2008-07-31 05:30:00
Torstar Corporation Reports Second Quarter Results
TORONTO, ONTARIO–(EMWNews – July 31, 2008) – Torstar Corporation (TSX:TS.B) today reported financial results for the second quarter and six months ended June 30, 2008.
Highlights for the quarter:
– Torstar reported net income of $37.0 million ($0.47 per share) up $6.9 million ($0.09 per share) from $30.1 million ($0.38 per share) in 2007, an increase of 24%.
– EBITDA (operating profit before restructuring provisions, interest, taxes, depreciation and amortization – see “Non-GAAP measures”) was up $6.0 million or 10.2% in the quarter from $58.8 million to $64.8 million.
– Revenue of $399.5 million was up $2.5 million or 0.6% from $397.0 million and was up $5.9 million or 1.5% excluding the impact of foreign exchange.
– A $4.4 million ($3.4 million or $0.04 per share, after tax) restructuring provision at Metroland Media Group was recorded in the second quarter of 2008. Annual savings are expected to be $5.0 million.
– Torstar reported a net gain of $6.8 million ($5.6 million or $0.07 per share, after tax), which included the sale of excess land, in the second quarter of 2008.
– Net debt was $636.4 million at June 30, 2008, down $3.0 million from $639.4 million at March 31, 2008.
“We returned to growth in the second quarter. Overall EBITDA grew 10 percent, led by growth at both Harlequin and Metroland, our two largest businesses”, said Robert Prichard, Torstar’s President and Chief Executive Officer. “We said our first quarter results were not indicative of our outlook for the year and these results confirm that view. Harlequin delivered an excellent quarter with higher revenues and unit sales leading to EBITDA growth of 44 percent. Metroland Media Group also returned to its growth track with revenue and profit growth and finished the quarter with a strong June and positive momentum. Offsetting this growth at Harlequin and Metroland, the Star Media Group had a tough quarter as lower print revenue at the Toronto Star outweighed continued good progress in our digital businesses and other publications within the Star Media Group”.
“For the remainder of the year, we expect these trends to continue. Harlequin is well on track to deliver solid growth for the year, albeit not at the pace of the second quarter. We also expect Metroland will grow well in the second half of the year, coming off its strong finish to the second quarter and aided by cost reductions. Star Media Group will likely face continuing tough revenue trends at the Toronto Star partially offset by growth in the remainder of its businesses. As a result, we are positive about the second half of the year while recognizing our growth prospects will be tempered by the soft Ontario economy and rising newsprint prices.”
The following chart provides a continuity of earnings per share from 2007 to 2008:
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Second Quarter Year to Date
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Net income per share 2007 $0.38 $0.58
Changes
- Operations 0.09 0.00
- Restructuring provisions (0.04) (0.22)
- Income from associated businesses (0.06) (0.08)
- Non-cash foreign exchange 0.03 0.06
- Unusual items 0.07 0.07
- One-time tax expense adjustments 0.00 0.02
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Net income per share 2008 $0.47 $0.43
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OPERATING RESULTS – SECOND QUARTER AND YEAR TO DATE 2008
Overall Performance
Total revenue was $399.5 million in the second quarter of 2008, up $2.5 million from $397.0 million in the second quarter of 2007. Newspapers and Digital revenue decreased $0.4 million to $280.6 million as growth at Metroland Media Group’s community newspapers, Star Media Group’s digital properties and the jointly-owned Metro dailies almost completely offset the decline at the daily newspapers. Book Publishing revenue was $118.9 million in the second quarter, up $2.9 million from $116.0 million in the same period last year. Underlying revenues were up $6.3 million in the quarter with strong growth in the North America Retail division partially offset by a decrease of $3.4 million from the unfavourable impact of foreign exchange rates.
Year to date total revenue was $751.2 million, down $23.2 million from $774.4 million in the same period last year. Newspapers and Digital revenue was $522.6 million year to date, down $11.4 million from $534.0 million last year. Book Publishing revenue was $228.6 million year to date, down $11.8 million from last year as a $14.2 million decline from the unfavourable impact of foreign exchange rates more than offset underlying growth of $2.4 million.
Operating profit, after deducting a $4.4 million restructuring provision, was $46.0 million in the second quarter of 2008, up $1.3 million from $44.7 million in 2007. Excluding the restructuring provision, operating profit was $50.4 million in the second quarter, up $5.7 million from 2007. Newspapers and Digital Segment operating profit was $36.1 million in the second quarter, down $0.9 million from $37.0 million in 2007. Book Publishing operating profit was $18.5 million in the second quarter of 2008, up $6.0 million from $12.5 million in 2007. Corporate costs were $4.2 million in the second quarter of 2008, down $0.6 million from the second quarter of 2007.
Year to date operating profit, before restructuring provisions, was $72.6 million, down $6.5 million from $79.1 million in the same period last year. Including the $25.2 million restructuring provision, operating profit was $47.4 million year to date. Newspapers and Digital Segment operating profit was $46.6 million in the first six months of 2008, down $10.4 million from $57.0 million last year. Year to date Book Publishing operating profit was $34.7 million in 2008, up $3.1 million from $31.6 million in 2007. Corporate costs were $8.7 million year to date in 2008 down $0.8 million from $9.5 million in 2007.
In the second quarter of 2008, a restructuring provision of $4.4 million was recorded related to non-voluntary staff reductions at Metroland Media Group. Year to date, restructuring provisions of $25.2 million have been recorded including $20.8 million for the first quarter voluntary and non-voluntary staff reductions in the newspapers. The restructurings will result in a net reduction of 250 employees with expected annual savings of $17.0 million.
Earnings before restructuring provisions, interest, taxes, depreciation and amortization (“EBITDA” – see Non-GAAP measures), was $64.8 million in the second quarter of 2008, up $6.0 million from $58.8 million in 2007. Year to date, EBTIDA was $101.1 million, down $6.0 million from $107.1 million in 2007.
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Second Quarter Year to Date
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2008 2007 2008 2007
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Newspapers and Digital $49,223 $49,850 $72,551 $82,539
Book Publishing 19,781 13,716 37,198 34,045
Corporate (4,159) (4,810) (8,697) (9,482)
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EBITDA, excluding
restructuring provisions $64,845 $58,756 $101,052 $107,102
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Interest expense was $7.1 million in the second quarter of 2008, down $1.5 million from $8.6 million in the second quarter of 2007. Year to date interest expense was $14.9 million, down $2.4 million from $17.3 million last year. The decrease reflected lower average debt levels and slightly lower effective interest rates in 2008. The average net debt (long-term debt and bank overdraft net of cash and cash equivalents) was $637.9 million in the second quarter of 2008, down from $684.3 million in the second quarter of 2007. Torstar’s effective interest rate was 4.4% in the second quarter and 4.7% year to date in 2008 down from 5.0% and 5.2% in the same periods in 2007. Net debt was $636.4 million at June 30, 2008, down $3.0 million from $639.4 million at March 31, 2008 and up $16.1 million from $620.3 million at December 31, 2007.
Torstar reported a non-cash foreign exchange gain of $0.1 million in the second quarter of 2008 and $0.9 million year to date. Non-cash foreign exchange losses of $1.8 million were reported in the second quarter and year to date in 2007. These gains/losses arose from the translation of foreign-currency denominated assets and liabilities into Canadian dollars. The amount of the gain or loss in any period will vary depending on the movement in relative value of the Canadian dollar and on whether Torstar has a net asset or net liability position in the foreign currency.
Torstar reported income from associated businesses of $4.9 million in the second quarter of 2008 down $5.5 million from $10.4 million in the second quarter of 2007. Year to date, income from associated businesses was $3.7 million in 2008 down $7.2 million from $10.9 million in 2007.
Torstar’s income from CTVgm was $6.8 million in the second quarter of 2008, down $1.4 million from $8.2 million in the second quarter of 2007. Year to date Torstar’s income from CTVgm was $6.4 million, down $2.3 million from $8.7 million in the same period last year. Net income before the Part II fee adjustment noted below improved at CTVgm in both the quarter and year to date as softness in conventional television advertising revenues was more than offset by strength in specialty television advertising revenues and lower interest expense due to lower levels of debt. The lower income reported by Torstar is attributable to a provision for Canadian Radio-television and Telecommunications Commission (“CRTC”) Part II license fees during the second quarter and an adjustment to CTVgm’s future income tax assets for a reduction in Canadian federal income tax rates that was made in the first quarter. In late 2006, the Trial Division of the Canadian Federal Court ruled that the CRTC Part II license fees were an illegal tax and that the broadcasters (including CTVgm) were not required to pay them for their fiscal years after 2006. Based on that decision CTVgm ceased to accrue Part II fees and reversed its existing accrual, which was reported by Torstar in the fourth quarter of 2007. In April 2008, the Federal Court of Appeal reversed the Trial Court decision and found that the fees are a valid regulatory charge. In June 2008, the Canadian Association of Broadcasters filed an application for leave to appeal to the Supreme Court. During the second quarter of 2008, CTVgm has made a provision for Part II fees for fiscal 2007 and 2008.
Torstar reported a loss from Black Press of $2.0 million in the second quarter of 2008 compared with income of $2.2 million in the second quarter of 2007. Year to date Torstar has reported a loss from Black Press of $2.9 million in 2008 compared with income of $2.1 million in the same period last year. $2.1 million of the decrease in the second quarter and year to date related to adjustments made to Black Press’s future tax assets. Operating results were down in the second quarter as the U.S. newspapers were negatively impacted by the U.S. economy and sub-prime mortgage crisis and higher amortization expense was incurred from acquisitions. The Canadian newspaper business continued to perform well. Year to date, Black Press results were also negatively impacted by the mark to market of its financial derivatives.
During the second quarter of 2008, Torstar reported a net gain of $6.8 million from unusual items. In the quarter, Torstar recognized a gain of $9.2 million on the disposition of excess land and a loss of $2.4 million on the write-down of its portfolio investment in U.S. based LiveDeal Inc. to fair market value. On an after-tax basis the unusual items contributed $5.6 million of net income or $0.07 per share.
Torstar’s effective tax rate was 27.2% in the second quarter of 2008 compared with 32.8% in the second quarter of 2007. Year to date, Torstar’s effective tax rate was 23.7% in 2008 compared with 35.4% in the same period last year. The lower effective tax rate in the second quarter includes the mix-of-income impact from items that were taxed at a capital gains rate and lower foreign losses that were not tax-effected. Year to date, the effective rate was impacted by these items as well as by one-time adjustments to tax expense recorded in the first quarter of both 2008 and 2007. The full year 2008 tax rate is expected to be approximately 31%.
Torstar reported net income of $37.0 million in the second quarter of 2008, up $6.9 million from $30.1 million in 2007. Year to date Torstar reported net income of $33.5 million, down $12.3 million from $45.8 million in the same period last year. Net income per share was $0.47 in the second quarter of 2008, an increase of $0.09 from net income of $0.38 per share in the second quarter of 2007. Net income per share was $0.43 in the first six months of 2008, down $0.15 from $0.58 in the same period last year. Excluding the impact of the restructuring provisions and unusual items net income per share would have been $0.44 in the second quarter and $0.58 year to date.
The average number of shares outstanding was 78.8 million in the second quarter and year to date 2008. In 2007, an average of 78.6 million shares was outstanding during the second quarter and 78.5 million during the first six months.
Transit TV
In early 2008, Torstar announced a strategic sales relationship with IdeaCast Inc., (a U.S. provider of custom television content and advertising to health clubs) and a letter of intent giving IdeaCast an option to acquire Transit TV in the second quarter of 2008. In April 2008, IdeaCast provided notice that it does not intend to exercise its option to acquire Transit TV within the option period. During the second quarter of 2008, Torstar and IdeaCast reached an agreement on the extension of the sales relationship. Torstar’s carrying value in Transit TV’s net assets at June 30, 2008 was approximately $17.9 million.
OUTLOOK
Harlequin and Metroland Media Group grew in the second quarter while the Star Media Group continued to face revenue challenges from the soft economy in Southern Ontario and the structural pressures facing large daily newspapers. We expect this pattern to continue for the remainder of the year.
After a very strong second quarter, we expect Harlequin’s growth to moderate in the second half of the year resulting in solid growth for the year as a whole. The U.S. economy could have a negative impact on Harlequin’s results, but to date, there is no evidence of this. From a foreign exchange perspective, if the Canadian dollar remains at its current level relative to the U.S. dollar and overseas currencies through the rest of the year, it is anticipated that there would be a modest negative year over year foreign exchange impact of approximately $0.4 million in the last six months of the year. The full year impact is estimated to be $3.5 million, $3.1 million of which has been reported in the first six months.
Metroland Media Group returned to its growth track in the second quarter with both revenue and profit growth, finishing the quarter with a strong June. We expect this positive momentum to continue into the second half of the year which, aided by cost reductions, should result in good profit growth for Metroland Media Group for the second half of the year.
Star Media Group had a difficult second quarter as lower revenues at the Toronto Star outweighed continued progress in the digital businesses and other publications. We expect the revenue challenges for the Toronto Star to continue into the second half of the year but that they will be partially offset by growth in the Star Media Group’s other businesses. In particular we expect strong growth at our two leading digital businesses – Workopolis and Olive Canada Network.
The Southern Ontario economic outlook continues to cause uncertainty for Torstar’s newspapers. Cost challenges for the newspapers include the expectation of higher year over year newsprint pricing in the last six months of 2008 and increasing distribution costs as gas prices continue to rise. The newspapers undertook restructurings during the first six months of 2008. The combination of voluntary and non-voluntary staff reductions will result in a net reduction of 250 positions with savings expected to be $17.0 million annually. $7.0 million of the savings is expected to be realized in the second half of 2008 mitigating the impact of the cost challenges referred to above.
OTHER
On July 30, 2008, Torstar declared a quarterly dividend of 18.5 cents per share on its Class A voting shares and Class B non-voting shares, payable on September 30, 2008, to shareholders of record at the close of business on September 11, 2008. 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.
ADDITIONAL INFORMATION
For additional information, please refer to Torstar’s consolidated financial statements and interim management’s discussion and analysis (“MD&A”) for the period ended June 30, 2008. The MD&A has been attached to this press release. The MD&A and the consolidated financial statements will be filed today with Sedar and are available on Torstar’s corporate website www.torstar.com.
CONFERENCE CALL
Torstar has scheduled a conference call for July 31, 2008 at 8:15 a.m. to discuss its second quarter results. The dial-in number is 1-800-473-0602. A live broadcast of the conference call will be available over the Internet on the Investor Relations (Conference Calls) page on Torstar’s website www.torstar.com. A recording of the conference call will be available for 8 days by calling 1-800-558-5253 and entering reservation number 21388098. An online archive of the broadcast will be available within one hour of the completion of the call and will be accessible by visiting the Investor Relations (Conference Calls) page on Torstar’s website www.torstar.com.
About Torstar Corporation
Torstar Corporation is a broadly based media company listed on the Toronto Stock Exchange (TS.B). Its businesses include the Star Media Group led by the Toronto Star, Canada’s largest daily newspaper and digital properties including thestar.com, toronto.com, Wheels.ca, Workopolis, and Olive Canada Network; Metroland Media Group, publishers of community and daily newspapers in Ontario; and Harlequin Enterprises, a leading global publisher of books for women.
Non-GAAP Measures
Management uses both operating profit, as presented in the consolidated statements of income, and EBITDA as measures to assess the performance of the reporting units and business segments. EBITDA is a measure that is also used by many of Torstar’s shareholders, creditors, other stakeholders and analysts as a proxy for the amount of cash generated by the reporting unit or segment. EBITDA is not the actual cash provided by operating activities and is not a recognized measure of financial performance under GAAP. Torstar calculates EBITDA as the reporting unit or segment’s operating profit before restructuring provisions, interest, unusual items, taxes, depreciation and amortization of intangible assets. Torstar’s method of calculating EBITDA may differ from other companies and accordingly, may not be comparable to measures used by other companies.
Forward-looking statements
Certain statements in this press release and in the Company’s oral and written public communications may constitute forward-looking statements that reflect management’s expectations regarding the Company’s future growth, results of operations, performance and business prospects and opportunities as of the date of this press release. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate”, “believe”, “plan”, “forecast”, “expect”, “intend”, “would”, “could”, “if”, “may” and similar expressions. All such statements are made pursuant to the “safe harbour” provisions of applicable Canadian securities legislation. These statements reflect current expectations of management regarding future events and operating performance, and speak only as of the date of this press release. The Company does not intend, and disclaims any obligation to, update any forward-looking statements, whether written or oral, or whether as a result of new information or otherwise.
By their very nature, forward-looking statements require management to make assumptions and are subject to inherent risks and uncertainties. There is a significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that management’s assumptions may not be accurate and that actual results, performance or achievements may differ significantly from such predictions, forecasts, conclusions or projections expressed or implied by such forward-looking statements. We caution readers to not place undue reliance on the forward-looking statements in this press release as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, outlooks, expectations, goals, estimates or intentions expressed in the forward-looking statements. In addition, forward-looking statements are provided for the purpose of providing information about management’s current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes.
These factors include, but are not limited to: general economic conditions in the principal markets in which the Company operates, the Company’s ability to operate in highly competitive industries, the Company’s ability to compete with other forms of media, the Company’s ability to attract advertisers, cyclical and seasonal variations in the Company’s revenues, newsprint costs, labour disruptions, foreign exchange fluctuations, restrictions imposed on existing credit facilities, litigation, and uncertainties associated with critical accounting estimates.
We caution that the foregoing list is not exhaustive of all possible factors, as other factors could adversely affect our results. For more information, please see the discussion of risks affecting Torstar and its businesses in Torstar’s 2007 Management’s Discussion & Analysis as well as the discussion in the Company’s current Annual Information Form. Copies of both documents are available at www.sedar.com and on Torstar’s corporate website www.torstar.com.
In addition, a number of assumptions, including those assumptions specifically identified throughout this press release, were applied in making the forward-looking statements set forth in this press release. Some of the key assumptions include, without limitation, assumptions regarding the performance of the North American economy; tax laws in the countries in which we operate; continued availability of printing operations; continued availability of financing on appropriate terms; exchange rates; market competition; and successful development of new products. There is a risk that some or all of these assumptions may prove to be incorrect.
Torstar’s new releases are available on the Internet at www.torstar.com.
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Torstar Corporation
Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
June 30 December 31
2008 2007
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Assets
Current:
Cash and cash equivalents $44,415 $34,096
Receivables 250,627 263,779
Inventories 33,775 31,807
Prepaid expenses 64,861 61,325
Prepaid and recoverable income taxes 7,068 3,097
Future income tax assets 19,749 19,010
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Total current assets 420,495 413,114
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Property, plant and equipment (net) 319,134 330,391
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Investment in associated businesses 436,856 434,294
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Goodwill (net) 567,107 562,120
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Other assets 197,808 182,948
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Future income tax assets 39,377 37,970
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Total assets $1,980,777 $1,960,837
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Liabilities and Shareholders' Equity
Current:
Bank overdraft $10,886 $3,616
Accounts payable and accrued liabilities 198,719 208,217
Income taxes payable 8,840 17,065
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Total current liabilities 218,445 228,898
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Long-term debt 669,907 650,798
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Other liabilities 93,770 89,678
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Future income tax liabilities 72,360 73,702
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Shareholders' equity:
Share capital 390,340 388,036
Contributed surplus 11,319 9,929
Retained earnings 539,622 535,242
Accumulated other comprehensive loss (14,986) (15,446)
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Total shareholders' equity 926,295 917,761
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Total liabilities and shareholders' equity $1,980,777 $1,960,837
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Torstar Corporation
Consolidated Statements of Income
(Dollars in Thousands)
(Unaudited)
Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
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Operating revenue
Newspapers and digital $280,638 $280,977 $522,569 $533,963
Book publishing 118,868 115,988 228,587 240,444
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$399,506 $396,965 $751,156 $774,407
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Operating profit
Newspapers and digital $36,051 $37,015 $46,622 $56,963
Book publishing 18,536 12,502 34,733 31,625
Corporate (4,175) (4,824) (8,730) (9,510)
Restructuring provisions (4,408) (25,225)
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46,004 44,693 47,400 79,078
Interest (7,069) (8,583) (14,879) (17,317)
Foreign exchange 112 (1,782) 906 (1,797)
Income of associated businesses 4,934 10,425 3,697 10,926
Unusual items 6,781 6,781
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Income before taxes 50,762 44,753 43,905 70,890
Income and other taxes (13,800) (14,700) (10,400) (25,100)
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Net income $36,962 $30,053 $33,505 $45,790
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Earnings per Class A and Class B
share:
Net income - Basic $0.47 $0.38 $0.43 $0.58
Net income - Diluted $0.47 $0.38 $0.43 $0.58
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INTERIM MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three and six months ended June 30, 2008 and 2007
Dated: July 30, 2008
The following review and analysis of Torstar Corporation’s (the “Company” or “Torstar”) operations and financial position for the three and six months ended June 30, 2008 and 2007 is supplementary to, and should be read in conjunction with the audited consolidated financial statements of Torstar Corporation for the year ended December 31, 2007 set forth in the Company’s Annual Report for such fiscal year and incorporated by reference in the Company’s renewal Annual Information Form dated March 18, 2008.
Torstar reports its financial results under Canadian generally accepted accounting principles (“GAAP”) in Canadian dollars. Per share amounts are calculated using the weighted average number of shares outstanding for the applicable period.
Non-GAAP Measures
Management uses both operating profit, as presented in the consolidated statements of income, and EBITDA as measures to assess the performance of the reporting units and business segments. EBITDA is a measure that is also used by many of Torstar’s shareholders, creditors, other stakeholders and analysts as a proxy for the amount of cash generated by the reporting unit or segment. EBITDA is not the actual cash provided by operating activities and is not a recognized measure of financial performance under GAAP. Torstar calculates EBITDA as the reporting unit or segment’s operating profit before restructuring provisions, interest, taxes, depreciation and amortization. Torstar’s method of calculating EBITDA may differ from other companies and accordingly, may not be comparable to measures used by other companies.
Forward-looking statements
Certain statements in this MD&A and in the Company’s oral and written public communications may constitute forward-looking statements that reflect management’s expectations regarding the Company’s future growth, results of operations, performance and business prospects and opportunities as of the date of this report. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate”, “believe”, “plan”, “forecast”, “expect”, “intend”, “would”, “could”, “if”, “may” and similar expressions. All such statements are made pursuant to the “safe harbour” provisions of applicable Canadian securities legislation. These statements reflect current expectations of management regarding future events and operating performance, and speak only as of the date of this report. The Company does not intend, and disclaims any obligation to, update any forward-looking statements, whether written or oral, or whether as a result of new information or otherwise.
By their very nature, forward-looking statements require management to make assumptions and are subject to inherent risks and uncertainties. There is a significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that management’s assumptions may not be accurate and that actual results, performance or achievements may differ significantly from such predictions, forecasts, conclusions or projections expressed or implied by such forward-looking statements. We caution readers to not place undue reliance on the forward-looking statements in this MD&A as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, outlooks, expectations, goals, estimates or intentions expressed in the forward-looking statements. In addition, forward-looking statements are provided for the purpose of providing information about management’s current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes.
These factors include, but are not limited to: general economic conditions in the principal markets in which the Company operates, the Company’s ability to operate in highly competitive industries, the Company’s ability to compete with other forms of media, the Company’s ability to attract advertisers, cyclical and seasonal variations in the Company’s revenues, newsprint costs, labour disruptions, foreign exchange fluctuations, restrictions imposed on existing credit facilities, reliance on its printing operations, reliance on technology and information systems, litigation, and uncertainties associated with critical accounting estimates.
We caution that the foregoing list is not exhaustive of all possible factors, as other factors could adversely affect our results. For more information, please see the discussion starting on page 24 of the Company’s 2007 Annual Report concerning the effect certain risk factors could have on actual results, as well as the discussion in the Company’s current Annual Information Form, which is incorporated herein by reference.
In addition, a number of assumptions, including those assumptions specifically identified throughout this MD&A, were applied in making the forward-looking statements set forth in this MD&A. Some of the key assumptions include, without limitation, assumptions regarding the performance of the North American economy; tax laws in the countries in which we operate; continued availability of printing operations; continued availability of financing on appropriate terms; exchange rates; market competition; and successful development of new products. There is a risk that some or all of these assumptions may prove to be incorrect.
OVERVIEW
Torstar Corporation is a broadly based media company listed on the Toronto Stock Exchange (TS.B). Torstar reports its operations in two segments: Newspapers and Digital; and Book Publishing. The Newspapers and Digital Segment includes the Star Media Group led by the Toronto Star, Canada’s largest daily newspaper and digital properties including thestar.com, toronto.com, Wheels.ca, Workopolis, and Olive Canada Network; and Metroland Media Group, publishers of community and daily newspapers in Ontario. Its Book Publishing Segment represents Harlequin Enterprises Limited, a leading global publisher of books for women. Torstar also has investments in CTVglobemedia Inc. (“CTVgm”) and Black Press Limited which are accounted for as Associated Businesses, using the equity method.
OPERATING RESULTS – Second quarter and year to date 2008
Overall Performance
Total revenue was $399.5 million in the second quarter of 2008, up $2.5 million from $397.0 million in the second quarter of 2007. Newspapers and Digital revenue decreased $0.4 million to $280.6 million as growth at Metroland Media Group’s community newspapers, Star Media Group’s digital properties and the jointly-owned Metro dailies almost completely offset the decline at the daily newspapers. Book Publishing revenue was $118.9 million in the second quarter, up $2.9 million from $116.0 million in the same period last year. Underlying revenues were up $6.3 million in the quarter with strong growth in the North America Retail division partially offset by a decrease of $3.4 million from the unfavourable impact of foreign exchange rates.
Year to date total revenue was $751.2 million, down $23.2 million from $774.4 million in the same period last year. Newspapers and Digital revenue was $522.6 million year to date, down $11.4 million from $534.0 million last year. Book Publishing revenue was $228.6 million year to date, down $11.8 million from last year as a $14.2 million decline from the unfavourable impact of foreign exchange rates more than offset underlying growth of $2.4 million.
Operating profit, after deducting a $4.4 million restructuring provision, was $46.0 million in the second quarter of 2008, up $1.3 million from $44.7 million in 2007. Excluding the restructuring provision, operating profit was $50.4 million in the second quarter, up $5.7 million from 2007. Newspapers and Digital Segment operating profit was $36.1 million in the second quarter, down $0.9 million from $37.0 million in 2007. Book Publishing operating profit was $18.5 million in the second quarter of 2008, up $6.0 million from $12.5 million in 2007. Corporate costs were $4.2 million in the second quarter of 2008, down $0.6 million from the second quarter of 2007.
Year to date operating profit, before restructuring provisions, was $72.6 million, down $6.5 million from $79.1 million in the same period last year. Including the $25.2 million restructuring provision, operating profit was $47.4 million year to date. Newspapers and Digital Segment operating profit was $46.6 million in the first six months of 2008, down $10.4 million from $57.0 million last year. Year to date Book Publishing operating profit was $34.7 million in 2008, up $3.1 million from $31.6 million in 2007. Corporate costs were $8.7 million year to date in 2008 down $0.8 million from $9.5 million in 2007.
In the second quarter of 2008, a restructuring provision of $4.4 million was recorded related to non-voluntary staff reductions at Metroland Media Group. Year to date, restructuring provisions of $25.2 million have been recorded including $20.8 million for the first quarter voluntary and non-voluntary staff reductions in the newspapers. The restructurings will result in a net reduction of 250 employees with expected annual savings of $17.0 million.
Earnings before restructuring provisions, interest, taxes, depreciation and amortization (“EBITDA” – see Non-GAAP measures), was $64.8 million in the second quarter of 2008, up $6.0 million from $58.8 million in 2007. Year to date, EBTIDA was $101.1 million, down $6.0 million from $107.1 million in 2007.
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Second Quarter Year to Date
-------------------------------------
2008 2007 2008 2007
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Newspapers and Digital $49,223 $49,850 $72,551 $82,539
Book Publishing 19,781 13,716 37,198 34,045
Corporate (4,159) (4,810) (8,697) (9,482)
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EBITDA, excluding
restructuring provisions $64,845 $58,756 $101,052 $107,102
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Interest expense was $7.1 million in the second quarter of 2008, down $1.5 million from $8.6 million in the second quarter of 2007. Year to date interest expense was $14.9 million, down $2.4 million from $17.3 million last year. The decrease reflected lower average debt levels and slightly lower effective interest rates in 2008. The average net debt (long-term debt and bank overdraft net of cash and cash equivalents) was $637.9 million in the second quarter of 2008, down from $684.3 million in the second quarter of 2007. Torstar’s effective interest rate was 4.4% in the second quarter and 4.7% year to date in 2008 down from 5.0% and 5.2% in the same periods in 2007. Net debt was $636.4 million at June 30, 2008, down $3.0 million from $639.4 million at March 31, 2008 and up $16.1 million from $620.3 million at December 31, 2007.
Torstar reported a non-cash foreign exchange gain of $0.1 million in the second quarter of 2008 and $0.9 million year to date. Non-cash foreign exchange losses of $1.8 million were reported in the second quarter and year to date in 2007. These gains/losses arose from the translation of foreign-currency denominated assets and liabilities into Canadian dollars. The amount of the gain or loss in any period will vary depending on the movement in relative value of the Canadian dollar and on whether Torstar has a net asset or net liability position in the foreign currency.
Torstar reported income from associated businesses of $4.9 million in the second quarter of 2008 down $5.5 million from $10.4 million in the second quarter of 2007. Year to date, income from associated businesses was $3.7 million in 2008 down $7.2 million from $10.9 million in 2007.
Torstar’s income from CTVgm was $6.8 million in the second quarter of 2008, down $1.4 million from $8.2 million in the second quarter of 2007. Year to date Torstar’s income from CTVgm was $6.4 million, down $2.3 million from $8.7 million in the same period last year. Net income before the Part II fee adjustment noted below improved at CTVgm in both the quarter and year to date as softness in conventional television advertising revenues was more than offset by strength in specialty television advertising revenues and lower interest expense due to lower levels of debt. The lower income reported by Torstar is attributable to a provision for Canadian Radio-television and Telecommunications Commission (“CRTC”) Part II license fees during the second quarter and an adjustment to CTVgm’s future income tax assets for a reduction in Canadian federal income tax rates that was made in the first quarter. In late 2006, the Trial Division of the Canadian Federal Court ruled that the CRTC Part II license fees were an illegal tax and that the broadcasters (including CTVgm) were not required to pay them for their fiscal years after 2006. Based on that decision CTVgm ceased to accrue Part II fees and reversed its existing accrual, which was reported by Torstar in the fourth quarter of 2007. In April 2008, the Federal Court of Appeal reversed the Trial Court decision and found that the fees are a valid regulatory charge. In June 2008, the Canadian Association of Broadcasters filed an application for leave to appeal to the Supreme Court. During the second quarter of 2008, CTVgm has made a provision for Part II fees for fiscal 2007 and 2008.
Torstar reported a loss from Black Press of $2.0 million in the second quarter of 2008 compared with income of $2.2 million in the second quarter of 2007. Year to date Torstar has reported a loss from Black Press of $2.9 million in 2008 compared with income of $2.1 million in the same period last year. $2.1 million of the decrease in the second quarter and year to date related to adjustments made to Black Press’s future tax assets. Operating results were down in the second quarter as the U.S. newspapers were negatively impacted by the U.S. economy and sub-prime mortgage crisis and higher amortization expense was incurred from acquisitions. The Canadian newspaper business continued to perform well. Year to date, Black Press results were also negatively impacted by the mark to market of its financial derivatives.
During the second quarter of 2008, Torstar reported a net gain of $6.8 million from unusual items. In the quarter, Torstar recognized a gain of $9.2 million on the disposition of excess land and a loss of $2.4 million on the write-down of its portfolio investment in U.S. based LiveDeal Inc. to fair market value. On an after-tax basis the unusual items contributed $5.6 million of net income or $0.07 per share.
Torstar’s effective tax rate was 27.2% in the second quarter of 2008 compared with 32.8% in the second quarter of 2007. Year to date, Torstar’s effective tax rate was 23.7% in 2008 compared with 35.4% in the same period last year. The lower effective tax rate in the second quarter includes the mix-of-income impact from items that were taxed at a capital gains rate and lower foreign losses that were not tax-effected. Year to date, the effective rate was impacted by these items as well as by one-time adjustments to tax expense recorded in the first quarter of both 2008 and 2007. The full year 2008 tax rate is expected to be approximately 31%.
Torstar reported net income of $37.0 million in the second quarter of 2008, up $6.9 million from $30.1 million in 2007. Year to date Torstar reported net income of $33.5 million, down $12.3 million from $45.8 million in the same period last year. Net income per share was $0.47 in the second quarter of 2008, an increase of $0.09 from net income of $0.38 per share in the second quarter of 2007. Net income per share was $0.43 in the first six months of 2008, down $0.15 from $0.58 in the same period last year. Excluding the impact of the restructuring provisions and unusual items net income per share would have been $0.44 in the second quarter and $0.58 year to date.
The average number of shares outstanding was 78.8 million in the second quarter and year to date 2008. In 2007, an average of 78.6 million shares was outstanding during the second quarter and 78.5 million during the first six months.
The following chart provides a continuity of earnings per share from 2007 to 2008:
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Second Quarter Year to Date
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Net income per share 2007 $0.38 $0.58
Changes
- Operations 0.09 0.00
- Restructuring provisions (0.04) (0.22)
- Income from associated businesses (0.06) (0.08)
- Non-cash foreign exchange 0.03 0.06
- Unusual items 0.07 0.07
- One-time tax expense adjustments 0.00 0.02
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Net income per share 2008 $0.47 $0.43
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SEGMENT OPERATING RESULTS – Newspapers and Digital Segment
The Newspapers and Digital Segment includes the Star Media Group; Metroland Media Group; and Transit Television Network (“Transit TV”).
Star Media Group includes the Toronto Star, with the largest circulation and readership of any daily newspaper in Canada; Torstar’s interests in Sing Tao Daily and the Toronto, Ottawa, Vancouver, Edmonton, Calgary and Halifax editions of Metro; thestar.com; toronto.com; Wheels.ca, Yourhome.ca, Healthzone.ca, Parentcentral.ca and Torstar Media Group Television (“TMG TV”). Star Media Group also includes Workopolis, Olive Canada Network and the Torstar Digital corporate group.
Metroland Media Group publishes in print and online more than 100 community newspapers and three daily newspapers – The Hamilton Spectator, the Waterloo Region Record and the Guelph Mercury. It is also the publisher of Gold Book Directories, a number of specialty publications, and operates several consumer shows throughout Ontario. Metroland Media Group has ten web press facilities which print the Metroland newspapers but also engage in commercial printing.
Transit TV is a U.S. based operation that delivers full motion, broadcast-quality information and entertainment to passengers on buses and rail transit on screens mounted in the vehicle.
The following tables set out, in $000’s, the results for the reporting units within the Newspapers and Digital Segment for the three months ended June 30, 2008 and 2007.
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Operating Profit
Operating Revenue (Loss) Profit Margin
2008 2007 2008 2007 2008 2007
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Metroland Media $153,769 $151,886 $31,825 $31,357 20.7% 20.6%
Star Media 126,186 128,367 5,596 8,275 4.4% 6.4%
Transit TV 683 724 (1,370) (2,617) n/a n/a
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Segment Total $280,638 $280,977 $36,051 $37,015 12.8% 13.2%
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--------------------------------------------------------------------------
Depreciation and
Amortization EBITDA EBITDA Margin
2008 2007 2008 2007 2008 2007
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Metroland Media $3,910 $3,823 $35,735 $35,180 23.2% 23.2%
Star Media 8,488 8,094 14,084 16,369 11.2% 12.8%
Transit TV 774 918 (596) (1,699) n/a n/a
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Segment Total $13,172 $12,835 $49,223 $49,850 17.5% 17.7%
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The following tables set out, in $000’s, the results for the reporting units within the Newspapers and Digital Segment for the six months ended June 30, 2008 and 2007.
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Operating Profit
Operating Revenue (Loss) Profit Margin
2008 2007 2008 2007 2008 2007
--------------------------------------------------------------------------
Metroland Media $279,959 $284,919 $48,137 $51,261 17.2% 18.0%
Star Media 241,557 247,802 1,704 11,197 0.7% 4.5%
Transit TV 1,053 1,242 (3,219) (5,495) n/a n/a
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Segment Total $522,569 $533,963 $46,622 $56,963 8.9% 10.7%
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--------------------------------------------------------------------------
Depreciation and
Amortization EBITDA EBITDA Margin
2008 2007 2008 2007 2008 2007
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Metroland Media $7,816 $7,611 $55,953 $58,872 20.0% 20.7%
Star Media 16,565 16,084 18,269 27,281 7.6% 11.0%
Transit TV 1,548 1,881 (1,671) (3,614) n/a n/a
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Segment Total $25,929 $25,576 $72,551 $82,539 13.9% 15.5%
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Total revenue of the Newspapers and Digital Segment was $280.6 million in the second quarter of 2008, down $0.4 million from $281.0 million in the second quarter of 2007. Year to date total revenue of the Newspapers and Digital Segment was $522.6 million down $11.4 million from $534.0 million in the same period last year. Digital revenues were 5.8% of the total in the second quarter of 2008 and 5.7% year to date, up from 4.3% and 4.1% in the same periods in 2007.
The Newspapers and Digital Segment was positively affected by the calendar during the second quarter of 2008. Most stores are closed for two days on Easter weekend and advertisers, accordingly, tend to reduce their advertising spend around that weekend. Easter weekend was in the first quarter of 2008 and in the second quarter of 2007. Year to date, there was no impact from the calendar.
Metroland Media Group
Revenues were $153.8 million in the second quarter of 2008, up $1.9 million from $151.9 million in the second quarter of 2007 with growth at the community newspapers and Gold Book directories more than offsetting declines at the daily newspapers. Year to date revenues were $280.0 million in 2008, down $4.9 million from $284.9 million in the same period last year. Advertising revenue at the community newspapers was up 2.2% in the quarter benefiting from underlying growth as well as the calendar. The daily newspapers continued to face challenges with National advertising revenues in the second quarter. Distribution revenues were up at both the community and daily newspapers for the quarter and year to date.
Metroland Media Group’s EBITDA was $35.7 million in the second quarter, up $0.5 million from $35.2 million in the second quarter of 2007. Year to date EBITDA was $56.0 million in 2008, down $2.9 million from $58.9 million last year. Cost savings continued during the quarter with lower staff costs from the restructuring efforts undertaken in 2007 and the first quarter of 2008. These savings were partially offset by higher pension costs.
Operating profit was $31.8 million in the second quarter of 2008, up $0.4 million from $31.4 million in the second quarter of 2007. Year to date operating profit was $48.1 million in 2008, down $3.2 million from $51.3 million in the same period last year.
Star Media Group
Star Media Group had revenues of $126.2 million in the second quarter of 2008, a decrease of $2.2 million from $128.4 million in the second quarter of 2007. Year to date revenues were $241.6 million in 2008, down $6.2 million from $247.8 million in the same period last year.
Revenue grew over 30% at the SMG digital properties in the second quarter and year to date with strong performance at Olive Canada Network and thestar.com. The jointly-owned Sing Tao and Metro newspapers provided revenue growth in the second quarter and year to date from a combination of new products and market expansion. Advertising revenue at the Toronto Star was down 10.5% in the second quarter of 2008 and 11.8% year to date with the National and Retail advertising categories continuing to be challenging.
Star Media Group’s EBITDA was $14.1 million in the second quarter of 2008, down $2.3 million from $16.4 million in the second quarter of 2007. Year to date EBITDA was $18.3 million in 2008, down $9.0 million from $27.3 million in the same period last year. Cost savings were realized by the Toronto Star in the quarter and year to date from reduced newsprint consumption (including the positive impact of the web-width reduction in 2007) and lower payroll costs from the restructuring efforts undertaken in 2007 and the first quarter of 2008. Newsprint prices were relatively flat year over year in the second quarter and 6.0% lower year to date.
The Star Media Group had an operating profit of $5.6 million in the second quarter of 2008, down $2.7 million from $8.3 million in the second quarter of 2007. Year to date operating profit was $1.7 million in 2008, down $9.5 million from $11.2 million in the same period last year.
Transit TV
Transit TV had an EBITDA loss of $0.6 million in the second quarter of 2008, an improvement of $1.1 million from a loss of $1.7 million in the same period last year. Year to date the EBITDA loss was $1.7 million in 2008, an improvement of $1.9 million from a loss of $3.6 million in 2007. The improvement reflected the continued focus on cost containment by Transit TV’s management.
In early 2008, Torstar announced a strategic sales relationship with IdeaCast Inc., (a U.S. provider of custom television content and advertising to health clubs) and a letter of intent giving IdeaCast an option to acquire Transit TV in the second quarter of 2008. In April 2008, IdeaCast provided notice that it does not intend to exercise its option to acquire Transit TV within the option period. During the second quarter of 2008, Torstar and IdeaCast reached an agreement on the extension of the sales relationship. Torstar’s carrying value in Transit TV’s net assets at June 30, 2008 was approximately $17.9 million.
Segment Operating Results – Book Publishing
The Book Publishing Segment reports the results of Harlequin, a leading global publisher of books for women. Harlequin publishes books around the world in a variety of genres and formats, selling through the retail channel and directly to the consumer by mail and the Internet. Harlequin’s publishing operations are comprised of three divisions: North America Retail, North America Direct-To-Consumer and Overseas.
The following tables set out, in $000’s, a summary of operating results for the Book Publishing Segment and a continuity of revenue and operating profit, including the impact of foreign currency movements, for the three and six months ended June 30, 2008 and 2007.
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Second Quarter Year to Date
---------------------------------------
2008 2007 2008 2007
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Revenue $118,868 $115,988 $228,587 $240,444
EBITDA $19,781 $13,716 $37,198 $34,045
Depreciation & amortization 1,245 1,214 2,465 2,420
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Operating profit $18,536 $12,502 $34,733 $31,625
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EBITDA margin 16.6% 11.8% 16.3% 14.2%
Operating profit margin 15.6% 10.8% 15.2% 13.2%
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----------------------------------------------------------------------------
Second Year to
Quarter Date
----------------------------------------------------------------------------
Reported revenue, prior year $115,988 $240,444
Impact of currency movements and foreign
exchange contracts (3,409) (14,226)
Change in underlying revenue 6,289 2,369
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Reported revenue, current year $118,868 $228,587
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Reported operating profit, prior year $12,502 $31,625
Impact of currency movements and foreign
exchange contracts (842) (3,119)
Change in underlying operating profit 6,876 6,227
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Reported operating profit, current year $18,536 $34,733
----------------------------------------------------------------------------
Book Publishing revenues were up $6.3 million in the second quarter of 2008 excluding the impact of foreign exchange. North America Retail was up $6.1 million, North America Direct-To-Consumer was down $1.4 million and Overseas was up $1.6 million. Year to date, Book Publishing revenues were up $2.4 million excluding the impact of foreign exchange. North America Retail was up $3.3 million, North America Direct-To-Consumer was down $2.6 million and Overseas was up $1.7 million.
Book Publishing operating profits were up $6.9 million in the second quarter of 2008 excluding the impact of foreign exchange. North America Retail was up $5.3 million, North America Direct-To-Consumer was up $0.3 million and Overseas was up $1.3 million. Year to date Book Publishing operating profits were up $6.2 million excluding the impact of foreign exchange. North America Retail was up $5.3 million, North America Direct-To-Consumer was up $0.6 million and Overseas was up $0.3 million.
North America Retail operating profits were up $5.3 million in the second quarter on revenue growth from a strong publishing schedule, improved net sales rates and positive adjustments to returns provisions. Higher promotional spending in the quarter and year to date was offset by product cost savings arising from the mix of product.
North America Direct-To-Consumer operating profits were up $0.3 million in the second quarter and $0.6 million year to date despite lower revenues. Revenue was down in the quarter and year to date as the revenue growth from Internet book and digital sales was not sufficient to offset the decrease from fewer books sold in the traditional direct mail business. Lower costs, primarily reduced advertising and promotion spending in the traditional direct mail business offset the lower revenues in both the quarter and year to date.
Overseas operating profits were up $1.3 million in the second quarter of 2008 with higher profits across most of the major markets. Japan’s
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