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Executives

John Cassaday - President and CEO

Tom Peddie - Senior Vice President and Chief Financial Officer

Paul Robertson – President, Corus Television

Analysts

Adam Shine – National Bank Financial

Paul Steep – Scotia Capital

Scott Cuthbertson – TD Newcrest

Ben Mogil – Thomas Weisel Partners

David McFadgen – Cormark Securities

Drew McReynolds – RBC Capital Markets

George Holland – GHE

Jason Jacobsen – GMP Securities

Randal Rudniski – Credit Suisse

Corus Entertainment Inc. (CJR) F1Q09 Earnings Call January 14, 2009 9:00 AM ET

Operator

(Operator Instructions) Welcome to the Corus Entertainment Q1 ’09 Analyst and Investor Conference Call. At this time I would like to turn the meeting over to Mr. John Cassaday, President and CEO.

John Cassaday

Welcome to Corus Entertainments 2009 First Quarter Report and Analyst Conference Call. Thank you for joining us today. Before we read the standard cautionary statement we’d like to remind everyone that there a series of PowerPoint slides that accompany this call. The slides can be found on our website www.CorusEnt.com in the investor relations section. I’ll now run through the standard cautionary statement.

This discussion contains forward looking statements within the meaning of the US Private and Securities Litigation Reform Act of 1955. Some of these statements may involve risks and uncertainties. Actual results may be materially different from those contained in such forward looking statements. 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 filing with the US Securities and Exchange Commission.

I’d like you introduce to you the Corus Entertainment team available on this call this morning. Tom Peddie our Senior Vice President and Chief Financial Officer, and Paul Robertson, President of Corus Television.

While never satisfied we are very proud to report continued top line and net income growth for the quarter despite the current economic climate. As slide three shows our revenue for the quarter was $216.8 million up 1% from year ago while our consolidated segment profit was $81.3 million down 2% from year ago.

Turning to slide four, even though free cash flow in Q1 is historically low compared to other quarters we delivered $2 million in positive free cash flow versus negative cash flow of $2.9 million last year. Our net income for the quarter was $40.6 million versus $39.4 million last year with a 9% growth in basic earnings per share at $0.51 per share versus $0.47 last year.

From a divisional standpoint our overall television revenues were up 4% versus last year, our Adult Specialty business had a great quarter with advertising revenues up 9%. Our women’s channels had a particularly strong quarter up double digit versus last year. Subscriber revenues for the quarter were up sharply achieving a 12% increase versus the prior year in part due to the launch of VIVA our new channel targeting boomer women.

Movie Central subscribers showed strong growth in the quarter adding 29,000 subscribers or 3% growth versus Q1 2008 and up 15,000 subscribers from our August 31, year end number. The result is very encouraging as it precedes the positive lift we are expecting from the launch of HBO Canada.

Our Kids business continued to be challenged with respect to ad revenue. Toys, food, and entertainment remained the top categories. Toys posted positive growth this quarter which provides us with further evidence that the category is bouncing back from many of the industry related issues we faced last year. This gain was offset by declines in other key categories.

For the fall season to date YTV has regained and held the number one position for kids two to 12 in the after school time period and has also regained the number one spot with boys two to 11 in other time periods. Our Kids division results were also assisted this quarter from Nelvana with Bakugan making a strong contribution.

Segment profit for television increased 1% to $64.3 million. Overall our profitability was impacted by higher than normal expenses in this quarter due to the launch of three new channels and the costs associated with the acquisition of the Nickelodeon digital rights. Though Cosmopolitan Television launched in February we had programming and marketing costs in this quarter that were not in last years comps. As well in this quarter we had expenses related to the launch of HBO Canada and VIVA for which we expect to see corresponding revenue growth in Q2 and beyond.

Now turning to our Radio division, revenues for the quarter were $75.5 million down 5% from last year and segment profit was $22 million down 14%. From a revenue standpoint clusters that were above or flat to last year included Edmonton, London, Kitchener, Kingston, Montreal, and our Quebec regional stations and our interactive division.

However, overall our revenues were down from last year. Each cluster and station and station is unique we see a common thread that accounts for some of the overall decline. With our predominance in news talk and classic rock genres, advertising sectors that have been traditional strong drivers of growth have seen declines in these tough economic times, specifically automotive, telecommunications and financial services. While our national automotive business was up sharply, local automotive was down in the quarter. Telecom saw a 39% drop from a national sales perspective.

Visibility remains very short but we expect both telecom and financial services to start to bounce back as new wireless entrants enter the telecommunications sector and the new tax free savings account and our RSP seasons begin. Automotive was down a local perspective but pacing in a number of markets is beginning to improve. In Edmonton for example local ad sales for the automotive sector were down 13% in Q1 but Q2 pacing to date is down only modestly.

We would like to provide some commentary on our outlook for the rest of the year but before we do, in summary, we believe Q1 is a solid building block for the year. Overall revenues grew, we delivered positive cash flow and we achieved solid earnings per share growth.

Turning to slide five, in terms of our outlook for the rest of the year, at our investor day in September we provided our guidance for the year for consolidated segment profit between $270 and $280 million and free cash flow of between $70 and $90 million. Since that time there has been significant turmoil in the global financial markets leading to, among other things, erosion in consumer confidence and slower GDP growth and growth estimates for 2009.

Approximately 60% of our revenues are derived from advertising and there clearly is a link between the growth rate of the economy and advertising growth rates. As a result, we have decided to reduce our segment profit guidance to between $255 and $265 million. While no one can predict with certainty the length or severity of this economic crisis what we can tell you is that our internal segment profit projection is currently above the mid point of our guidance. We also want to confirm with you that our cash flow guidance remains unchanged at a target of between $70 and $90 million.

We’d like to take the opportunity to provide some more detailed commentary on the outlook. We have a strong and diversified portfolio of assets that we believe will allow us to continue to drive positive growth overall. First, we see great opportunity in our Women’s business. W Network continues to see double digit revenue growth. From a ratings standpoint we have also opened up a double digit rating lead versus our nearest competitor in the women 25 to 54 demographic.

We are also encouraged by the launch of both Cosmo TV and VIVA. Cosmo continues to outpace our revenue targets and we see strong upside on VIVA from an ad revenue standpoint. When looking at the 2007 CRTC returns for this channel we are confident that VIVA’s new programming, branding, and target towards boomer women can improve on the $1 million in ad revenue which was achieved in 2007 benchmarking it against Food Network or Star TV for example puts potential ad revenues in the range of $6 million to $20 million. While it will take some time for the new brand to take hold, we see large potential upside.

Second, with respect to our pay TV business we were certainly encouraged by the subscriber growth that we saw this quarter. As you know, we launched HBO Canada on October 30. We have a strong advertising campaign and are working closely with our BDU partners to capitalize on this well recognized brand.

In addition to our continued marketing and promotion around HBO, there is also a high definition campaign that runs until March. The campaign includes direct mail, radio, on air, and online elements to help up sell HD services in the key post Christmas period to capture consumers who bought new flat screen TVs. We also have a continued slate of fresh programming such as Season 2 of Flight of the Concords, Season 3 of Big Love, Steven Spielberg’s United States of Tara staring Toni Collette and Real Time with Bill Maher.

On the Kids business, as we mentioned, our rating story continues to improve and we will leverage this to strengthen our revenues. Our bookings to date for the last half of this year have low visibility but we are seeing some improvement in the back half at this early stage. The integration of Nelvana into our television division is paying early dividends as we are capturing synergy cost savings and seeing the benefits of the integration with improved ratings and growing merchandising revenues.

We can report that Bakugan was a toy hit over the holiday season ranking a top five toy in virtually all key territories. We saw positive gain already in Q1 with merchandising revenues more than double year ago. The recent strong holiday performance at retail will bring more positive results for the rest of the year.

Overall for our television division we see continued advertising and subscriber growth. Our higher than normal costs in Q1 have helped us set the table with a trio of exciting brands that will drive growth the rest of the year. Importantly we continue to project overall EBITDA growth for this division in the mid single digit range.

Turning to our radio division, we had a solid S4 ratings book. Out of our top 15 clusters, seven were up overall and six were flat. In the West, CKNW, CHQR, CHED and CJOB hold number one ranking positions in their respective markets. These are AM stations competing with the increasingly popular FM band so to maintain a number one ranking 12 plus means that the majority of AM tuning is coming to our news talk stations.

Another key highlight was the great performance in Toronto led by Q107 where adults 25 to 54 increased by 24%, its best rating in that demographics since 2006. We have already seen this result in an increase in average spot unit return but also an opportunity to participate with some advertisers that include females in their target.

Lastly, the Montreal market moved from diaries to the PPM panel methodology this quarter and the results were positive overall for Corus. We gained three share points in the important 18 to 54 demo. In particular Sequa gained 21% and moved up a rank in the adult 18 to 54 demo. We are aggressively selling against these strong rating results however; we do not expect to show year over year revenue growth for radio this year. We will implement measures to offset some of the revenue declines that we experienced in the first quarter through expense reductions particularly in markets which lag behind from a margin perspective.

We hope that you have found our comments helpful in providing an overview of our Q1 results and outlook for the remainder of the year. Before moving to the question and answer portion of our call we would also like to draw your attention to a recent ruling that impacts our business, turning to slide six.

On December 18, 2008, the Supreme Court of Canada granted leave to appeal the decision of the Federal Court of Appeal concerning the validity of the so-called Part II CRTC fees. The FCA had held that the fees were a valid fee imposed by regulation and were not a tax that would require specific legislation. This reversed the Federal Court Trial Division decision which held that Part II fees were an unlawful tax.

A hearing of this matter by the Supreme Court is expected during the fiscal year but no decision is expected until late in calendar 2009 at the earliest. As you know, until this issue is resolved we have accrued and will continue to accrue for these fees. For fiscal 2009 the accrual is an estimated $6 million. For fiscal 2007 and 2008, the total accrual for these two years was $10.9 million.

We have not made a cash payment against these fees since fiscal 2006 but we will continue to accrue for them until the issue is resolved. We are obviously very pleased with the recent decision and will continue to work with our broadcasting and cable partners to push forward our position on this matter and drive for a favorable outcome.

We’ll now take any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Adam Shine – National Bank Financial

Adam Shine – National Bank Financial

Starting trying to isolate the contribution of the VIVA I appreciate low advertising so not much of a move there but you’ve acknowledged the contribution to subscriber fees. Any way to give us more of an organic contribution for TV revenues?

John Cassaday

Modest from an ad revenue perspective reasonably significant from a subscriber perspective. The one thing that I believe you’ll see in our report to shareholders is an attempt to try to isolate the impact of all of these items. Collectively, if memory serves, there was about $6 million in incremental expense in the quarter that we did not have year ago to essentially promote these new services.

Adam Shine – National Bank Financial

Those are the $5.5 million of costs. As we move forward you alluded to this a little bit earlier in your presentation but as we move forward obviously its still early days with HBO, still early days with VIVA as well as the Nickelodeon rights that you just picked up, those are the digital rights. How should we look at costs on the TV side related to these issues moving forward, still some additional startup elements but obviously tracking considerably lower from the $5.5 million in Q1?

John Cassaday

I think significantly lower. The bulk of our startup expenses were driven into Q1. I think you’ll see our cost position improve significantly for TV going forward. The one thing that I would say is that based on anecdotal comments we are extremely positive about the likelihood of meeting or exceeding our stated goal of improving our subscriber base by 50,000 subscribers. We are also hopeful that at some point in the future given the success and impact of HBO that there will be a pricing opportunity afforded us on that brand.

Adam Shine – National Bank Financial

Reverting to pay TV obviously heavy into the quarter there was the benefit from a timing perspective related to Entourage, Dexter, and a few other shows that due to the writers strike had moved from May, June renewals to the fall. Fundamentally those would be the issues driving the increase rather than any material contribution yet from the HBO Canada launch right?

John Cassaday

That’s exactly right. I think this is a function of two things. First of all, as you all know, our three principal customers are Bell TV, Star Choice and Shaw. Shaw has made a real concerted effort to drive digital. We also are really pleased that they have made a decision to go to a universal SBOD platform which we believe is a real key contributor to the reduction of churn.

We’re really quite optimistic about it. The big drivers are, as you say, the new programming, the concerted effort on the part of Shaw to get these digital boxes into their subscriber base and of course what’s happening on the electronics front with people moving to high definition flat screen televisions. All of this is conspiring to result in a real renewed growth period for pay TV in general. We expect with HBO that we can really put the cherry on the cone here and get the most advantage out of it possible.

Adam Shine – National Bank Financial

It’s a funny broadcast period heading into Q2; I know you guys adjust when you report. The broadcast here loses a week in the upcoming seasonally lighter Q2, should that affect you guys in any way. Obviously you adjust but can you talk to that dynamic a little bit.

John Cassaday

The way we think about it and we would encourage you to think about it is, I’m not sure how far into this recession whether we’re two quarters in or three quarters in, as you know, you don’t know you’re in a recession until afterwards. The way I look at it is we’re at least one quarter closer to being out of it. We got through the first quarter we think in pretty good fashion. We grew our revenue, came pretty close to flat operating income and our net income was up.

Q2 is not a significant quarter for us or really any media company in general. You could expect that most media companies will do less than 20% of their operating income for the year in Q2. Not a meaningful quarter and what we’re hoping is that by the time we get into March, April, May we’re beginning to see the up turn, we can take advantage of the ratings improvement that we have, we can take advantage of the momentum that we have on pay TV, continue to benefit from what’s going on, on our television side.

Of course we will know what the post Christmas results were like to Bakugan and we are very optimistic about that being a meaningful contributor to our results going forward. We kept our head above water in tough Q1. Q2 is not that meaningful for us and we think we’re really well positioned for the back half of this year. We hope, like all of us do, that we see some signs of recovery in the economy as we get into March, April, and May.

Paul Robertson

John did a great job of painting over all the affect of Q2. Specifically what we do is we log it on a calendar basis so despite the fact there is one week less on a broadcast year basis it doesn’t affect the way the numbers ultimately get reported.

Operator

Your next question comes from Paul Steep – Scotia Capital

Paul Steep – Scotia Capital

Maybe you could talk a little bit about radio, as you said, it was a strong book and Quebec is actually looking like it’s in good shape. Can you maybe talk just a little bit about what the fixes would look like in the underperforming regions or what we should think about this year beyond some of the obvious? Should we be thinking about broader reformats in the network, should we be thinking about bigger changes? You sort of mentioned in the MD&A some new content how should we think about that part of the business.

John Cassaday

I think you should be thinking more in terms of us having relative to perhaps even total status quo from a formatic point of view. If we were to really isolate what our issue was in Q1 it was our rock stations. In particular it was our rock stations in Toronto, the EDGE and Q107. I hate to use a work like this but we had an extraordinary book in Toronto. If there’s one place you want to have an extraordinary book and if its one place you want to make sure you don’t have a terrible book its in Toronto.

It is the most dominant market in the radio industry in Canada over $200 million market. We think we are really well positioned at both the EDGE and Q107 to begin to recover the softness that we experienced in the first quarter. We were also soft at Rock 101 in Vancouver and I think this is characteristic of the fact that those rock stations are largely dependent on the two categories that were most obviously impacted by a soft economy.

There’s no question in our mind that there is going to be a significant financial stimulus provided to the automotive sector relatively soon and that they have a job at hand which is to move cars off the lot and to prepare for the new year sales. In Western Canada in particular we are really trying to give the economy a boost with the campaign focused on encouraging people to be positive about what’s going on, take advantage of some of the extraordinary deals in the automotive sector.

I suspect that we will move that campaign into Ontario and Quebec and really start assisting our partners in the automotive sector in moving vehicles off their lots. I don’t think we feel formatically we’re challenged. We dominate the male demos in Canada. Admittedly it wasn’t a strategic decision; it was a serendipitous outcome of a series of acquisitions. We would certainly rather have the control position that we have and these stations are still very profitable than start fussing around with formats that may not be as sustainable as we know and believe classic rock and new rock to be.

Paul Steep – Scotia Capital

On the Nickelodeon content deal obviously you don’t want to get into giving us all the details but maybe you could just give us broader perspective on what the deal means in terms of how long is the deal, is it going to increase costs and more importantly how you’re going to monetize the streaming revenues out of it in the digital side.

Paul Robertson

First of all from a term standpoint it’s a very long term deal so there won’t be a renewal coming up anytime soon. What we really did was we extended our program output deal so we now have control of everything that comes out of the Nickelodeon Channel whether its animation or live action. The live action portion is doing really well for them lately so we’re pleased to get a handle on that.

In addition to that we’ve added these digital rights and that includes representation of all the websites of Nickelodeon in Canada, it includes the VOD rights on all the programming, broadcast streaming rights. As I think everyone appreciates this is the growing part of our business so we think we can continue to build that side of things 10% to 20% a year.

In the early going there was a lot of blocking and tackling to do to get the assets in shape so that we could employ them into market in the most effective way. We can report now that we’ve now got it under control and working well with our customers. We think there’s a lot of interest out there, we’re at the early end of building that digital business but we think it will be a growth engine for us as we go through the years.

Paul Steep – Scotia Capital

On CapEx you mentioned that you sort of delayed some things, how should we think about the ramp through the back end of the year. You gave better disclosure around the AR’s not that the changes were material I think just for the economy it would be useful if we couldn’t see the year ago period that we’ve seen any big shift there in terms of the aging.

Tom Peddie

From a CapEx point of view, and I guess from a guidance point of view, first if you look at our depreciation levels last year as being around $21 million we’re expecting our depreciation levels to be in that area again this year because most of our capital expenditures will be pushed more towards the fourth quarter. As you know, we have a commitment to build out the waterfront which is going really well, we’re really excited about that particular opportunity. At this particular point in time because of a cash flow issue we’ll probably reduce our capital expenditures by about $5 million for the year.

With respect to accounts receivable, that’s certainly something that’s capturing an awful lot of our attention. We monitor all of our accounts daily, weekly; we stay in touch with all of our customers. John’s used the word partnership; we work together with the agencies. We’re certainly concerned about their ability to pay. We’re certainly seeing a slowdown in the payment of receivables. We’re seeing our receivables move by a couple days outstanding. At this particular point in time we’re not seeing any significant impairment.

Operator

Your next question comes from Scott Cuthbertson – TD Newcrest

Scott Cuthbertson – TD Newcrest

Can you give us an update on Qubo and KidsCo initiatives if their having any impact, if that’s playing it the way you’d hoped?

John Cassaday

Qubo and KidsCo are both playing out as we hoped. As you know, on KidsCo we’ve got a 33% ownership position. KidsCo is now available in over five million homes in Europe and Asia, in over 40 countries and over 11 languages. We’ve had terrific reaction and we’re expecting to close on a number of new distribution partners going forward. That’s really off to a very encouraging start. Of course both these services give us platforms for our programming in these markets.

In the case of Qubo we have only a 12% share of the equity in that company but Qubo is now available in 12 million homes throughout the United States. We are still programming the Saturday morning block on NBC and also Sunday afternoon on Telemundo. We’re stripped in the on the Ion Network in the United States so again a great outlet for our programming. The tale of the tape for Qubo will be post February with the transition to digital. Our hope is that we can translate Ion’s retransmission consent agreements into broad distribution for the Qubo brand in the United States. I think this will be the pivotal year.

So far we’re involved in services that look very good, we have very modest amount of invested capital in them. We have partnerships with terrific companies and we have great outlets for our programming and platforms to launch merchandising and apparel off the back of the audiences that we reach through both of those services.

Scott Cuthbertson – TD Newcrest

The thing I wonder about is you lost a couple new YTV spin offs I wondered if you could help us with the timing of those launches, or at least you got approval for them. I wondered if you could help us with the timing of the launches and any guidance you could provide or any help you can provide with your initial expectations on the financial impacts of those two?

John Cassaday

We have ideas of how we can further segment the kids business. Paul may have some additional comments. I think from a modeling point of view you probably should not assume there would be any incremental expense associated with the launch of a new service in this fiscal year. I think that we feel that with VIVA, HBO, Cosmo and Nick digital launch that we attacked the P&L sufficiently for this year so we’re excited about the opportunities we see in the kids area with these new channels. From an investment point of view I think it’s more likely it will be profiled early into next fiscal.

Scott Cuthbertson – TD Newcrest

On the kids channels you did provide a little bit of color there but you mentioned food and entertainment as being issues, the toys as well. You said that’s starting to bounce back, are we still suffering from the recalls, are there significant movie releases which will help the entertainment category going forward. This has been one of your core franchises and it’s been challenged a little bit for several quarters now. Do you think we’re finally turning the corner on that and what should we look for as the major catalyst to get that business back to where it was a year or two ago.

Paul Robertson

We’re encouraged about the prospects of the kids business probably relating more to the back half of the year. Our tracking data is showing that based on the kind of timing of the Easter season and the business that we’ve been able to book to date that we’re looking to showing more strength in the third quarter. From a category standpoint the toy side of the business has been a challenge for us and we think a lot of the issues that have been associated with toys have really flown through the system and their kind of behind us.

With respect to food, I said we think also that the manufacturers have done a really good job in terms of retooling their product lines and looking at the advertising model and returning back to advertising in some cases they’d pulled some of the money out of kids and into adult. We’re still very positive about this sector and we think that we will start to show better traction as we get into the back half of the year.

Scott Cuthbertson – TD Newcrest

My final question is on radio. I just noticed a pretty big swing in the agency part of radio. Agency was the strong part of, at least demand on that was very strong last year I think it was almost 10% growth overall for ’08 and yet that’s the weak sister in this quarter. What’s going on there and what should we look for going forward.

John Cassaday

The principal reason for that is that we did a re-org in Ontario and we repatriated about three categories from CBS that we wanted to deal with on our own. What we saw there is a swing out of the CBS originated national business into local so I wouldn’t read too much into that. The big, big item in terms of national declines was I think timing related and that was Telecom, Bell, Rogers had been very, very aggressive in Q1 last year.

I think everybody basically has gone into a tuck position getting ready for a new competitive environment. I think the wireless segment will be a huge area of growth for radio going forward when we start to see the new wireless competitors come out and the incumbents protect their positions.

Operator

Your next question comes from Ben Mogil – Thomas Weisel Partners

Ben Mogil – Thomas Weisel Partners

We’ve seen guys like Four Kids program the Fox block and that turn out to be very unsuccessful for them can you talk about what you’re doing different than say what they did and other guys that have purchased the morning blocks and then end up failing and why you see your model as a little bit different.

John Cassaday

The first thing is that we paid a lot less to program the NBC block and I would not say that the NBC block even at the very low rate that we pay has been profitable for us but its been a beach head to impress regulators and parents in the United States about our educational positioning for the brand. We position this as a safe haven for kids, a brand that parents can really embrace.

The big difference is that with Four Kids they made a significant investment in that block, they were using it as a launch pad to try to establish merchandising success. We didn’t look at it that way. So much of the kid viewing has migrated to the themed networks like Nickelodeon and away from broadcast TV that we really looked at the NBC block only as a way of getting exposure for it.

It’s not a long term commitment and if we can’t parlay that into the kind of broad based digital distribution that we believe is possible. It is not a key component of our Qubo strategy. Our Qubo strategy hinges on digital distribution not continued programming of that Saturday block on NBC.

Ben Mogil – Thomas Weisel Partners

When you saw the numbers coming in September, October, November and obviously into December and January what specifically shocked you the most in terms of weakness either by asset class, obviously radio was weak, but by geography can you talk about where in specifics you were really surprised at what deteriorated very quickly.

John Cassaday

Can you repeat that? You broke up a little bit there I apologize.

Ben Mogil – Thomas Weisel Partners

What I’m curious about is from the time you gave guidance until the numbers came in and even into December and January what areas of either the countries geographically or assets class particular like talk radio, music radio, did you end up seeing de-accelerated or went negative much more quickly than you had originally anticipated? I’m trying to get a sense in general of where you guys were surprised.

John Cassaday

I’d say that there were a number of things. First of all, it’s very clear that the economic news is not all bad. One of the things that I think we have a tendency to think is that we’re in this big dode. There are a number of segments that are doing very well. Quick serve restaurants are doing very well. Probably many of you saw a major article in the New York Times last Sunday sighting McDonald’s numbers as being up I think it was 6% if I recall.

Paul and Chris Pandoff and I were into another restaurateur account and their quick serve restaurant in Canada is doing very well also. Health and beauty aids are doing extremely well. Electronics are doing very well. The entertainment sector has been pretty active but less so on specifically targeted children’s properties which has been an impact on ours. Net, net, automotive after market has been very strong so there are a number of different companies and categories that are doing well. Kraft and Campbell’s Soup continue to perform extremely well in this economy.

Your question is what sort of surprised me on the negative side, on the positive side there were a number of things really happy with our Pay, I know a lot of people were skeptical about whether or not we were dreaming about what was going to happen to Pay in a tough economy and I think that we have substantial evidence part of which is provided this morning and again remember these numbers that we gave you only are actual to the end of October. We know that November and December were very strong on Pay we just don’t have confirmed numbers there.

On the downside I guess the most disappointing thing for us was the performance of our Toronto cluster. We had soft ratings at a time when the economy was soft. As I mentioned earlier, as excited as we are about the upside that we can look forward to there if you’re soft in Canada’s biggest radio market its going to have a big impact on you. Much of the decline that we experienced overall in radio was attributed to Q107 and the EDGE. The third conspirator there was Rock 101 in Vancouver but the same sort of theme pervades. Otherwise we had a lot of success stories.

Kiss and the long time property in the country format in Edmonton up double digits. There are lots of those success stories. London continues to be on fire for us. We have so many pockets of good news it would be unfortunate if people went away thinking that the radio business is in bad shape. I think the radio business still continues to be in pretty good shape. We had some self inflicted wounds as a result of rating softness of our three big male oriented rock stations. We have some pretty compelling evidence that that should get better in the back half as a result of the S4 book.

Ben Mogil – Thomas Weisel Partners

Historically you guys guided toward 70% of free cash flow being given out in dividends or share repurchases. Are you still sticking with that number?

Tom Peddie

A simple answer, no. We were in the market buying shares of course up until probably the middle of October. We have not been buying shares under our normal course issue or bid. We do not currently have a plan to purchase more shares. It’s unfortunate because the shares are trading at such a low level and represents great value.

Our feeling is that we should be retaining our cash to give us some flexibility. We certainly will maintain our strong dividend policy but we want to have the financial flexibility because we think that there could be some opportunistic acquisitions out there that we could pick up at some pretty good prices. Our focus would be more on conserving our cash for flexibility, maintaining a strong dividend policy and being opportunistic on acquisitions.

Operator

Your next question comes from David McFadgen – Cormark Securities

David McFadgen – Cormark Securities

On the television business it was asked earlier but in terms of your organic growth rates for advertising subscription the ad revenue decline was 1% in the quarter. I imagine you have some ad revenue from your new channel launches but I guess it wouldn’t be that significant. Would it be safe to say that the organic change for TV advertising in the quarter was down low single digits or would it have been down mid single digits?

Paul Robertson

It would be down low.

David McFadgen – Cormark Securities

Can you give us any color on the subscriber organic growth rate would it have been up low to mid single digits?

Paul Robertson

In terms of adding all the subs together?

David McFadgen – Cormark Securities

Like if I looked at organically if I exclude the new channel launches.

Paul Robertson

Rather that doing it aggregate subs which is kind of hard to get at because of the different rates if you looked at the overall sub revenue which was up 12% in the quarter. If you adjusted for VIVA which is the significant chunk you’d still be in the mid single digits.

David McFadgen – Cormark Securities

On Movie Central, as you’ve only had HBO in for say one month in the quarter now we’re in the new year can you give us some sort of anecdotal evidence in terms of how that’s going and has that caused the growth rate to increase? Any feedback from the BDU’s yet?

Paul Robertson

Absolutely, first of all, just to remind people with the lag effect we don’t get the data from the BDU’s until they return the payment to us which is in the 60 to 90 day range. That’s typically the kind of lag affect we get on reporting the data. Given that HBO was launched on October 31, that’s 60 to 90 days and that’s where we’re at. You see the affect of HBO is going to happen second month of the second quarter, so that’s January.

If you look at the second quarter we know that we had the major activity behind HBO every single BDU supported us with the launch whether they’ve had a three month free period or direct mail major media blitz, outdoor, and extensive radio support. It was a major, major blitz and a total focus by the customer service reps during that time period.

What we’re hearing from all of our majors is that they’ve been able to add a significant number of subscribers behind the promotion of HBO. We know that when we get to the second quarter that we’ll be able to report a significant up tick. We can’t tell you how many but I think John reinforced at the outset that we were counting on an add of 50,000 subscribers through the year. What we’re hearing anecdotally really reinforced that and boy wouldn’t it be great if we could do even more than that.

This is one area of the business where it continues to roll. The economy seems to favor activity inside the home rather than going out of home and this is just a great value to get the package of movies and series that people are enjoying particularly when you add the on demand feature which as John said is now available throughout Shaw.

David McFadgen – Cormark Securities

In your disclosure you talked about kids advertising being soft, was it down similar to say low single digits?

John Cassaday

It was a little softer than that. I’d say it was down more like mid to high singles. It was not a great quarter on the kids front. As we said earlier we felt that from a timing standpoint that the back half of the year was going to show better results on kids.

David McFadgen – Cormark Securities

Assuming that the Part II fees concludes negatively for the broadcast industry would those fees not be captured in the EBITDA?

Tom Peddie

What we decided to do as you know in Q3 last year was to keep it below the line and so we could highlight it. We had it in, we had it out and we said that we’ll leave it there. If it turns out that going forward that that’s a tax that continues to apply then what would happen is it would move up to the segment profit line.

David McFadgen – Cormark Securities

Your revised guidance is that, just as a matter of clarification, does that include or exclude the Part II fees?

Tom Peddie

It excludes the Part II fees just like last years number of the $252 million excluded Part II fees.

Paul Robertson

One more comment on the kids front, in the consolidating of the departments with Nelvana and Television one really great aspect is that the performance on Bakugan is really showing a terrific growth curve. When you take the Bakugan and some of the ad challenges we’ve had on the kids front Bakugan really helps to build the business back up. We’re kind of balancing the portfolio there a bit by putting these things together.

Operator

Your next question comes from Drew McReynolds – RBC Capital Markets

Drew McReynolds – RBC Capital Markets

Thanks for the revised guidance it’s nice to again see guidance in this type of environment. On the visibility if you can comment on what the visibility is in your businesses perhaps relative to the last conference call in October or relative to the end of the year?

John Cassaday

We are spending a lot of time with our customers. Paul, myself and others have been with all of our top agency partners one on one over the past 90 days. We’re encouraging all of our people to stay close to our retail customers. What we are hearing from them is a very consistent theme and that is that we expect that the advertising will flow as is currently planned but that we are being encouraged to hold on to our money to the latest possible time. I think many advertisers are taking the view that an ad booked tomorrow could well be less expensive than an ad booked today so why not wait until tomorrow.

Furthermore, instead of booking 52 week business like we’ve done in the past let’s book 13 weeks then take our changes on the spot markets. The first point that I would make to you is that none of the major agencies are saying to us that they expect the business to be significantly down. In fact, that expression that you’ve heard that’s become kind of a cliché in our business flat is the new up is where everybody’s at. Everyone’s expecting that business will be at least as solid as it was year ago.

Secondly, the visibility is not what it was and what it’s been in my 20 years in broadcasting because people are hanging on to their money later and later. We’re a little bit schizo if you would from looking at the sheets but then the revenues just keep rolling in. I’d say in summary, visibility is not good but the outlook that we have from all of our customer’s remains positive and the evidence to date suggests that the money is rolling in albeit later than it has historically.

We’re out in Calgary now, I spent a lot of time talking to our sales reps in the Calgary office and their pipeline is strong. Clearly there are sectors that are hurting but they’re talking about places like the construction housing sector that didn’t have to advertise out here because the demand was so high in the past are now looking to radio to help them move products. We continue to be optimistic but visibility is weak.

Drew McReynolds – RBC Capital Markets

With respect to your revised guidance were there a set of economic assumptions that you went with underlying that guidance? If you could share with us that would be very helpful.

John Cassaday

Our process for forecasting our business is very thorough and solid and time tested. I think you can attest to the fact that historically we’ve done a pretty good job at delivering the numbers that we anticipate delivering. We have a monthly forecasting meeting, it is a bottom’s up forecast and for example in radio it comes from each individual cluster, is aggregated regionally and then consolidated nationally the same is done on expenses.

What we were faced with at our last forecast meeting was a number that was slightly below the low end of our previous guidance and we simply determined that it was the fair thing to do to revise that guidance this morning based on what our new number is. As I said in my opening comments our actual forecast is above the mid point of our new guidance, it is a bottoms up forecast, it is done incorporating the input of each of our reps and each of our business units and profit centers across the country. We are confident that based on what we see today that that’s achievable.

One of the alternatives is to simply say that we will miss our guidance and we’re not going to give new guidance because who knows what the future is and perhaps some of you are saying that’s what we should have done. I can tell you that we did discuss that possibility. Where we netted out is that we’ve always tried to be transparent, we’ve always tried to provide our shareholders with a sense of where we think the business is going and this is our best estimate of where we’re going to end out the year based on all of the input that we have today.

Believe me when I tell you we are not anticipating any miracle recoveries in the back half. This is our realistic look what the next nine months of our business year will turn out like.

Drew McReynolds – RBC Capital Markets

On the free cash flow guidance obviously reiterated the previous range. Based on your earlier comments on CapEx is there any other thing you’re doing with respect to free cash flow that flows through to maintain that relative to lowering the EBITDA guidance?

Tom Peddie

Building on what John said about our detailed analysis we’re doing the detailed analysis on the EBITDA and therefore we do the detailed analysis on the cash flow. When we look at the shortfall in our revenue we’re offsetting that with lower expenses and controlling all of our discretionary spending. As I mentioned, we’re looking at a lower CapEx. Our interest expense at this particular point in time we think would be probably about $5 million less than what we had originally thought it would be and that’s assuming that our debt number is about $700 million.

With interest rates having dropped our effective rate on interest rate is less than 4% so we have some opportunities there. We’re clearly watching the working capital side and particularly on the collection of accounts receivable and doing the matching. If we’re seeing slow cash coming in we’re a little slower with the cash going out. At this particular point in time we did not feel that it was necessary for us to change our free cash flow guidance.

Drew McReynolds – RBC Capital Markets

We’ve talked about automotive financial and telecom ad categories; one that hasn’t been really discussed is the retail category which is obviously a big one. I’m wondering what you did see in Q1 ‘09 on the retail side and how that compares obviously with maybe a run rate as of today.

John Cassaday

Our retail is obviously a funny one because I think we’re all interested to hear what the outcome of Christmas was. There are a couple of things that are really quite positive. First of all, retail did remain our number one category in Q1 and was up in fact almost 3% versus year ago. We are hearing rumblings that Wal-Mart is looking at getting into radio. We’ve had confirmation that Zellers is going to get into radio.

While you might think that retail is going to be a real soft spot we’re in fact getting some encouraging signs about retail and certain Q1 was not a disappointment at all.

Drew McReynolds – RBC Capital Markets

One of the concerns with respect to pay television outside of obviously the good growth you expect to see from HBO Canada and some of the programming is what the resilience of this business is in a downturn and you did allude to folks turning to in home entertainment. I’m wondering have you built in a little bit of cushion here in terms of higher churn if people do want to eliminate premium tiers from their cable or satellite bill.

Paul Robertson

That’s always a challenge managing the churn and ensuring that you’re adding more new subscribers than churn out. All we can say on this one is that we’ve got all the opportunity we could hope for in terms of the programming, the new brand that customers support, the alignment with them, if we couldn’t hope for much more in terms of the marketing thrust.

We think that we can build new subscribers at such a rate that if the bucket leaks a bit out the bottom we’ll be putting enough water in the top to show the kind of growth numbers that we’re looking at here. We’re feeling very positive about it.

In terms of the value of pay television it really is an extraordinary value for the kinds of costs once it’s packaged in with a VIP package and this sort of thing to get the range of movies on demand that they get and it really is terrific. We also come back with boxing in the new year which we haven’t even talked about that comes in January. That’s another opportunity to go after some subscribers that have a particular interest. I think we’re very well positioned on pay here to exceed any churn we might experience.

John Cassaday

I want to clarify one thing; the retail number that I provided so that everyone is aware of this is a national number. I don’t have a consolidated local retail number so just to be clear that 3% growth rate I talked about for retail was national.

Operator

Your next question comes from George Holland – GHE

George Holland – GHE

There was some discussion that you touched on very briefly about digital and online. Could you expand a little bit more about what your intentions or plans are with regard to increasing online revenues?

John Cassaday

We have a very active online program; all of our radio stations have strong online presence. We’re extremely committed and well positioned in the kids online area. On the specialty side and pay side we also have an online business that we developed. Many of our advertisers when they book now are looking for what they would call integrated campaigns giving them some online presence in addition to their traditional media bookings. Our online business in total continues to grow nicely, it represents less than 5% of our total revenue but it is an area of our business that’s growing double digit and is profitable.

George Holland – GHE

Do you have any intensions to expand with regards to internet TV; you mentioned VOD of Nickelodeon content and creation of online specific content?

John Cassaday

We have 3,400 episodes of children’s programming. That programming is available through a number of platforms globally. We talked in the past about our strategic focus which is core and explore this fits in the explore category. There’s not a lot of revenue derived from there but we feel it’s important that we bet very experimental. Explore all of these platforms and we’re one of the few Canadian broadcasters that is well positioned in this regard because we actually control a significant amount of content.

Operator

Your next question comes from Jason Jacobsen – GMP Securities

Jason Jacobsen – GMP Securities

As it relates to the macro environment for radio I know Corus IPO’d in ’99 just drawing from your past experiences I’m just wondering if you can compare this environment to that of the early 90’s. I guess what I’m really trying to drive at is radio experienced a couple of the worst years in its history around 3% to 3.5% decline in that range and I’m wondering if that’s something you’re contemplating at this time.

John Cassaday

It would really be dependent on what the economy performs like going forward. I think radio probably is the best bell weather if you will of what the overall economy is happening because of its immediacy. We feel the pain of our customers on a daily basis. We also benefit when things get good for them. Right now our feeling is that radio will continue to perform flat to plus 2% this year. I’m just looking for the tram results thus far for…

Tom Peddie

One of the other things that you should keep in mind is that you’re comparing the early 90’s and there are some fundamental structural differences in radio now than there were in the 1990’s. One simply is that we now have the two plus rule so that we have an awful lot of competitors now who have four stations in a market which they did not have. We also have greater concentration with the big players.

What that has done is brought is better stability to the market, certainly better stability from a pricing point of view. I think therefore better approach to working more closely with your advertising clients. I think there are some structural differences then to now which I think will help.

John Cassaday

The radio market for Q1 was flat. I think that’s probably indicative of what my outlook is for the year, flat to plus 2% is still a decent number for radio going forward.

Jason Jacobsen – GMP Securities

To clarify, within your results you said that local is down 6%, national down 10%. The division overall was down 5%. Is the difference specifically interactive revenue?

John Cassaday

No, you’ve got to remember the sku is largely to local 76% of our business or so is local so that’s why you don’t have just an average arithmetic number.

Jason Jacobsen – GMP Securities

To clarify on specialty television, if I’m hearing you right you’re expecting overall ad revenues to be relatively flat for the year?

Paul Robertson

No, I don’t think we were suggesting that. We’re looking at the overall market and thinking that a plus 4% to 6% number on specialty looks about right. In terms of our own performance, while we’ve been lagging a bit on the kids side we’re really doing terrifically well on the women’s side, kind of offset. We think we can track with that mid single digit outlook from a market standpoint.

John Cassaday

There would be some web advertising in that number to get you to the 5% overall.

Operator

Your next question comes from Randal Rudniski – Credit Suisse

Randal Rudniski – Credit Suisse

On the guidance recognizing that it’s a bottom’s up approach but would the approach entail a better economic environment in the back half of the year even if it’s not a robust recovery but an improving environment?

John Cassaday

I would say no worse.

Randal Rudniski – Credit Suisse

The $5.5 million of incremental expense that’s been referred to related to HBO, VIVA, Cosmo, etc. is that purely a promotional expense item or does that include the cost of operating Cosmo and VIVA.

John Cassaday

It’s a total but its predominantly marketing related but it does include some G&A.

Randal Rudniski – Credit Suisse

Especially TV ad revenues for the adult services plus 9% year over year does that include VIVA, recognizing VIVA is going to be small?

John Cassaday

Yes it does.

Randal Rudniski – Credit Suisse

When you initially set the guidance we were kind of in a previous economic world. As we’ve moved through fiscal ’09 can you take us through how you’ve responded in terms of the cost side of the equation?

John Cassaday

A very aggressive part of our activity over the last several months has been on cost containment. Management committee has taken a 5% pay cut as an example. We have been scrubbing all of our G&A accounts, travel has been significantly curtailed, conferences have been cancelled, Christmas parties were cancelled. These sound like very modest initiatives but I’m only raising them to give you some sense of how seriously we are approaching the task of eliminating all non essential expenses.

We are doing everything in our power to avoid layoffs. There are some areas of our company where we have cost issues that we will have to take action in terms of layoffs. Our first priority is to get this done by eliminating non essential expenses and our people are responding very, very well to that. We’re also looking at programming very carefully. We want to continue to invest in our businesses, ensure that we have strong ratings coming out of this. Every program purchase is being examined very carefully.

Top to bottom, clamp down on expenses, maximize cash flow and ensure that if we get some wins that are back on the revenue side that we’ll be able to outperform. We’re extremely diligent on cost control right now.

Randal Rudniski – Credit Suisse

Would it be possible to put a range in terms of dollars in terms of what you’ve pulled out so far?

John Cassaday

It’s in the millions.

Operator

We have no other questions.

John Cassaday

We’d like to thank everyone for their active participation in the call this morning. We look forward to talking to you in the days to come.

Operator

This does conclude your conference call for today. Once again, thank you for participating and at this time we ask that you please disconnect your lines. Have yourself a great day.

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Source: Corus Entertainment Inc. F1Q09 (Qtr End 11/30/08) Earnings Call Transcript
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