Harlequin Sales Decline in Last Quarter Profits Also Sag

March 6, 2008
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March 6 – March 13, 2008 Edition

Harlequin Sales

Decline in 4th Quarter,

Profits Also Sag

TORONTO, CANADA/3/8/08–The book publishing unit of Torstar Corporation, which includes Harlequin Enterprises, reported this week that book publishing revenues were down $3.1 million in the fourth quarter of 2007, excluding the impact of foreign exchange. Harlequin’s publishing operations are comprised of three divisions: North America Retail, North America Direct-To-Consumer, and Overseas. North America Retail was down $1.3 million, North America Direct-To-Consumer was down $0.1 million and Overseas was down $1.7 million.

Book Publishing operating profits were also down $1.7 million in the fourth quarter of 2007 excluding the impact of foreign exchange. North America Retail was down $1.0 million, North America Direct-To-Consumer was up $1.0 million and Overseas was down $1.7 million.

Torstar publishing’s North America Retail sales volumes were relatively flat in the fourth quarter with revenues down slightly. The decrease in operating profit in the fourth quarter was driven by higher expenses. North America Direct-To-Consumer results were up in the fourth quarter due primarily to lower promotional spending. Slightly lower sales volumes were offset by the positive impact of the mid-year price increase.

Overseas results were down in the fourth quarter. Higher results in the Nordic group and Japan were more than offset by lower results in the United Kingdom and Holland and increased investment spending in India. The Nordic group continued its growth trend during the quarter and Japan realized some cost savings. The lower United Kingdom results were due to lower year over year 26 positive adjustments to returns provisions. Holland’s results were down as it continued to be impacted by lower sales volumes during the summer and fall.

Book Publishing Performance in 2007

Book Publishing revenues for the year ending December 31, 2007 were down $1.0 million excluding the impact of foreign exchange. North America Retail was up $3.6 million, North America Direct-To-Consumer was down $5.0 million and Overseas was up $0.4 million.

Book Publishing operating profits were up $6.3 million in 2007 excluding the impact of foreign exchange. North America Retail was up $5.8 million, North America Direct-To-Consumer was up $2.2 million and Overseas was down $1.7 million.

North America Retail operating profits were up $5.8 million in 2007 from a combination of the positive impact from the midyear price increase on series books, a more profitable mix of titles, reduced overhead and promotion costs and lower amortization expense. Overheads were lower due to savings realized from the restructuring undertaken in late 2006. North America Retail had been recognizing $2.1 million of amortization expense each year related to the cost of a distribution agreement. This cost was fully amortized by the end of 2006. The number of books sold was stable for both series and single title product in 2007.

North America Direct-To-Consumer operating profits were up $2.2 million in 2007 with improved performance from the 2007 promotional programs. A portion of this year over year improvement was related to the shipping disruptions associated with the bankruptcy of a key supplier in 2006 which negatively affected last year’s results. North America Direct-To-Consumer benefited in 2007 from higher sales via the Internet, lower promotional spending and the positive impact of the midyear price increase on series books which helped to offset underlying volume declines.

Torstar Performance for the Year

Torstar’s company-wide total revenue was $1,546.5 million in 2007, up $18.2 million from $1,528.3 million in 2006. Newspapers and Digital revenue grew $27.3 million to $1,083.8 million with strong growth in the digital operations and market expansions.

Reported Book Publishing revenue was $462.7 million in 2007, down $9.1 million from $471.8 million in 2006 including an $8.1 million decline from the strengthening of the Canadian dollar during the year. Revenue improvements for North America Retail and Overseas were not sufficient to offset declines in North America Direct-To-Consumer.

Torstar operating profit was $162.8 million in 2007, up $39.5 million from $123.3 million in 2006. The increase included $14.8 million of lower restructuring provisions in 2007. Newspapers and Digital Segment operating profit was $128.7 million in 2007, up $20.9 million from $107.8 million in 2006 including $13.7 million of savings from lower newsprint pricing and $4.5 million from the mid-2006 closure of Weekly Scoop. Continued investment in the digital operations offset growth in the other businesses.

Book Publishing reported operating profit was $60.6 million in 2007, up $4.3 million or 7.6% from $56.3 million in 2006. Underlying operating profit was up $6.3 million or 11.2% in the year while the strengthening Canadian dollar decreased profits by $2.0 million. Underlying results were up in the North America Retail and Direct-To-Consumer divisions and down in Overseas. Corporate costs were $19.0 million in 2007, up $0.5 million from $18.5 million in 2006.

In 2007 Harlequin published books in 29 languages in 107 international markets. Harlequin reported a total of 130 million books sold in 2007, down slightly from 131 million in 2006. Harlequin sells books under several imprints including Harlequin, Silhouette, MIRA, HQN, Red Dress Ink, Steeple Hill, LUNA, Spice and Kimani Press. Harlequin publishes books in both series and single title formats. Series titles are published monthly in mass-market paperback format under an imprint that identifies the type of story to the reader. Each series typically has a preset number of titles that will be published each month. The single title publishing program provides a broader spectrum of content in a variety of formats (massmarket paperback, trade paperback, hardcover) and generally a lengthier book. New single title books are published each month and the individual titles have a longer shelf life.

2008 Outlook

Uncertainty in the economic outlook for both Canada and the U.S. may affect Torstar’s businesses in 2008. Newspapers have traditionally experienced lower revenues and results in difficult economic conditions. Early indications in 2008 are that the economy may be having a negative impact on newspaper revenues.

While the book publishing industry has traditionally not been as cyclical, the current economic uncertainty in the US could have a negative impact on Harlequin’s US sales if discretionary consumer spending falls.

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