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Edited Transcript of TS.B.TO earnings conference call or presentation 3-May-17 12:15pm GMT

Thomson Reuters StreetEvents

Q1 2017 Torstar Corp Earnings Call

TORONTO May 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Torstar Corp earnings conference call or presentation Wednesday, May 3, 2017 at 12:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenda Wheeler

* Ian Oliver

Torstar Corporation - President of Metroland Media Group Ltd

* John Boynton

Torstar Corporation - CEO, President and Director

* Lorenzo DeMarchi

Torstar Corporation - CFO and EVP

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Conference Call Participants

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* Bentley Cross

TD Securities Equity Research - Associate

* David McFadgen

Cormark Securities Inc., Research Division - Director of Institutional Equity Research

* Drew McReynolds

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Torstar Corporation First Quarter 2017 Results Conference call. Please be advised that this call is being recorded. Your speakers for today's call are Mr. John Boynton, President, CEO, Torstar Corporation and Publisher Toronto Star; and Mr. Lorenzo DeMarchi, Executive Vice President and CFO of Torstar Corporation.

I would now like to turn the meeting over to Mr. Boynton. Please go ahead.

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Glenda Wheeler, [2]

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Good morning. Before John begins, I'll just take a few moments to read the forward-looking statement. Certain statements in the remarks that follow may contain forward-looking information and can generally be identified by the use of words such as anticipate, believe, plan, forecast, expect, intend, would, could, if, may, and other similar expressions. These statements reflect current expectations of management regarding future events and performance and speak only as of today's date. By its very nature, forward-looking information requires management to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties.

Actual results could differ materially from the predictions, conclusions, forecasts, projections or similar statements in the forward-looking information. Additional information regarding the material factors, assumptions, risks, uncertainties that could cause actual results to differ materially from the statements in the forward-looking information and regarding the material factors and assumptions that may have been applied in making statements is described in more detail in the Corporation's annual report, beginning on Page 9, and in our annual and interim MD&A, which can be found on our website and at www.sedar.com.

John?

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John Boynton, Torstar Corporation - CEO, President and Director [3]

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Thanks very much. Thanks, everybody, for joining us on the call. This is my first call as the new CEO of Torstar.

And I wanted to start out by thanking Dave Holland for leaving me a great team to work with and a really good debt-free balance sheet, which is a great start and something not normal in North America in this industry. So thank you, David.

I'm joined today on the call by Ian Oliver, President of Metroland Media; and Lorenzo DeMarchi, Executive Vice President and Chief Financial Officer of Torstar.

I plan to make some opening comments, which will include the Star Media Group and Digital Ventures Group including VerticalScope. I'll then turn it over to Ian to comment on Metroland Media. And Lorenzo will close things off with financial commentary, and then we'll open up to questions.

Segmented adjusted EBITDA was up $2.7 million to $2 million in the quarter, as growth in adjusted EBITDA in the Digital Ventures and Star Media Group segments offset a modest decline at Metroland Media. The highlight of the quarter was the continued strong performance of VerticalScope business with the Digital Ventures segment. VerticalScope followed its strong fourth quarter performance contributing an adjusted EBITDA of $5.2 million, reflecting revenue growth of 22% and adjusted EBITDA growth of 25%. VerticalScope, with its position in desirable verticals such as automotive, power sports, outdoor, is benefiting from both increasing its higher yield direct sales and continuing to build their programmatic revenue base.

Both Star Media Group and Metroland Media continued to confront print advertising revenue headwinds, particularly in the national advertising category. But the relentless pursuit of continued efforts on costs yielded combined growth of approximately $2 million in EBITDA for the quarter across the 2 operations.

Within the Star Media Group, adjusted EBITDA loss was $2.9 million in the first quarter 2017, an improvement of $3.3 million from the first quarter 2016, as $3.7 million of lower net investment in Star Touch and $4.2 million of savings from restructuring initiatives and other cost reductions exceeded the impact of the revenue decline.

Star Media Group revenues of $59 million were down $10 million or 15% in the first quarter of 2017, largely resulting from weakness in the national advertising category at both the Toronto Star and at Metro. Retail advertising revenues, however, in the Toronto Star were down 8% in the quarter, and we're encouraged that regional advertising revenues at Metro were stable relative to Q1 last year. Subscriber revenues at the Toronto Star declined 7.3% in the first quarter of 2017.

In the balance of 2017, we expect to benefit from a $6.7 million in cost savings related to restructuring and outsourcing initiatives already undertaken to date as well as reduced EBITDA investments of approximately $2 million related to Star Touch. We expect these cost reductions to help offset print advertising revenue trends, which we expect will continue to be challenging.

I'll turn it over to Ian now to discuss now the Metroland results.

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Ian Oliver, Torstar Corporation - President of Metroland Media Group Ltd [4]

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Thank you, John. Adjusted EBITDA in Q1 was $1.8 million, down $1.5 million from a year ago, as cost reductions only partially offset revenue declines.

Metroland's revenues in the first quarter were $81.5 million, down $7.6 million or 8.5% from prior year, as we continue to face a challenging print advertising market. Local advertising revenues on a combined print and digital basis, which represents the largest portion of Metroland's advertising revenues, were down 12% in the quarter. Within the combined print and digital advertising revenues, the real estate category continues to be much weaker than the local revenue category, where declines were more moderate. We believe the real estate declines are related to the overheated real estate market in Southern Ontario. National advertising revenue on a combined print and digital basis, which represents a less significant portion of Metroland's overall revenue, were down 31% in the first quarter of 2017. We were pleased that flyer distribution revenues, which represented 32% of Metroland's total revenue in the first quarter of 2017, were up 1.5% from prior year. Metroland's total digital revenues were down 8.3% relative to the comparable period in the prior year. We continue to have strong growth in local digital advertising revenue and our local sales force is succeeding in providing digital solutions to local businesses. However, growth in this area is being offset by lower revenues from Save.ca and WagJag.

Costs were down $6.1 million in the first quarter, which included the benefit of $3.4 million in cost savings from restructuring. For the remainder of the year, we expect that we'll benefit from $6.3 million in cost savings relative -- related to restructuring initiatives already announced. Although it is difficult to predict revenue trends, especially with respect to print advertising, we continue to be encouraged by the ongoing strength of the readership of our newspapers, flyers and websites and communities across Ontario.

Our strategic focus continues to be on local revenue initiatives, including building digital revenue through our relationships with small and medium-sized local businesses, and we are pleased with the progress that we have made to date.

Lorenzo?

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Lorenzo DeMarchi, Torstar Corporation - CFO and EVP [5]

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Thank you, Ian, and good morning, everyone. We reported net loss of $24.4 million in the first quarter compared to a net loss of $53.5 million a year ago. Result in the quarter included $17.2 million of amortization, $3 million of noncash impairment charges and $4.9 million of restructuring charges. Adjusted earnings per share in the quarter was a loss of $0.22, an improvement of $0.18 from the first quarter of 2016. Adjusted EPS included a $0.21 per share effect of amortization and depreciation primarily associated with our investment in VerticalScope.

Total segmented adjusted EBITDA was $2 million in the first quarter, up $2.7 million from prior year. The year-over-year improvement reflects gains at SMG and Digital Ventures which was partially offset by a decline at Metroland. Digital Ventures, which includes our interest in VerticalScope, was the largest EBITDA contributor in the quarter of $5.2 million. The first quarter results benefited from $7.6 million in restructuring-related savings, and $3.7 million low -- in lower Star Touch investment, which more than offset the impact of print advertising decline.

Total segmented revenue was down $18.1 million or 10% in the first quarter, reflecting declines of 19% in print advertising and 9.5% in subscriber revenue. These declines were partially offset by modest growth in flyer distribution revenue, which remained a resilient category, and strong growth in revenue at VerticalScope.

Digital revenue across all segments declined by 4% as growth in local digital advertising at Metroland and growth at VerticalScope only partially offset declines at Workopolis, WagJag and Save.ca. Digital revenues represented 18% of total segment revenues in the first quarter compared to 17% a year ago.

Loss from associated businesses was $2.2 million in the quarter compared to a loss of $17.2 million reported a year ago, largely driven by significantly lower amortization charges at VerticalScope. At VerticalScope, a $2 million loss in the quarter included the effect of $6.6 million of amortization. We also reported a loss of $0.5 million of Black Press and income of $0.3 million of Blue Ant Media in the quarter.

With respect to our closing cash and debt positions, we finished the quarter with $59 million of unrestricted cash, $9.1 million in restricted cash and no bank debt. I would also note that our reported cash and debt amounts do not include our share of cash and debt held within joint ventures and at VerticalScope.

Lastly, a few comments on our outlook. Within the Digital Ventures segment, we expect the trend in revenue growth at VerticalScope experienced in the first quarter 2017 to continue into the balance of the year. This reflects both organic and acquisition-related growth. We also expect continuation of the revenue trends experienced at Workopolis and eyeReturn through the balance of the year.

At Metroland Media Group and Star Media Group, our results continue to reflect the challenging print advertising market resulting from ongoing shifts in spending by advertisers, particularly in the national advertising category. Declines were more moderate in the retail and local advertising categories. These trends have continued early into the second quarter, but it remains difficult to predict if they will continue in the balance of 2017.

We currently expect that flyer distribution revenues will decline modestly in the balance of the year. Subscriber revenue declines experienced in the first quarter 2017 are expected to improve slightly in the balance of the year. Overall, digital revenue trends at Metroland Media Group and Star Media Group are expected to be relatively stable for the balance of the year with growth in thestar.com and local digital revenue at Metroland's community sites, offset by decline in other properties.

Cost reductions will remain an important area of focus. That savings related to restructuring initiatives already taken through the end of the first quarter of 2017 are expected to be $13 million in the balance of the year. In addition, we also expect the net investment in Star Touch to be approximately $2 million lower in the balance of the year. While newsprint pricing has increased in 2017, we expect that any impact of price increases will continue to be more than offset by lower consumption in the balance of the year.

That concludes our opening comments. And at this stage, we'd be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from David McFadgen from Cormark.

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David McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [2]

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So a couple of questions. So if you look at the Digital Ventures segment, if you exclude VerticalScope, what was the rest of the business rate of decline in Q1 on revenue?

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Lorenzo DeMarchi, Torstar Corporation - CFO and EVP [3]

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It's Lorenzo, David. The segment in total was relatively flat. We had $1.5 million of revenue growth at VerticalScope and that was offset by eyeReturn and Workopolis. So they had a $1.5 million revenue decline between the 2 of them.

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David McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [4]

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Okay. And any update on when you might be able to access the cash at VerticalScope or any need to?

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John Boynton, Torstar Corporation - CEO, President and Director [5]

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No. It's John Boynton. No, we haven't started that process yet.

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David McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [6]

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Okay. And can you just go over what the VerticalScope growth drivers were in the quarter? You talked about building the programmatic revenue base, but what are the other drivers resulting in increased revenue?

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Lorenzo DeMarchi, Torstar Corporation - CFO and EVP [7]

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Yes. I'd say from 2 perspectives, David. First on a category perspective, we had a very strong and pretty consistent growth across every category. And as John mentioned earlier, the top 3s are automotive, outdoor and power sports. But the kind of growth we had there was represented across the other 4 or 5 categories that they have significant presence in. And then from a form of advertising, again, it was virtually every category. The 2 big ones are programmatic and direct. And we saw comparable levels of growth in both of those categories. So it was pretty broadly based.

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David McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [8]

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Okay. But is the underlying growth being driven by higher audience or pricing? Or is that a combination?

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John Boynton, Torstar Corporation - CEO, President and Director [9]

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Yes, no. Fair question. It's a couple of things. One is, we did see increase in audience. We saw increase in impressions. We saw it on organic sites. And obviously, we benefited from some acquisitions. And I'd say, the pricing within category is relatively stable, but what we have been successful in doing is, moving some of that mix from the lower programmatic category of advertising into a higher, more-value-added direct category. So it's a -- so it's more of a mix shift.

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Lorenzo DeMarchi, Torstar Corporation - CFO and EVP [10]

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The good news is the fundamental business without acquisition is growing really strongly and the acquisition on top is an addition.

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David McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [11]

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So what would the growth have been without acquisitions like on an organic basis?

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John Boynton, Torstar Corporation - CEO, President and Director [12]

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The growth is probably -- it's roughly split between organic and acquisition, Dave.

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David McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [13]

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Okay. And then just lastly, can you give us an update on the uptake on Star Touch?

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John Boynton, Torstar Corporation - CEO, President and Director [14]

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This is John. The volume doesn't look like it's progressing at all. So the time spent on the device, the amount of engagement with the consumer looks very strong, but nothing different to report in terms of the cumulative subscriber growth. So we're currently just in review phase.

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Operator [15]

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And your next question comes from Bentley Cross from TD Securities.

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Bentley Cross, TD Securities Equity Research - Associate [16]

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Just to get right into it, maybe I'd first wanted to just ask about your holistic view of the portfolio of assets and if you see any need to prune that or add to it as you might wish?

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John Boynton, Torstar Corporation - CEO, President and Director [17]

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That's a big question. I mean part of why I'm here is that A, I'm excited by the assets. There is a lot of properties and brands in regions and mediums that Torstar owns or has invested it in. How to put those all together to drive a higher output, 1 plus 1 equals 3 kind of thing is really what the task is going to be over the next little while. So I'm really early days in the process, 4 weeks in, trying to look at all of it. But I think the asset collection itself is exciting if we could put it together in a different way.

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Bentley Cross, TD Securities Equity Research - Associate [18]

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Okay, that's fair. Lorenzo, the release touched on some potential relief measures. These have been talked about for some time on the pension funding front. Just wondering if being closer to the situation, you have any more visibility than I do as an outsider?

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Lorenzo DeMarchi, Torstar Corporation - CFO and EVP [19]

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No. I think what we all heard was some additional closure coming out in the budget. I think the encouraging news is that they certainly confirmed that, that something is coming. There's going to be some measures and drafts coming out in the spring and -- with the timeline of the fall scheduled for public consultation, and they talked about some transitional measures. So it certainly sounds like there is something that will reflect a change. Exactly what that is, I can't say I have any more insight than probably you do at the moment, Bentley -- only that it does sounds like something is coming. And we'll know a lot more this spring, and it will be vetted in the public in the fall.

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Operator [20]

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(Operator Instructions) And we have a follow-up question from Drew McReynolds from RBC.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [21]

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Welcome, John. Just probably an unfair question, just given it’s early days for you, but just on the strategic side and asset mix side, obviously Transcontinental's put up some properties for sale. Just thematically, is doubling down on print and newspaper where you could potentially head? Or are you, with VerticalScope, just really focused on the digital front?

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John Boynton, Torstar Corporation - CEO, President and Director [22]

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Well, you are accurate. That was an unfair question. It's way too early to be able to answer something like that. Our job will be to look at the assets, look at the consumer segments out there, try to figure out how to match the two in a way that obviously drives the maximum monetization. And we're still way too early in the review process to be able to answer that question. But as I'll talk about in the AGM, we're not looking about rounding at the edges; we're looking to do something significant.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [23]

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Okay. Well, that's great. Maybe Ian, for you, just wanted to get an update on flyers and flyer distribution, obviously a stable part of Metroland. And more specifically, just any update in terms of volumes or usage of flyers versus kind of other digital offerings that are out there? Just want to get a sense if there's any change or shift in the market on that front.

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Ian Oliver, Torstar Corporation - President of Metroland Media Group Ltd [24]

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Yes. It’s showing consistency with the volumes, and we're getting some increases on the rate side of things. Retail has continued to like, believe in flyers, because customers use them. On the digital side, we're seeing it's a -- the powersave.ca, for example, is complementary to the flyers, not replacing the flyers. So there is a direct correlation between putting out flyers and driving people to the store and there is no sign of that softening.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [25]

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Okay, that's great. One last one, maybe for you, Lorenzo. Just remind us specifically when the next kind of actuarial review is? I know you'll reset kind of funding requirements in 2018. But just do we wait until year-end '17 and then wait a couple quarters and get kind of the updated numbers?

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Lorenzo DeMarchi, Torstar Corporation - CFO and EVP [26]

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No. We're -- the actuarial valuation is going to be based on our year-end 2016. So it's underway now. So we’ll have the results later up in the year, probably second half of the year, which will tee us up for whatever the new funding requirement will be going into 2018.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [27]

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Okay. So maybe get kind of an update in the back half of this year?

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Lorenzo DeMarchi, Torstar Corporation - CFO and EVP [28]

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Yes.

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Operator [29]

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Thank you. And at this moment I'm not showing any further questions. I would like to turn the call back to Mr. Boynton for any further remarks.

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John Boynton, Torstar Corporation - CEO, President and Director [30]

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Well, thanks, everybody for joining us. And hope to see you all at the AGM. Thanks, again.

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Operator [31]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.