Business News

Torstar Corporation Reports First Quarter Results and Increase in Quarterly Dividend

Wednesday 04. May 2011 - Torstar Corporation (TSX:TS.B) today reported financial results for the first quarter ended March 31, 2011.

Highlights for the quarter:
Revenue was $351.4 million in the quarter, up $16.4 million from the first quarter of 2010. Excluding certain unusual items and the impact of foreign exchange, total revenue was up $5.5 million or 1.6% in the quarter.
EBITDA (operating profit, as presented on the consolidated statement of income, which is before charges for interest and taxes, adjusted for amortization and depreciation and restructuring and other charges – see “non-IFRS measures”) was $41.7 million in the quarter, down $7.3 million from $49.0 million in the first quarter of 2010. This includes a $3.1 million decline from the impact of foreign exchange and the increased level of investment spending in the Media Segment.
Net income was $15.4 million in the first quarter, down $1.2 million from $16.6 million last year.
Net income per share was $0.20 in the first quarter of 2011, down $0.01 from $0.21 last year.
Net debt was $373.8 million at March 31, 2011, up $5.2 million from $368.6 million at December 31, 2010.
Torstar’s Board of Directors have approved, effective with the June 30, 2011 dividend, a 35% increase in the quarterly dividend from $0.0925 to $0.125 per share.
“Results were mixed in the quarter,” said David Holland, President and Chief Executive Officer of Torstar Corporation. “EBITDA was down $7.3 million to $41.7 million. The strength of the Canadian dollar, our commitment to investment back into the Canadian media operations and a modest decline in print revenues all factored into the quarter’s results.”
“In the Media Segment, EBTIDA was down $5.4 million due to increased investment spending, primarily in digital initiatives, and a soft print revenue environment. At Harlequin, EBITDA was down $1.2 million but this result was negatively affected by a $3.1 million foreign exchange impact due to the stronger Canadian dollar. Excluding the exchange impact, Harlequin is off to a very good start up almost $2 million or 10% versus prior year. Harlequin’s positioning continues to benefit from the shift to digital reading.”
“Looking forward, in the Canadian Media operations there is limited visibility related to both the print revenue environment and the pace of economic recovery. We continue to be pleased with our digital progress and remain committed to making investments back into our business, whether in digital or print, when we see opportunity to add value over time. At Harlequin, we anticipate underlying business performance will remain solid. We will continue to confront foreign exchange headwinds as the year progresses. However, if rates remain at current levels, the most significant quarterly impact is behind us.”
“The CTV transaction closed on April 1 and we received $291.6 million of proceeds. Adjusted for these proceeds, Torstar’s net borrowings are $82.2 million as of April 1, 2011. We move forward with the advantage of a very solid financial foundation.”
“We announced this morning a 35% increase in Torstar’s quarterly dividend from $0.0925 to $0.125 per share. We are hopeful that from this level of dividend we will be in a position to consider further increases to the dividend annually.”
The following chart provides a continuity of net income per share from 2010 to 2011:
First Quarter
Net income attributable to equity shareholders per share 2010 $0.21
Changes
• Operations (0.09 )
• Restructuring and other charges 0.07
• Settlement of interest rate swap contracts (0.03 )
• Loss from CTV (2010) 0.06
• Non-cash foreign exchange (0.02 )
Net income attributable to equity shareholders per share 2011 $0.2
OPERATING RESULTS – First quarter 2011
Overall Performance
Total revenue was $351.4 million in the first quarter of 2011, up $16.4 million from $335.0 million in the first quarter of 2010. Excluding the $8.4 million of higher product sales in Metroland Media Group’s TMGTV operations, the $3.7 million increase from a change in reporting for Torstar’s share of Metro’s revenues, the $4.1 million of higher revenue from the second quarter 2010 acquisition of the other half of Harlequin’s German publishing business and the $5.3 million decrease from the stronger Canadian dollar, total revenue would have been up $5.5 million in the quarter. Excluding these items, Media Segment revenues were up $1.7 million in the quarter with digital revenue growth more than offsetting declines in print advertising revenue. Book Publishing revenues were up $3.9 million in the quarter with strong growth in North America digital revenues more than offsetting declines in all other divisions.
Operating profit before restructuring and other charges was $33.9 million in the first quarter of 2011, down $6.7 million from $40.6 million in the first quarter of 2010. Including the $0.4 million of restructuring and other charges, operating profit was $33.5 million in the first quarter of 2011, up $1.4 million from $32.1 million in 2010 (which included $8.5 million of restructuring and other charges). Media Segment operating profit before restructuring and other charges was $15.6 million in the first quarter of 2011, down $4.9 million from $20.5 million in the same quarter last year. Results in the segment were affected by an increase in investment spending, primarily in the digital businesses, and softness in print advertising revenues which was mitigated by cost savings from prior year restructuring initiatives.
Book Publishing operating profit before restructuring and other charges was $22.0 million in the first quarter of 2011, down $1.2 million from $23.2 million in the first quarter of 2010, including a decline of $3.1 million from the impact of a stronger Canadian dollar and a smaller gain on the U.S. dollar hedges in the first quarter of 2011. Excluding the impact of foreign exchange, Book Publishing operating profit before restructuring and other charges was up $1.9 million in the quarter including $0.7 million from the second quarter 2010 acquisition of the other half of Harlequin’s German publishing business.
Corporate costs before restructuring and other charges were $3.7 million in the first quarter, up $0.6 million from $3.1 million in the same period last year. The increase primarily relates to year over year differences in the mark-to-market of a share-based compensation hedging instrument.
EBITDA was $41.7 million in 2011, down $7.3 million from $49.0 million in 2010.
(in $000’s) 2011 2010
Media $22,468 $27,917
Book Publishing 22,890 24,145
Corporate (3,679 ) (3,100 )
EBITDA $41,679 $48,962
Restructuring and other charges
Restructuring and other charges of $0.4 million were recorded in the first quarter of 2011 compared with $8.5 million in the first quarter of 2010. The 2010 amount included $7.5 million of restructuring provisions in the Media Segment, $0.8 million of costs related to Torstar’s bid to purchase the newspaper and digital business of Canwest Limited Partnership and $0.2 million related to transaction costs from Harlequin’s acquisition of the other half of the German publishing business.
Interest and financing costs
Interest and financing costs were $10.7 million in the first quarter of 2011, up $6.4 million from $4.3 million in the first quarter of 2010.
The first quarter 2011 costs included $3.8 million related to the settlement of Canadian dollar debt interest rate swaps. In 2006, in connection with the investment in CTV, Torstar had entered into interest rate swap agreements to fix the rate of interest on $250 million of Canadian dollar borrowings at 4.3% (plus the applicable interest rate spread based on Torstar’s long-term credit rating) through September 2011. The five-year swap arrangements required a resetting of pricing and debt instruments every ninety days with a reset date occurring in March 2011. In anticipation of the receipt of the funds from the completion of the CTV sale, the swap arrangements were not reset in March and Torstar settled the swaps.
Interest expense was $6.2 million in the first quarter of 2011, up $1.9 million from $4.3 million in the first quarter of 2010. The higher expense reflects higher effective interest rates partially offset by a lower level of average net debt outstanding in the first quarter of 2011. The average net debt (long-term debt and bank overdraft net of cash and cash equivalents) was $371.2 million in the first quarter of 2011, down $131.8 million from $503.0 million in the same period last year. Torstar’s effective interest rate was 6.7% in the first quarter of 2011 and 3.4% in the first quarter of 2010. The higher rate in 2011 reflected the higher interest rate spread that started to apply to new debt during the first quarter of 2010. It also reflected the mix of debt outstanding with a larger proportion being the higher fixed-rate debt in the first quarter of 2011. Net debt was $373.8 million at March 31, 2011, up $5.2 million from $368.6 million at December 31, 2010.
The first quarter of 2011 also included $0.7 million of interest accretion on long-term restructuring provisions, deferred purchase price and contingent consideration obligations. There was no interest accretion in the first quarter of 2010.
Foreign exchange
The non-cash foreign exchange gain or loss reported in the consolidated statement of income primarily relates to the translation of U.S. dollar denominated assets and liabilities held by Torstar’s Canadian operations into Canadian dollars. It does not include the translation of foreign currency (including U.S. dollars) denominated assets and liabilities of Torstar’s foreign operations or the translation of U.S. dollar debt that has been designated as a hedge against those net assets. The foreign exchange on the translation of those foreign-currency denominated assets and liabilities and the related hedge-designated debt into Canadian dollars is reported through other comprehensive income. The amount of the non-cash foreign exchange gain or loss in any year will vary depending on the movement in the relative value of the Canadian dollar and on whether Torstar’s Canadian operations have a net asset or net liability position in U.S. dollars.
Torstar reported a non-cash foreign exchange gain of $0.8 million in the first quarter of 2011 compared with a gain of $2.8 million in the first quarter of 2010. The gains arose as Torstar’s Canadian operations were in a net liability position in U.S. dollars and the Canadian dollar strengthened during the quarter in both years. The gain in 2010 was much larger as Torstar had not designated any of its U.S. dollar debt as a hedge against its net investment in U.S. operations in 2010 thereby increasing the net liability position in U.S. dollars. Effective January 1, 2011, Torstar has designated $80.0 million of its U.S. dollar denominated debt as a hedge against its net investment in the Book Publishing businesses that have the U.S. dollar as their functional currency.
Loss of associated businesses
The loss of associated businesses was $0.6 million in the first quarter of 2011 compared with a loss of $4.6 million in the first quarter of 2010. The 2011 loss included Torstar’s share of Canadian Press’s loss for the quarter. Torstar acquired a one-third interest in Canadian Press in the fourth quarter of 2010.
Torstar ceased to equity account for its investment in CTV on September 10, 2010 and as a result did not include any amounts related to CTV in the loss of associated businesses in the first quarter of 2011. Torstar’s share of CTV’s net loss was $4.7 million in the first quarter of 2010.
Torstar is also not currently recording its share of Black Press’s results due to a notional accounting negative carrying value. Torstar’s share of Black Press’s net income would have been a loss of $0.2 million in the first quarter of 2011 compared with a loss of $3.6 million in the first quarter of 2010. The 2010 loss included a $3.1 million impairment loss related to a customer-related intangible asset and goodwill related to a printing operation.
Income and other taxes
Torstar’s effective tax rate was 33.1% in the first quarter of 2011 and 36.5% in the first quarter of 2010. Excluding the impact from not tax-affecting the losses of associated businesses in both years, the effective tax rate would have been 32.3% in 2011 and 31.0% in 2010. The effective tax rate was higher in the first quarter of 2011 due to a lower amount of capital gains, which are taxed at one-half of the statutory tax rate, in 2011 than in the prior year. Torstar only realized a small benefit from the lower Canadian statutory tax rates in 2011 as a large proportion of its income is taxed in foreign jurisdictions where tax rates remain unchanged.
Net income attributable to equity shareholders
Torstar reported net income attributable to equity shareholders of $15.5 million or $0.20 per share in the first quarter of 2011 down $1.0 million or $0.01 per share from $16.5 million or $0.21 per share in the first quarter of 2010. The average number of Class A and Class B non-voting shares outstanding was 79.1 million in the first quarter of 2011 and 79.0 million in the first quarter of 2010.
OUTLOOK
After the first quarter of 2011, there is still limited visibility on both the print advertising environment and the pace of economic recovery and the related impact on the full year revenue for the Media Segment. While digital revenues grew 32.2% in the quarter, print advertising revenues were soft. Investment spending was increased in the Media Segment in the first quarter to support future growth in digital and other areas. Torstar expects to invest between $5 million and $10 million on such initiatives over the course of the year. For the balance of the year, pension expense is expected to be $1.3 million higher for the segment, while newsprint pricing is expected to remain flat. Cost savings from restructuring initiatives are expected to be $7.9 million through the next nine months.
After a solid first quarter, Harlequin expects operating results for the balance of the year to be stable excluding the impact of foreign exchange. This reflects the uncertainty around the print book industry given the continued rapid growth of digital books. 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 $7.4 million (including the $3.1 million realized in the first quarter), including the impact of the U.S. dollar hedges currently in place.
As of April 1, 2011, with the receipt of the CTV sale proceeds, Torstar’s net debt was reduced to $82.2 million. Torstar anticipates that the interest rate on its debt will be approximately 4.0% for the balance of the year.
SUBSEQUENT EVENTS
On April 1, 2011, Torstar completed the sale of its 20% interest in CTV to BCE Inc. for proceeds of $291.6 million. This sale will result in a gain of $190.2 million being recorded in the second quarter. The proceeds were used in April to pay down long-term debt.
On May 3, 2011 the Torstar Board of Directors approved, effective with the June 30, 2011 dividend, a 35% increase in the quarterly dividend from $0.0925 to $0.125 per share.
DIVIDEND
On May 3, 2011, Torstar declared a quarterly dividend of 12.5 cents per share on its Class A shares and Class B non-voting shares, payable on June 30, 2011, to shareholders of record at the close of business on June 10, 2011. 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.