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Executives

John M. Cassaday – President, Chief Executive Officer & Director

Thomas C. Peddie – Chief Financial Officer & Senior Vice President

Paul W. Robertson – President Television

Analysts

Drew McReynolds – RBC Capital Markets

Paul Steep – Scotia Capital

Bob Bek – CIBC World Markets

David McFadgen – Cormark Securities

Scott Cuthbertson – TD Newcrest

Adam Shine – National Bank Financial

Ben Mogil – Thomas Weisel Partners

Jason Jacobsen – Griffiths McBurney Partners

Randal Rudniski – Credit Suisse

Corus Entertainment, Inc. (CJR) F2Q09 Earnings Call April 8, 2009 9:00 PM ET

Operator

Welcome to the Q2 analyst conference call. At this time all participants are in a listen only mode. Following the presentation we will conduct a question and answer session. (Operator Instructions) As a reminder, know that today’s conference is being recorded and the date is April 8, 2009. It is now my pleasure to introduce your host Mr. John Cassaday.

John M. Cassaday

My name is John Cassaday, welcome to Corus Entertainment’s 2009 second 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 are 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.

We will now run through the standard cautionary statement. This discussion contains forward-looking statements within the meaning of the US Private 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 filings with the US Securities & Exchange Commission.

The Corus Entertainment team available on the call today includes Tom Peddie, Senior Vice President and Chief Financial Officer and Paul Robertson, President of Corus Television. We were very pleased with our Q2 results, we were successful in delivering both revenue and segment profit growth this quarter. As Slides Three and Four show, our revenue for the quarter was $181.4 million, up 1% from year ago while our consolidated segment profit was $51 million, up 3% from year ago.

We continued to generate strong positive free cash flow and our net income for the quarter was $29 million or $0.36 per share. Particularly noteworthy is the fact that we improved our operating margin by 30 basis points versus last year. Cost containment and cost reduction have been and will continue to be an important part of our response to this difficult economic environment.

Turning to Slide Five, from a divisional standpoint, television revenues were $123.4 million, up 5% versus last year and segment profit was up 7% for the quarter. Our pay-TV business continued the strong growth trend from Q1 as the positive effects of our launch of HBO Canada began to take hold and as consumers continued to transition to digital. During Q2 we added 17,000 subs, up 39,000 subs or 4% growth versus the same time last year. Overall, our specialty television business had another positive quarter with single digit revenue growth led by strong sub revenues. We did experience soft ad revenues on the kid business.

We want to take a moment now and provide some additional detail to frame our TV ad results. Our combined women’s advertising revenues, W Network, VIVA and Cosmo were up high single digits in the quarter demonstrating that there are positive segment stories within the overall advertising economy. These positive results were supported by W network’s continued ranking as the number one specialty channel for women 25 to 54 and women 18 to 49. Also, a doubling of our VIVA ratings since we launched the new schedule and Cosmo TV’s rankings as the number six digital network for women 18 to 34 after only a year from launch.

We had provided on our last call that Q2 would be a soft ad quarter for our kids business and it was. The timing of Easter this year and continued challenges in the key category of food and toys led to an ad revenue decline versus last year. Our ratings however continued to show positive momentum with YTV seeing the biggest growth in kids two to 11 AMAs compared to all other kid networks. YTV also continued to hold the number one spot with boys two to 11 and boys six to 11 in the key after school blocks and we will continue to leverage these rating improvements going forward.

We also saw a strong contribution this quarter from our kids merchandising and publishing businesses, in particular Bakugan which won toy of the year, boys action brand of the year and property of the year at the annual toy awards held at toy fair in February. In summary, television delivered outstanding results in Q2. We had strong pay-TV growth which contributed to solid subscription revenue growth, continued success in selling the women’s demographic, strong growth in merchandising and single digit growth from our conventional television stations. Importantly, our competitive position continued to improve with continued ratings progress.

Turning to our radio division, revenues for the quarter were $57.9 million, down a disappointing 6% from last year. But, we were essentially bang on our guidance from the Q1 call. Segment profit was down 31% versus year ago. Profitability for radio in the quarter was impacted by a restructuring charge for our Quebec radio operations. Improving our performance in Quebec has been a key strategic goal and we continue to see progress. Our Montreal French and CFOM in Quebec City all performed well in the quarter.

The soft economy particularly in the Western Canadian market continues to affect the radio industry and Corus’ radio division. For Corus our top three categories in Q2 were retail, professional services and automotive retail. Top 10 categories that had positive swings in the quarter include retail, automotive and media while top 10 categories that saw declines in the quarter include home products, telecommunications and entertainment.

In closing, we will provide some comments on our outlook for the rest of the year. So, if you would turn to Slide Six. First, we do not expect to see year-over-year revenue growth from our radio operations. We can tell you that March was only down around 2% but visibility remains poor due to late bookings and our outlook for the full year currently sees declines in the mid single digit range.

Second, we have positive revenue momentum in Quebec. From a ratings standpoint PPM results released on March 11th had some clear wins for us which we will sell hard against. For example, CKOI in Montreal is now emerging as a market leader for the first time since 2002 and 98.5 also came out strong and is now ahead of the SRC among the news talk stations. We reformatted four of our FM stations in Gatineau, Trois-Rivieres, Saquenay and Sherbrooke in the quarter to a hybrid local news and music format using music similar to our popular CFOM station which leads the 12 plus demo in Quebec City. This gives these stations an improved cost structure going forward.

Third, last week the S1 ratings were released. For our stations in the survey, 15 out of 22 were positive or neutral but we do not believe our ad share potential was materially impacted up or down by these results. The overall economy continues to be the determining factor for our numbers in the back half of this year.

Next, we are confident of our continued solid growth from our pay-TV business. Our target of adding 50,000 subscribers during the year will be met or exceeded. Our coordinated marketing efforts and compelling introductory offers with our BDU partners around the launch of HBO Canada will continue to be highly successful. On the programming side, the spring and summer slate is strong with new seasons of popular series such as True Blood, Entourage, In Treatment and Tracy Ullman’s State of the Union all scheduled to be released.

Increased digital subscriber growth like the results issued by Shaw a few weeks ago and then I think updated again this morning, point to similar pay-TV growth trends and also are consistent with the growth trends we are seeing in the United States. The combination of Shaw’s success in and the ongoing US progress give us confidence that our subscribers will continue to show growth for both our pay and specialty television businesses. The introduction of Movie Central on demand universally across the Shaw system is another positive factor. Also, we have been successful in securing a price increase for Movie Central which will kick in, in mid Q3 and impact all of Q4’s results.

Next, we continue to see growth for our women’s brands. W remains strong and both VIVA and Cosmo continue to meet our ratings and ad revenue expectations. From a programming standpoint our W movie strategy has been a huge success with W Network delivering 24 of the top 25 movies for women 25 to 54. We will leverage our strength in movie buying to include VIVA and Cosmo TV and as we continue to build our VIVA programming we will launch a VIVA cuisine segment and a new programming block including food.

We are managing our kids’ portfolio now as one integrated business unit with the intent of building a powerful portfolio of kids’ growth engines thus ultimately reducing our dependence on ad revenues. We expect our kids’ ad performance to improve however in the back half due to the timing of Easter, continued ratings performance and an expected uptick in the food category as many companies begin to invest in reformulated products and healthy line extensions. We continue to enjoy considerable success with Bakugan and expect that this brand will continue to be a bestselling toy in top tier selling territories this year. We are also now launching in key secondary territories like Germany, Italy, Spain, Scandinavian and Switzerland which we believe will continue to drive further growth of this exciting brand.

Before we turn the call over to your questions, in summary we continue to deliver positive revenue, segment profit, free cash flow and net income this quarter. We have a diversified portfolio of entertainment brands that have multiple revenue streams that we believe will continue to offset any continued ad softness. We hope that you found our comments helpful in providing an overview of our Q2 results and outlook for the remainder of the year and we’ll now take any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Drew McReynolds – RBC Capital Markets.

Drew McReynolds – RBC Capital Markets

I’ll start off with a few questions and then maybe circle back. Just on the specialty advertising decline of 8%, can you quantify precisely what the Easter impact was in there? Then also, with respect to the 12% sub growth can you break that down in broad strokes between what VIVA contributed and perhaps what pay television has contributed?

Paul W. Robertson

First of all the -8% in ad sales was particularly driven by the kids area as John said at the start. In terms of the way Easter fell, it certainly favored more revenue this year in to Q3 when last year it put more revenue in to Q2 so there was an effect there. But, I wouldn’t say would extraordinarily shift that -8% number. I think that’s pretty reflective of what we saw during the quarter despite that Easter impact although hopefully we’ll get a little bit of lift in Q3 as we get better comps compared to last year.

So that’s in on the ad sales side, in terms of the impact on subscriber revenue growth, importantly I think if you took out VIVA which is a good contributor on the sub revenue side, you were still left with a 4% revenue growth across the rest of the portfolio.

Drew McReynolds – RBC Capital Markets

Maybe a couple of follow ups here, maybe for John, can you just comment on pricing pressure across radio and specialty just in terms of ad rates? I’m just looking for comments on general trends here?

John M. Cassaday

Well I would say that there is considerable pricing pressure. Clearly, we’re seeing not only in radio but also in television now advertisers booking later. There’s no question that given the headlines about the state of affairs in newspapers and conventional television there are a number of advertisers that are concluding that all media companies are in the same difficult situation. Quite frankly, the demand on our women’s networks and our top performing radio stations gives us considerable insulation from that and we certainly recognize that our customers are struggling right now in many respects and are looking for help from us. But, we’re working very hard to hold our margins.

As you saw in this particular quarter we in fact improved our margins overall corporate and certainly increased them nicely on television. So, that’s probably as good a demonstration as I can give you of that. But, there is no question as this thing goes on everybody is looking for a deal. The top performing stations have got the best opportunity to hold their pricing and we’re working very hard at doing that.

Drew McReynolds – RBC Capital Markets

I think I missed some of our outlook comments, presumably pertaining to radio was it March was down -2% and then for the full year expecting it to be down mid single digits? Did I get that right?

John M. Cassaday

The point that we were trying to make there is that the pacing for March was as good as we’ve seen in quite some time but now you start looking out again and the visibility is less clear. So, what I was saying is I don’t want to take real comfort from the fact that March was pretty darn good because I just don’t know yet how the rest of the year would unfold. So, what we were suggesting is that this year we’re running around -5% for the first half and we’re thinking that something in the range of -5% to -8% could be the outlook for the full year. We hope it’s better but what we were suggesting is that Q3 could be in the -5% to -8% range and that’s something you should factor in to your thinking.

Drew McReynolds – RBC Capital Markets

Last question, just on the conventional television I noticed it was up year-over-year obviously, it continues to be a pretty great performer in particular on a relative basis. Just, what’s the magic there for you guys given what’s happened in the rest of the industry?

John M. Cassaday

I think we’re in two markets where we effectively have a monopoly situation if you will in terms of local television. We’ve got good management, we’ve done a good job of managing our costs and retaining our sales force. We’re less vulnerable to national advertising which has probably been the most impacted by this downturn and we’re just proud of the work that our teams are doing in Kingston, Peterborough and Oshawa for that matter to hold our own.

Operator

Your next question comes from Paul Steep – Scotia Capital.

Paul Steep – Scotia Capital

Maybe we can talk a little bit I guess more for Tom, you’ve obviously done some changes on radio, maybe you can just give us a sense of where we are in the process in terms of getting the cost benefits out of some of the changes that you’ve made, whether those all showed up in the quarter or we’re still sort of lagged by maybe a quarter before the margins sort of stabilizes or turns the other way?

Thomas C. Peddie

I guess I would describe it still as a work in progress. We are initiating a number of cost saving steps. There will be some additional charges in Q3 related to what we’ve been doing in Quebec. It’s just taken us a lot longer to get our costs aligned. As we said on the previous call, we initially felt that our problem was more on the revenue side but we are getting some strength in the revenue but still our costs in that particular market are just a little too high.

Paul Steep – Scotia Capital

I assume on the charge size we’re still talking about the same size we had this quarter, nothing substantially bigger?

Thomas C. Peddie

I’m not sure how to answer that question. Certainly, the charges in Q3 will be higher than they would have been in Q2 because of a timing issue. Some of the initiatives that we had announced didn’t actually take place until March so the impact on Q3 will be higher than what it was on Q2.

Paul Steep – Scotia Capital

I guess the next one would be again, still for you, help us out a little on the modeling side, how much Max Trax was in on the revenues and EBITDA in the first half because obviously that disappears in the rest of this year?

Thomas C. Peddie

I don’t think that we decided that we would disclose that particular number. I mean, it was a positive contributor to us but not material. As we had said at the time we had felt that for us it was more of a sunset business so we felt we should dispose of it. The one positive impact to us was on the cash flow side where we received approximately $9 million in the quarter. Just as a comment, year-over-year Max Trax was flat.

Paul Steep – Scotia Capital

I guess the last one really is actually again still for you as well and sort of the working capital management, it looks like everybody else in this economy, you’re taking the provisions up a little bit. Can you talk just a little bit about just what you are doing on the receivable side and whether or not we’re screening clients harder in terms of credit availability or not. Because, it looks like AR, it seems like working capital, some of that swings but went in the right direction and provisions are up a little bit. Any big changes there or are you just on top of it as usual?

Thomas C. Peddie

I think the answer is that we’re on top of it. As you would expect, it needs to be a balance between kind of our collection people and our sales people in that we don’t want our collection people to become the sales prevention department and at the same time we need the sales people to continue to push. We’re clearly finding that advertisers are taking longer to pay but they are paying. As you noticed and as we said in the report, we were talking some additional provisions but we haven’t had any real substantive changes and as you also note, when you look at our receivable position at the end of August versus now you saw a significant improvement.

Now, some of that was because of lower sales but we’ve been doing a good job on collections. So, our focus has really been on managing the working capital and it is the reason that we’re continuing to forecast that we will hit our free cash flow guidance.

Operator

Your next question comes from Bob Bek – CIBC World Markets.

Bob Bek – CIBC World Markets

Just if I could turn back to Paul’s answer on the general specialty ad market, so the kid’s segment was particularly hit in the quarter as you explained. If you had to look a more general ad commentary for the quarter away from that segment in particular Paul, where would you sort of see where the market as a whole was lining up in the quarter?

Paul W. Robertson

Sure Bob, I think that overall the specialty ad market is still in a growth mode and whether that’s kind of low to mid single somewhere in around there. But, I think it’s still healthy. As John set out, it just depends on which categories. So, the more we sell in the women’s area the more we still feel we’re in a relatively buoyant business. So, we don’t really see why the specialty market can’t continue to grow at that sort of level.

We thought we got hit pretty hard on kids’ during the quarter and that we could drive more growth out of specialty in the back half. So, I guess a couple of things, on the -8% that we had during the quarter, it was offset a lot with really strong performance in other revenues in the kids area and that’s something maybe that doesn’t come to your attention that much. But, with Bakugan performing so well, we were really able to kind of balance the books in the kids’ portfolio. Then, I think pass that we feel we can perform better in the kids’ area in the back half and that we can continue to grow that women’s portfolio.

Bob Bek – CIBC World Markets

Just turning to radio obviously, you’re continuing to look at the costs. John, I noted that you kind of formally put a statement in the risks and uncertainties about a more formal process to take a look at radio. Is there more to read in to that or is that just the continuation of what you’ve been talking about as far as looking at the cost structure for radio.

John M. Cassaday

First of all, on the broad subject of cost containment, we’re very much focused on this corporately. There’s a number of initiatives that we have put in place already including a hiring freeze. There’s been approximately 100 positions that have been now saved through this hiring freeze, meaningful dollars there. Salary reductions at the management committee level, massive reductions in G&A spending, elimination of certain events that we had planned. So, I just want to make sure that everyone is aware that we are doing everything in our power to control costs.

We are also looking at some additional initiatives that we’ll be talking to our employees about over the next couple of days so I’m not really at liberty in speaking about that now. But, our view is that everything that we can do right now to make sure that we have the optimal cost structure is in the best interest of our shareholders. So, we’re working on that.

As it relates to your comment about radio, we have got a new radio management team so we’re taking the opportunity to take a fresh look at our radio business. We have a process underway to look at all aspects of radio from a strategic planning point of view and what results come out of that we’ll share with you probably, if not before our investor day, at that time. But, I wouldn’t read anything dramatic.

We still think radio is a terrific business that has the capability of generating lots of free cash flow. We think that our performance can be improved over historical levels by getting our Quebec business back on track and we’re really, really focused on that right now. We just need some wind in our sails to take advantage of some of the strong formats and rating performances that we have in the balance of the country to get radio back in a position that we want it to be in.

Bob Bek – CIBC World Markets

I guess while I have you on the line, a broader question for you perhaps John and your team, you guys have been around the media space for quite some time and seen a number of recessions, is there a couple of comments you can make as far as obviously there’s some extraordinary circumstances we’re going through currently but how it feels and looks in the various spaces relative to other difficult periods you guys have seen in prior recessions?

John M. Cassaday

Well, I guess one thing that I would say Bob is that in our view we’ve now gotten through three quarters or nine months, we started to see this in June of last year. So, I don’t know when the end is but what I can say is we’re through it by three full quarters now and Corus has performed very well. I don’t know how many media companies in North America, I can’t think of one, that is going to be able to do as we’ve done today, report year-over-year earnings growth over the first six months, year-over-year revenue growth over the first six months.

So, I think some of the comments that you and your colleagues have made about the strength of our diversified portfolio is serving us very well right now. So, we’re managing the heck out of this company right now, we’re managing all of these different portfolio assets that we have, we’re managing our cost side and we’re quite convinced that by continuing to invest in programming during this downturn, keeping our costs under control that when the economy does start to turn, Corus is going to be extremely well positioned.

As Paul said, and I won’t go on too much longer here but, we are seeing some interesting segment growth opportunities within it so there’s not a complete malaise over the whole ad economy, there are segments of the ad economy that are continuing to grow. We believe, and I know I’ve said in the past, that we believe that we’re going to start to see some improvement in May/June of this year. Our belief is based on the fact that we think that fundamentally the Canadian economy is stronger than the US economy and only time will tell if that prediction holds out.

Bob Bek – CIBC World Markets

Just a housekeeping and then I’ll leave it for others, Tom G&A run rate is this a decent number to use going forward? It looks like it’s down a bit from a year ago and a fair bit from Q1. I’m just looking for some guidance on that.

Thomas C. Peddie

I think that the run rate that you’re seeing there is probably pretty consistent.

Operator

Your next question comes from David McFadgen – Cormark Securities.

David McFadgen – Cormark Securities

A couple of questions, can you quantify at all the impact that Bakugan had on your results in the quarter?

John M. Cassaday

Well, we haven’t isolated it but as Paul said, effectively the kids’ business was a wash with the strength of Bakugan and also to a lesser degree Backyardigans offsetting the softness on the ad revenue side. So, I think the sort of wisdom if you will of putting together our kids business and starting to look at that as a broad global portfolio really played well in the quarter. We see continued momentum on that brand and sustaining earnings potential on that brand for some time in to the future.

As we indicated we’re still in the midst of rolling it out in to some of the secondary and then ultimately tertiary markets. But, the brand looks like it’s got legs.

Paul W. Robertson

[Inaudible] the show is kind of early in its lifecycle, we’re launching season 2 of Bakugan in Teletoon and Cartoon Network in the spring so we’re really still at the front end of the revenue lift there.

David McFadgen – Cormark Securities

If the kids’ advertising was the main reason why specialty advertising revenue was down about 8% in the quarter, that would lead me to believe that the kids’ advertising was down fairly aggressive on a double digit basis. I’m just wondering if that’s an accurate characterization of what happened in the quarter.

Paul W. Robertson

That’s the way that it would balance out because we were in a growth mode on the women’s side.

David McFadgen – Cormark Securities

So it looks like the specialty advertising revenue decline accelerated in Q2 so I’m just kind of wondering what the outlook is for Q3? You seem to have expressed more optimism so it should get better in Q3 and Q4, no?

Thomas C. Peddie

Well David we’re hanging a fair bit on this Easter effect but I think that will be a small part of the improvement. But, I think also just if we read our bookings pattern compared to a year ago I mean John and I have been kind of looking at this on a weekly basis going, “Wow, we’re really down from a year ago given the lateness of the bookings.” But, really now we’ve kind of caught up to things and our bookings are about exactly equal to last year. So, that’s been really encouraging.

Now, we hope that it will kind of hold out that we’ll kind of get back in to a growth mode on the total specialty business as we finish up in Q3 but, we can tell you the comparative trend in terms of how much we have already written up is much better than anything we’ve seen in the last six to nine months.

David McFadgen – Cormark Securities

Can you help us with the magnitude of the price increase that you would expect to see for Movie Central?

John M. Cassaday

Well, we can’t be specific but I think for modeling purposes assume something in the 8% to 12% range.

David McFadgen – Cormark Securities

One of the upsides that I always thought was possible for you guys was the VIVA ad revenue is pretty low when you bought that channel, how’s that trending?

John M. Cassaday

It’s trending well, we as you know ratings are the key and we’ve more than doubled the ratings since we have reformatted the station so I think we’re continuing to invest in programming there. We see great potential there, we’re getting good reaction from both advertisers and from audiences. So, I think your expectation of that becoming a decent size brand in a relatively short period of time is real. Certainly, nothing that we’re seeing to this point would suggest it’s anything but what we characterized it as. Remember, we gave you some analogous channels to look at like Showcase Action and some of those others and I think we’re definitely going to be able to achieve those levels of growth and revenue size.

David McFadgen – Cormark Securities

Just lastly, at the beginning of this fiscal year, I think it was at your investor day you talked about making cost reduction in the radio business, I think it was about $5 million, was that achieved?

John M. Cassaday

Yes, we certainly have achieved that. In terms of corporate I’d say our run rate is about $4 million for the year and that was the elimination of the role of president, VP sales, VP programming, VP finance. Those savings are sustainable. We’ve also obviously been working hard on our G&A costs, travel costs and also this hiring freeze that we’ve had in radio. So, I think our savings will be certainly well in excess of $5 million year-over-year.

You have to remember that there were also wage increases that got in to this year that were announced before we put the hiring freeze and we also had some incremental talent costs this year as we locked up many of our top talent last year in to multiyear deals. So, there’s a bit of a masking affect around the good work that was done on reducing costs in radio.

Operator

Your next question comes from Scott Cuthbertson – TD Newcrest.

Scott Cuthbertson – TD Newcrest

Just a couple of questions left, just kind of wonder if you can give us a bit more color on the strength in Quebec and what’s driving that and how sustainable it is.

John M. Cassaday

Basically the Quebec market moved to PPM, a new method of tracking audiences and while we believe fundamentally in the power of that particular pieces of research and have advocated it for quite some time, we realize that in some markets the move away from diaries to PPMs would hurt us and in others it would help us. Well, in fact in Quebec it’s helped us quite nicely. CKOI has seen a nice uptick and that is an important brand for us from a revenue point of view so that’s very positive.

CKEC which a news talk station that we converted to an all sports station has also seen a terrific bump in audience. So, the bottom line is that we were a net winner out of PPM there. The other thing that’s really gone our way is that we have a station in Quebec City that’s effectively in an oldies format that’s also done extraordinarily well and has gone from sort of the hinter lands to number one in Quebec City and we’re monetizing that success now as well.

Scott Cuthbertson – TD Newcrest

How about the overall market John, is Quebec versus Western Canada, is Western Canada I would imagine maybe hit harder during the earlier part of this recession because of the whole energy thing, then Quebec? Is that a reasonable statement? How is Quebec doing on a relative basis?

John M. Cassaday

I would say that we’re seeing less of a bounce in Quebec and we’re just recognizing that Quebec never really enjoyed the success that Ontario and particularly the west had over the last couple of years. So, the west has fallen off quite a bit as a result in the downturn in the economy but Quebec’s been basically flat and we’re seeing some uptick there as a result of our improved competitive position.

Scott Cuthbertson – TD Newcrest

Just looking ahead a little bit in to the program buying season and upfront, I remember last year you saw this coming to some extent and so you booked more, I think it was like 15% to 20% more in the upfront market than you’ve done previously. Can you just give us your thoughts as we get in to program buying and upfront ad selling season the way things have changed? It’s going to be a pretty interesting year in that market for conventional, how’s that shaping up for specialty?

John M. Cassaday

Well I personally, and I’m sure Paul will have a comment on this too but, my feeling is having talked to virtually all of our major customers that we’re going to be big spot market players next year. I think that a lot of the agencies are going to be less willing than they have in the past to make longer term commitments but, we’ll see what happens. That process is pretty much underway for us particularly on the kids side. Paul, I don’t know if you have any additional comments but, certainly my gut reaction Scott is that people are going to be playing it pretty close to the vest for the next several quarters.

Scott Cuthbertson – TD Newcrest

What about program acquisition costs, can you see any relief on that front given the economic weakness?

John M. Cassaday

Well, there’s two aspects to our program acquisition, one is our Canadian content and that of course goes up in direct proportion to our increases in revenue, that’s a regulated amount. We do have some relief where we are able to under spend and average our program costs over the term of the license so we will be working hard to control our Canadian costs through that particular avenue. As it relates to US programming costs, we are really walking a fine line here because we are absolutely committed to growing our franchises so we need to continue to invest in programmings.

We have just acquired to new important sitcoms for YTV to continue our efforts to reposition ourselves for co-viewing or essentially family viewing. We continue to invest in W, we’ve made a comment here about the success that we’re enjoying in movies so I’d say we’re becoming one of the most important movie buyers in the country and we do believe that we have a really good opportunity to grow VIVA and what we need to do is to invest in a couple of really outstanding series.

We’re also looking at the repositioning of one of our brands in the hopes of broadening the appeal of that service. So, I guess as I said walking a fine line between making sure we control our program expense and at the same time make sure that we’re delivering outstanding schedules for our audiences and our distribution partners.

Scott Cuthbertson – TD Newcrest

The last one, I have one tiny housekeeping question, I guess I’ll ask that now just for Tom, Tom cap ex this year you seem to be trending a little bit slower than if you just took the yearly number and divide it by four, where are you on that?

John M. Cassaday

I think Scott if you look back at what we were saying at investor day is that we thought over a three year period we’d spend about $140 million on our capital expenditures and what we were really doing was slowing expenditures down last year and the year before in anticipation of our move to the waterfront. So, we’ve been really careful in the first half of the year on what we really spend because the spending will start to ramp up in the back half of this particular year on our capital side but when we look at it on a three year basis, we’re in I guess good shape relative to that forecast.

One of the things that we are seeing which is a positive I guess from the downturn in the economy is that it looks like some of our build out costs on the waterfront will be less because of the competitive pricing in that particular sector.

Scott Cuthbertson – TD Newcrest

My last question just I guess for John and/or Paul, just trying to understand a little bit better the trend in kids. Kids has been down for a while, we’ve heard about child obesity, we’ve heard about the toy recalls, all this kind of stuff and it seems a little bit elusive when that market is going to turn. I know you’ve mentioned the impact of Easter and stuff like that but what are some of the bigger trends that will bring that back in to being a more viable business like it use to be? And, when can we realistically expect to see that?

John M. Cassaday

I think the big thing for us Scott is the repositioning of YTV as the destination for co-viewing and you’re going to see us make significant inroads in that and that will give us the opportunity to broaden our ad base. Right now there are a number of advertisers that are very attractive to us like telecom and financial services that are not interested in the YTV audience. But, we have now got substantial evidence that we are by far in the way the leader in this co-view and there’s not too many advertisers who don’t want to reach families when they’re sitting together and enjoying a television show so that’s going to be a major, major focal point for us going forward.

The food piece is going to evolve. As Paul mentioned in his comments, a lot of food advertisers have had to step back and retool. Reaching this audience is important to them but the messaging has got to change relative to what it was historically and that’s just going to take some time. Whether it’s next quarter or fiscal 2010 I don’t know but you are seeing these guys go back and relook at how they communicate to kids. We’re talking about the elimination of trans fats, the reduction of sugar, the fortification of food products and all of that is part in parcel to them getting ready for renewing their activities as it relates to reaching kids and their moms.

On the toy side, I think it’s all about having a hit toy. I mean, quite frankly yes, there have been some issues associated with confidence that stem from the lead and paint issues coming out of China but the bottom line is that business is a hit driven business and a few more Bakugans out there and we’ll see the toy category come back in a big way.

Paul W. Robertson

I thought it was informative and if you add a couple of thoughts to that in terms of this year, the entertainment category continues to perform very well. It’s kind of the third big category for us and it’s been in a growth mode and kind of continues to be there for us so we think over the long haul that entertainment will always form a big part of the business.

The other side is, if you look at that co-view business, it’s starting to become a larger and larger portion of YTV’s revenue. In fact, if you look at it in the context of this fiscal year, our projections are that the co-view portion of the business will actually be in a growth mode inside of YTV. So, the more that we can put in to that co-view area the more we can turnaround the overall growth rate.

Scott Cuthbertson – TD Newcrest

So I guess pulling all that down, it’s tough to say but especially co-viewing will be the main driver and we should hopefully see some traction late this fiscal, early next fiscal? Is that reasonable?

John M. Cassaday

Certainly next fiscal we will start to see the impact of that. I’d just like to make a comment here, we’re really pleased to spend the time with you guys this morning, we’re delighted with our results as you’ve heard me say but, we’re going to have to end the call at 10 o’clock your time o begin our board meeting. So, just so you can think about that and if there’s any questions, I know you know you can reach us offline but I don’t want to end this abruptly at 10 o’clock without telling you now that that’s the time constraint that we’re under.

Operator

Your next question is from Adam Shine – National Bank Financial.

Adam Shine – National Bank Financial

I just want to press a little bit on some of the answers given earlier. Let’s start with corporate costs, Tom alluded to Q2 being a decent run rate but you’re already tracking about $1.3 million at least lower in the first half than you were last year. And, I think the guidance on the Q1 call was for sort of a similar $23 millionish in total corporate cost in fiscal ’09. So, if Q2 is in fact the real run rate you’re probably looking at something closer to $16 million which is a far cry from the level last year. So, maybe we can start there.

Thomas C. Peddie

I think you’ve captured it quite well. As John said, we’ve got an awful lot of initiatives on the table in trying to reduce our costs so the number will be well under $20.

Adam Shine – National Bank Financial

So Q2 is in fact the real run rate?

Thomas C. Peddie

Yes.

Adam Shine – National Bank Financial

If we go to the increase, I think it was David’s question where you allude to 8% to 12% increase for the PTV Movie Central price. Any related concession to Shaw to achieve that? I mean, is this going to be a partial revenue share related to that incremental price increase?

Thomas C. Peddie

No, I think this is a recognition of the investment we made in bringing the HBO brand to Canada and the impact that has proven to have in increasing the satisfaction level of their subscribers. So, no this is purely in response to the value added that we offered with Movie Central through the addition of HBO.

Adam Shine – National Bank Financial

Just maybe lastly, when I look down at your minority interest line, it doesn’t tend to get a lot of interest but, it is down quite dramatically from Q2. Usually we’ve got I guess CNT in there, Telelatino and perhaps elements of the Diginet. Anything that we should be aware of there? I mean, are we seeing a material decline in CMP revenues as well among some of the other elements down there?

Thomas C. Peddie

I think the real driver there would be Cosmo which we had launched last year on Valentine’s Day a year ago. So, it’s really reflecting the launch costs of that.

Adam Shine – National Bank Financial

That makes a lot of sense although there wasn’t a terrible impact of that in prior quarters?

Thomas C. Peddie

Right.

Adam Shine – National Bank Financial

Any related residual onetime items associated with either VIVA or the HBO launch during Q2? There was reference to that in the Q1, anything in Q2?

Thomas C. Peddie

I think the simple answer is no. I think in Paul’s comments or certainly in earlier comments we had talked about our additional launch costs with respect to HBO. But, there’s nothing that’s really unusual in Q2 or Q3 going forward.

Adam Shine – National Bank Financial

Have you been able to confirm whether HBO and Showtime, some of the big series are being launched in the May/June timeframe or pushed out to September?

Thomas C. Peddie

We’ve got In Treatment coming in the third quarter, True Blood in the fourth quarter, Entourage in the fourth quarter so that’s the big guns.

Operator

Your next question comes from Ben Mogil – Thomas Weisel Partners.

Ben Mogil – Thomas Weisel Partners

I know the time is short so I’ll make it quick as well, first of all on the TV numbers, can you give us a sense if you were to strip our the CLT contribution what the sort of major metrics on TV would have looked like, the sub revenue and the advertising revenue? Then also, is CLT performing up or down say compared to last year?

John M. Cassaday

Well CLT is performing up, our ratings are more than double what they were last year. We’ve been able to maintain our subscriber revenue as Paul said, the sub number which we reported at 12 would have been four adjusted for CLT.

Ben Mogil – Thomas Weisel Partners

What about on the ad number?

John M. Cassaday

CLT was repositioned as VIVA so that’s the confusion Ben.

Ben Mogil – Thomas Weisel Partners

What about on the ad revenue side?

Paul W. Robertson

On the ad revenue side I think we said earlier that CLT was pretty [inaudible] when we picked it up, kind of $1 million in ad revenue so we’re building off a pretty low base. So, you can imagine at this point the advertising revenues aren’t material enough to swing our overall results but as John said we’ve got high hopes for turning this in to something special given that [inaudible].

Ben Mogil – Thomas Weisel Partners

Sort of two questions, one for Paul and one I guess for Tom, Paul for you and sort of going back to Scott’s question about children’s advertising and the last couple of quarters as being some issues I think one quarter I think it was movies, obviously the food issue continues to be there, any sort of concerns that what we’re seeing there is really more secular as kids go online earlier and they’re simply sort of changing their media consumption habits at an earlier age than they were even say really three or four years ago? That some of that audience change is permanent?

Then I think for Tom, looking at sort of the cash flow line, it looks to me that sort of the film programming costs were up a lot. I’m guessing that’s related to HBO. Are you seeing sort of higher costs being pushed through from HBO and Showtime because certainly on the US calls they do mention that they are spending more for the original programming and I’m guessing you guys are seeing the end result of that?

Paul W. Robertson

In terms of the way in which kids are using TV and other devices, there’s no question that they’re spending a lot more time on computer and mobile devices but in total the amount of TV that they’re consuming has remained pretty much unchanged for the last lot of years and of course, as we know the kids multitask and watch TV at the same time that they do other things which is part of the phenomena.

So, we don’t see a significant change in the way kids are using television and I think the challenges we have are more industrial challenges than they have to do with kids’ behavior. So, that’s the good news in that, kids still get the information about brands from television and we think that the advertisers, we know from experience recognize when they reduce the amount of kids’ advertising the brands just don’t perform as well. So, as we lick some of these more societal based issues and find new ways of messaging and new ways of formulating products, we really believe that this market will bubble up again and strengthen compared to the recent results.

Thomas C. Peddie

I guess with respect to the programming, building on an earlier comment that John had made, we are required to spend more on Canadian program driven by the revenue growth of last year and so as we said in the report, we had additional costs for YTV and Treehouse, probably about $10 million really on the Canadian side and then we had our new programming additions at W and VIVA and Cosmo which also helped drive it up.

Ben Mogil – Thomas Weisel Partners

Are you seeing from HBO and I guess Showtime as well, particularly with the Canadian dollar now at $0.80 not at par any longer, are you seeing any kind of pressure through pricing?

Thomas C. Peddie

We have long term deals with them that are set in place and as you know most of our deals are done in Canadian dollars which I guess works against us now but certainly worked in our favor in prior years. But, we have longer term deals with them.

Ben Mogil – Thomas Weisel Partners

Are you paying a percentage of production costs?

Thomas C. Peddie

No.

Operator

Your next question comes from Jason Jacobsen – Griffiths McBurney Partners.

Jason Jacobsen – Griffiths McBurney Partners

Just a few questions left, first just in relation to the cost control initiatives, particularly at TV, it looks like in Q1 costs increased around 6.5%, Q2 it was closer to 3% so I’m just wondering if you expect to continue on that 3% run rate or if it could even dip lower? Maybe, I’ll just leave it there and follow up?

Thomas C. Peddie

We expect it will dip lower.

Jason Jacobsen – Griffiths McBurney Partners

You’re looking for an overall cost decrease?

Thomas C. Peddie

No, I don’t think we’ll be able to achieve that but we’re very committed to holding our costs and maintaining our margins.

Jason Jacobsen – Griffiths McBurney Partners

Just on the cap ex, I think before the guidance for this year was in the $45 million range because of that waterfront project, I’m just wondering if some of that has been pushed off and if you can I guess give a bit of renewed guidance on that front?

Thomas C. Peddie

I think Jason consistent with what I said earlier, our plans are unfolding as we thought that it would and that we’re still budgeting for capital in that particular range. Part of that clearly will be timing issue as whether it falls in to August or whether it would fall in to September but, we don’t have anything that would be substantially different.

John M. Cassaday

What we can say is given the timing here, our timing is actually going to be quite good. There’s good opportunity to keep our costs under control here as there are not a lot of projects out there for the major trades. So, I think that any concerns that you had that we might blow this number out of the water are not well founded. I think that we’ve got a pretty good handle on the number that we’re going to spend on getting the waterfront up and going.

Jason Jacobsen – Griffiths McBurney Partners

Then just finally, wondering if you can give us an idea of kids as an overall percentage of TV now that you’ve got the division consolidated?

John M. Cassaday

We’ll get back to you on that. One more or do we have it covered for today folks?

Operator

Your last question comes from Randal Rudniski – Credit Suisse.

Randal Rudniski – Credit Suisse

This will just be very quick and it pertains to the revenue outlook on the radio division, I found it a touch confusing, the declines in revenues in March being much lower than probably January and February but the outlook for the quarter being essentially in line which would imply that April/May will be back to January and February. So, the question really is, is that purely just a lack of visibility given the lead time of booking revenues or is there anything else behind that?

Thomas C. Peddie

Randal, you’ve hit the nail on the head it’s exactly that. I looked at this and said, “Is it possible that it will continue to pace poorly in the balance of April/May?” And I just don’t know the answer? We are literally booking business at the last minute now in radio and as a result all we can tell you is we’ve asked our guys just to be as conservative but as realistic as they possibly can in terms of our forecasting. We know that March was better than Jan/Feb in terms of positioning versus a year ago but we’re looking at the pacing for April/May and it’s not very good so what we’re saying to you is where we think we’re going to end up could be -7%, -8% in Q3. Based on March, it’s hard to believe it will be but again, just no visibility.

Paul W. Robertson

I think the kids broadcast side and combined it with [inaudible] you’re about 45% of the TV group, 55% being non-kid.

John M. Cassaday

I hope we haven’t rushed any of you or caused any of you not to be able to ask anything that’s on your mind. I know you all know you can reach us with any questions you have. We’re in Calgary right now so we’ve got our board meeting about to begin which is why we asked for your indulgence in wrapping this thing up this morning at this particular time. So, thanks for your continued interest in the company and your questions this morning.

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Source: Corus Entertainment, Inc. F2Q09 (Qtr End 02/28/09) Earnings Call Transcript
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