August 2, 2017 Last Updated 10:13 am

Publisher of Toronto Star, Torstar Corporation, narrows losses, but revenue falls as print ads fall 15%

‘Looking forward, we expect earnings in the balance of the year to continue to benefit from growth at VerticalScope, helping to offset continued pressures on print advertising revenues in the newspaper operations’

TORONTO, Ontario – August 02, 2017 – Torstar Corporation today reported financial results for the second quarter ended June 30, 2017.

Highlights for the second quarter:

  • Ended the second quarter of 2017 with $48.4 million of cash and cash equivalents and $9.1 million of restricted cash; Torstar has no bank indebtedness.
  • Our net loss attributable to equity shareholders was $7.0 million ($0.09 per share) in the second quarter of 2017. This compares to a net loss of $23.9 million ($0.30 per share) in the second quarter of 2016.
  • Adjusted loss per share was $0.03 in the second quarter of 2017, an improvement of $0.10 from adjusted loss per share of $0.13 in the second quarter of 2016. Adjusted loss per share in 2017 and 2016 included $0.24 and $0.50 per share effects of amortization and depreciation.
  • Our segmented operating loss was $8.1 million in the second quarter of 2017 which included $19.2 million of non-cash amortization and depreciation expense as well as $6.2 million of restructuring and other charges.
  • Our segmented adjusted EBITDA was $18.0 million in the second quarter of 2017, up $1.8 million from the prior year. Segmented adjusted EBITDA in the Digital Ventures segment was $6.9 million in the quarter which benefitted from 32% growth in adjusted EBITDA at VerticalScope (27% growth in USD). In the newspaper operations, the segmented adjusted EBITDA at the Star Media Group was $0.8 million, an improvement of $1.5 million, while segmented adjusted EBITDA at the Metroland Media Group was $12.7 million, down $1.2 million in the quarter.
  • Segmented revenue was $180.8 million in the second quarter of 2017, down $15.7 million (8%) from $196.5 million in the second quarter of 2016 which included revenue growth of $2.0 million or 22% (17% growth in USD) from VerticalScope.

“Segmented adjusted EBITDA was up $1.8 million to $18.0 million in the second quarter and included $6.9 million from our Digital Ventures segment which continues to benefit from very strong year over year growth in revenue and 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 challenges in the print advertising environment with earnings up $0.3 million across the two operations,” said John Boynton, President and CEO of Torstar Corporation. “Looking forward, we expect earnings in the balance of the year to continue to benefit from growth at VerticalScope, helping to offset continued pressures on print advertising revenues in the newspaper operations. In addition, efforts to reduce cash outflow, along with recent regulatory developments related to minimum funding requirements for registered defined benefit pension plans are expected to provide Torstar with additional flexibility in the balance of 2017 and in 2018 as we progress through our transformation.”

Revenue

Segmented revenue was down $15.7 million or 8% in the second quarter and included revenue growth of $2.0 million (22%) from VerticalScope. Segmented revenue in the second quarter of 2017 reflected declines of 15% in print advertising revenues, with particular softness in national advertising revenues, a 3.6% decrease in subscriber revenue and a 4.6% decrease in distribution revenues.

Operating revenue (excluding our proportionate share of revenues from our joint ventures and our 56% interest in VerticalScope) was down $16.1 million or 9% in the second quarter of 2017.

Digital revenue in the second quarter of 2017 was comparable to the second quarter of 2016 reflecting lower revenues at Workopolis, Toronto Star Touch and WagJag offset by continued strong growth at VerticalScope as well as in local digital advertising within the community websites at Metroland Media Group. Digital revenues were 18% of total revenue in the second quarter of 2017 compared to 17% in the second quarter of 2016.

Salaries and benefits

Segmented salaries and benefits costs were down $12.5 million (15%) in the second quarter of 2017 reflecting the benefit of savings from restructuring initiatives, including the closure of the Vaughan Printing Facility as well as lower staffing costs associated with Toronto Star Touch.

Other operating costs

Segmented other operating costs primarily include newspaper circulation and flyer distribution costs, production costs and newsprint costs which represented 41%, 13% and 12% respectively of segmented other operating costs for the second quarter of 2017.

Segmented other operating costs were down $5.0 million or 5.3% in the second quarter of 2017 as a result of lower print volumes and the impact of other cost reductions partially offset by outsourcing costs related to printing of the Toronto Star effective the third quarter of 2016.

Adjusted EBITDA

Our segmented adjusted EBITDA was $18.0 million in the second quarter of 2017 up $1.8 million from the prior year. Segmented adjusted EBITDA in the Digital Ventures segment was $6.9 million in the quarter which benefited from 32% growth in adjusted EBITDA at VerticalScope (27% growth in USD). In the newspaper operations, the segmented adjusted EBITDA at the Star Media Group was $0.8 million, an improvement of $1.5 million, while segmented adjusted EBITDA at the Metroland Media Group was $12.7 million, down $1.2 million in the quarter. Segmented adjusted EBITDA for the second quarter of 2017 included Corporate expenses of $2.5 million.

Amortization and depreciation

Total segmented amortization and depreciation of $19.2 million in the second quarter of 2017 decreased $21.5 million from the second quarter of 2016, primarily the result of lower amortization associated with our investment in VerticalScope as well as the absence of accelerated amortization of equipment related to the transition of printing of the Toronto Star to Transcontinental Printing in the second quarter of 2016.

Operating earnings (loss)

Segmented operating loss was $1.8 million in the second quarter of 2017 compared to segmented operating losses of $25.1 million in the second quarter of 2016. These improvements were the result of increases in adjusted EBITDA combined with lower amortization and depreciation expense.

Restructuring and other charges

Total segmented restructuring and other charges were $6.2 million in the second quarter of 2017 compared to $6.9 million in the second quarter of 2016.

Restructuring charges taken through the end of the second quarter of 2017 are expected to result in annualized net savings of $17.5 million and have resulted in the reduction of approximately 195 positions with $11.5 million of the savings expected to be realized in 2017 (including $2.7 million in the first six months) and $6.0 million in 2018.

Operating profit (loss)

Segmented operating loss decreased $24.0 million in the second quarter of 2017. Operating loss for the second quarter of 2017 included $19.2 million of non-cash amortization and depreciation expense as well as $6.2 million of restructuring and other charges. Our loss in the second quarter of 2016 included $40.7 million of amortization and depreciation expense and $6.9 million of restructuring and other charges.

Our operating loss excluding our proportionate share of operating profit (loss) from VerticalScope and our joint ventures decreased $2.2 million in the second quarter of 2017 relative to the comparable period in 2016.

Interest and financing costs

Interest and financing costs were $0.6 million in the second quarter of 2017, down $0.2 million from the second quarter of 2016 primarily reflecting lower net financing expense relating to employee benefit plans and higher interest earned on cash and cash equivalents.

Foreign exchange

Non-cash foreign exchange gains were $1.0 million in the second quarter of 2017 compared to gains of $nil in the second quarter of 2016. The gains in the second quarter primarily reflected an increase in the fair value of the hedge of the original net investment in VerticalScope.

Income (loss) from joint ventures

Our income from joint ventures was $0.4 million in the second quarter of 2017 compared to income of less than $0.1 million in the second quarter of 2016. The results of our joint ventures are included in our discussions of segmented revenue and segmented adjusted EBITDA below.

Loss from associated businesses

Our loss from associated businesses was $0.3 million in the second quarter of 2017 compared to a loss of $16.0 million in the second quarter of 2016.

The loss in the second quarter of 2017 included income of $1.9 million from Blue Ant and income of $1.1 million from our investment in Nest Wealth offset by a loss of $2.0 million from Black Press and a loss of $1.2 million from VerticalScope. The loss from VerticalScope included $6.3 million of amortization expense. The loss in the second quarter of 2016 included income of $1.7 million from Black Press and income of $0.3 million from Blue Ant, offset by a loss of $17.9 million from VerticalScope which included $26.6 million of amortization expense.

Investment in VerticalScope

During 2015, we acquired a 56% interest in VerticalScope. During the second quarter of 2017, VerticalScope generated U.S. $4.4 million of cash from operations and made acquisitions totalling U.S. $16.3 million. VerticalScope’s debt, net of cash, was up U.S. $6.9 million from U.S. $74.4 million at December 31, 2016 to U.S. $81.3 million at June 30, 2017.

In connection with the investment in VerticalScope, during the second quarter of 2017 we recorded $6.3 million of amortization and depreciation expense (2016 – $26.6 million in the second quarter of 2016). Further details of our accounting for this investment are included in Section 3 of our annual MD&A.

Income and other taxes

We recorded a tax recovery of $nil in the second quarter of 2017 compared to $2.6 million in the second quarter of 2016. Excluding the impact of deferred income tax assets not recognized, our effective tax rate was 25.3% in the second quarter of 2017.

Net loss from continuing operations

Our net loss was $7.5 million ($0.10 per share) in the second quarter of 2017. This compares to a net loss of $24.3 million ($0.30 per share) in the second quarter of 2016. The second quarter of 2017 included $6.3 million of non-cash amortization and depreciation expense associated with our investment in VerticalScope and $6.1 million of restructuring charges. The second quarter of 2016 included $26.6 million of non-cash amortization and depreciation expense associated with our investment in VerticalScope as well as $6.9 million of restructuring charges and $4.5 million of additional non-cash amortization and depreciation expense related to the transition of printing of the Toronto Star to Transcontinental Printing.

Net loss attributable to equity shareholders

Our net loss was $7.0 million ($0.09 per share) in the second quarter of 2017. This compares to a net loss of $23.9 million ($0.30 per share) in the second quarter of 2016.

OUTLOOK

Metroland Media Group and Star Media Group continued to face a challenging print advertising market in the quarter resulting from ongoing shifts in spending by advertisers, particularly in the national advertising category while declines were more moderate in the local advertising categories. It is difficult to predict if these trends will continue in the balance of 2017 although trends improved somewhat towards the end of the quarter. We currently expect that flyer distribution revenues will experience moderate declines in the balance of 2017. Subscriber revenues declined moderately in the first six months of 2017 and this trend is expected to continue in the balance of the year. Overall digital revenue at Metroland Media Group and Star Media Group in the balance of the year is expected to benefit from continued growth at thestar.com and in local digital advertising at the Metroland community sites partially offset by expected continued declines in other areas.

Within the Digital Ventures segment, the quarter to quarter trend in revenue growth from a combination of acquisitions and organic revenue growth at VerticalScope experienced in the first six months of 2017 is expected to continue in the balance of the year. In addition, the revenue trends experienced at Workopolis and eyeReturn in the first six months of 2017 are expected to continue through the balance of the year.

Cost reduction will remain an important area of focus for us in the balance of 2017. Net savings related to restructuring initiatives undertaken through the end of the second quarter of 2017 were $18.0 million in the first six months of 2017 and included savings associated with the outsourcing of printing the Toronto Star as well as lower investment in Toronto Star Touch. The pace of year over year cost savings is expected to moderate in the second half of 2017 with net savings related to restructuring initiatives already undertaken expected to be $12.5 million in the balance of the year ($5.1 million in Metroland Media Group and $7.4 million in the Star Media Group). These savings include the benefit of our planned migration from Toronto Star Touch to the new universal app effective August 1, 2017 where development and operating costs are expected to be very modest.

In addition, from a cash flow perspective, we expect full year contributions to our registered defined benefit pension plans in 2017 to be reduced to $10 million down from our previous estimate of $18 million. Furthermore, we currently expect full year 2018 funding into these plans will remain at approximately $10 million. This expected lower level of funding is associated with the draft results of new pension plan valuations completed as at December 31, 2016 and the impact of new interim solvency relief measures concerning funding requirements announced by the Ontario Government on June 29, 2017.

DIVIDEND

On August 1, 2017, Torstar declared a quarterly dividend of 2.5 cents per share on its Class A shares and Class B non-voting shares, payable on September 29, 2017, to shareholders of record at the close of business on September 8, 2017. 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.

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