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Torstar Corp. (OTC:TORSF)

Q2 2014 Earnings Conference Call

July 30, 2014 08:15 AM ET

Executives

David P. Holland - President and CEO

Lorenzo DeMarchi - EVP and CFO

Ian Andrew Oliver - President, Metroland Media Group Ltd.

John D. Cruickshank - Publisher, Toronto Star, President, Star Media Group

Analysts

David McFadgen - Cormark Securities Inc.

Bentley Cross - TD Securities

Haran Posner - RBC Capital Markets

Operator

Good morning, ladies and gentlemen. Welcome to the Torstar Corporation’s Q2 2014 Results Conference Call. Please be advised that this call is being recorded. Your speakers for today are Mr. David Holland, President and CEO, and Mr. Lorenzo DeMarchi, Executive Vice President and CFO of Torstar Corporation.

I’d now like to turn the meeting over to Mr. Holland. Please go ahead sir.

David P. Holland

Thank you very much and good morning everyone. Let me begin with this certain statements in the remarks that follow may contain forward-looking information and can generally be identified by the use of forward-looking terminology such as anticipate, believe, plan, forecast, expect, intend, would, could, if, may, and other similar expressions.

These statements reflect current expectations of management regarding future events and performance and speak only as of today’s date. By its very nature, forward-looking information requires management to make assumptions, or rely on certain material factors and is subject to inherent risks and uncertainties. Actual results could differ materially from the predictions, conclusions, forecasts or projections in the forward-looking information.

Additional information regarding the material factors, assumptions, risks and uncertainties that could cause actual results to differ material from the predictions, conclusions, forecasts or projections in the forward-looking information and regarding the material factors and assumptions that may have been implied in making such predictions, conclusions, forecasts or projections is described in more detail in the corporation’s 2011 annual report and in our MD&A, which can be found on our Web site and at www.sedar.com.

Good morning again everyone. I’m very pleased to be joined in the call today by, Ian Oliver, President of Metroland Media; John Cruickshank, Publisher of the Toronto Star and President of Star Media Group and Lorenzo DeMarchi, Executive Vice President and Chief Financial Officer of Torstar.

I plan to make some brief opening comments. I’ll then turn it over to Ian and John, who will comment on their operations. I will say giving the pending sale of Harlequin, our operations commentary will solely be on our Media operations. Lorenzo will close things of with financial commentary and a view on our outlook. At that point, any of us will be happy to take your questions.

As you may have seen results in the operations were relatively stable with weaker results at Star Media Group, more than offsetting improved results at Metroland Media, resulting in segment EBITDA coming in at $32.5 million, $1.1 million lower than prior year.

We are in the midst of some change within Star Media Group that we felt had some impact on the results in the quarter. In Metroland Media we felt there were some encouraging signs in the quarter and I will leave it to John and Ian to elaborate on those points.

We’ve received both shareholder and regulatory approval of the pending sale of Harlequin and we’re currently expecting to close the transaction on or about August 1, 2014. As we previously stated, we intend to apply a portion of proceeds to eliminate net debt. The Company will attain the remainder of the proceeds pending a very thorough review of our future cash requirements and potential investment opportunities. It goes without saying that we will do what we judge to be in the long-term interest of the Company.

That concludes my comments. And I’ll now turn it over to Ian.

Ian Andrew Oliver

Thank you, David. It was a solid quarter for Metroland. EBITDA up $1 million or 4.2% from a year-ago. And with this Q2 growth Metroland is now up slightly in the EBITDA for the year-to-date.

Revenues in the second quarter were $130 million, down $6 million or 4.4% including a $1.6 million reduction in TMGTV and product sale revenues. If we exclude the effect of the TMGTV and product sale decline, revenue was down $4.4 million or 3.3% primarily from lower print advertising revenue.

The rate of decline in print advertising slowed in Q2 relative to the first quarter. Digital revenue was up 1.9% in the second quarter despite lower WagJag revenues. We are very pleased with the positive momentum in revenue, profitability, and engagements across our digital businesses.

Excluding WagJag, digital revenue was up over 7%. Flyer distribution revenue continues to be relatively stable in the quarter. Metroland’s EBITDA in the second quarter was $23.6 million, which as mentioned was up $1 million or 4.2% from last year. It was encouraging to see the profit increase as we benefited from the impact of restructuring savings, improved profitability in our digital operations and product sale business, and the positive impacts of other cost reductions. At the same time, we continue to invest in growing our digital presence.

Over to you John.

John D. Cruickshank

Thank you. Star Media Group EBITDA of $12.1 million was down $2.7 million in the second quarter, as lower revenues were partially offset by $9.4 million in cost reductions which included $4.4 million of cost savings from restructuring initiatives, lower pension costs and the impact of lower news print price assumption.

Star Media Group revenues of $107.3 million were down $12.1 million or 10.1% in the second quarter, with print advertising revenues down 21.2% at the start. These declines were partially offset by an increase of 1.3% in subscriber revenue and by growth in digital advertising revenues.

At the Metro newspapers, advertising revenues decreased in the quarter. On a geographic basis, the Metro declines were largely in a result of declines in Toronto and Vancouver markets, partially offset by growth in some markets in Western Canada.

At the beginning of March this year, all advertising sales for the Toronto Star were outsourced to Metro. This transition involves restructuring of the Metro sales force and an addition of staff at Metro while print advertising revenues continue to be under market pressure during this period that results at both the Star and at Metro were also negatively impacted by the sales transition. However, we expect this to be a temporary issue.

At the start of the third quarter we announced that we will be closing the print editions in three of our newer smallest Metro markets in favor of focusing our efforts on our seven larger markets. Metro remains an important part of the future of the Star Media Group and this position does not reflect any change in our commitment to the Metro franchise, both in print in larger markets and in digital in all markets.

Digital revenue from properties in the Star Media Group were relatively flat in the quarter and year-to-date reflecting revenue growth in eyeReturn Marketing and thestar.com, partially offset by decreased revenue from Workopolis.

Profitability of Star Media Group digital properties continue to improve in the second quarter and for the six months of 2014. While we continue to adapt to the challenges in our industry, we remain committed to the pursuit of editorial excellence, and as commitment was recognized in the second quarter of the Star through a number of awards, including the Canadian Journalism Foundation Award of Excellence, Michener Award and five National Newspaper Awards. Lorenzo?

Lorenzo DeMarchi

Thanks, John and good morning, everyone. As a reminder, with the pending sale of Harlequin, beginning this quarter, we will classify Harlequin as an asset held for sale and discontinued operations. Our financial disclosure distinguishes results from continuing operations which excludes Harlequin from overall results, which includes Harlequin. Prior periods have been restated on a comparable basis for the income statement and the cash flow statement.

Total net income including Harlequin was $19.7 million in the second quarter, up $1.7 million from $18 million reported a year-ago. On an earnings per share basis, reported EPS of $0.25 in the quarter was up $0.02 versus year-ago.

For continuing operations, which excludes Harlequin, net income was $18.1 million in Q2, up $5.6 million versus a year-ago. On an adjusted basis which excludes the impact of certain items, which in Q2 included the favorable tax effect of the Star’s donation of the photo archive to the Toronto Public Library, adjusted EPS of $0.20 was down slightly from $0.21 in Q2 last year. This reflects slightly lower operating results and income from associated businesses offset by lower interest and financing costs.

Total segmented EBITDA from continuing operations in the quarter which includes a proportionate interest in joint ventures was $32.5 million, down $1.1 million from prior year. This reflects a modest increase at Metroland Media and lower corporate expenses which were more than offset by a decline of Star Media Group.

The Metroland results benefited from an improvement in the rate of decline and for advertising, relatively stable flyer distribution revenue and growing digital profitability. Earnings performance in the quarter of both Metroland and the Star Media Group reflected the benefit of significant cost savings with a $16.4 million reduction in our media operations cost base offsetting most of the $18.1 million decline in revenue. The cost reduction included $8.9 million in restructuring related savings as well as lower pension costs, news print savings, and lower expenses at TMGTV.

From a revenue perspective, total segmented revenues from continuing operations of $237 million in the quarter, was $18.1 million or 7.1% lower than in 2013. The quarter saw continued growth of stability in flyer distribution revenue and subscriber revenue, which combined account for over a third of overall media revenue.

We also saw a return to stability in digital revenue after several quarters of modest declines, with digital advertising representing 12% of total media revenue in the quarter, up from 11.1% a year-ago. Digital revenue continued to reflect softness at WagJag and Workopolis, while the remaining digital operations were up over 3% in the quarter.

Print advertising across the group continued to experience pressure in the quarter, although Metroland’s result reflects an improvement in the rate of decline relative to the first quarter. We did not experience a similar improvement in SMG where declines in the quarter were impacted by a transition in the sales force. We believe the impact with the sales force transition is temporary.

With respect to income from associated businesses in Q2, we reported income of $0.1 million which was $2.2 million, worse than in 2013. This reflects lower earnings at Black Press and a greater loss at Shop.ca.

From a net borrowings perspective, Torstar finished the quarter with total net debt of $156 million, down almost $17 million in the quarter and approximately $3 million since the beginning of the year.

On a year-to-date basis, this includes funding approximately $18 million pre-tax into our registered defined benefit pension plans, almost $50 million pre-tax and restructuring related payment and $10 million to acquire the remaining 10% of Metro.

Looking ahead, visibility on how advertising revenues will evolve over the balance of the year remains limited. Through the second quarter and the first six months of 2014, the Media segment continued to face challenges as a result of continued shifts in spending by advertisers.

The rate of decline of print advertising revenues at Metroland community and daily newspapers slowed in the second quarter of 2014, relative to earlier in the year. And while indications are that the trend experienced in the second quarter of 2014 have continued early into the third quarter. Print advertising revenues are likely to continue to be under pressure.

We do however expect multi platform subscriber revenues and flyer distribution revenues to continue to be relatively stable in the balance of the year. Across Torstar, cost reduction is expected to remain an important area of focus and our Media operations expect to realize $10.5 million of savings in the balance of 2014 from restructuring initiatives undertaken through the end of the second quarter of 2014.

Management anticipates pursuing additional cost saving opportunities in the balance of the year, including the recently announced closure of Metro’s print operations in Regina, Saskatoon and London.

Net investments spending associated with growth initiatives in 2014 is expected to be somewhat lower than in 2013. From a cash flow perspective, we estimate net proceeds from the Harlequin sale at closing in the range of $435 million. For the balance of 2014, we anticipate spending approximately $17 million for the funding of registered defined benefit pension plans, excluding Harlequin. Lastly, spending on CapEx in the balance of 2014, excluding Harlequin, is currently expected to be approximately $14 million.

That concludes our opening comments and at this stage we’re happy -- we’d be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from David McFadgen from Cormark Securities. Please go ahead.

David McFadgen - Cormark Securities Inc.

Yes, couple of questions. So when you look at the digital revenue, you said that excluding WagJag the digital revenue was up 7%. Is there a certain time say within the next 12 months where you expect WagJag to stabilize, and you would lap those year-over-year declines in WagJag and that digital revenue would then start to grow faster?

Lorenzo DeMarchi

Yes, I think its beginning to stabilize now, but we’ll probably up against it for a couple of more quarters.

David McFadgen - Cormark Securities Inc.

Okay. So say by the end of this year and then starting into 2015, you’d see that phenomenon take place?

Lorenzo DeMarchi

Yes. And that we’re -- the profitability at WagJag has been improving. So, although revenue is -- we’re up against some big revenue numbers, but declining profitability is steadily improving at WagJag.

David McFadgen - Cormark Securities Inc.

Okay. And then Lorenzo, have you thought anymore about what you would do at the proceeds in terms of making additional investments? Anything on the horizon that looks good that you’ve come across, any comment on?

Lorenzo DeMarchi

David, we’re going to obviously we first got to get this closed which we’re anticipating to be on Friday. And I think we’re actually going to kind of step back and take our time and I don’t think there’s anything that’s right in front of us, but I do think we’re going to take some -- save some time to reflect on what should the Torstar of the future look like, and obviously our fundamental choice is, do you stay closer in or do you go a little further away or is it a combination of the two. So, we want to be thoughtful in terms of how we move forward and make sure that it fits within a broader game plan.

David McFadgen - Cormark Securities Inc.

Okay. Would you or the board contemplate a special dividend or do you want to use those proceeds for future growth?

Lorenzo DeMarchi

I must say like my bias is to see us employ the capital back into the business. Having said that I think we’ve obviously got to maintain the kind of discipline. I think we maintained the date around how we think about investing capital. But I will say that, I think it would be in Torstar’s long-term interest to try and determine if it can employ the capital back in the business and I think that’s what our first choice would be. But obviously it will be a function of the deliberations that occur over the coming period of time.

David McFadgen - Cormark Securities Inc.

Okay. Thank you.

Operator

Thank you. (Operator Instructions) Our next question is from Bentley Cross from TD Securities. Please go ahead.

Bentley Cross - TD Securities

Good morning, gentlemen.

David P. Holland

Good morning.

Bentley Cross - TD Securities

Hello.

Lorenzo DeMarchi

Hello.

David P. Holland

Hello.

Bentley Cross - TD Securities

First, I just wanted to touch on restructuring. You guys highlighted and maybe there is some opportunities in the later part of this year. Have you guys identified maybe the cost or any expected savings there?

Lorenzo DeMarchi

Yes, so what we’ve got identified so far that will hit Q3 and Q4 is $10.5 million. As you saw we recently announced the closings of the smaller Metro markets that will probably save us another $1 million to $2 million. And there is some other initiative’s that are currently in development but we haven’t got any range on that at the moment.

Bentley Cross - TD Securities

And from those closings, what sort of cost can you expect?

Lorenzo DeMarchi

I think it’s probably $1 million to $2 million over the balance of the year.

Bentley Cross - TD Securities

That’s in terms of the actual savings or in terms of the cost?

Lorenzo DeMarchi

The profit impact.

Bentley Cross - TD Securities

Okay. And then another question on the pension. With the telecom guys there’s pretty defined smoothing rules and how they have to pay it off. Can you give us any sort of insight as to what you can be expecting in 2015 or are there similar smoothing rules for you guys?

David P. Holland

I think it’s probably safe to assume that we think it will be lower. As you’ve mentioned its pretty complicated stuff, and we’re working through some of that detail right now and we hope to be able to slide a bit more guidance on the third quarter call.

Bentley Cross - TD Securities

Okay. And then lastly, Torstar ad revenues were obviously quite depressing in the quarter, but Star Media Group revenues were down just 10%. Can you give us an updated breakdown of the different revenue performance within Star Media?

Lorenzo DeMarchi

No, our history is that we don’t kind of provide that kind of depth. I think John could give a little bit of color on the situation that we’re working through and the experience in the quarter. But we don’t provide that kind of a lot of depth by category.

Bentley Cross - TD Securities

No, I know. I was just hoping. But any thought, I would appreciate it. Go ahead.

John D. Cruickshank

Yes, you did see the breakdown like we do talk about subscriber revenue which was up $1.5 million in the quarter and digital revenue which was basically stable in the quarter. So, you’ve got certainly the subscriber piece circulation which is (indiscernible) given portion of Star Media Groups revenue basis as it continues to be stable and growing modestly.

Bentley Cross - TD Securities

Okay, thanks. That’s all from me.

Operator

Thank you. (Operator Instructions) Our next question is from Haran Posner from RBC Capital Markets. Please go ahead.

Haran Posner - RBC Capital Markets

Thanks. Good morning, guys. Maybe just if I can try to push a little bit more on the print advertising down 20% or so with the Star. I think John, if you listen to some of the other print publishers out there like Postmedia, they attribute a pretty significant portion of the decline to automotive, and it sort of feels like, correct me if I’m wrong, it sort of feels like Auto is now going through something similar to what Finance has gone through a couple of years ago with a significant decrease in newspaper spend. I’m just curious if that’s sort of how you’re seeing it from your end, and whether there’s any kind of end insight in that category then to sort of stabilize?

John D. Cruickshank

Yes, the Auto revenues have been softening probably for the last 12 months or so. However we haven’t had -- what we did have was Finance which was potentially all advertisers dropping probably about 50% in a very short period. And of course interestingly in the first quarter of this year we saw some bump upwards in Finance again. So, it’s distinct. Every one of these categories are distinct and of course they’re very much influenced by how they’re doing in selling cars off the lot and whether they’re introducing new products. So, I don’t want to say that this is a trend like the others because I’m not sure that we’ve made up our minds about that yet. Our issues as much as anything else had to do with the combined impact of pretty soft print market in Toronto over the last three months and the fact that, that we’re still learning to make a much more complex -- but we think much more efficient sale of both the Star and Metro and they’re very complementary audiences.

Haran Posner - RBC Capital Markets

Okay.

David P. Holland

Even the Finance guys will come in and out depending on what they’re up to. So, our first quarter in Finance was pretty strong with the push on credit cards. So, I think we still for certain types of marketing the medium obviously is still inactive for advertisers.

Haran Posner - RBC Capital Markets

Okay. Now I do appreciate the color, so thanks for that Dave and John. And then maybe looking at Workopolis, this is also a bit of a drag on your digital revenue growth. So, just wondering here, I imagine there’s some structural challenges in that employment segment. But just curious from your standpoint is there any sort of plan to change the offering or potentially for you to sell that asset?

David P. Holland

Well, I’d say in terms of the offering they’re constantly evolving what they’re looking at, and the responding to the different ways that recruiting services are being offered in the market today, and I think they’ve got some products in final stage which look promising and address some of those new forms of selling which are a little bit more results oriented. So, I think that piece is evolving and we feel good about the way it’s moving. There’s no plan’s as it relates to its roles in asset in our portfolio today. But it remains a discreet asset, and we’ll continue to evaluate whether or not that’s the best path going forward.

Haran Posner - RBC Capital Markets

Okay. Now that’s great. And then maybe just the last one from me, you guys get (indiscernible) probably every other quarter, but just with respect to the printing of the Star and [ph] [Avon]. Just curious if there’s any updates from your perspective on that, whether outsourcing is something that could be soon or rather than later?

David P. Holland

[Ph] [Avon] gets more efficient every month. So, it’s steady as she goes at this point.

Haran Posner - RBC Capital Markets

Okay. Thanks very much.

Operator

Thank you. Mr. Holland, we have no further questions at this time.

David P. Holland

Okay. Thank you very much to everyone and enjoy the rest of the summer.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time and we thank all who participated.

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