and provide greater value to our customers. We remain focused on increasing our customer touch points, building relationships and understanding the priorities of key decision makers, which we believe will lead to long-term sustainable organic revenue growth for our company.

In 2019, total revenue was down approximately 7%, but we exited the year with strong customer relationships and strong competitive positioning within the market. The biggest drivers of the 2019 revenue decline were the custom agendas category, which has been exited and divested; continued softness in the science curriculum, which had begun to gain good traction during the first quarter of 2020 prior to slowing in late March due to the impact of COVID-19; and finally, strategic decisions to move away from certain large, low-margin supplies and furniture opportunities.

Specifically, in the supplies and furniture categories, which collectively account for 80 -- approximately 80% of our overall sales, we generated a combined 1.3% higher gross profit during the second half of 2019 despite having 6.1% lower revenue. This is due to a strong overall 210 basis point gross margin improvement in these areas.

In short, we delivered operationally for our customers in 2019. We successfully implemented a more effective approach to pricing and bids, and we were able to exit the fiscal year with stronger customer relationships that enable us to start 2020 with new growth opportunities across most of our major product categories.

Our second priority is to continue our focus on cost containment and operational process excellence. As we pursue new growth opportunities, driving operating leverage in our fixed and variable cost is imperative, particularly related to transportation and labor. Our efforts to control transportation costs, optimize labor staffing and improve operational efficiency continue to take hold in a positive way as evidenced by the favorable decline in SG&A expense.

Total SG&A costs were down $4.2 million or 1.9% for the year. When excluding the impact of noncash expenses, SG&A associated with the custom agendas business and all onetime restructuring related costs, all other SG&A expense was down $9.5 million or 5.1% year-over-year.

Our third priority, which is a function of the first 2, is to build top line revenue momentum, which will result in strong bottom line profitability improvement. As we move into 2020, 3 factors were combining to deliver our strongest start in 5 years: one, exceptional peak season operating performance; two, effective customer engagement; and three, a smarter, more strategic approach to pricing and bids.

Through March 14, which represents the first 11 weeks of the fiscal year, our bookings were up nearly 10% overall, and we were experiencing solid gross margin improvement. Importantly, we are experiencing strength across substantially all product categories, including science curriculum.

Unfortunately, the COVID-19 pandemic brought an abrupt halt to this momentum as schools across the country began to close during the second half of March. As Ryan will comment further on COVID-19 and the implications for our business, I will conclude by touching on the fourth business priority, which we have been discussing throughout 2019.

The entire School Specialty team is highly focused on generating sustainable free cash flow. More specifically, while we did not achieve the EBITDA improvements targeted for 2019, working capital normalized as expected. This, coupled with efficient and prudent capital spending, led to a $20.5 million improvement in free cash flow. Despite a $2.2 million increase in cash interest and a $9.3 million increase in onetime restructuring related costs, leverage free cash flow was modestly positive in 2019.

Now that I've discussed 2019 from a strategic standpoint, I'd like to turn the call over to our COO, Ryan Bohr, to discuss the COVID-19 impact in more detail and our efforts to address the challenges associated with our capital structure. Ryan?

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Ryan M. Bohr, School Specialty, Inc. - Executive VP & COO [4]

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Thank you. As Mike noted, we were experiencing considerable momentum in our business prior to the impact of COVID-19. Total bookings were up 9.9% through March 14 with strength in supplies, up 5%; furniture, up 22%; and science curriculum, up 23%. Further, the supplies and furniture standard gross margins were up 100 and 120 basis points, respectively, year-to-date.

We reference these pre-COVID-19 trends because they point to the strong position we have with our customers and in the market more generally. That strength will serve as the foundation for a recovery as the education market shifts its focus to the 2020-2021 school year and business activity increases.

Since the week ended March 15, we have seen a 60% to 80% pullback in orders from prior year levels, depending on the product category. This is a developing situation, and it is far too premature to estimate the full year impact, but we are seeing signs that districts continue to move forward with plans and purchases for the upcoming school year.

We expect the school closures will result in a onetime loss of revenue in the consumable facility and classroom supplies areas. However, we expect a lower level of permanent lost revenue opportunities in the furniture and curriculum areas as a meaningful level of purchasing decisions and deliveries scheduled in current periods are expected to be deferred and ultimately recovered in subsequent periods.

In response to COVID-19, we have taken a number of steps to safeguard the well-being of our employees while remaining operational as an essential business to service the needs of educators, which includes supporting their at-home learning efforts. After initially taking the basic steps to practice social distancing, including limiting travel, employee meetings and events, we quickly pivoted and transitioned substantially all nonfulfillment center employees to effective remote working arrangements. As mentioned, our core fulfillment centers remain operational as an essential infrastructure or business within the states they operate. We have significantly enhanced our cleaning protocols and implemented measures to enable social distancing within the facility.

We have scaled back staffing levels in our fulfillment centers and customer care and reduced hours for our inside sales team to align with the current level of business activity. We are confident we can ramp up capacity in these areas as customer activity increases.

In addition, we have made adjustments to scale back the seasonal inventory build. Our merchandising and procurement teams are monitoring stock levels and remain in close contact with our vendor partners.

Finally, we have begun to reset catalog and other marketing plans to align with changes in the market and customer circumstances. Beyond the actions taken, we will continue to identify and execute cost-reduction opportunities where appropriate.

Finally, I'd like to provide an update on our efforts to address our capital structure. Our 2019 10-K filed Monday evening contain specific language pertaining to our financial position that I'd like to further explain. In the 10-K, it states that it is likely that our current financial situation will depend on the negotiations with senior secured lenders, and we expect those negotiations will result in our equity having little or no value and the lenders taking control of the company.

At this point, we are working with our senior secured lenders in a process to recapitalize the business in a manner that would lower outstanding indebtedness and inject capital to address our liquidity pressures. This process is not complete, and there can be no assurance that it will be completed successfully.

However, these discussions have been collaborative, are progressing on an expedited time line and are targeting a solution that can avoid a bankruptcy filing and be beneficial to the long-term viability of our company. While management is very disappointed that it's been unable to arrive at a transaction that would have provided a better outcome to shareholders, we remain focused on completing a successful recapitalization.

With that, we'll turn the call back to the operator to open up Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ken Maciora with Empire Relations.

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Kenneth Maciora;Empire Relations Group;Chief Executive Officer, [2]

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Thank you for all the information that you've provided on this call. It's been very helpful. There was a comment made that we are seeing signs of, I guess, it was said plans and purchases for the upcoming school year. Can you give us some sort of idea of what percentage of school districts within your client base are actually purchasing at this point for the upcoming school year, understanding that deliveries may not be over the short term?

And also, do you have some sort of way of evaluating what their inventory situation is because they may not be using inventory right now? In fact, most school districts are not. And how that's going to actually impact the third and fourth quarter for 2020?

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Ryan M. Bohr, School Specialty, Inc. - Executive VP & COO [3]

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Sure. Thank you for your question. This is Ryan. So first of all, just to -- as a note, we service 95-plus percent of the school districts in the country in some capacity. So essentially, our customer base is the entire public school system.

For the most part, as the -- is known, a significant majority, 90-plus percent of the school facilities are closed. However, when we were referring to the level of business activity, we are seeing districts across the country continue to procure product. It's been, as we mentioned earlier, the supplies areas have been down considerably. That's the area that is down the most, being down 75% to 80%.

However, longer lead time decision items such as furniture, curriculum, we continue to see activity. There are, for the most part, I would say, in the majority of the situations, we're seeing some level of administrative staff in facilities. We are seeing facilities and maintenance personnel in the facilities, and they continue to do work within those facilities to prepare them for either the return of students, which is becoming less and less likely state by state for the current year, but more importantly, to prepare for next year.

We do not have really broad or, I would say, any reliable view into their inventories. However, the fact that they are not consuming basic classroom and facility supplies is what has led to our perspective that, for the most part, that will represent a loss in sales.

I would say that for our business, the final comment is that as we move into May and June, the orders we received for customers typically are more aligned with use in the next school year as opposed to consumption for the balance of the current school year.

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Operator [4]

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Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Chris McIlwaine for any further remarks.

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Christopher McIlwaine;FTI Consulting;Senior Consultant, [5]

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Thank you. That concludes today's call. We appreciate you all taking the time to join, and we hope that you have a great rest of the week. Thank you so much.

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Operator [6]

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