Fairfax's rivers of red

Greg Hywood needs some luck if he is to pull off the radical, complex, risky and traumatic restructuring of Fairfax Media and reposition his key print media businesses for a digital future. He's not getting much at this point.

The deterioration in the advertising environment that has undermined Fairfax's metropolitan mastheads worsened, he said today, in the second half of the year and has continued into 2012-13, with revenues in the early part of the current financial year tracking 10 per cent below last year's and difficult trading conditions likely to continue.

For a group that has just reported a 26 per cent fall in earnings (excluding the $3 billion of significant item losses that produced its headline loss of $2.8 billion) any continuation of a decline in its revenue base at that rate while it is trying to execute a massive and experimental restructuring of its key mastheads would ratchet up the pressure and the degree of difficulty that is already daunting.

The significant losses were dominated by $2.76 billion of impairment charges against the mastheads and the goodwill associated with them and follow $649 million of write-downs in 2010-11.

While those charges might be non-cash and have no implications for Fairfax's borrowing covenants, they are reflective of the destructive pressures Fairfax is under because they represent its board's assessment of the outlook for the mastheads' future cashflows. Self-evidently, and understandably, its directors aren't optimistic.

"The outlook worsened considerably over the course of the second half of the year as the cyclical downturn became more pronounced and confidence in a sustained improvement in market conditions reduced," Fairfax said.

There is no doubt that an element, and perhaps a large one, in the continuing erosion of Fairfax's revenue base – and those of its peers – is cyclical and associated with the general climate of defensiveness and risk-aversion within the economy.

There is also, however, a major and irreversible and indeed accelerating structural element to it as the migration of advertising revenue from the high-yielding print environment to the low-yielding digital environment continues. The savage write-downs reflect something other than a cyclical downturn, as does Hywood's desperate strategy for attempting to secure the survival of the mastheads.

While that "Fairfax of the Future" plan was said to have contributed $21 million to the group's earnings before interest, tax, depreciation and amortisation of $506 million it has barely got underway, with the waves of job-shedding about to start, the format changes and subscription pricing for the metropolitan mastheads scheduled for the first quarter of 2013 and the closure of the Chullora and Tullamarine printing facilities not due until 2014.

Hywood hopes to take $235 million out of Fairfax's cost base by 2015 but the restructuring is going to have to occur against revenue and earnings bases that are still weakening. Within the metros revenue was down 7.4 per cent for the year and EBITDA 34 per cent, to $102.5 million.

The travails of the two big metro mastheads, The Sydney Morning Herald and The Age, have been well chronicled but within the result was the disclosure that the Financial Review Group is also suffering, losing 9.3 per cent of its revenue and experiencing a 64 per cent fall in its earnings before interest and tax, to $3.1 million. Fairfax described the business as being in a "turnaround" phase but its results illustrate that the issues confronting Fairfax aren't confined to its key broadsheet titles and, indeed, reflect the reality that all metro print media businesses are under varying levels of threat.

The ray of hope for Hywood lay in a 20 per cent increase in the group's digital revenues and a trebling of the EBITDA from a notional metro digital unit, from $4.5 million to $18.4 million.

The tricky task for Hywood is to try to maintain the overall profitability of the metros and the print division (which generated a combined $85.5 million of EBITDA, down 39 per cent), or at least slow the rate of decline, while building the revenue from digital advertising, subscriptions and Fairfax's transaction sites. Whether the digital revenues and earnings will ever be able to replace even the vastly-diminished metro print businesses is, however, an open question.

At least, thanks to the selldown of Fairfax's stake in Trade Me, Fairfax has created some breathing space within its balance sheet.

Three years ago Fairfax had about $3 billion of debt and a year ago it still had $1.5 billion. With the latest Trade Me sale (and excluding the debt within separately-listed but still majority owned Trade Me) it is now down to $815 million. Had Fairfax still been carrying the leverage it had only a few years ago it would be in even deeper trouble.

The group's regional media businesses held up relatively well, with EBIT down 7.3 per cent to $153 million and its New Zealand operations' EBIT was down 11.2 per cent to $67.6 million.

Those businesses provide a somewhat more resilient core to Fairfax's earnings – the regional businesses represent about 30 per cent of its earnings base – although there is a very real question as to whether they, too, will eventually experience the digital onslaught.