Fairfax roams the pages for more cost clippings

Despite some surprise savings, Fairfax remains faced with an earnings crisis. And chief Greg Hywood is being forced to get creative.

Greg Hywood would be under no illusion that the next 12 months is going to be critical if the core of Fairfax Media is to be viable, nor that the challenge of stabilising the group is becoming harder and the efforts to transform its model more urgent.

Confronted by a continuous and continuing decline in revenue and earnings Hywood has had no option but to implement continuous and continuing cost-cutting programs in recognition that the dramatic shifts in the economics of the sector are more structural than cyclical.

Last year he announced a program to deliver $251 million of annualised cost savings by 2015. At today’s investor briefing he said the program had already delivered $155 million of savings and then announced that the changes to the structure of the publishing businesses unveiled earlier this year would deliver an additional $60 million by the end of this September – by 2015 the program is scheduled to have taken more than $300 million out of the group’s cost base.

Beyond the savings already identified Fairfax is now undertaking a product-by-product review to try to find even more cost reductions.

It has to. At the briefing Hywood provided earnings guidance for the second half of the current financial year, saying Fairfax expected to generate earnings before interest, tax, depreciation and amortisation from about $129-$135 million.

That range of EBITA is 39-36 per cent lower than the EBITDA generated in the same half of last financial year and would produce a full-year result at the EBITDA level about a third lower than last year – and about $480 million less than Fairfax was producing five years ago.

Fairfax, of course, isn’t alone. Print media groups across the globe are struggling with the same issues and seeking to find the right strategies and cost structures to make the transition to an all-digital environment.

The "new" News Corp (publisher of Business Spectator), which conducted its own investor briefing only yesterday, is experiencing similar pressures and responding in similar fashion.

Ahead of its demerger it has had the luxury, one not available to Hywood, of being able to hide the detail of its performance and its own large cost-reduction programs within the larger News Corp empire.

Even after the demerger later this month it will include non-print assets, like a half-share of Foxtel, its Fox Sports business, its majority interest in REA Group and a pile of cash, to help it to manage its restructurings.

An important moment for both Fairfax and News will occur next month when Fairfax moves its two major mastheads, The Sydney Morning Herald and The Age, behind paywalls. News began putting its big tabloid mastheads behind paywalls last month. Both publishers are using the metered model implemented with some success by The New York Times, with Fairfax describing its model as "deliberately porous".

The ambition is to increase subscription revenues without significantly impacting digital audiences. The New York Times has shown that it is possible for a general newspaper to charge for digital access without damaging the audience but what’s unclear as this early phase of the introduction of online subscriptions is whether that experience is unique to one of the world’s premier mastheads.

In any event, the fact that both the major print media groups will be charging for digital access gives both Fairfax and News the best possible chance of generating subscription revenue without shedding slabs of their online audiences and advertising revenues.

Within the media it is regarded as inevitable, and not that distant, that the print mastheads will disappear, creating a massive challenge to try to create an economic model for digital-only publishing that is viable.

There has been considerable speculation that Fairfax will stop printing its metro mastheads, or at least the weekday editions, and shift to online mastheads only once it has shut down its Chullora and Tullamarine printing plants and moved production to its regional facilities as part of the drive to reduce its fixed cost base.

Hywood said today Fairfax has no intention of reducing the frequency of the print publication of its major mastheads in the foreseeable future because, he said, they were profitable.

With revenue down 9 or 10 per cent across the group this year – 11 per cent in the metro and regional businesses – and earnings tumbling, however, shutting down weekday publication of the two big metro mastheads will be a live option – albeit an expensive one – once production at the two big plants ends next year. Fairfax has previously estimated the cost of moving to a digital-only model for the two mastheads would be about $200 million.

As part of the restructuring earlier this year Fairfax separated its Domain real estate business from the publishing businesses.

That was presumably partly to highlight its growth potential – it is a high margin business with digital revenues growing at double-digit rates – and also its value in case Fairfax needs a mechanism for raising capital to fund its continuous restructuring other than having to call on shareholders.

With EBITDA of about $22 million in the first half, about 60 per cent of it flowing from digital products, a spin-out of the business could raise a useful chunk of capital if required – which it might well be if the dive in traditional revenues and earnings continues to outpace the cost reductions.

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