Torstar Corporation Reports Second Quarter Results

TORONTO, ONTARIO--(Marketwire - July 29, 2011) - Torstar Corporation (TSX:TS.B) today reported financial results for the second quarter ended June 30, 2011.

Highlights for the quarter:

• Revenue was $393.3 million in the quarter, up $15.7 million from the second quarter of 2010. Excluding accounting changes and the impact of foreign exchange, total revenue was up $11.6 million or 3.1% 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 $65.7 million in the quarter, down $5.1 million from $70.8 million in the second quarter of 2010. This decline included a $0.9 million decline from the impact of foreign exchange, $3.8 million of lower Harlequin results and relatively stable results in the Canadian media businesses.

• Net income was $228.3 million ($2.87 per share) in the second quarter, up $204.9 million ($2.57 per share) from $23.4 million ($0.30 per share) last year including a gain of $190.1 million ($2.40 per share) on the sale of Torstar's 20% interest in CTV Inc.

• Excluding the impact of the CTV sale in 2011 and the loss of associated businesses in 2010, net income was $38.2 million ($0.47 per share) in 2011, up $7.8 million ($0.08 per share) from $30.4 million ($0.39 per share) in 2010.

• Net debt was $108.1 million at June 30, 2011, down $265.7 million from $373.8 million at March 31, 2011.

"Results continue to be mixed in 2011," said David Holland, President and Chief Executive Officer of Torstar Corporation. "EBITDA was $65.7 million in the second quarter, down $5.1 million. Lower Harlequin results and stable results in the Media segment resulted in the overall decline."

"At Harlequin, EBITDA was down $4.7 million in the quarter including $0.9 million of foreign exchange impact. Results in the quarter were affected by a few factors that we do not anticipate continuing through the balance of the year. Excluding foreign exchange, results year to date were down $1.5 million but we remain confident that the results for the full year will be stable to up slightly."

"On the Canadian Media operations, earnings stabilized in the second quarter, an improvement relative to the decline experienced in the first quarter. We are focused on growing our revenue base and numerous digital initiatives are contributing to the revenue growth experience in the second quarter. We were pleased with the 33% digital revenue growth experienced in the quarter. Looking forward, visibility remains limited on print revenue and more generally on the pace and nature of the economic recovery we are experiencing. But we do anticipate continued progress on the digital front. We continue to be very committed to making investments back into the business, whether in digital or print, where we see opportunity to add value."

"With the benefit of the proceeds from closing the CTV transaction in early April, our net borrowings closed June at $108 million. This solid financial foundation will serve us well as we move forward."

The following chart provides a continuity of net income per share from 2010 to 2011:

OPERATING RESULTS – Second quarter and year to date 2011

Overall Performance

Total revenue was $393.3 million in the second quarter of 2011, up $15.7 million from $377.6 million in the second quarter of 2010. Excluding the $4.4 million increase from a change in reporting for Torstar's share of Metro's revenues and the $0.3 million decrease from the stronger Canadian dollar, total revenue would have been up $11.6 million or 3.1% in the quarter. Excluding these items, Media Segment revenues were up $18.9 million or 7.3% in the quarter with growth in product sales, digital and distribution revenues more than offsetting declines in print advertising revenue. Book Publishing revenues were down $7.3 million or 6.2% in the quarter as declines in print retail revenues more than offset digital revenue growth in both the North America and Overseas divisions.

Year to date, total revenue was $744.7 million, up $32.2 million from $712.5 million in 2010. Excluding the $8.2 million increase from a change in reporting for Torstar's share of Metro's revenues and the $5.6 million decrease from the stronger Canadian dollar, total revenue would have been up $29.6 million in the first six months of 2011. Excluding these items, Media Segment revenues were up $29.0 million year to date with growth in product sales, digital and distribution revenues more than offsetting declines in print advertising revenue. Book Publishing revenues were up $0.7 million year to date with both the North America and Overseas divisions up.

Operating profit before restructuring and other charges was $58.0 million in the second quarter of 2011, down $4.9 million from $62.9 million in the second quarter of 2010. Including the $3.4 million of restructuring and other charges, operating profit was $54.6 million in the second quarter of 2011, down $4.2 million from $58.8 million in 2010 (which included $4.1 million of restructuring and other charges). Media Segment operating profit before restructuring and other charges was $46.1 million in the second quarter of 2011, up $0.2 million from $45.9 million in the second quarter last year. Revenue growth for the Media Segment was offset by related cost increases and net investment spending, primarily in the digital properties. Book Publishing operating profit before restructuring and other charges was $16.3 million in the second quarter of 2011, down $4.4 million from $20.7 million in the second quarter of 2010, including a decline of $0.9 million from the impact of foreign exchange. The decline in underlying results included lower positive adjustments to prior year returns, higher book returns, timing of promotional spending and softness in several overseas markets.

Year to date, operating profit before restructuring and other charges was $91.9 million, down $11.6 million from $103.5 million in 2010. Including the $3.8 million of restructuring and other charges, operating profit was $88.1 million in the first six months of 2011, down $2.8 million from $90.9 million in 2010 (which included $12.6 million of restructuring and other charges). Media Segment operating profit before restructuring and other charges was $61.7 million in the first six months of 2011, down $4.7 million from $66.4 million in the same period last year. Book Publishing operating profit before restructuring and other charges was $38.3 million in the first six months of 2011, down $5.6 million from $43.9 million in the same period in 2010, including a decline of $4.1 million from the impact of foreign exchange.

Corporate costs before restructuring and other charges were $4.4 million in the second quarter of 2011, up $0.7 million from $3.7 million in the second quarter of 2010. Year to date, corporate costs were $8.1 million, up $1.3 million from $6.8 million in 2010. In both periods, the increase primarily relates to year over year differences in the mark-to-market of a share-based compensation hedging instrument. Increased salary and benefit costs have been partially offset by lower professional fees.

EBITDA was $65.7 million in the second quarter of 2011, down $5.1 million from $70.8 million in the second quarter of 2010. Year to date, EBITDA was $107.4 million, down $12.4 million from $119.8 million in 2010.

Restructuring and other charges

Restructuring and other charges of $3.4 million were recorded in the second quarter of 2011 and $3.8 million year to date. The second quarter charge included a $2.4 million provision for rented space that the Media Segment will be vacating as reduced staff counts allow for space consolidation. The charge represents the discounted shortfall between the remaining obligation under the existing lease and the amounts to be received through a sublease arrangement. The annual cost savings from the space consolidation are approximately $1.3 million a year with $0.3 million expected to be realized in the fourth quarter of 2011. The balance of the restructuring and other charges relate to staff reductions in the Media Segment. The 2011 restructuring initiatives are expected to result in annualized savings of approximately $2.9 million (rent and salaries) and a reduction of approximately 20 positions. $1.4 million of the savings is expected to be realized in 2011 (with $0.3 million realized in the first six months).

In 2010, restructuring and other charges of $4.1 million and $12.6 million were recorded in the second quarter and year to date respectively. The second quarter 2010 charge included $2.0 million for restructuring in the Media Segment, $2.0 million of costs related to Torstar's bid to purchase the newspaper and digital business of Canwest Limited Partnership and $0.1 million related to transaction costs from Harlequin's acquisition of the other half of the German publishing business. Restructuring and other charges in the first six months of 2010 included $9.4 million for restructuring in the Media Segment, $2.8 million of costs related to Torstar's bid to purchase the newspaper and digital business of Canwest Limited Partnership and $0.4 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 $2.0 million in the second quarter of 2011, down $4.6 million from $6.6 million in the second quarter of 2010. Year to date, interest and financing costs were $12.8 million, up $1.9 million from $10.9 million in 2010.

Interest expense was $1.4 million in the second quarter of 2011, down $5.2 million from $6.6 million in the second quarter of 2010. The lower expense reflects the significantly lower level of average net debt outstanding in the second quarter of 2011 subsequent to the receipt of the CTV sale proceeds and a slightly lower effective interest rate. The average net debt (long-term debt and bank overdraft net of cash and cash equivalents) was $95.2 million in the second quarter of 2011, down $390.3 million from $485.5 million in the same period last year. Torstar's effective interest rate was 4.3% in the second quarter of 2011 and 5.0% in the second quarter of 2010.

Year to date, interest expense was $7.6 million, down $3.3 million from $10.9 million in 2010. The lower expense reflects the significantly lower level of average net debt outstanding in the second quarter of 2011 and a higher effective interest rate. The average net debt (long-term debt and bank overdraft net of cash and cash equivalents) was $233.2 million in the first six months of 2011, down $261.8 million from $495.0 million in 2010. Torstar's effective interest rate was 5.7% in the first six months of 2011 and 4.1% in the same period last year. 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 2011.

Net debt was $108.1 million at June 30, 2011, down $260.5 million from $368.6 million at December 31, 2010.

Year to date interest and financing costs include the $3.8 million first quarter charge 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 and financing costs also included interest accretion on long-term restructuring provisions, deferred purchase price and contingent consideration obligations of $0.6 million in the second quarter of 2011 and $1.4 million year to date. There was no interest accretion in the first six months 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 $0.9 million in the second quarter of 2011 compared with a loss of $5.8 million in the second quarter of 2010. Year to date, Torstar reported a non-cash foreign exchange gain of $1.6 million compared with a loss of $3.0 million in 2010. Torstar's Canadian operations were in a net liability position in U.S. dollars in both years however, the Canadian dollar strengthened during the second quarter and first six months of 2011 and weakened during the second quarter and first six months of 2010.

Torstar's net liability position in U.S. dollars was larger in 2010 as Torstar had not designated any of its U.S. dollar debt as a hedge against its net investment in U.S. operations 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. This reduces Torstar's net liability position in U.S. dollars.

Loss of associated businesses

The loss of associated businesses was $0.6 million in the second quarter of 2011 compared with a loss of $7.1 million in the second quarter of 2010. Year to date, the loss of associated businesses was $1.2 million compared with a loss of $11.7 million in 2010. The 2011 losses included Torstar's share of Canadian Press losses. 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 second quarter or first six months of 2011. Torstar's share of CTV's net loss was $7.0 million in the second quarter and $11.7 million for the first six months 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 $1.7 million in the second quarter of 2011 down slightly from $2.0 million in the second quarter of 2010. Year to date, Torstar's share of Black Press's net income would have been $1.5 million compared with a loss of $1.7 million in 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. Excluding the impairment loss in 2010, results would have been flat year over year.

Gain on sale of CTV

During the second quarter of 2011, Torstar recorded a gain of $190.1 million on its sale of its 20% interest in CTV. The transaction closed on April 1, 2011 and Torstar received cash proceeds of $291.6 million.

Income and other taxes

The reporting of the gain on the sale of CTV in 2011 and the loss of associated businesses from CTV in 2010 had an impact on Torstar's effective tax rate in both years. There was no tax expense recorded against the gain on the sale as it was a reversal of prior year losses of associated businesses and impairment losses which had not been tax-affected.

Excluding the impact of CTV in both years, Torstar's effective tax rate was 27.4% in the second quarter of 2011 and 33.7% in the second quarter of 2010. Year to date, Torstar's effective tax rate was 29.2% in 2011 and 32.6% in 2010. The lower effective tax rates in 2011 included the benefit of the lower Canadian statutory tax rate and the impact of permanent differences year over year. The Canadian statutory rate is lower in 2011, although Torstar only realizes a portion of the benefit as a large proportion of its income is taxed in foreign jurisdictions where tax rates remain unchanged. In 2010, Torstar had incurred a larger amount of expenses that were only partially deductible for income tax purposes which increased the effective tax rates in that year.

Net income attributable to equity shareholders

Torstar reported net income attributable to equity shareholders of $228.3 million or $2.87 per share in the second quarter of 2011 up $204.9 million or $2.57 per share from $23.4 million or $0.30 per share in the second quarter of 2010. Year to date Torstar reported net income attributable to equity shareholders of $243.7 million or $3.07 per share up $203.8 million or $2.57 per share from $39.9 million or $0.50 per share in 2010.

The second quarter 2011 gain on the sale of CTV was $190.1 million or $2.40 per share. In 2010, Torstar recorded $7.0 million ($0.09 per share) in the second quarter and $11.7 million ($0.15 per share) year to date from CTV as part of the loss of associated businesses. Excluding the impact of CTV in both years, Torstar would have reported net income attributable to equity shareholders of $38.2 million or $0.47 per share in the second quarter of 2011 up $7.8 million or $0.08 per share from $30.4 million or $0.39 per share in the second quarter of 2010. Year to date Torstar would have reported net income attributable to equity shareholders of $53.6 million or $0.67 per share up $2.0 million or $0.02 per share from $51.6 million or $0.65 per share in 2010.

The average number of Class A and Class B non-voting shares outstanding was 79.4 million in the second quarter and 79.3 million in the first six months of 2011 up slightly from 79.1 million and 79.0 million in the same periods last year.

OUTLOOK

After the first six months of 2011, there is still limited visibility on the print advertising environment, the pace of economic recovery and their related impact on the full year revenue for the Media Segment. Digital revenues grew 32.4% in the first six months and this trend is generally expected to continue in the second half of the year. Net investment spending was increased in the Media Segment in the first six months 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 $0.8 million higher for the segment, while newsprint pricing is expected to remain flat. Cost savings from restructuring initiatives are expected to be $5.5 million through the next six months.

After the first six months of 2011, Harlequin's operating results are down $1.5 million compared to 2010 excluding the impact of foreign exchange. The transition from printed books to digital has been very rapid. Harlequin has been adjusting the volume of printed books distributed into the market and expects to see lower book returns relative to books distributed which should contribute to better year over year operating results in the second half of the year. This is anticipated to result in full year earnings being flat to slightly up excluding the impact of foreign exchange. Relative to prior year and excluding the negative impact of foreign exchange, fourth quarter earnings are expected to be stronger than third quarter earnings. 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 $7.7 million (including the $4.1 million realized in the first six months), including the impact of the U.S. dollar hedges currently in place. The negative impact of foreign exchange is expected to be similar in both the third and fourth quarters.

DIVIDEND

On July 28, 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 September 30, 2011, to shareholders of record at the close of business on September 9, 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.

ADDITIONAL INFORMATION

For additional information, please refer to Torstar's condensed consolidated financial statements and interim Management's Discussion and Analysis ("MD&A") for the period ended June 30, 2011. Both documents 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 29, 2011 at 8:15 a.m. to discuss its second quarter results. The dial-in number is 416-340-2216 or 1-866-226-1792. 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 9 days by calling 905-694-9451 or 1-800-408-3053 and entering reservation number 4332887. An online archive of the broadcast will be available shortly after 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 and book publishing 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, Workopolis, Olive Media, and eyeReturn Marketing; Metroland Media Group, publishers of community and daily newspapers in Ontario; and Harlequin Enterprises, a leading global publisher of books for women.

Non-IFRS measures

Management uses both operating profit, as presented in the consolidated statement 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 Torstar's operations or by a reporting unit or segment. EBITDA is not the actual cash provided by operating activities and is not a recognized measure of financial performance under IFRS. Torstar calculates EBITDA as the consolidated, segment or division operating profit as presented on the consolidated statement of income, which is before charges for interest and taxes, adjusted for amortization and depreciation. Torstar also excludes restructuring and other charges from its calculation of EBITDA. 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 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 release. 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.

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 not to 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.

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 and media platforms; the Company's ability to attract and retain advertisers; the Company's ability to retain and grow its digital audience and further develop its digital businesses; cyclical and seasonal variations in the Company's revenues; labour disruptions; newsprint costs; the Company's ability to reduce costs; foreign exchange fluctuations; credit risk; restrictions imposed by existing credit facilities, debt financing and availability of capital; pension fund obligations; results of impairment tests; reliance on its printing operations; reliance on technology and information systems; risks related to business development; interest rates; availability of insurance; litigation; environmental regulations; dependence on key personnel; loss of reputation; privacy and confidential information; product liability; intellectual property rights; control of Torstar by the Voting Trust; 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.

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; rates of return and discount rates relating to pension expense and pension plan obligations; royalty rates, expected future revenues, expected future cash flows and discount rates relating to valuation of goodwill and intangible assets; and successful development of new products. There is a risk that some or all of these assumptions may prove to be incorrect.

When relying on our forward-looking statements to make decisions with respect to the Company and its securities, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. 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, except as may be required by law.

For more information, please see the discussion of risks affecting Torstar and its businesses in Torstar's 2010 Management's Discussion & Analysis which is available at www.sedar.com and on Torstar's corporate website www.torstar.com.

Torstar's new releases are available on the Internet at www.torstar.com.