Torstar Corp. (OTCPK:TORSF) Q2 2017 Earnings Conference Call August 2, 2017 8:15 AM ET
Linda Hughes - Independent Director
John Boynton - President and Chief Executive Officer and Publisher, Toronto Star
Lorenzo DeMarchi - Executive Vice President and Chief Financial Officer
Ian Oliver - President, Metroland Media
David McFadgen - Cormark
Good morning, ladies and gentlemen. Welcome to Torstar Corporation’s Second Quarter 2017 Results Conference Call. Please be advised that this call is being recorded. Your speakers for today are Mr. John Boynton, President and CEO, Torstar Corporation and Publisher, Toronto Star and Mr. Lorenzo DeMarchi, Executive Vice President and CFO of Torstar Corporation.
I would now like to turn the meeting over to Mr. Boynton. Please go ahead.
Good morning. Just before John begins, I will take a few minutes to read the forward-looking statement. Certain statements and the remarks that follow may contain forward-looking information and can generally be identified by the use of words 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, projections or similar statements in the forward-looking information.
Additional information regarding the material factors, assumptions, risks and uncertainties that could cause actual results to differ materially from the statements in the forward-looking information and regarding the material factors and assumptions that may have been applied in making statements is described in more detail in the corporation’s annual report beginning on Page 9 and in our annual and interim MD&A which can be found on our website and at www.sedar.com. John?
Thank you. Good morning. I am pleased to be joined on the call today with Ian Oliver, President of Metroland Media and Lorenzo DeMarchi, Executive Vice President and Chief Financial Officer, Torstar. I plan to make some opening comments which will include Star Media Group and Digital Ventures, including VerticalScope. I will then turn it over to Ian to comment on Metroland Media and Lorenzo will close things off with financial commentary.
Results in the quarter were solid with segmented adjusted EBITDA of $18 million, that’s up $1.8 million versus a year ago as growth in the adjusted EBITDA in the Digital Ventures segment along with efforts on cost of the newspaper operations more than offset the impact of revenue declines at Star Media Group and Metroland Media. Both Star Media Group and Metroland Media continue to confront challenging print advertising revenue trends, particularly in the national advertising category, but the combination of continued efforts on costs yield a $0.3 million increase in adjusted EBITDA for the quarter across the two operations.
The highlight of the quarter was the continued strong performance of VerticalScope within the Digital Ventures segment. VerticalScope had a very strong quarter again contributing adjusted EBITDA of $6.4 million reflecting revenue growth of 22% and adjusted EBITDA growth of 32%. VerticalScope has strong positions in desirable verticals such as automotive, power sports, outdoor and revenues benefiting from continued growth in both the higher yield direct sales as well as growth in programmatic revenue.
Within the Star Media Group, adjusted EBITDA was $0.8 million in the second quarter of 2017, that’s an improvement of $1.5 million from the second quarter of 2016 as $1.2 million of lower net investment in Star Touch and $3.5 million of savings from restructuring initiatives and other cost reductions including the benefit of savings associated with the print advertising of the Toronto Star in July 2016 exceeded the impact of the revenue declines. Star Media Group revenues of $61.6 million were down $9.6 million or 13% in the second quarter of 2017 largely resulting from the weakness in the national advertising categories in both the Toronto Star and Metro as well as local advertising revenues at the Toronto Star.
We remain encouraged that important subscriber revenues at the Toronto Star were relatively stable in the second quarter of 2017. In the balance of 2017, we expect to benefit from $7.4 million in cost savings related to restructuring and outsourcing initiatives already undertaken today, including the benefit of the migration of the Toronto Star Touch to the new universal app effective August 1. Development and operating costs related to this app are expected to be very modest. We expect those cost reductions to help offset print advertising revenue trends, which we expect will continue to be challenging.
Looking ahead, an increased focus on reducing cash flow across our operations along with positive developments in the outlook for our pension funding situation are expected to provide us with the additional flexibility in the balance of the year and forward as we progressed through our transformation in the coming years.
Ian will now discuss Metroland’s results.
Thank you, John. Adjusted EBITDA in Q2 was $12.7 million, down $1.2 million from a year ago, primarily reflecting revenue declines, which were largely offset by cost reductions. Metroland’s revenues in the second quarter were $100.8 million, down $7.4 million or 6.8% from prior year as we continue to face a challenging advertising market. Local advertising revenues on a combined print and digital basis which represents the largest portion of Metroland’s advertising revenues were down 10% in the quarter. Within the combined print and digital advertising revenues, the real estate category although showing improvement through the quarter continued to be much weaker than the local retail category where declines were more moderate.
National advertising revenue on a combined print and digital basis, which represents a less significant portion of Metroland’s overall revenue were down 18% in the second quarter of 2017, which was an improvement over the very difficult first quarter. We were pleased that flyer distribution revenues which represented one-third of Metroland’s total revenue in the second quarter of 2017 were relatively stable, down just 2.5% in the quarter from prior year and down only 0.8% in the first 6 months. Metroland’s total digital revenues were down $4.2 million relative to the comparable period in the prior year. We continue to have growth in local digital advertising revenue and our local sales force is succeeding in providing digital solutions to local businesses. However, growth in this area is being offset by lower revenue declines from lower revenues from WagJag and other properties.
Costs were down $6.2 million in the second quarter, which benefited with the benefit of $3.6 million in cost savings from restructuring. For the remainder of the year, we expect that we will benefit from $5.1 million in cost savings related to restructuring initiatives already announced. Although it is difficult to predict revenue trends especially with respect to print advertising, we continue to be encouraged by the ongoing strength of the leadership of our newspapers, flyers and websites in communities across Ontario. Our strategic focus continues to be on local revenue initiatives, including building digital revenue through our relationships with local businesses and we are pleased with the progress that we have made in that area. Lorenzo?
Thanks, Ian and good morning everyone. We reported net loss of $7 million in the second quarter compared to a net loss of $22.9 million a year ago. Results in the quarter included $19.2 million of non-cash amortization and $6.1 million of restructuring charges. Adjusted earnings per share in the quarter, was a loss of $0.03, an improvement of $0.10 from the second quarter of 2016. Adjusted EPS included a $0.24 per share effective amortization and depreciation largely associated with our investment in VerticalScope.
Total segment’s adjusted EBITDA was $18 million in the second quarter, up $1.8 million from prior year. The year-over-year improvement reflects gains at SMG and Digital Ventures which were partially offset by a modest decline of Metroland. Digital Ventures results include $6.4 million of EBITDA from our interest in VerticalScope, which was up 32% quarter in the quarter. In our newspaper operations, restructuring related savings of $7.1 million and a $1.2 million lower investment in Star Touch offset the impact of print advertising revenue decline.
Total segmented revenue of $181 million was down $15.7 million or 8% in the second quarter reflecting declines of 15% in print advertising and 3.6% in subscriber revenue. These trends improved somewhat relative to declines experienced in the first quarter. Flyer distribution revenue declined modestly in the second quarter following a stronger than expected first quarter. Within Digital Ventures segment, VerticalScope revenues continued to deliver strong growth, up 22% over prior year.
Digital revenue in the quarter across all segments were comparable year-over-year as growth in local digital advertising at Metroland and growth at VerticalScope only partially offset declines at Workopolis, WagJag and Star Touch. Digital revenues represented 18% of total segment revenues in the second quarter of 2017 compared to 17% a year ago. Loss from associated businesses was $0.3 million in the quarter compared to a loss of $16 million reported a year ago with the improvement largely driven by the significantly lower amortization charges at VerticalScope. Results in the quarter also benefited from net income of $1.9 million of Blue Ant Media and $1.1 million at Nest Wealth which offset a $2 million loss at Black Press.
With respect to our closing cash and debt positions, we finished the quarter with $48 million of unrestricted cash, $9.1 million in restricted cash and no bank debt. I would note that our reported cash and debt amounts do not include of our share of cash and debt held within our joint ventures and at Vertical Scope.
Lastly a few comments on our outlook, Metroland Media Group and Star Media Group continued to face the challenging print advertising market in the quarter resulting from ongoing shifts in spending by advertisers, particularly in the national advertising category. Local advertising declines were more moderate. It’s 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 the 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 continue to benefit from continued growth at thestar.com and the local digital advertising at 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 experienced this year at VerticalScope resulting for both organic growth and acquisitions is expected to continue in the balance of the year. We also expect the revenue trends experienced that we accomplished and higher return in the first six months of the year to continue through the balance of the year. Cost reduction remains an important area of focus. Net savings related to restructuring initiatives undertaken were $18 million in the first half of the year and included savings associated with the outsourcing of printing at the Toronto Star as well as lower investment in the Toronto Star Touch. The pace of year-over-year cost savings are 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. These savings include the benefit of our migration from Toronto Star Touch to the new universal app.
In addition from a cash flow perspective we now expect full year contributions to our registered defined benefit pension plans in 2017 will be reduced to $10 million, down from our previous estimate of $18 million. This level of funding is approximately what is expensed in our income statement for these plans. Furthermore, we expect the full year funding in 2018 for these plans will remain at approximately $10 million. This lower level of funding is associated with the result of drive 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 in June of this year.
That concludes our opening comments and at this stage we will be happy to take the questions.
Thank you. [Operator Instructions] Our first question comes from David McFadgen with Cormark. You may begin.
Hi, a couple of questions. So first of all, can you give us an update on exactly what’s happening with Star Touch, I know in the past you guys wanted to use the La Press platform and sort of emulate what they have done that seems like you have gone in a different direction, so can give us an update on exactly what’s happening there?
Sure. We did a full review over the last little while around the Star Touch product and restarted from a consumer lens first, looking at what our consumers are looking for in terms of consumption of content, the screens that are consuming it on time a day there we can place a location. Looked at the text deck that we had developed as a result of the separate Star Touch text deck and really it’s our belief that we wanted a much more simplified back office and text deck with a lower total cost of ownership that thought of a customer more in a 360 view and a more omni-channel execution. So we are really trying to have a more holistic view of how we deliver and serve our customers and that really was the driving force around the decision.
Okay. So you are not using you the La Press platform anymore?
No the application has been turned down. We now have the universal app, so simplified our text deck so that the execution on a mobile side is of similar user interface, user experience for both the desktop and on a smartphone browser as well as the native app both on the smartphone and on the tablet. So we no longer have any of that other technology.
Okay. And is the – are you still optimistic on the advertising potential on this?
I think so because quite frankly it’s easy to buy for our clients and easier to sell for our sales people and easier to target as well when it’s all part of the same text deck.
Okay. The other question I have is just on VerticalScope, so we have seen some good growth there obviously and the company generates cash, I know right now that there is no intension to receive any dividends from VerticalScope, but if you actually wanted to access the cash there could you or is there something that would inhibit you from doing that?
Well, I think we have the same commitment that we have had previously and that we have committed to publicly on VerticalScope were our strong supporters in the current business plan. And the current business plan involves two things; making sure we drive organic growth out of the business as well as very judicious targeted acquisitions. We have just completed a whole bunch of acquisitions in June. We have got another list of acquisitions that we would like to make. So we remain all-in on support for the current strategy and plan. We do have a timeline that we publicly have made available before and how that comes to fruition and what format is really not something we are to worried about this point in time, we will get to it when we will get to it.
I mean the reason why I am asking is there are some investors that are wondering if there is some technical issue that would impede you from being able to access the VerticalScope cash if you wanted to say in the short-term, is there anything like that or is it just the [indiscernible] business plan?
Yes. I know I think it’s just we got to make sure we are aligned on what the timing would be right and at this point in time we don’t feel the timing is right, because we have a lot of acquisitions still to make and a lot of organic growth still be ahead that we had. So through the joint decision and we will do it as a partnership and such that we make those decisions together.
Okay, alright. Thank you.
Thank you. [Operator Instructions] And I am currently showing no further questions at this time. I would like to turn the call back over to John Boynton for closing remarks.
Thanks everybody for joining on this call. And as you heard from the results, we are facing continued headwinds, but we continue to make great progress on the bottom line, we continue to be very encouraged by our VerticalScope side and we continue to be very encouraged by our core digital news sites and their performance as well. So we will continue to plough away on the transformation plan and more information on that in the coming quarters. Thanks very much.
Ladies and gentlemen, this concludes today’s conference. Thanks for your participation. Have a wonderful day.