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Executives

John M. Cassaday - Chief Executive Officer, President, Non-Independent Director, Member of Executive Committee, Member of Audit Committee, Member of Corporate Governance Committee and Member of Human Resources & Compensation Committee

Douglas D. Murphy - Executive Vice President and President of Corus Television

Chris Pandoff - Executive Vice President and President of Corus Radio

Thomas C. Peddie - Chief Financial Officer and Executive Vice President

Analysts

Paul Steep - Scotiabank Global Banking and Markets, Research Division

Michael Elkins - TD Securities Equity Research

Adam Shine - National Bank Financial, Inc., Research Division

Aravinda Galappatthige - Canaccord Genuity, Research Division

Tim Casey - BMO Capital Markets Canada

Haran Posner - RBC Capital Markets, LLC, Research Division

Corus Entertainment (OTCPK:CJREF) Q1 2013 Earnings Call January 15, 2013 4:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Q1 Analyst and Investor Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, January 15, 2013. I would now like to turn the conference over to John Cassaday, President and CEO. Please go ahead.

John M. Cassaday

Thank you, operator. Good afternoon, everyone. I am John Cassaday, and welcome to Corus Entertainment's Fiscal 2013 First Quarter Report and Analyst Call. Thank you for joining us today. Before we read the standard cautionary statement, we would like to remind everyone that there are a series of PowerPoint slides that accompany this call. Slides can be found on our website at www.corusent.com in the Investor Relations section.

We will now run through the standard cautionary statement. This discussion contains forward-looking statements which may involve risks and uncertainties. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's filings with the Canadian Securities Administrators on SEDAR.

Now, we would like introduce you to the Corus Entertainment team joining us on the call today. Tom Peddie, our Executive Vice President and Chief Financial Officer; Doug Murphy, Executive Vice President and President of our Television division; and Chris Pandoff, Executive Vice President and President of our Radio division.

So turning to Slide 3 of the PowerPoint presentation, you'll see Corus had a solid first quarter. Consolidated segment profit finished the quarter at $93 million, up 2% from the prior year. Our subscriber revenues were positive, Women specialty ad sales were positive and Radio was positive, up 1% in revenues. Continued softness in Kids resulted in a 5 percentage point decline in revenues.

Turning to Slide 4, we maintained excellent segment profit margins, finishing the quarter at 45% and 36% in Television and Radio respectively. Our net income attributable to shareholders was $52 million, up 3% compared to last year. Basic earnings per share attributable to shareholders increased by 3% as well to 63% -- $0.63 per share compared to $0.61 in the prior year.

Turning to Slide 5, we are very pleased with the performance of our Radio business. Revenues were up 1% for the quarter compared to prior year, and the division achieved 16% growth in segment profit due to strong ratings in key markets and the continued focus on cost controls across the business. Our British Columbia and Alberta markets are experiencing an ongoing turnaround, impressive rating gains and favorable economic conditions in B.C. and Alberta translated into revenue increases, which offset some of the softness in Manitoba and Ontario.

According to TRAM, our radio stations in major markets: Vancouver, Calgary, Winnipeg, Kitchener, London and Toronto outperformed their respective markets in the quarter. We saw strong ad sales growth in key categories, including financial services, which is becoming a significant category for the Radio division, as well as continued strength in automotive and fast food. The Radio division delivered a solid margin of 36%, up from 32% last year.

Now turning to Slide 6 and our Television business, a soft Kids' ad market and tough comps due to Beyblade's exceptionally strong prior year results had an impact on the division's revenues, which were down 6%. Our Women's portfolio, however, saw advertising growth led by our flagship channel W Network, which generated further rating gains from its successful lineup of original Canadian hits.

In our Pay business, Movie Central saw a subscriber lift in the quarter in response to the deployment of new offerings, an exceptional fall lineup of premium programming and an aggressive acquisition and retention campaign. Movie Central finished the quarter with 998,000 subscribers. That was up 22,000 from the prior quarter. While segment profit for the divisions saw a modest decline down 2% in the first quarter, Television did deliver very strong segment profit margins of 45%, driven, as I said, once again, by growth in our Women's and Pay portfolios and rigorous cost management efforts.

Moving to Slide 7 and our outlook for Radio, while the economic environment remains challenging and advertisers are certainly focused on shorter-term buys, they are still spending. Radio solid showing in Q1 is forecast to continue into the second quarter with growth expected in key markets, led once again by our Western markets where sales are pacing ahead of last year. Impressive ratings, strong advertising demand and the return of hockey are expected to contribute to growth in Q2, again particularly in Western Canada.

As well, we expect our Edmonton market to benefit from the reformat of one of its underperforming stations to the Fresh FM brand. Edmonton's new 95 -- 92.5 Fresh FM represents the third Corus station to make the transition to this successful adult contemporary format and brand, which should contribute to further audience gains in the Alberta market. In Ontario, Q2 national sales in our major markets are soft at this time, but we anticipate this will be offset by gains in the West and South Western Ontario, driving low single-digit revenue growth in the quarter.

In Q2, we are seeing continued demand and advertising spend from automotive, homebuilders and repairs and Professional Services, which is a growing category for Radio, and this is a particular category will include financial services and some new entrants, specifically those in the legal and medical services verticals.

In the local markets, we also expect to see gains from advertisers who continue to shift to radio as an alternative the print media. The ongoing implementation of digital initiatives remains an important strategy for our Radio division as we continue to drive deeper audience engagement and reach our listeners on multiple platforms. We recently invested in SoCast, which is a social media relationships to all that is being rolled out across our stations this fiscal year. Initiatives such as SoCast will drive greater audience loyalty and ratings for our brands.

Moving to Slide 8 and the outlook for our Television business, in Q2, we expect advertising growth for our Specialty Services as a result of ratings gains in our key audience demos, the upshot of strong holiday and winter schedules and the ongoing shift in audience share from conventional to Specialty TV. In Specialty advertising, we are forecasting low single-digit growth over the prior year, driven by our Women's portfolio's strong pacing.

In addition to W Network's ongoing rating momentum, Oprah Winfrey Network's ratings are benefited from Oprah's increased presence on-air and the rollout of new original programming, an exclusive high-profile interviews, such as this Thursday night's highly anticipated interview with Lance Armstrong. We expect the Lance Armstrong interview will bring additional focus and awareness to the Oprah Winfrey Network. To bolster our leadership position in the Women's space, we have partnered with NBC Universal to operate iVillage Canada and South Canadian advertising on the iVillage international network of sites. As one of the largest online communities for women, iVillage will complement our brands and extend our other relationships with women. We also expect further gains from our newest addition, ABC Spark, which is performing very well as advertisers respond to this strong brand and it's appealing female and millennial audience base.

With its expanded distribution into 35% more households since we last talked, which now includes the important Toronto market, ABC Spark provides a significant growth opportunity for Corus. While the Kids advertising market remains tough, we are starting to see ratings growth in this vertical. In December, the important holiday season, YTV was #1 with adults 18 to 49 and Kids 2 to 11 across all Specialty networks. We expect further gains to come from the strong demand for the co-view audience in our Kids and family portfolios.

In our Pay business Movie Central and HBO Canada are benefiting from the significant advances in TV Everywhere initiatives. New platforms such as Shaw Go, which offer best-in-class and non-linear experiences with our premium content on multiple screens, are being very well received by consumers. Our On Demand offerings combined with Movie Central's winter lineup of hit series and blockbuster films, including the highly anticipated new season of Girls and films like Sherlock Holmes are expected to drive increased subscriber retention and further growth in the quarter for our Pay TV business.

Our international Kids business remains focused on driving digital revenue growth by exploiting the growing demand from multi-language, nonlinear kid content. We are making significant progress on this front by maximizing the value of our deep library of brand-name Kids content to meet this demand in both established and emerging markets. As part of our strategy to extend our international presence, last week, we began transmitting our international children's Television channel, KidsCo, which is a partnership with NBC Universal from Corus Quay. Investments like KidsCo, which reaches 100 countries in 17 languages around the world, will provide upside for our business as we expand our Broadcasting portfolio and expose our exceptional Kids brands to wider markets.

In our Merchandising business, Beyblade remains a strong brand but is coming off record highs. We anticipate that revenues will be down compared to the exceptional comps from a year ago. We're pleased to report that new brands, such as the CG animated preschool series, Mike the Knight, which is a coproduction with Mattel on HIT Entertainment, is poised for success. Mike the Knight is rating very well on major broadcast platforms, including Nick Jr. in United States where it ranks #1 and #2 respectively for girls 2 to 5 and kids 2 to 5 with locked-in broadcast sales in major territories around the world and a global Master Toy program with Mattel's Fisher-Price launching later this fiscal. The stage is set for our next big hit, Mike the Knight.

In summary, we feel we are really well positioned for the year, and despite some broader forces at play in the economy, we are confident that we will continue to drive growth in the back half of this fiscal. We remain focused on optimizing the value of our brands by expanding the digital reach of our content and offerings both domestically and internationally, by taking advantage of opportunistic investments and tuck-ins that complement our asset mix, and of course, by continuing to rigorously manage our costs.

Yesterday, we were pleased to announce that our strong balance sheet and free cash flow has enabled us to deliver a significant dividend increase of 6.25% to our shareholders, bringing our annual dividend on our class B shares up to $1.02 per share compared to the previous rate of $0.96.

As part of this call today, we would also like to reiterate our annual guidance. As announced at our Investor Day, which was held in November 29, our guidance for fiscal 2013 is $293 million to $303 million in consolidated segment profit. And also, we are looking to generate free cash flow in excess of $140 million.

We hope you found these comments helpful, and we'll now take any questions that you may have. So operator, over to you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Paul Steep with Scotia Capital.

Paul Steep - Scotiabank Global Banking and Markets, Research Division

John, you talked briefly, I guess in the prepared remarks, about the launch of Shaw Go and the uptake there. Maybe you can give us some more feedback just on what the rollout have been of potentially additional services? I know Shaw talked on our call a little bit about Kids. And then maybe back to the core service what the availability of the core library looks like today in terms of how you're ramping that up.

John M. Cassaday

I think the -- first of all, Shaw Go has been exceptionally well received, and the sort of a feature item in that offering was our Movie Central and HBO, which was very flattering to us. We're excited about Shaw Go for a number of reasons. One, as you know, Paul, we've really been advocates for a long period of time about TV Everywhere initiatives. In other words, keeping our ecosystem strong by ensuring that people that pay a subscription are entitled to get our content on whatever platform they want, whenever they want it. We think that this is going to be a significant boost for our Movie Central or Pay business in general. It's going to assist in reducing churn. And as we add new content, like we discussed in our opening remarks, and retention programs like the ones that we have in place now and have had historically, think this combination of the rollout of HD services at Shaw and the introduction of Shaw Go is going to have a real positive impact on that. So in terms of actual subscriber count levels, all we can really tell you is that it's been extremely well received. The application is viewed by users as being very friendly, maybe best in class. And what we've been doing is adding additional content from our services, making it available and most recently, just made available to them a significant portion of our library to deploy across their various services, set-top box and Shaw Go.

Douglas D. Murphy

It's Doug, Paul. If I could just build on John's comments, as regards to Pay, at this point in time, we feel very positive about the customer proposition in the marketplace. We've got the best ever programming with hit shows such as Girls and others debuting at the moment, delivered now on a TV Everywhere platform, in this case Shaw Go and available in HD On Demand. So this pickup in subs is obviously encouraging to us, and I think and we believe strongly that our retention activities should be very strong this year because the product itself is a much better consumer proposition. So that's on Pay. On the Kids side, as John noted and just to put a fine point on it, we have a big opportunity in the coming year and then some domestically to work with all our BDUs and license our Nelvana library of content to be deployed to their systems via set-top boxes to their subscribers. And we started with Shaw most recently but we're currently discussing a similar offering with all the BDUs across the country.

Paul Steep - Scotiabank Global Banking and Markets, Research Division

And do you think by the end of the year basically, you'll get it all done, Doug, or aim to?

Douglas D. Murphy

We'd like to. Of course, it's a negotiation in every case, but obviously there's a high degree of demand for the Nelvana library, Paul, and we have a very strong view as to what the value of that library is. So assuming we can come to satisfactory negotiations with our BDU partners, and we expect that.

Paul Steep - Scotiabank Global Banking and Markets, Research Division

Great. Just 2 quick ones left for me. One, just on further carriage maybe for ABC Spark and Nickelodeon. It was good to see them both going to the VIP package on Rogers. How should we think about the rollout of further carriage for those services over the next year? Should we think that, that's sort of a 2014-type event?

John M. Cassaday

I think we're in pretty good shape on both of those services now. There's going to be modest gains. But when you've got good distribution with the 3 big players, Bell, Shaw and Rogers, which we now do, I think you're in the sweet spot. So I would say that whatever happens from this point forward would be incremental as opposed to transformational change. But most importantly, now we've got a platform where we can translate improved ratings into incremental revenue. We're talking earlier this morning about the success that we had with W years ago, a service that when we acquired it was doing less than $10 million in advertising, now doing over $50 million in advertising. And yes, we did a lot in terms of ratings but bottom line is, it was a real attractive demo that allowed us to really index above norm on that service. We think ABC Spark, in particular, is a brand very similar in character to that, that has the potential of being a significant contributor to our growth going forward, particularly now that we've locked in , as you said, that additional carriage with Rogers which was really, really key to our advertising proposition.

Paul Steep - Scotiabank Global Banking and Markets, Research Division

Great. Last one, I guess, for Tom or Chris. On the Radio margin, just sustainability there you did mention in the MD&A here a little bit of timing on copyright and talky sort of playing into bit of the boost this quarter. I'm not sure how much of that kicked into the margins or if it was largely on the other factors side?

Chris Pandoff

Paul, it's Chris. Basically, this fiscal year, going into it from last year to this year, we -- a lot of the hard work we done - had done with our margin, we've continued through this year. And in the first quarter, we held back on some discretionary expenses, primarily marketing and some administrative headcounts that we didn't replace. It continues to be an important part for us in the fact that the markets aren't as robust as we've seen in the past. We're still concentrating on expense and maintaining margins. So on a go-forward basis, that's our primary goal.

Thomas C. Peddie

Paul, it's Tom. The one comment I would add is that, as you know, that number fluctuates quarter-to-quarter. So a very strong margin in Q1. That margin will be in the low to mid-'20s in Q2. We've stated that our overall goal is to make sure we maintain those margins in excess of 30.

Operator

Our next question comes from the line of Mike Elkins from TD Securities.

Michael Elkins - TD Securities Equity Research

So the $10 million decline in merchandising and other revenue in the quarter, was that primarily driven by Beyblade, or were there other items that affected that category?

John M. Cassaday

Two items, Beyblade and Bakugan. There was still some residual from Bakugan in the year-over-year comp. And then about -- and it was about equal.

Michael Elkins - TD Securities Equity Research

Okay. So John, I think -- I don't know if you want to get too specific, but I think you previously indicated that you expected that Beyblade sales might be down around $10 million for the year. Is that kind of number still consistent with your expectations?

John M. Cassaday

Well, sorry to correct you on that, Mike. But what I simply said, I used a -- basically tried to help frame what it was. And what I said to everybody is that a $10 million decline would represent about a $4 million drop in EBITDA. So we weren't specific about where this thing is going to go because we don't really know. We're one of the partners in this, but it depends entirely on what happens at retail, and my example was simply to help you understand essentially how -- what the dynamics were. And the dynamics are a $10 million drop in revenue was a $4 million drop in EBITDA. We're seeing some very encouraging things from Beyblade. Doug was sharing with our board over the last couple of days the plans for '14 and '15. We really hope that this can be an Evergreen brand. It probably will not. In fact, we're quite sure it won't continue at the levels that it achieved last year, but we think it's got continued legs, and the reports that we've got from our partners that they had a pretty darn good Christmas sell-through period. So we go into the spring in the enviable position of not having inventory backed up. Doug, you may want to add some additional color to that, but the general comment is that we do expect the Beyblade to be softer, strong comps last year, and this will be particularly true in Q2. But this brand seems to have some sustainability potential.

Douglas D. Murphy

Yes, just to add, I'll echo John's comments, Mike. Q2 last year was our breakout quarter where Hasbro and our partners hit the cover off the ball. We do expect this year to be down from last year, and we saw this play out in Q1. Q2 is the remittances against the Christmas selling season. We don't have further visibility to that right now because not all of the reports are back-end. But I think as we've commented today, that we will be down versus last year. But to echo John's comments as well, obviously we have ongoing investments in content, new product innovations. Those that attend Toy Fair in the next month of February will see all the great new innovation that we have for the product line, they're part of the Hasbro and Mitsubishi d-rights have put in play. So we're all aligned to make sure this business is sustainable. But this year, I think will be the year we'll find this level of sustainability as we kind of comp against last year's outstanding results.

Michael Elkins - TD Securities Equity Research

Okay. That's very helpful. And maybe just one more question on programming cost amortization. Maybe provide some color on what drove the 2% decline in the quarter? Was it a function of lower costs, produced your own content, maybe lower cost in U.S. content? Are there any particular genres that are driving it? Anything you can provide there would be helpful.

Douglas D. Murphy

It's Doug, Mike. Specifically, the results of this quarter were very strong in our view. Most of it came from a disciplined management of our Canadian programming expenditures. So principally for the quarter, that's where the source of savings were.

Michael Elkins - TD Securities Equity Research

Right. And sustainable going forward through the next couple of quarters?

Douglas D. Murphy

Sustainable within the context of our requirements from the regulator to spend a certain amount of CPE against our networks. So we have proven this year, and we're especially proud of the ratings performance is on W, in particular, our Canadian original programming. W's performance and week day prime is up North of 40% and the network itself is delivering outstanding ratings on the back of our original programming investments. So for the first quarter, we were able to shift some investments around but we're committed to investing in Canadian programming. And so every quarter will be a bit of a different story but we're going to make the right investments for the business.

Operator

Our next question comes from the line of Adam Shine with National Bank Financial.

Adam Shine - National Bank Financial, Inc., Research Division

John, maybe just starting with you, I guess and/or Tom. Just with respect to ABC Spark and maybe even Cartoon Network in the Q1. Can you speak to whether or not there are any lingering sort of a free preview periods and/or whether there was any contribution of any kind worth noting in Q1?

John M. Cassaday

The Cartoon Network would've been free preview period, virtually all of it. ABC Spark, I suspect most of that was free preview period as well. And of course, we've just begun a free preview period with Rogers. So you would've been looking at in the case of ABC Spark, at DUSK sub-revenue out with ABC Spark coming in and no commensurate revenue there. So we've got -- so that's why we're a little bit more optimistic about the back half as that begins to kick in. And Cartoon Network, really early stages. No real contribution from them, Cartoon Network, at this point speed.

Adam Shine - National Bank Financial, Inc., Research Division

And just on that point, I guess, whether it relates specifically to post preview environment and/or some of these initiatives that seems to be successful in the Movie Central front, anything worth noting with regards to the marketing spend which I think was referred to as being a bit later from a timing perspective in Q1?

Douglas D. Murphy

It's Doug, Adam. On Q -- this quarter, right now, in market, we have some marketing investments against both W. We've got -- you'll see all kinds of material out there in the marketplace. I'd draw your attention to the One Dundas big digital screen there. If you're dropping by Yonge and Dundas, you'll see and many, many others as well as ABC Spark. Once we were secured additional distribution on Rogers with ABC Spark. We had on deck a marketing campaign to bring the country's attention to this great new service. So we are supporting our investments in programming with commensurate investments in marketing in this quarter. And as a result, we expect to see some continued strong waiting story, which in time, will convert to revenue.

Operator

[Technical Issue]

Operator

We'll move on to the next question. It comes from the line of Aravinda Galappatthige with Canaccord Genuity.

Aravinda Galappatthige - Canaccord Genuity, Research Division

A couple of questions on Nelvana. Firstly, on Mike the Knight, you talked about the progress there, could you sort of help us out in terms of the roadmap from here on? Are there any set of merchandise that hit the shelves anytime soon? And at what point do you think that you'll start to see meaningful merchandise revenues from this brand?

John M. Cassaday

There's quite a successful merchandising program for Mike the Knight in play right now in the U.K., strong line of plastics. It will likely be fiscal '14 before we see anything meaningful on Mike the Knight in North America.

Douglas D. Murphy

It's Doug, Aravinda. There'll be -- there's going to be some soft -- some soft fabric toys coming out as sort of early line with Fisher-Price to the late spring through the summer. But there'll be a full range of plastics plush and other toys in the fall, a very full range. So we're very enthusiastically awaiting that launch.

Aravinda Galappatthige - Canaccord Genuity, Research Division

And on the Investor Day, you talked about sort of the digital sales ramp expecting a fairly sharp increase in sale of your products, Nelvana to most of the OTT operators. Any update on that front? Are you still seeing sort of that kind of steep growth that you've discussed then and you saw last there?

John M. Cassaday

We have an aggressive plan to take advantage of that this year, both domestically. Doug talked about the fact that we have been successful with one distribution partner in Canada and have offerings in front of all of the others. As it relates to our International business, we spent a significant amount of time developing a comprehensive list of who all the OTT players where, where they could be contacted, kinds of interest that they had and the acquisition of programming and now, we put our international sales team to work to make that a reality. So we've got best case, worst-case and mid-case plans, and because this is all sort of frontier-type activity, we don't really know where this thing could go, but we know there's a terrific opportunity, and we're trying to take full advantage of it. So that's one that we'll unfold on a weekly basis. And as I said, we've had considerable success, as you know already, with Netflix both in the United States and throughout other markets in the world, and we're now beginning to I think tap the Canadian marketplace with our traditional distribution partners.

Aravinda Galappatthige - Canaccord Genuity, Research Division

And then just moving onto the Kids TV side, I mean, you've indicated that you all suddenly see some strength on the ratings front. The ad revenues, that seems to have been declining for a while now. Any sign of stability as these ratings kind of take hold towards the end of the year, or is the visibility still quite poor on that front?

Douglas D. Murphy

It's Doug. The visibility is still fairly murkier. And to be candid, we were very pleased with the ratings results. We're actually tracking on the Kids audiences about plus 10% this year versus last. So we were in a challenging ratings comparative environment for the last 18 months, and we've turned the corner there. And as we've said in the past, audience has lead revenues. So that's in motion. The challenge we've continued to have at this point in time is the demand-creation challenge. We've talked in the past about our issues at retail with the transition of Zellers and Target, as well as some other factors and consecutive [ph] issues in and around the food business. But what's encouraging is that we're soon going to be seeing Target opening with 35 stores by April 1 and then getting to the full contingent of launch by 140 stores by fall of next year. We think that's going to bring an overall firming up on the retail market, which will have knock-on effects with the toy business, with the DVD business, with the food categories. As we, in parallel, continue to work on developing new categories of advertising on our Kids network. So it starts with ratings. It'll be helped by the firming of retail in the market over the coming quarters. So we're optimistic, as we said at Investor's Day, that we'll begin to turn the corner on a revenue growth basis in the back half of the year.

Aravinda Galappatthige - Canaccord Genuity, Research Division

And then lastly, perhaps to Tom. On the corporate cost, sizable decline in Q1. Is it fair to expect, perhaps not as big, but continued declines on a year-over-year basis on the corporate cost line? Any commentary along those lines?

Thomas C. Peddie

Aravinda, I think we would guide you to a number of probably $26 million to $28 million, totally depending upon stock-based comp. As you know, the number last year was $29 million. Right now, we're tracking a little lower than the $26 million, but somewhere in the $26 million-plus range.

Operator

[Operator Instructions] Our next question comes from the line of Tim Casey with BMO.

Tim Casey - BMO Capital Markets Canada

Doug, could you explain or help us understand, sorry, what the economic model you're pursuing with the BDUs as you try and license out Nelvana, the Nelvana content? I'm assuming that would be a -- it would be largely a library deal, given the new stuff is on your channels. And is it kind of a one-off sale that we would see one hit on the P&L, or would these be multiyear deals where the P&L impact is spread out? And another question I had is I'm curious about how we should think about programming costs on the pay side. And where I'm poking at is you obviously have a long-term deal with HBO, but HBO's costs change through the term of this, of your arrangement as no other new competitors enter the market by certain libraries and their costs change. How does it work for you? Is there a very varying programming cost based on HBO's costs, or is it a set rate that gets revalued or reset periodically? Just structurally, can you help us? I'm trying to understand that.

John M. Cassaday

Tim, I'll handle the HBO one, and Doug can give you some color on how we're looking at the OTT opportunity. The HBO deal is a long-term deal. It runs till 2018. The pricing per hour is set. The unknown is how many hours will be put to us. So it depends on how prolific HBO is and the unknown for us and the challenge for us in estimating our cost in HBO as how many movies are they going to push our way, how many series are they going to push our way. I can tell you one thing, we never begrudge an extra one because they continue to be promotable and serve us well. But it is in fact a "variable cost" because of the uncertainty that relates only to the amount of throughput, not the rate per hour.

Tim Casey - BMO Capital Markets Canada

And is it a pay per play deal, John? Or do you have the right and say, that program is not going to work for us?

John M. Cassaday

It is a pay per play. We are obliged to take all of the content that they produced for their own service. We are their partner on this, and we're in this together.

Tim Casey - BMO Capital Markets Canada

How about the movie side?

John M. Cassaday

Same on the movies.

Tim Casey - BMO Capital Markets Canada

Same on the movies. Okay. Great.

John M. Cassaday

Yes, and I'm talking about their domestic stuff, not the studio content that they acquired. Just their original content.

Tim Casey - BMO Capital Markets Canada

And how about the third-party studio stuff, how is that...

John M. Cassaday

The third-party studio, that's separate. We have our own arrangements so with the studios.

Tim Casey - BMO Capital Markets Canada

You buy totally separate from them, got you.

John M. Cassaday

Yes.

Douglas D. Murphy

On the Kids side, Tim, we spend a lot of time sort of honing our strategies to go hunting for these digital revenues, and we looked at sort of the best practice, license terms that we've seen out there in the marketplace and then basically emulated that in Canada. So the deal have typically short-term nonexclusive licenses. They behave very much like the program licenses we do for the linear broadcast. So the revenues are recognized when we deliver content and have an executed document. And so the revenues will come in based on us securing said deals with the various BDUs across Canada.

Tim Casey - BMO Capital Markets Canada

And am I right in assuming that this is largely a library deal or...

Douglas D. Murphy

Yes, this is Nelvana library content. So it's part of the very robust and deep library that we have at Nelvana. It's the same library that outside of Canada that we're licensing very liberally to over-the-top operators, Hulu, Amazon Prime, Netflix, et cetera. In Canada, our decision is to focus entirely on the BDU ecosystem, the license on a nonexclusive basis.

John M. Cassaday

The other thing I'd say is we're absolutely, totally committed to protecting our ratings where we drive advertising revenues. So we have a separate tranche of programming that appears, that our subscribers pay for on a monthly basis. And this is completely different programming than that, which appears in our regular schedule on YTV, Treehouse and TELETOON.

Operator

Our next question comes from the line of Haran Posner with RBC Capital Markets.

Haran Posner - RBC Capital Markets, LLC, Research Division

So most of my questions have been answered, but maybe I can go back to CRTC hearing on OWN, if I may. And just I guess a couple of questions, maybe starting with you, John. If you can comment perhaps on what the possible outcomes are now following the hearing?

John M. Cassaday

We had a whole day of a very robust discussion with the CRTC regarding OWN I think on December 10 or 11. I think we had a very productive day. We offered up some alternatives from a programming standpoint to offer "a more adult education-oriented approach" to some of our programmings. So specifically, 2 hours of additional adult educational programming, which we will intersperse into our schedule. And we will produce it as creatively as is possible. And as a result, we're quite confident that we will retain our category A status as a result of the discussion that we had with the Commission. And we're also committed to continuing to build on our rating's success. So I guess the summary comment is good discussion. We expect a very positive outcome from those discussions, and we have begun the work to prepare to add some additional programming to our schedule, which we think will complement our service.

Haran Posner - RBC Capital Markets, LLC, Research Division

Okay. That's all very helpful. John, maybe just one point of clarification though. If you did lose the cat A license and specifically as it relates to linkage requirements on the Shaw systems, I'm wondering if that's an area -- is the risk primarily for OWN or in that event, can you just -- could Shaw then just drop other cat B channels that you have in order to fulfill the linkage rules?

John M. Cassaday

At this point, what I'd really like to say is that we are extremely confident that as a result of the discussions that we had with the CRTC, that we will be successful in maintaining our category A license.

Haran Posner - RBC Capital Markets, LLC, Research Division

Okay, that's fair. And then one for you, Tom, if I may, just with respect to the bonds and the potential refinancing. I'm wondering if there's any update you could give there.

Thomas C. Peddie

No specific update. As you know, our first opportunity to call those bonds is February 10. We have to give 30 days notice. We're in the process of continuing to assess our options.

Operator

And there are no further questions on the phone lines at this time. I'll turn the conference back to you.

John M. Cassaday

Thank you, operator. Once again, everyone, thank you for your continued interest in Corus, and we look forward to talking to you in the next few days and weeks, and once again, at our second quarter analyst call. Thanks. Bye for now. Have a good day.

Operator

Ladies and gentlemen, that does conclude the investor call for today. We thank you for your participation and ask that you please disconnect your lines.

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