Business News

Torstar Corporation Reports Revenue Growth and Higher Earnings From Operations in the Third Quarter

Wednesday 03. November 2010 - Torstar Corporation (TSX:TS.B) today reported financial results for the third quarter ended September 30, 2010.

Highlights for the quarter:
Revenue was $352.7 million in the quarter, up $9.0 million from $343.7 million in the third quarter of last year. Excluding the $6.4 million decrease from the stronger Canadian dollar, revenue was up $15.4 million or 4.6% in the quarter.
EBITDA (operating profit, as presented on the consolidated statements of income which is before charges for interest and taxes, adjusted for depreciation and amortization of intangible assets, and restructuring and other charges – see “non-GAAP measures”) was $50.8 million in the quarter, up $8.0 million or 18.7% from $42.8 million in the third quarter of 2009.
Net income was $4.1 million ($0.05 per share) in the third quarter of 2010 consistent with the third quarter last year.
Excluding the losses from CTVgm in both years, net income was $22.0 million ($0.28 per share) in the third quarter of 2010, up $4.4 million ($0.06 per share) from $17.6 million ($0.22 per share) in the third quarter of 2009.
Net debt was $450.4 million at September 30, 2010, down $29.7 million from $480.1 million at June 30, 2010.
“We continue to be pleased with results in 2010,” said David Holland, President and Chief Executive Officer of Torstar Corporation. “EBITDA was up in the quarter driven by growth in the Newspapers and Digital division and stable results at Harlequin. In both divisions, we continue to be very committed to adapting successfully to the increasingly digital environment. Throughout the business, we remain focused on free cash flow generation and reduction of net borrowings. In the quarter, net borrowings declined by $30 million to $450 million. Year to date, net borrowings have declined by $65 million.”
“Looking forward to the balance of the year, we are encouraged by print advertising revenue momentum at the Toronto Star but, more generally, are concerned about the modest economic recovery we are experiencing. At Harlequin, we have experienced very good results year to date but are wary of some indicators of weakness that are emerging in the U.S. market.”
The following chart provides a continuity of earnings per share from 2009 to 2010:

Third Quarter Year to Date
Net income (loss) per share 2009 $0.05 ($0.27 )
Changes
• Operations 0.05 0.34
• Restructuring and other charges (0.01 ) 0.12
• Loss from associated businesses
• Impairments 0.02 (0.06 )
• Tax valuation allowance (2009) 0.00 0.38
• Other (0.07 ) (0.07 )
• Asset sale 0.02 0.02
• Non-cash foreign exchange (0.01 ) (0.03 )
Net income per share 2010 $0.05 $0.43
OPERATING RESULTS – Third quarter and year to date 2010
Overall Performance
Total revenue was $352.7 million in the third quarter of 2010, up $9.0 million from $343.7 million in the third quarter of 2009. Excluding the $6.4 million decrease from the stronger Canadian dollar, total revenue was up $15.4 million in the quarter. Newspapers and Digital revenue was $235.2 million in the quarter, up $14.0 million or 6.3% from $221.2 million in 2009 reflecting growth in digital and print advertising revenues. National advertising was up in the quarter while retail and classified advertising remained soft. Book Publishing revenue was $117.5 million in the third quarter of 2010, down $5.0 million from $122.5 million in the third quarter of 2009. Excluding the impact of the strong Canadian dollar, Book Publishing revenues were up $1.4 million in the quarter. The North America Direct-To-Consumer and Overseas divisions had revenue growth in the third quarter that was partially offset by lower North America Retail revenues.
Year to date total revenue was $1,063.4 million, up $6.9 million from $1,056.5 million in the first nine months of 2009. Newspapers and Digital revenue was $715.3 million year to date, up $29.9 million or 4.4% from $685.4 million in the same period last year. Book Publishing revenue was $348.1 million year to date, down $23.0 million from $371.1 million in the same period last year. Excluding the impact of the stronger Canadian dollar, Book Publishing revenues were up $6.0 million year to date.
Operating profit before restructuring and other charges was $39.6 million in the third quarter of 2010, up $9.5 million from $30.1 million in the third quarter of 2009. Including the $2.4 million of restructuring and other charges, operating profit was $37.2 million in the third quarter of 2010, up $8.2 million from $29.0 million in 2009 (which included $1.1 million of restructuring and other charges). Year to date, operating profit before restructuring and other charges was $127.1 million, up $43.8 million from $83.3 million in the first nine months of 2009. Including the $15.5 million of restructuring and other charges, operating profit was $111.6 million year to date, up $59.1 million from $52.5 million in the same period last year (which included $30.8 million of restructuring and other charges).
Newspapers and Digital Segment operating profit was $20.7 million in the third quarter of 2010, up $10.1 million from $10.6 million in the same quarter last year. Year to date, Newspapers and Digital Segment operating profit was $72.2 million, up $41.2 million from $31.0 million in 2009. In both the quarter and the year to date, results benefited from revenue improvement, lower pension costs and labour cost savings from restructuring initiatives.
Book Publishing operating profit was $23.0 million in the third quarter of 2010, up $0.1 million from $22.9 million in the third quarter of 2009, as $1.4 million of underlying growth offset a negative $1.3 million from the impact of foreign exchange. Year to date, Book Publishing operating profit was $66.1 million, up $3.0 million from $63.1 million last year as $6.2 million of underlying growth more than offset a negative $3.2 million from the impact of foreign exchange. In both the quarter and the year to date, operating results were up in the North America Direct-To-Consumer and Overseas divisions and down in the North America Retail division.
Corporate costs were $4.0 million in the third quarter, up $0.6 million from $3.4 million in the same period last year. Year to date, corporate costs were $11.2 million, up $0.3 million from $10.9 million in 2009. The increase was from higher compensation expense year over year, including mark-to-market adjustments related to stock-based compensation.
EBITDA, excluding restructuring and other charges, was $50.8 million in the third quarter of 2010, up $8.0 million from $42.8 million in the same period last year. Year to date, EBITDA, excluding restructuring and other charges, was $162.1 million, up $39.9 million from $122.2 million in 2009.
Third Quarter Year to Date
(in $000’s) 2010 2009 2010 2009
Newspapers and Digital $ 30,863 $ 22,302 $ 103,902 $ 66,542
Book Publishing 23,977 23,924 69,322 66,486
Corporate (4,013 ) (3,403 ) (11,119 ) (10,832 )
EBITDA, excluding restructuring and other charges $ 50,827 $ 42,823 $ 162,105 $ 122,196
Restructuring and other charges
Restructuring and other charges of $2.4 million were recorded in the third quarter of 2010 compared with $1.1 million in the third quarter of 2009. The 2010 amount included $1.3 million related to restructuring provisions in the Newspapers and Digital Segment and a $1.1 million adjustment to a provision for litigation in the Newspapers and Digital Segment. In 2009, the restructuring and other charges were related to restructuring provisions in the Newspapers and Digital Segment.
Year to date, restructuring and other charges of $15.5 million were recorded compared with $30.8 million in 2009. The 2010 amount included $11.6 million related to restructuring provisions in the Newspapers and Digital Segment, $2.8 million of costs related to Torstar’s bid to purchase the newspaper and digital businesses of Canwest Limited Partnership and its related entities and a $1.1 million adjustment to a provision for litigation in the Newspapers and Digital Segment. In 2009, the restructuring and other charges included $12.8 million related to the transition in leadership at Torstar Corporate, $16.6 million for restructuring provisions in the Newspapers and Digital Segment and $1.4 million related to the closure of a distribution centre in Harlequin’s U.K. operation.
The restructuring charges in the Newspapers and Digital Segment reflect the ongoing focus on reducing operating costs in both Metroland Media Group and Star Media Group. Total annualized net savings from the third quarter 2010 restructuring activities are expected to be approximately $1.1 million (with approximately $0.3 million to be realized during the fourth quarter of 2010) and a net reduction of approximately 8 positions.
Interest
Interest expense was $6.7 million in the third quarter of 2010, up $1.6 million from $5.1 million in the third quarter of 2009. The higher expense reflects higher effective interest rates partially offset by the lower level of average net debt outstanding in 2010. Torstar’s effective interest rate was 5.8% in the third quarter of 2010 and 3.5% in the third quarter of 2009. This higher rate reflects the impact of the higher interest rate spread that was effective starting in 2010 for borrowings under Torstar’s long-term credit facility. The average net debt (long-term debt and bank overdraft net of cash and cash equivalents) was $465.3 million in the third quarter of 2010, down $123.1 million from $588.4 million in the same period last year.
Year to date interest expense was $17.6 million, up $1.7 million from $15.9 million in 2009. The higher year over year expense reflects higher effective interest rates partially offset by the lower level of average net debt outstanding in 2010. Year to date, Torstar’s effective interest rate was 4.8% compared with 3.5% in the first nine months of 2009. Year to date, the average net debt (long-term debt and bank overdraft net of cash and cash equivalents) was $484.9 million, down $120.9 million from $605.8 million in the same period last year.
Net debt was $450.4 million at September 30, 2010, down $65.4 million from $515.8 million at December 31, 2009.
Foreign exchange
Torstar reported a non-cash foreign exchange loss of $0.4 million in the third quarter of 2010 and $2.1 million year to date. These losses arose from the translation of foreign-currency (primarily U.S. dollars) denominated assets and liabilities into Canadian dollars. The amount of the gain or loss in any year 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. A non-cash foreign exchange gain of $0.3 million was reported in the third quarter of 2009.
Loss from associated businesses
The loss from associated businesses was $17.9 million in the third quarter of 2010 compared with a loss of $13.6 million in the third quarter of 2009. Year to date, the loss from associated businesses was $29.0 million compared with a loss of $48.3 million in 2009.
Torstar’s share of CTVgm’s net loss was $17.9 million in the third quarter of 2010 compared with a loss of $13.6 million in the third quarter of 2009. CTVgm completes its annual impairment testing of its intangible assets and goodwill during this quarter which resulted in an impairment loss of $6.6 million in the third quarter of 2010 and $8.1 million in the same period last year. During the third quarter of 2009, CTVgm recorded a recovery related to Canadian Radio-television and Telecommunications Commission (“CRTC”) Part II licence fees that offset the impact of the impairment loss. Excluding these items, Torstar’s share of CTVgm’s net loss would have been $11.3 million in the third quarter of 2010, down $3.6 million from a loss of $14.9 million in the third quarter of 2009. The lower losses in 2010 reflect improved operating results in what is traditionally the weakest quarter for CTVgm.
Year to date, Torstar’s share of CTVgm’s net loss was $29.1 million in 2010 compared with a loss of $48.1 million in 2009. The year over year improvement included $8.5 million of improved operating results. The balance of the improvement related to a 2009 $29.9 million valuation allowance that was recorded against certain of CTVgm’s future income tax assets, partially offset by $4.8 million of higher impairment losses in 2010 and the non-recurrence of the 2009 Part II fee recovery and the 2009 gain on the sale of one-half of CTVgm’s interest in Maple Leaf Sports and Entertainment Ltd.
On September 10, 2010, Torstar announced that it had entered into agreements to sell its 20% interest in CTVgm for aggregate cash proceeds of approximately $345 million. The transactions are subject to customary approvals and closing conditions, including approval by the CRTC and the Competition Bureau. The transactions are expected to close by mid 2011. Effective with the signing of the agreements, Torstar ceased to meet the accounting test for significant influence over the operations of CTVgm and as a result will stop equity accounting for its results effective September 10, 2010. The third quarter of 2010 is the last quarter that Torstar will report its share of CTVgm’s net income or loss. Torstar will carry its investment in CTVgm at its current carrying value of $150.3 million until the transactions are completed.
Torstar is not currently recording its share of Black Press’s results. Torstar’s carrying value in Black Press was reduced to nil in the fourth quarter of 2008. Under Canadian GAAP a negative carrying value is not recorded, but any deficit must be recovered prior to the reporting of any further results. Torstar’s share of Black Press’s net loss would have been $0.7 million in the third quarter of 2010 compared with net income of $1.0 million in the same period last year. Year to date, Torstar’s share of Black Press’s net income would have been a loss of $2.3 million, including a $3.1 million impairment loss related to a customer-related intangible asset and goodwill related to a printing operation. Excluding the impairment charge, Torstar’s share of Black Press’s net income would have been $0.8 million year to date compared with $1.6 million in the same period last year. Black Press’s EBITDA has improved in 2010 but has been offset by higher interest and restructuring costs.
Gain on sale of assets
During the third quarter of 2010, Torstar realized a gain of $2.8 million on the formation of a joint venture with Rogers Media to manage and further develop the Total Online Publishing Solutions (“TOPS”) system. The TOPS system is a highly scaleable content management system for internet media publishers that had been developed by Torstar and used by its newspapers.
Income and other taxes
Torstar recorded a tax provision of $11.0 million in the third quarter of 2010 and $6.8 million in the third quarter of 2009. In both years the loss from associated businesses was not tax affected. Excluding the impact from not tax-affecting the losses, the effective tax rate would have been 33.3% in the third quarter of 2010 and 27.8% in 2009.
Year to date Torstar’s effective tax rate was 47.9%. In the first nine months of 2009, Torstar recorded a tax provision of $10.2 million on a loss before taxes of $11.5 million. In both years the loss from associated businesses was not tax affected. Excluding the impact from not tax-affecting the losses, the effective tax rate for the first nine months would have been 33.2% in 2010 and 27.7% in 2009.
The higher effective tax rates in 2010 reflect the impact of foreign income that is being taxed at rates in excess of the Canadian statutory rate (which has been decreasing over time) as well as the impact of other adjustments, including items that are not deductible for income tax purposes, which reduced the tax rate in 2009 but increased it in 2010.
Net income (loss)
Torstar reported net income of $4.1 million or $0.05 per share in the third quarter of 2010, which was consistent with the third quarter of 2009. Year to date Torstar reported net income of $34.2 million or $0.43 per share compared with a net loss of $21.7 million or $0.27 per share in 2009.
The average number of Class A and Class B non-voting shares outstanding was 79.1 million in both the third quarter and year to date, up slightly from 79.0 million in the same periods last year.
OUTLOOK
The Newspapers and Digital Segment had revenue growth of 4.4% through the first nine months of 2010 compared to a weak comparable period in 2009. Signs of the strength and stability of the economic recovery remain mixed. The strengthening of National advertising in September at the Toronto Star has continued into October. At Metroland the revenue recovery remains more moderate. The digital properties are expected to continue to deliver strong growth, but there will be increased investment in certain digital operations in the fourth quarter. It is also worth noting that the fourth quarter was the strongest quarter in 2009. In the fourth quarter of 2010, the Segment will benefit from $3.4 million of net cost savings from restructuring activities undertaken in 2009 and 2010 and $1.2 million in lower pension expense. The impact of newsprint pricing is expected to be moderately negative in the fourth quarter. Torstar has arrangements in place with its suppliers that fix the price for the majority of Torstar’s newsprint requirements in 2010. For 2011, there are similar arrangements in place that should result in relatively flat newsprint pricing on a year over year basis.
With the softening in Harlequin’s North America Retail business recognized in the third quarter, Harlequin’s full year 2010 outlook is expected to be down slightly year over year, including the negative earnings impact of foreign exchange. Continued growth in North America digital sales may offset part of the Retail decline but the weak U.S. economy causes some concern for fourth quarter sales. Year to date, Harlequin realized a net negative impact of $3.2 million from foreign exchange (including the impact of the U.S. dollar hedges). If the Canadian dollar remains at its current levels relative to the U.S. dollar and overseas currencies, Harlequin anticipates that the fourth quarter foreign exchange impact would be neutral. Looking forward to 2011, if the Canadian dollar remains at its current levels relative to the U.S. dollar and overseas currencies, Harlequin anticipates a year over year negative foreign exchange impact of approximately $5.0 million, including the impact of the U.S. dollar hedges currently in place.
OTHER
On November 2, 2010, Torstar declared a quarterly dividend of 9.25 cents per share on its Class A shares and Class B non-voting shares, payable on December 31, 2010, to shareholders of record at the close of business on December 10, 2010. 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.