Torstar Corp. (TORSF) CEO John Boynton on Q2 2018 Results - Earnings Call Transcript

Torstar Corp. (OTCPK:TORSF) Q2 2018 Results Earnings Conference Call August 1, 2018 8:15 AM ET

Executives

Glenda Wheeler - Executive Assistant to Executive Vice President and Chief Financial Officer

Ian Oliver - Executive VP & President of Daily News Brands & Operations

John Boynton - CEO, President

Lorenzo DeMarchi - Executive VP & CFO

Neil Simon Oliver - Executive VP & President of Community News Brands

Analysts

David McFadgen - Cormark Securities

Drew McReynolds - RBC

Operator

Good morning, ladies and gentlemen. Welcome to the Torstar Corporation Q2 2018 Results Conference Call. Please be advised that today's call is being recorded. Your speakers for today are Mr. John Boynton, President and CEO of Torstar Corporation and Publisher Toronto Star; and Mr. Lorenzo DeMarchi, Executive Vice President and CFO of Torstar Corporation.

I would like to turn the meeting over to Mr. Boynton. Please go ahead.

Glenda Wheeler

Good morning. Before John begins, I'll just take a few moments 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, estimate, assume, predict, intend, would, could, if, may, will 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 2017 Annual Report beginning on [indiscernible] and in our annual MD&A which can be found on our website at www.sedar.com

I'll now turn the meeting over to John.

John Boynton

Thanks, Glenda. Good morning, everybody. I'm very pleased to be joined on the call today by Neil Oliver, Executive Vice President of Torstar and President of Daily News Brands; Ian Oliver, Executive Vice President of Torstar and President of Community Brands and Operations; and Lorenzo DeMarchi, Executive Vice President and Chief Financial Officer of Torstar.

I plan to make some opening comments, including some brief comments about VerticalScope. And then I'll turn it over to Neil and Ian who will comment on their operations, and Lorenzo who will close things off with a financial commentary and a view on our outlook. At any point, any of us would be happy to take your questions at that time.

As I mentioned at our AGM back in May, we are in the midst of a very significant transformation in our business, and I'm very pleased with the progress we're making across many fronts in laying the foundation of our transformation plan.

In Q2, we launched a major national digital expansion, and we entered into an exclusive deal with The Wall Street Journal while increasing our investment in more sharply focused investigator journalism, hyper-local and local content as we push towards digital subscriptions.

What's less obvious but critically important is the progress we're making in the areas of data infrastructure, advanced analytic capability, single sign-on and identity management, paywall and subscription platform implementations and customer life-cycle management capabilities. While we're in the early days of the comprehensive multiphase transformation plan, signs of progress are definitely clear.

In terms of results this quarter, segmented adjusted EBITDA was $27.8 million, up $9.8 million over last year, includes the benefit of a $15.8 million digital media tax credit. While print advertising trends remain challenging, we saw trends improve in both the local category, and we continue to be pleased with the stability we are seeing in the subscriber revenue, which is a large and more resilient part of our business.

Our results also benefited from synergies associated with the purchase and sale of a number of daily and community papers in late 2017 as well as continued efforts on costs, which largely offset continued pressure on print ad revenue and necessary investments in our transformation.

At VerticalScope, revenue growth was 16% on a U.S. dollar basis, roughly in line with our experience in Q1, with acquisitions being the driver of growth in the quarter. You'll recall from the call last quarter that organic traffic was impacted by a change in the Google search algorithm, and management has been busy taking the usual steps required to adapt when one of these changes occur.

The business continues to operate at very strong margins and is generating great cash flow, but we did ramp up some spending in the quarter on some technological advancements, and we think those will help the search stages.

Our stronger categories in the quarter were actually outdoor, technology, health and home, and our advertising rates in the quarter continued to be solid. Neil?

Neil Simon Oliver

Thank you, John. Within the Daily Brands segment, adjusted EBITDA was $18.7 million in the second quarter of 2018 and included the benefit of a $15.8 million digital media tax credits.

Adjusting for the tax credits, segmented adjusted EBITDA decreased from -- decreased just $0.2 million in Q2 as revenue declines and investments in our transformation were almost entirely offset by lower costs, include the benefits of a $1 million in savings from restructuring as well as incremental $0.8 million in synergies associated with properties purchased and sold late in 2017.

Daily Brands revenues were down 5% in Q2 and included an incremental $2.4 million of net revenue associated with the Postmedia transaction. The year-over-year revenue comparison for Daily Brands segments, which I will discuss, are on same-store basis and also adjusts for the impact of calendar shifts.

Subscriber revenues, which represented 40% of the Daily Brands total revenue in the second quarter, were almost flat relative to the same period last year with the decrease in revenue in the second quarter primarily the result of lower print advertising.

Local print advertising revenues, which represented 23% of the Daily Brands' total revenue in the quarter, were more resilient, down 6% relative to the second quarter last year. However, national print advertising revenues, which represented 10% of the Daily Brands' revenue in Q2, were more challenged and down 41% compared to the prior year.

On a same-store basis, digital revenues from the Daily Brands were flat in the second quarter of 2018, reflecting growth of thestar.com and the other daily websites, offset by declines in other daily -- in other digital revenue streams.

Ian will now discuss the Community Brands' results.

Ian Oliver

Thanks, Neil. The Community Brands' adjusted EBITDA in the second quarter were $7.9 million, down $2.5 million from the second quarter a year ago, primarily reflecting lower revenues, which were partially offset by benefits of lower costs, including $2 million of savings related to restructuring initiatives and $900,000 of synergies associated with the transaction with Postmedia.

Community Brands' revenues in the second quarter were $68.7 million, down $13.9 million or 17% from prior year, with an estimated $6.8 million of the decrease resulting from publications purchased and sold in 2017.

The year-over-year revenue comparisons for the Community Brands segment, which I will now discuss, are on a same-store basis and also adjusts for the impact of the closure of certain large retailers in 2017.

Local print advertising revenues, which represents the largest portion of the Community Brands' advertising revenues, were down 11% in the second quarter of 2018. Relative to a year ago, declines in the real estate category improved noticeably in the second quarter of 2018.

Following a very strong first quarter, national print advertising revenues, which represents a less sizable portion of the Community Brands' overall revenue, were down 8% in the second quarter, representing an improvement in the trend compared to what we experienced in 2017.

Flyer distribution revenues, which represented 36% of the Community Brands' total revenue in the second quarter of 2018, were down 5% versus the second quarter of 2017.

Digital revenues were up $0.02 in the quarter as a result of strong growth in local digital advertising revenue of the Community sites, which was partially offset by declines in other digital verticals.

We continue to make progress in growing our core community sites, digital audience and increasing their level of engagement. This is translating into higher digital revenues in those sites and in helping to build a stronger foundation for deeper digital relationships with visitors and advertisers across our footprint. Lorenzo?

Lorenzo DeMarchi

Thank you, Ian, and good morning, everyone. We reported a net income of $4.8 million in the second quarter, up $11.8 million from a net loss of $7 million a year ago. On an adjusted earnings per share basis, EPS of $0.16 in the quarter was up $0.19 from prior year.

Total segmented adjusted EBITDA of $27.8 million in the second quarter of 2018 was up $9.8 million from last year. The $15.8 million digital media tax credit we've spoken about included in the Daily Brands' results related to a 2015 claim and not the current year operation.

Second quarter EBITDA included a $1.7 million benefit from synergies related to the Postmedia transaction as well as $3 million in savings related to restructuring initiatives. These were offset by $4.9 million of costs related to our transformation activities and higher corporate costs.

Total segmented revenues of $161 million in the quarter were down $20 million or 11%. However, excluding the Postmedia transaction and differences in the publishing calendar, revenues were down $10 million or 5%.

On that same-store and comparable timing basis, print advertising revenue declined 14% while flyer distribution declined a more modest 5% and subscriber revenues were essentially flat to last year. Subscriber revenues made up almost 20% of Torstar's total revenue in the quarter.

Digital revenue across all segments was up 3% in the quarter, excluding the impact of the Postmedia transaction as well as WagJag and Workopolis, which are no longer part of our business.

Our growth was led by VerticalScope, which was up 16% in U.S. dollars, our local digital advertising within the community websites and higher display advertising for star.com [ph] - thestar.com. Our digital ad revenue represents 19% of total segment revenues in the second quarter.

In general, operating results were in line with our expectations with digital revenue growth, cost savings, a higher subscriber contribution and synergies from the Postmedia transaction mitigating the impact of lower print advertising revenues and investment spending in our transformation.

Loss from associated businesses was $5.7 million in the quarter compared to a net loss of $0.3 million reported a year ago was a bit -- declined largely driven by results of VerticalScope, which reflected higher acquisition-related amortization expense.

With respect to our closing cash and debt position, we finished the quarter with $49.4 million of unrestricted cash, $7.7 million of restricted cash and no bank debt. This is down slightly from an unrestricted cash balance at the end of the first quarter of $51.5 million, but up slightly from $48.4 million a year ago. It's worth noting that our reported cash and debt amount do not include our share of cash and debt held within joint ventures and at VerticalScope.

Lastly, a few comments on our outlook. Our newspaper operations continue to face a challenging print advertising market resulting from ongoing shifts in spending by advertisers. While these trends have continued early into third quarter, it's difficult to predict that they will improve or worsen in the balance of the year.

Underlying flyer distribution revenues declined 5% through the end of the second quarter, and we expect this trend to deteriorate slightly in the balance of the year.

Underlying subscriber revenues were almost flat through the end of the second quarter. However, we expect that it will decline modestly in the balance of 2018 as we continue to increase focus on subscriber profitability.

Overall digital revenue at the Community Brands and the Daily Brands is expected to continue to grow in the balance of the year, benefiting from growth at thestar.com and the local digital advertising with the daily newspaper sites and the community sites, partially offset by expected continued declines in other digital verticals.

We expect the transaction with Postmedia will continue to have a positive effect on earnings due to anticipated synergies, but a negative effect on revenue as we experienced in the first 6 months of 2018.

Synergies from this transaction are expected to contribute to an improvement in operating earnings in the range of $5 million to $7 million for the full year, with approximately $4 million of that benefit having already occurred through the first 6 months.

Within the Digital Ventures segment, we expect revenue growth at VerticalScope will increase slightly in the back half of the year relative to the first 6 months. This will be partially offset by declines resulting from the sale of Workopolis this year on April 12. For reference, Workopolis' segmented revenue and adjusted EBITDA in the back half of 2017 was $4.8 million and $0.7 million, respectively.

The revenue trends experienced at eyeReturn in the second quarter of the year are expected to continue through the balance of the year.

In the first 6 months, we had $4.8 million of incremental OpEx and $1.1 million of incremental CapEx related to our transformation efforts. We anticipate that for the full year, incremental OpEx will be approximately $13 million and incremental CapEx will be in the range of $5 million to $6 million related to transformation.

We expect these incremental costs will be more than offset by $17.9 million of full year savings related to restructuring initiatives already undertaken, with $8.4 million of this benefit having been realized in the first 6 months of the year.

We also expect to identify additional cost savings in the balance of the year. We anticipate the total capital expenditures for the full year, including capital for transformation, will be in the range of $15 million to $16 million.

And on the pension front, we continue to make progress on a potential merger with CAAT. On June 22, we entered into an agreement to merge our 8 registered defined benefit pension plans with the CAAT pension plan effective October 1, 2018. The agreement is subject to customary closing conditions and approvals, including consent by the Torstar plan members and approval of the Financial Services Commission of Ontario, or FSCO.

If approved by Torstar plan members, members will begin accruing benefits under the provisions of the CAAT pension plan beginning on October 1, 2018. Now once approved by plan members, we'll submit the merger to FSCO for approval. And when that approval is granted, the liabilities for all past benefits of the Torstar plans will be transferred to the CAAT plan together with the assets of the Torstar plans.

And at that point, CAAT will assume responsibility for all pension benefit payments to members of the Torstar plans going forward. We expect it could take until sometime in the second half of 2019 before we would get regulatory approval.

From a cash flow perspective, we expect that no additional cash funding will be required related to the transfer of liabilities.

That concludes our opening comments, and at this stage, we'd be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of David McFadgen from Cormark Securities.

David McFadgen

So a couple of questions. First of all, just on VerticalScope. When do you think you might actually get back to organic growth with that asset? I know you talked about being able to get around the new Google search algorithm. Just wondering when you think you might be able to get back to organic growth.

Lorenzo DeMarchi

David, it's Lorenzo. Look, I don't think it's a quick fix. It's not a 1- or 2-month exercise. It does take time, especially when you open a number of sites like VerticalScope does. I would say that they're doing a lot of testing, and they are encouraged by some of the results from the sites that they've got. So they're making progress, but it is, I would say, at least a 2- to 3-quarter probably exercise to fully implement the changes they're making.

David McFadgen

Okay. Can you tell us what the organic change was in Q2? Was it down? And if so, how much?

Lorenzo DeMarchi

It really depends from site to site, but it was down in the low double digit.

David McFadgen

Low double-digit?

Lorenzo DeMarchi

Yes.

David McFadgen

Okay. So those costs are going to remain for some time until you fix the organic issue, right?

Lorenzo DeMarchi

Well, we've got some -- certainly some onetime costs that we're making that relate to sort of technology enhancements, and I think we'll see those costs come out of the operating base, although I would say that, that will be replaced by some additional costs but not the kind of level we're seeing right now in the quarter.

David McFadgen

Okay. And then just a question on transformation plan. So you talk about data infrastructure, advanced analytics capabilities and so on. Can you give us an idea exactly what you mean by those terms? And when do you expect to possibly be generating revenue?

John Boynton

It's John. What we're doing is fundamentally changing the core of the company. And inside the core of the company, we've now declared journalism and data core capability. From that, you launch many, many things over a long period of time, and so we've been very quiet and very deliberate in making very strategic investments.

And the investments are anything from amalgamating all of your data into one database so you have a 360 view of the customer, building the capabilities to drive the first-party data versus cookies, being able to move all your client data into the same kind of centralized view so you have one way of helping all of your advertising clients and then starting to put some advanced uses of that data in order to be able to monetize the asset both on a client level and on a consumer level.

So it's a lot of infrastructure. It's a lot of people. It's a lot of skill sets. It's a lot of software. And it's -- on top of that, it's all of the IP in terms of leveraging it to monetize.

David McFadgen

So it sounds like a big data plan at the end of the day. Who are the customers? And who would be buying this data?

John Boynton

That's correct. Just to be clear though, we won't be selling the data.

David McFadgen

Okay. You're just using it to augment your traditional ad sales?

John Boynton

We are using the data and will continue to use the data better and better not only to serve and surprise and delight our customers, but also to help our advertisers achieve their required goals and KPIs.

David McFadgen

Okay. And do you have sort of a time line on when you think some of this would be ready to give to your customers?

John Boynton

Got it. It's a tough question to answer only because we're talking multiple layers of technologies and infrastructure and people and skills and software. So all of it comes online at different points in time, but already, we're starting to use some of the data to help us make decisions and start to figure out how to serve customers better and same with the client side.

So it's really one of those gradual things you see over a period of time. Think of it more like a building-block approach as opposed to "your done now, go do it" kind of thing.

David McFadgen

And involved in the transformation plan, are there any new revenue streams that you're trying to create here?

John Boynton

Well, certainly, we've already announced our commitment to digital subscriptions, which we don't have today or we don't have very much of it. So it is a staple in order to be able to do that very well. And certainly, it is going to help us in terms of advertising revenue, in terms of being a lot more targeted and a lot more efficient and effective for advertisers.

We are a media company, so using the data to help both the relevancy of advertising to customers so that we're adding value and also the, as I said, the efficiency and effectiveness on behalf of clients.

Operator

[Operator Instructions] Our next question comes from the line of Drew McReynolds from RBC.

Drew McReynolds

One follow-up on the transformation, John. In terms of the incremental OpEx and CapEx that's flowing through this year, presumably that's recurring on a go-forward basis. And in -- just wondering how kind of you see the relationship between revenue and cost structure playing out in the next few years under the transformation.

John Boynton

I'll let Lorenzo handle that in terms of our outlook. That's a good question.

Lorenzo DeMarchi

Yes, I think the incremental OpEx that we're talking about, Drew, I -- certainly, a large chunk of it, I think, is going to be sort of baked into the base going forward. And also, quite the entire amount we're spending this year, there's a little bit of a ramp-up. As you saw on the restructuring side, it's -- what we're really trying to do is to reallocate how we spend money.

So we're pulling back and cutting costs in certain areas and redeploying and allocating to the areas that our transformation. So even in the year, we've got more restructuring-related savings, and we do have an incremental OpEx. So I think in the short term, we're definitely very focused on funding the shift over to these new areas of spending.

And I'd say longer term, we still are very committed and aware that we've got to keep our cost base in line with our revenue trajectory, and it's something that we've been doing for the last several years. And we will continue to have to do it. I do think the positive is that, as you've seen in this quarter, the trends on some of our major areas of revenue have improved and stabilized somewhat.

So with a bit of luck, I think that the headwinds that we'll see from an overall revenue decline will start to moderate and not become a significant headwind as we experienced in the last 2 or 3 years.

Drew McReynolds

Okay. That's helpful. And in addition to that, when you kind of look at, and I guess back to you, John, on your journalism and data comment, it all makes sense to me. To what extent does the industry have to kind of get together and aggregate things in order to scale what you're wanting to do?

I guess maybe the analogy is on the magazine side of things and what Rogers has done there. Is that where -- once the core is re-established, is that something that's a requirement or not?

John Boynton

I don't think our strategy and transformation has really any requirement from anybody else in the industry, but I do think the industry needs to be moving a lot faster and not let the outside world move faster than the inside world, which I think is generally what happened to the industry.

So what we're trying to do is not only catch up to where the industry is, but really go more towards something more sophisticated players in the world are in how they use content and data as opposed to us, which is journalism and data. And you see that in some of the companies like Netflix and YouTube and Amazon and Spotify.

And they're companies that know how to use data and use data to help people and either surprise and delight them or guide them or save them time or energy or frustration or whatever. They have all value props that use data for good. And I think our particular scenario in our categories, whether we're talking about the Community Brands or the Daily Brands, they both have roles to play for customers.

And so if that role is to really deliver what matters most to them, that's what the data will help us do. If we have to bring other things to the table that customers really want based on the data that we're seeing, such as The Wall Street Journal, exclusive arrangement we just announced in Canada or whether it's including The Kit, which is our fashion and beauty brand in some of our properties, those are decisions we'll continue to make in terms of how we bundle things to the market. But we're not planning to work with any of the competition whatsoever.

Drew McReynolds

Okay. Just shifting gears to VerticalScope maybe for you, Lorenzo. You talked about a 2- to 3-quarter fix here. Changes, I guess, to Google's algorithm are not uncommon, fortunately infrequent. Does what you're seeing this time around kind of alter your confidence or view of the business model in terms of what VerticalScope is doing and how much kind of dependence there is on an algorithm and an algorithm change?

Lorenzo DeMarchi

No, I don't think it changes our confidence in the business at all. And as you said, these changes come along somewhat frequently. And each time they do, they're always a little bit different, and it's never quite clear what the intention of what the change is intended to do.

And as I said, the thing that we were really attracted to when we made the investment in VerticalScope is that search fundamental -- fundamentally, the purpose of search is to surface the kind of content that exists in these sites. This is all legitimate, genuine, very helpful, user-generated content that's very specific and niche-oriented.

And from time to time, Google changes the algorithm that relate to how you're buying that content, but our confidence level relies on the fact. At the end of the day, the purpose of search is to find that stuff. So -- and the change that we're making in technology, I think, are just what Google does really always put a premium on is site performance and speed and consumer experience.

So if you're playing this game, you just got to make sure that you've got a technology that will satisfy those conditions, and that's a constant effort that you have to maintain. So I don't think it -- we're -- we question the business model or the long-term outlook at all. I think this is just another one of those instances where you have to react to a change in the landscape, but I wouldn't say it changes our confidence.

John Boynton

I think one thing that it does highlight though, if I can just make a point, is that when any one company, globally or domestically, has a market share that big and can make changes that affect other companies whether they're domestic or foreign companies to that degree, it does raise some big questions on the regulatory front. And so it's yet another example of, I think, that's exactly happening, and it would be interesting to see what the federal government thinks about that, how they think about that.

Drew McReynolds

Yes, couldn't agree more, John, on that one. Two final ones, back to you, Lorenzo. On the digital media tax credits, these things, I think, over the years have been a little bit lumpy kind of coming in. Do you get these tax credits on a recurring basis and this was just a kind of one-off kind of retroactive settlement or hit?

And then second question maybe for you, Ian, on the flyers. It just feels as if there's a little bit of core weakness in the flyer business this year. I think last quarter, you talked about the core still being stable, just wondering if that is the case still?

John Boynton

On the digital media tax credit, Drew, you're right, they are lumpy, and the program relates back to a program that I think for newspapers really kind of expired in 2015. So these are claims related to a bunch of digital development that we did prior to 2015. The credits received to date relate largely to the Daily Brands side of the business.

And as you see in our results, we've got two of those credits approved by the Ontario government. We still have some additional credits that are out there that haven't been picked up yet relating more to the community side.

Given the uncertainty as to how these credits are reviewed and approved, we have quite a lot of information on it. So there could be some additional, but they are -- they won't be ongoing beyond the credits that we've kind of applied for today. We're not banking on them. I'd be careful about, including anything in the future and our projections.

Ian Oliver

And Drew, on the flyer side, we have the -- we're up against the CS closure from last year, which we just lapped now. And as far as our [indiscernible] clients, it's -- there's a lot of stability there. And if you look at the -- our largest clients and the categories that they represent, they are stable over last year.

Operator

We have no further questions in queue. I'll turn the call back to the presenters for closing remarks.

John Boynton

No closing remarks. Enjoy your summer, everybody, and see you next quarter.

Operator

This concludes today's conference call. You may now disconnect.