Edited Transcript of TS.B.TO earnings conference call or presentation 26-Feb-20 1:15pm GMT

In addition, both our print and digital subscribers can access the Wall Street Journal digital service for no additional cost to their subscription fee. We have now experienced stable subscriber revenue for the fifth consecutive quarter, underpinned by our investment in data and our ongoing commitment to journalism. In addition, we ended the year with more than 280,000 registrations to our community news sites, which has grown to approximately 11% of the homes we serve in these markets. Adjusted EBITDA, including joint ventures and VerticalScope was $23.4 million in Q4, which included the benefit of $9.4 million of digital media and journalism tax credits as well as continued efforts on costs, which helped to offset the continued pressure on print advertising revenues. At VerticalScope, revenue and adjusted EBITDA were down versus prior year, as they continue to roll out a new technology platform, but we’re encouraged by the early user engagement feedback and the continued strong EBITDA and free cash flow characteristics of the business. We begin 2020 from a continued solid financial position, having finished 2019 with $42.2 million of cash and no bank debt.

And very importantly, having completed the merger of Torstar-defined benefit pension plans with the CAAT Plan. We continue to advance those areas important to our future, while maintaining a strong focus on cash, and we are intent on identifying additional cost reductions.

Now I’ll turn it over to Neil.

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Neil Simon Oliver, Torstar Corporation – Executive VP & President of Daily News Brands [4]

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Thank you, John. Within the Daily Brands segment, adjusted EBITDA was $6.6 million in the fourth quarter and included the benefit of $4.5 million of tax credits. Excluding the tax credits and the change in accounting for leases, adjusted EBITDA was down $2.7 million from a year ago as revenue declines were partially offset by the benefit of cost reductions which included $3.3 million in savings from restructuring, including the closure of the Hamilton printing and mailroom operations in the third quarter of 2019.

Daily Brands’ revenues were down $8.7 million or 12% in Q4. Subscriber revenues, which represented almost half of the Daily Brands’ total revenue in the quarter were comparable to the same period a year ago, reflecting the growing incremental revenue from paid digital subscriptions at thestar.com, partially offset by modest declines in print subscriber revenues. We continue to focus on creating a more stable mix of revenue as we transition away from a significant reliance on print advertising, which continues to decline in the quarter.

Local print advertising revenues, which represented 18% of the Daily Brands’ total revenue were down 18% relative to the fourth quarter last year, while national print advertising revenues, which represented only 8% of the Daily Brands’ total revenues continue to be more challenging, were down 39% compared to the same quarter a year ago. As a result of these continued pressures on print advertising revenues, at the end of December, we ceased publication of the printed editions of the StarMetro free daily newspapers, in order to both reduce cost and transition to a digital-only news service outside of Ontario.

Digital revenues from the Daily Brands were up 3% in Q4 compared to the prior year. And in 2020, we are focused on improving existing digital products as well as providing new digital products for our advertising customers. We continue to be pleased with the progress we made in digital subscriptions, finishing the quarter with almost 80,000 subscribers with digital access, including almost 28,000 paid digital-only subscribers in the Daily’s. Ian will now discuss the Community Brands results.

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Ian Oliver, Torstar Corporation – Executive VP & President of Community Brands & Operations [5]

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Thank you, Neil. The Community Brands adjusted EBITDA in the fourth quarter was $12.5 million and included the benefit of $4.9 million of tax credits as well as a $700,000 benefit related to the change in accounting for leases. Excluding these factors, adjusted EBITDA was down $5.4 million from the fourth quarter a year ago primarily reflecting lower revenues, which were partially offset by the benefit of the $3.6 million of savings related to restructuring initiatives and other cost savings.

Community Brands’ revenues in the fourth quarter were $57.8 million, down $10.9 million or 16% from prior year. Local print advertising revenues, which represented 26% of the Community Brands’ total revenues were down 19% in the quarter with decline slightly better than our Q3 experience and also included fewer additions as well as the sale of several small community papers in the third quarter. National print advertising revenues, which represents only 3% of the Community Brands’ overall revenue were down 34%. Flyer distribution revenues, which represented approximately 40% of the Community Brands’ total revenue in the quarter were down 15% against a strong comparable period in the fourth quarter of 2018. Digital revenues were down 3% in the quarter, reflecting continued strong growth in local digital advertising revenues at the community sites, which were more than offset by declines in properties in other digital verticals. We continue to make progress in growing our core community sites, digital audience and ended the year with more than 280,000 registered users in the community news sites.

These registrations represent approximately 11% of households in the markets we serve. This will help to build a stronger foundation by creating deeper digital relationships with visitors for future potential subscription products and improve our performance for our digital media across our footprint. We also continue to test potential subscription models and in the one test market where we fully rolled out paid subscriptions, subscribers grew to 18% of the households where we deliver at the end of the year. Lorenzo?

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Lorenzo DeMarchi, Torstar Corporation – Executive VP & CFO [6]

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Thanks, Ian, and good morning, everyone. Net income in the fourth quarter was $14.1 million compared to a loss of $3.1 million a year ago. Our results included a $24.6 million gain associated with the completion of the pension plan merger with CAAT, offset by a $15.4 million restructuring charge and an $8.2 million impairment charge. On an adjusted earnings per share basis, our EPS was $0.11 in the quarter, down $0.04 from the prior year.

Total operating revenue of $124 million in the quarter was down $20.8 million or 14%, which is roughly in line with the Q3 trend, adjusting for a stronger prior year comparable period. Subscriber revenues across Torstar continue to be a large, stable revenue category in the quarter, with growth in new digital-only subscriber revenue offsetting modest declines in print subscriber revenue. Flyer distribution revenues were down 16% against a strong quarter last year and print advertising revenue down 24%, roughly in line with the decline reported last year — or last quarter.

Digital advertising revenue across Torstar was down 7%, with continued strength in local digital advertising at the communities and growth at The Star, being offset by declines in eyeReturn and other digital properties. Digital advertising revenue represented 14% of total operating revenues in the quarter. Adjusted EBITDA was $17.4 million, down from $22.1 million a year ago. Adjusted EBITDA, including joint ventures and VerticalScope, was $23.4 million in the fourth quarter, down $6.4 million from prior year.

Results included the benefit of $9.4 million of digital media tax credits. Excluding both digital media tax credits and the journalism tax credit as well as a favorable impact of a change in accounting related lease expense, adjusted EBITDA, again, including joint ventures and VerticalScope, was $14 million in Q4, down $9 million from last year. Our proportionate share of adjusted EBITDA of VerticalScope was $6.1 million, down $1.1 million from the fourth quarter last year.

The loss from associated businesses was $1.4 million in the quarter compared to a loss of $5 million reported a year ago, reflecting a $3 million improvement in VerticalScope and a $1.6 million improvement of Blue Ant Media, partially offset by a decline at Black Press. At VerticalScope, we incurred a net loss of $2.1 million, which included $7.8 million of noncash amortization. On a 100% basis, revenue of VerticalScope of $21.9 million in the fourth quarter declined 12%, representing an improvement in the trend experienced last quarter, with organic traffic declines moderating as they lap search algorithm changes last year.

Revenue continued to be impacted by the ongoing transition of user forums to a new technology platform. As at the end of 2019, VerticalScope had migrated over 300 sites, representing approximately 35% of forum traffic. Total adjusted EBITDA of $10.9 million was down $2 million from last year, as cost reductions only partially offset revenue declines. The business continues to generate very strong EBITDA margin, which is 50% in the quarter. It also generated $2.3 million in operating cash flow in the fourth quarter, bringing the full year total of $17.9 million. With respect to our closing cash and debt positions, we finished the quarter with over $42 million of unrestricted cash, $8 million in restricted cash and no bank debt. This was down from an unrestricted cash balance of $68 million and a $7 million of restricted cash a year ago.

Our closing cash position benefited from $5.7 million of proceeds related to the sale of 2 properties in the quarter. Now subsequent to the end of the year, we received an additional $20.2 million related to digital media tax credits.

In addition, the sale of our Hamilton property is expected to close in the first quarter, and net proceeds are expected to be in the range of $25 million. It’s worth noting that our reported cash and debt amounts did not include cash and debt held within joint ventures and at VerticalScope. Lastly, a few comments on our outlook. We continue to face a challenging print advertising market in 2019, resulting from ongoing shifts and spending by advertisers. Similar trends have continued early into 2020, and it’s difficult to predict if these trends will improve or worsen as the year progresses, while distribution revenues declined 12% in 2019, and we expect this trend to be slightly better in 2020, including the benefit of the additional week of publication in the community segment in the fourth quarter of the year.

Subscriber revenues grew modestly in 2019, benefiting from new digital subscription revenues, offset by a modest decline in print subscription revenue. We expect this trend to continue in 2020 and that total subscriber revenues in 2020 will be comparable to 2019 levels.

Digital advertising revenues at the Community Brands and Daily Brands segments were down 1% in 2019, and we expect to reverse this trend and achieve modest growth in digital advertising revenues in 2020, as we continue to benefit from solid growth in local digital advertising at the community sites, offset by modest declines in other digital verticals. We expect our cost base in 2020 to benefit from $31.8 million of full year savings related to restructuring initiatives undertaken through the end of 2019. We also expect to identify additional cost savings that we will benefit from in 2020.

Similar to 2019, we continue to expect to benefit from approximately $6 million to $7 million of journalism tax credits this year. At VerticalScope, we expect that revenue and traffic will continue to be negatively impacted by the migration of forum sites onto the new technology platform. Over 300 sites were migrated by the end of 2019 and the remaining sites are expected to be migrated by the end of 2020. The new platform is expected to improve the user experience and site performance and is intended to return site to growth over time.

However, traffic and revenue are likely to decline during the transition and a period of adjustment and revenue trends experienced in 2019 are expected to continue for the full year in 2020. Our early indicators suggest that site performance and user engagement has improved on migrated sites. EBITDA margin and cash flow from operations are expected to decline somewhat, but remain relatively strong.

From a cash flow perspective, we expect to again reduce capital expenditures in 2020 to approximately $13 million. The majority of which relates to capital spending related to technology platforms in connection with our transformation activities as well as spending aimed to reduce future operating expenses. And lastly, at the end of 2019, we had net receivables related to digital media tax credits totaling $31.3 million, $20.2 million of which was received in January of this year. The amount and timing of any further cash to be realized is dependent upon the final review and approval by the Canada Revenue Agency.

Now that concludes our opening comments. And at this stage, we’d be happy to take your questions.

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Operator [7]

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(Operator Instructions) At this time, I am currently showing no questions in the queue. I will turn the call back over to Mr. John Boynton.

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John Boynton, Torstar Corporation – CEO, President & Director [8]

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Thanks, everybody, and we’ll see you next quarter.

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Operator [9]

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Ladies and gentlemen, thank you for your participation. You may now disconnect.