November 2, 2016 Last Updated 11:08 am

Torstar Q3 earnings reflect challenging newspaper environment in Canada

Segmented revenue in the third quarter reflected declines of 16.1% in print advertising revenues, with particular softness in national advertising revenues

TORONTO, Ontario – November 2, 2016 – Torstar Corporation today reported financial results for the third quarter ended September 30, 2016.

Highlights for the third quarter:

  • During the third quarter of 2016, we sold the Vaughan Printing Facility and surrounding lands for net proceeds of $53.6 million recognizing a gain of $21.8 million on the sale.
  • Ended the third quarter of 2016 with $69.8 million of cash and cash equivalents and $18.7 million of restricted cash; Torstar has no bank indebtedness.
  • Our net income from continuing operations was $1.1 million ($0.01 per share) in the third quarter of 2016. This compares to a net loss of $164.8 million ($2.04 per share) in the third quarter of 2015.
  • Our net income attributable to equity shareholders was $1.4 million ($0.02 per share) in the third quarter of 2016 compared to a net loss attributable to equity shareholders of $164.3 million ($2.05 per share) in the third quarter of 2015.
  • Adjusted loss per share was $0.08 in the third quarter of 2016, an improvement of $0.05 from adjusted loss per share of $0.13 in the third quarter of 2015. Adjusted loss per share in 2016 and 2015 included $0.30 and $0.31 per share effects of amortization and depreciation.
  • Our segmented operating loss was $15.2 million in the third quarter of 2016 which included $23.9 million of non-cash amortization and depreciation expense as well as $3.7 million of restructuring and other charges.
  • Our segmented adjusted EBITDA was $13.1 million in the third quarter of 2016 up $2.7 million from the prior year benefiting from $3.2 million of higher contribution from our Digital Ventures segment which included 42% comparable period growth in adjusted EBITDA at VerticalScope. Segmented adjusted EBITDA in the third quarter in the newspaper operations was relatively stable with adjusted EBITDA at Star Media Group up $0.5 million and Metroland Media Group down $0.8 million in the third quarter.
  • Segmented revenue was $181.7 million in the third quarter of 2016, down $19.7 million (9.8%) from $201.4 million in the third quarter of 2015.

torstar-front-275“We were pleased, overall, with our progress in the quarter. Segmented adjusted EBITDA was up $2.7 million to $13.1 million and included $7.8 million from our Digital Ventures segment which continues to benefit from very strong year over year growth in adjusted EBITDA at VerticalScope. At Metroland and the Star Media Group, we benefitted from continuing efforts on costs which offset the impact of the continuing revenue challenges resulting in relatively stable earnings across the two operations.” said David Holland, President and CEO of Torstar Corporation. “We were also very pleased with the outcome and timing of the sale of the Vaughan Printing Facility completed within three months of transitioning out of the facility for net proceeds of $53.6 million. The outsourcing of the printing of the Toronto Star has gone smoothly and we are tracking right in line with expectations.

“Looking forward, we expect earnings in the fourth quarter to benefit from growth at VerticalScope, efforts on reducing costs, and as anticipated, lower net investment in Toronto Star Touch compared to the 2015 launch. We remain very committed to a multi-platform evolution across our media operations, and led by VerticalScope, a meaningful transformation of our asset base towards a more digital orientation for Torstar as a whole.”

The following chart provides a continuity of earnings per share from the third quarter and first nine months of 2015 to the third quarter and first nine months of 2016:

trostar-q3-1

Revenue
Segmented revenue was down $19.7 million or 9.8% in the third quarter of 2016 with revenues negatively impacted by several factors including the absence of $3.6 million of net revenue associated with the closure of Olive Media at the end of 2015 and the absence of $2.1 million of commercial printing revenue at the Vaughan Printing Facility. These negative factors were partially offset by incremental revenue of $2.4 million from VerticalScope resulting from our investment on July 28, 2015. Adjusting for these factors, segmented revenue was down $16.4 million or 8.3% in the third quarter of 2016.

Segmented revenue in the third quarter reflected declines of 16.1% in print advertising revenues, with particular softness in national advertising revenues, a 7.2% decrease in subscriber revenue and a 1.3% increase in distribution revenues.

Operating revenue (excluding our proportionate share of revenues from our joint ventures and our 56% interest in VerticalScope) was down $23.3 million or 12.6% in the third quarter of 2016.

Excluding the impact of Olive Media, digital revenue across all segments increased 17.9% in the third quarter of 2016 which was primarily attributable to the investment in VerticalScope on July 28, 2015. Digital revenues for the third quarter of 2016 also reflected lower revenues at Workopolis and WagJag offset by revenues from Toronto Star Touch combined with continued growth in local digital advertising within the community websites at Metroland Media Group and growth at eyeReturn marketing. Digital revenues were 18.8% of total segment revenues in the third quarter of 2016 compared to 16.2% in the third quarter of 2015.

Salaries and benefits
Segmented salaries and benefits costs were down $13.9 million (15.5%) in the third quarter of 2016 including the absence of $1.1 million of digital media tax credits recorded in the third quarter of 2015. Segmented salaries and benefit costs in the third quarter of 2016 included the benefit of savings from restructuring initiatives, including the closure of the Vaughan Printing Facility, lower commission costs, and lower staffing costs associated with Toronto Star Touch, partially offset by the inclusion of our proportionate share of salaries and benefit costs of VerticalScope.

Other operating costs
Segmented other operating costs primarily include newspaper circulation and flyer distribution costs, production costs and newsprint costs which represented 41.7%, 10.9% and 13.7% respectively of segmented other operating costs for the third quarter.

Segmented other operating costs were down $8.5 million or 8.4% in the third quarter of 2016 as a result of lower print volumes and the impact of other cost reductions partially offset by fees associated with outsourcing the printing of the Toronto Star as well as increased costs related to our proportionate share of VerticalScope’s other operating costs.

Adjusted EBITDA
Our segmented adjusted EBITDA was $13.1 million in the third quarter of 2016 up $2.7 million from the prior year benefiting from $3.2 million of higher contribution from our Digital Ventures segment which included 42% comparable period growth in adjusted EBITDA at VerticalScope. Segmented adjusted EBITDA in the third quarter in the newspaper operations was relatively stable with adjusted EBITDA at Star Media Group up $0.5 million and Metroland Media Group down $0.8 million in the third quarter.

Amortization and depreciation
Total segmented amortization and depreciation decreased $1.4 million in the third quarter of 2016 compared to the third quarter of 2015, primarily as a result of a decrease in amortization of intangible assets associated with our investment in VerticalScope and partially offset by increased amortization of software and other intangible assets at the Star Media Group. The third quarter of 2016 included $13.0 million of amortization of intangible assets associated with our investment in VerticalScope.

Operating earnings (loss)
Segmented operating loss was $11.4 million in the third quarter of 2016 compared to an operating loss of $15.4 million in the third quarter of 2015. The reduction in the operating loss in the third quarter of 2016 was due to a $2.7 million increase in adjusted EBITDA as well as lower amortization and depreciation expense.

Restructuring and other charges
Total segmented restructuring and other charges were $3.7 million in the third quarter of 2016 and $4.2 million in the comparable period of 2015. Restructuring charges in the third quarter of 2016 included $6.4 million of charges related to cost reduction initiatives, partially offset by a $2.7 million recovery in respect of revised estimates of non-avoidable facility related expenses related to the closure of the Vaughan Printing Facility.

Restructuring charges through the end of the third quarter of 2016 reflect a reduction of approximately 570 positions which are expected to result in annualized net savings of $34.0 million. Of the $34.0 million in expected savings, $19.2 million are expected to be realized in 2016 (including $10.6 million in the first nine months) and the remaining $14.8 million in 2017.

Operating profit (loss)
Segmented operating loss decreased $152.1 million in the third quarter of 2016. Operating loss for the third quarter of 2016 included $23.9 million of non-cash amortization and depreciation expense as well as $3.7 million of restructuring and other charges. The operating loss in the third quarter of 2015 included $25.3 million of amortization and depreciation expense as well as $147.8 million of non-cash impairment charges.

Our operating loss excluding our proportionate share of operating profit (loss) from VerticalScope and our joint ventures decreased $132.8 million in the third quarter of 2016 compared to 2015.

Income (loss) from joint ventures
Our income from joint ventures was $0.4 million in the third quarter of 2016 compared to a loss of $11.6 million in the third quarter of 2015 the results of which are included in our discussions of segmented revenue and segmented adjusted EBITDA above. The loss from joint ventures in the third quarter of 2015 included impairment charges of $12.0 million.

Income (loss) from associated businesses
Our loss from associated businesses was $4.0 million in the third quarter of 2016 compared to a loss of $11.8 million in the third quarter of 2015.

The loss in the third quarter of 2016 included income of $1.0 million from Black Press, income of $0.3 million from Blue Ant and a loss of $5.3 million from VerticalScope. The loss from VerticalScope included $13.0 million of amortization expense. The loss in the third quarter of 2015 included income of $0.5 million from Black Press offset by a loss of $0.9 million from Blue Ant, a loss of $1.1 million from Shop.ca and a loss of $10.3 million from VerticalScope which included $17.3 million of amortization expense. We invested in VerticalScope on July 28, 2015.

Investment in VerticalScope
During the third quarter of 2015, we acquired a 56% interest in VerticalScope. Pursuant to certain terms in the shareholders agreement, the investment is accounted for as an associated business using the equity method, rather than a subsidiary or joint venture. The results of VerticalScope are reported as part of our Digital Ventures Segment in our segmented reporting.

In connection with the investment in VerticalScope, and consistent with the general methodology VerticalScope uses when making its acquisitions, we allocated the difference between the fair value of the purchase price paid and the book value of the net assets of VerticalScope to customer relationships, technology, domain names, acquired content and goodwill. The amortization periods for these intangible assets generally range from 5-10 years, with the exception of acquired content which, consistent with VerticalScope’s accounting policy, is amortized over one year. Given the relatively large value allocated to acquired content (U.S. $60.6 million) and the one year amortization period associated with it, we have incurred large amortization charges related to these intangible assets through the end of July 2016.

Our 56% share of VerticalScope’s third quarter 2016 net loss included $13.0 million in respect of amortization and depreciation expense. This included amortization of fair value differences of intangible assets identified when we made our investment in VerticalScope as well as the amortization of fair value differences which VerticalScope has identified on acquisitions it has made subsequent to July 28, 2015.

During the first nine months of 2016 VerticalScope made acquisitions totalling U.S. $11.0 million which were financed from VerticalScope’s operating cash flow. VerticalScope’s debt, net of cash on hand, was U.S. $77.0 million at September 30, 2016 down U.S. $4.7 million from U.S. $81.7 million at June 30, 2016.

Other income
Other income was $23.1 million in the third quarter of 2016 compared to $nil in the third quarter of 2015. Other income for the third quarter included a gain of $21.8 million on the sale of the Vaughan Printing Facility and surrounding lands and a gain of $1.3 million on the sale of a real estate property in Guelph.

Income and other taxes
We recorded tax expense of $7.5 million in the third quarter of 2016. This compares to income tax recoveries of $1.2 million in the third quarter of 2015. Excluding the impact of adjustments to deferred taxes for previous years and losses not recognized our effective tax rate was 24.5% in the third quarter of 2016.

Net income (loss) from continuing operations
Our net income from continuing operations was $1.1 million ($0.01 per share) in the third quarter of 2016. This compares to a net loss of $164.8 million ($2.04 per share) in the third quarter of 2015. The third quarter of 2016 included a gain of $23.1 million on the sale of two properties, partially offset by $13.0 million of non-cash amortization and depreciation expense associated with our investment in VerticalScope as well as $3.7 million of restructuring charges. The loss in the third quarter of 2015 included $147.8 million of non-cash impairment charges and $17.3 million of non-cash amortization and depreciation expense associated with our investment in VerticalScope.

Net income (loss) attributable to equity shareholders
Our net income attributable to equity shareholders was $1.4 million ($0.02 per share) in the third quarter of 2016 compared to net loss attributable to equity shareholders of $164.3 million ($2.05 per share) in the third quarter of 2015.

OUTLOOK
Through the third quarter and first nine months of 2016, Metroland Media Group and Star Media Group continued to face a challenging print advertising market resulting from continued shifts in spending by advertisers. Indications are that the revenue trends experienced at Star Media Group and Metroland Media Group in the third quarter of 2016 have continued early into the fourth quarter. However, it is difficult to predict if these trends will continue in the balance of 2016. We currently expect that flyer distribution revenues will experience moderate declines in the fourth quarter of 2016. Subscriber revenues declined moderately in the first nine months of 2016 and this trend is expected to continue in the balance of the year. Excluding the impact of the closure of Olive Media, Metroland Media Group and Star Media Group digital revenue is expected to grow in the balance of 2016 as a result of revenues from Toronto Star Touch, growth at thestar.com as well as growth in local digital advertising at Metroland Media Group.

Within the Digital Ventures segment, the trend in revenue and adjusted EBITDA growth from a combination of acquisitions and organic growth at VerticalScope experienced in the first nine months of 2016 is expected to continue in the balance of the year.

Cost reduction remains an important area of focus for us in the balance of 2016. Net savings related to restructuring initiatives undertaken through the end of the third quarter of 2016 are expected to be $9.9 million in the balance of 2016 ($3.5 million in Metroland Media Group, $6.2 million in the Star Media Group and $0.2 million in Digital Ventures), including an expected $3 million of cost savings relative to 2015 (in the range of approximately $10 million on an annual basis) associated with the transition of printing the Toronto Star to Transcontinental Printing. While newsprint pricing has increased in 2016, we expect that any impact of price increases will continue to be more than offset by lower consumption in the balance of the year. Our net investment in Toronto Star Touch was $10.1 million in the first nine months of 2016 and included significant marketing costs. We currently anticipate that the net investment in the fourth quarter of 2016 will be $1.5 million, down from $9.6 million in the fourth quarter of 2015 and including the benefit of an additional $0.8 million of savings from restructuring initiatives undertaken to date and not included above.

In addition, in the fourth quarter of 2016, we anticipate our 56% share of VerticalScope’s non-cash amortization charges, including those related to intangible assets identified at the time of our investment to drop to approximately U.S. $5 million.

Looking forward, in 2017, we expect the cost base to benefit $15.2 million from restructuring initiatives undertaken to date, including a full year impact of outsourced printing of the Toronto Star. We expect the net investment in Toronto Star Touch to be between $2 million and $4 million for the full year in 2017, including the benefit of an additional $2.2 million of savings from restructuring initiatives undertaken to date and not included above. Expenses related to our registered defined benefit pension plans are currently expected to decrease by approximately $3 million to approximately $11 million in 2017. However, from a cash flow perspective, in 2017, Torstar anticipates required funding of its registered defined benefit pension plans to remain at approximately $18 million. Capital expenditures in 2017 are currently anticipated to be between $12 million and $13 million.

DIVIDEND
On November 1, 2016, Torstar declared a quarterly dividend of 2.5 cents per share on its Class A shares and Class B non-voting shares, payable on December 30, 2016, to shareholders of record at the close of business on December 9, 2016. Torstar advises that, for the purposes of the Income Tax Act, Canada and for any relevant provincial tax legislation, this dividend is designated as an eligible dividend.

Comments are closed.