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Executives

John Cassaday – President & CEO

Thomas Peddie – SVP & CFO

Paul Robertson – President Corus Television

Analysts

Adam Shine - National Bank Financial

Paul Steep - Scotia Capital

Scott Cuthbertson - TD Newcrest

Drew McReynolds - RBC Capital Markets

Bob Bek - CIBC World Markets

Tim Casey - BMO Capital Markets

David McFadgen - Cormark Securities

Eric Bernofsky - Desjardins Securities

Corus Entertainment Inc. (CJR) F3Q09 Earnings Call July 15, 2009 2:00 PM ET

Operator

Welcome to the Corus Entertainment Q3 analyst conference call. (Operator Instructions) I would now like to turn the conference over to John Cassaday, President and Chief Executive Officer; please go ahead sir.

John Cassaday

Good afternoon everyone. My name is John Cassaday. Welcome to Corus Entertainment’s 2009 third 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 of our website.

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 risk and uncertainty. 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.

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

Our Q3 results show that the current advertising climate continues to be challenging. As slide three and four illustrate our revenues for the quarter were $195.4 million, which was down 6% from a year ago, while our consolidated segment profits was $61.4 million, down 14% from year ago.

We continue to generate strong positive free cash flow this quarter, now at $76.4 million versus $58.6 million last year. As you will have noted we reported a net loss for the quarter of $145 million or $1.81 per share compared to earnings per share of $0.45 a year ago.

This non cash adjustment reflects a $163.5 million goodwill impairment and an $11.5 million broadcast license impairment related to our radio assets. Broadcast licenses and goodwill are generally conducted on an annual basis.

In Q3 however we concluded that in the current economic climate in Canada we should test for impairment. When we completed the test we determined that the fair value of our radio assets was $19.5 million lower than the book value. For accounting reasons this resulted in a goodwill charge of $163.5 million and a broadcast license charge of $11.5 million for a total impairment of $175 million.

When we originally ascribed value to our broadcast licenses and goodwill, we placed a lower value on broadcast licenses than goodwill. In today’s environment a higher value is attributed to broadcast licenses but unfortunately we are not allowed to actually write-up these licenses to offset or effect the drop in goodwill.

This has resulted in a much larger write-down than the actual reduction in the fair value of the radio division. The net book value of our radio division is now $463 million compared to the fair value of our radio division assets of $607 million and I’m sure you’ll have additional questions about this which Thomas will detail for you later on in this call.

Turning to slide six and our television division, revenues there were $129.8 million which is down 1% versus last year. Our segment profit was down 5% on television. Overall subscriber growth was up 13% with our Pay TV business seeing strong growth. During Q3 Movie Central added 30,000 subscribers which is up 63,000 subscribers or 75 versus the same time last year. So we’re well on track to meeting our stated goals with respect to this division.

For our specialty channels, total revenue was up 5% this quarter. There was a contrast between subscriber and ad revenue results. Across the board all of our Kids and Lifestyle channels saw increases in subscriber revenue this quarter versus year ago and while the addition of VIVA helped drive this gain, we had increases across all our other services.

It’s clear from our subscriber growth and ratings performance that Corus has strong brands that are meeting our audiences’ and our customers’ expectations. We continue to see some softness in advertising however with an overall decrease in specialty advertising of 4% versus last year.

And while this is a decline versus year ago, this pacing is an improvement on the 8% decline we recorded in Q2. The women’s demographics continue to show strength with positive growth for W network contributing to an overall growth of our women’s ad revenues of mid single-digits.

On the kids side we had forecasted the back half of this year would remain soft versus a year ago but improve versus the first half of this year and Q3 did in fact show marked improvement over the first half of the year with revenue declines in the mid single-digits.

We also saw softer results for our networks directed towards the adult demographics. In terms of our content business, we continue to see strong growth from our merchandising business led by our Bakugan brand. Bakugan remains the number one voice action toy at Wal-Mart and Toys R Us in the United States.

Our launch in key international territories like Germany, Italy, Spain, Scandinavia, and France early this spring is quickly seeing positive results. In fact Bakugan is the fastest growing boy’s action toy in France and has already reached the number one rank in the UK, Germany, and Spain.

In summary our Pay business continues to show very strong growth. Specialty subscriber revenues saw growth across the board and our women’s services continue to show positive advertising sales growth.

Our kids business declined but we saw improvement in our pacing versus the first half of this year. Turning to our radio division, revenues for the quarter were $65.5 million, down a disappointing 15% from last year with segment profit down 35% versus year ago.

While our clusters Toronto, London, Kitchener, Quebec City and Sherbrooke, outpaced their markets in general for both Corus and the industry as a whole, sales were down overall in the west, Ontario, and Quebec.

And while we continued to perform well from a ratings standpoint we believe that there were two key factors that contributed to our soft results this quarter. First with our historical strength in the west in particular and Ontario secondarily, stronger declines in these markets hurt us disproportionately.

Also key ad categories for us are those that serve the male demographic and the most important of those categories saw significant declines this quarter; automotive, electronics, financial services, beer, and alcohol and telecom all saw double-digit declines in Q3.

This hit us particularly hard in Vancouver and Toronto where we have two large male dominated stations in each cluster. During our last call we were asked about our worst case scenario for radio this year and we said it could be as bad as 8%. It appears that this prediction sadly is proving to be correct.

In closing we will provide some comments on our outlook for the rest of the year so if you turn to slide seven, I’ll begin by saying while our financial guidance for the year remains unchanged, we are identifying, we did identify a risk of 2% to 4% for our segment profit guidance.

I would say that we would be extremely disappointed if that proved to be any greater than 2%. At Corus we have an incredibly disciplined and rigorous forecasting approach but in times like these low visibility and economic volatility make it difficult to predict with our normal level of precision.

Having said that here is what we do know about the outlook for Q4 and beyond. First of all we expect continued strong results from our Pay TV business. Consumers have responded to our subscription video on demand offerings and we will maintain our coordinated marketing efforts with our broadcast partners and we have a strong summer slate of programming returning such as True Blood, Entourage, and Durham County and the success of two new series, Hung and Nurse Jackie, which stars from the Sopranos Edie Falco.

Second, we continue to see strong subscriber growth along with VIVA and the full benefit of a wholesale rate increase on our Pay TV business in Q4, the growth of digital subscribers with our broadcast partners will continue to benefit us.

Third, we continue to see ad growth for our women’s brands. W network remains the number one Canadian specialty channel for women 25 to 54 and women 18 to 49. It also increased its weekend prime time ratings by 9% in Q3 and had six of the top 25 programs in both of the key women demographics.

VIVA and Cosmo continue to perform from a ratings and revenue standpoint. For example though from a very small base VIVA has doubled its prime time audience in Q3.

Subscriber and merchandising, so number four, subscriber and merchandising revenues for our kids business will continue to grow. As we mentioned earlier in this call Bakugan continues to do well in the United States, Canada and key international markets. And as a result our toy partner has just increased their 2009 forecast in response to the continued strong sales of this brand.

Recently we announced the fall 2010 relaunch of the popular [inaudible] brand and have begun production of our new Babar 3D series. We expect to record merchandising advances for both of these brands in Q4. We also expect to see a strong increase in Q4 versus last year for our kid’s production and distribution activities as a result of a pretty substantial shift in deliveries from Q3 this year to Q4.

Kid’s ad revenues will show improvement on the first half of the year. We have a massive drive on our kid’s business with programs to target co-viewing or what we are calling The Power of Mom. We are also targeting growth with new healthy active living partnerships at retail and another initiative to target more Government of Canada business.

Fifth, we predict that our radio business will remain challenged in the fourth quarter. While visibility is at an all time low our current facing is somewhat better than our Q3 results. Out west we have restructured our sales team in Vancouver and are seeing positive results in pacing with the cluster increasing its last two forecasts.

In Calgary, Q107 has under achieved but we have implemented programming changes in this quarter that we believe will improve performance going forward. In Edmonton, we have a very strong market share and aggressive price competition in this market has hurt our sales. Having said that our cluster in Edmonton has a leading 34% of the adult 18 to 54 audience and is still taking a 40% share of revenue from that market year to date.

In Ontario the downturn in the Toronto market has been the biggest challenge in this province for us. But Corus outpaced the market in Q3 and we expect that to continue. Our S2 ratings in Toronto, which is our BBM ratings remain steady and a key competitor has abandoned the rock format which we are confident will benefit Q107 going forward.

In Quebec CFOM in Quebec City remains number one overall and we have received CRTC approval to move our tower in Sherbrooke so we expect these two clusters to continue to outperform the market. In Montreal our French stations are showing positive pacing and our relaunch of Q92 has seen a more than 20% increase in PPM ratings in the seven weeks since the brand was relaunched.

Lastly division wide as current advertisers scale back their buys we have placed a large focus on cultivating new business. In the west alone we have booked over $10 million in new business this year which is business that we define as advertisers that have not been on the station for more than 18 months.

In the short-term this has helped to offset some of the softness we have seen and importantly from a long-term perspective this gives us and even larger client base to work from when the economy turns around.

I’d like to make a few remarks about what we’ve been doing to manage expenses and it has been substantial and we will continue to apply a strong disciplined approach to expense control going forward.

Our team has done an excellent job to date in reducing expenses to mitigate the impact of soft advertising. We have cut travel and conferences. We’ve cut entertainment and administrative expenses. We’ve implemented a hiring freeze and reduced headcount by over 100 positions.

Our management committee has taken a 5% pay cut and has foregone any bonus payments for this year. We have reorganized our Montreal operations to align their cost structure with their revenue levels. On April 16 we announced added cost containments that included unpaid days and a pension hiatus for the balance of fiscal 2009 and all of fiscal 2010.

A large number of our on air talent and some of our unionized employees took voluntary pay cuts as well. We will see the full benefit of this in Q4 which coupled with the other ongoing expense reductions company wide will help our divisional expenses and we’ll see a reduction of corporate expenses in Q4 by approximate one third compared to last year.

Corus employees have been extremely supportive of these aggressive cost reduction measures and we appreciate that support and help. Finally we also will continue to invest in our future. Yesterday we announced the acquisition of Sex TV and Drive-In Classics. We believe that both of these services are great additions to our women’s and movie portfolios.

We will work to reshape Sex TV to fit with our channels that serve the women’s demographic and Drive-In Classics will benefit from our strength in movies. We will also relaunch Scream this fall by rebranding from Scream to Dusk and adjusting the programming from, if you will, less “slaughter” to more “shadow”. We’ll broaden the demographic appeal by virtue of this change and make it a much more attractive offering to the women’s demographic and to our broadcast customers, our distribution customers.

So we hope that you have found our comments helpful in providing an overview of our Q3 results and our outlook for the remainder of the year. We have confidence that our diversified portfolio, strong brands, and continued investment in our future will position us to not just recover but prosper when the economy turns around and we’d now be happy to take any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Adam Shine - National Bank Financial

Adam Shine - National Bank Financial

In the context of the impairment charge, I guess you alluded to Thomas maybe giving us a little more clarity, maybe a few questions. First off you reference in your MD&A, let alone the press release, the context of not only the market backdrop and your specific ad trends in radio but you also talked about how the multiples have adjusted in the marketplace for radio. I’d be curious if you’d be willing to talk about what you think the market multiples are in terms of how you assess the reduction to your goodwill.

Thomas Peddie

We don’t really look at it from a multiple point of view. We look at it more on a discounted cash flow point of view and as you know the multiples are I guess really a judgment and those would vary by circumstances as to what your growth assumptions are, etc. So we look at it more on a discounted cash flow basis.

Adam Shine - National Bank Financial

That’s what I assumed but just the way you worded the text, I thought there might be a little more color there. In regards to your comment vis-a-vie what you thought would be an upsizing potentially or at least in theory regarding the broadcast licenses, can you elaborate on that a little bit further in terms of, you take the charge on goodwill but in theory you think there’d be some upsizing of the broadcast license.

Thomas Peddie

Yes there is but unfortunately we’re not actually able to write it up. Its, I guess kind of the way we might describe it is kind of the [algebra] of goodwill impairment testing. So back in 2000 2002 when we were doing our acquisitions, there was no clearly established methodology for valuing broadcast licenses in a purchase equation and every company did something different.

Some placed more of the purchase price discrepancy in broadcast licenses, some placed it all in goodwill and some did something in between. Our methodology at the time placed a relatively low value on the broadcast licenses and put a larger portion of the purchase price into goodwill.

As valuation methodologies have evolved, today those licenses would be ascribed to a much higher value so when you do the hypothetical purchase equation of the impairment test there’s a notional write-up of the broadcast licenses leaving less room for goodwill. So put another way is that I guess our broadcast licenses are understated by about a$175 million.

And unfortunately as I said we don’t get the ability to write-up broadcast licenses. We only get the ability to write-down the goodwill. So as John said we’re in that funny situation right now where we did our impairment test. We only missed by $19 million but you missed and so then you have to go back and do the next step and say, okay let’s look at the allocation of the purchase price and that’s what happened.

Adam Shine - National Bank Financial

When I look at some of the comments in the supplemental and listen to what you were saying vis-a-vie the Q4 outlook, is there an issue of timing that we should I guess be aware of, you kind of referenced that at least in the context of Nelvana production activity and maybe even on the merchandising side because quite frankly your radio didn’t miss by much at least from my forecast but the TV side certainly did. Can you elaborate a little bit more on that.

John Cassaday

Yes, I think there’s a number of things, first of all, a number of timing related issues for Q4 in terms of certainly year over year comparisons and that’s the additional subscriber growth on Pay plus the price increase. The additional subscriber growth from VIVA and just some general growth that we’re getting particularly as the digital tier penetration increases but there’s also a significant difference quarter over quarter in terms of the pacing that we expect out of the kid’s group as a result of some delayed production and distribution sales to our broadcast partners globally. And also just the continued momentum of Bakugan.

So we sort of realized as we were preparing for this call that if you were to model using some kind of straight line arithmetic to come to your own conclusions about what the year might shape up like, it would probably be somewhat below what I estimated on this call today which is if you take the 2% as what I’m saying as kind of the miss that we might have, that would see it about 250 versus the 255 guidance.

So we do think there are some notable pacing things that give us reason to be perhaps more optimistic about Q4 than you might be simply looking at the pace year to date. The other thing that I can say to you all is that from a corporate point of view we have give the challenge to our organization that, to keep pushing to meet the low end of our guidance but minimally to achieve a level of $252 million in operating income which is of course where we ended up last year.

And the rallying cry for us has been that we think that we have the opportunity to perhaps be one of the few media companies in North America to meet or exceed our previous year’s earnings despite this dramatic downturn in the economy and to achieve that we’ve reached out to all of the profit centers within the company and asked them to re look at their Q4 forecasts both as it relates to revenue and expenses and attempt to exceed those by 5%.

So to reduce the expenses that they had budgeted for Q4 by 5% and to increase the revenues that they had budgeted in their last forecast to us by 5% and there is a spirited level of competition going on across the country in an attempt to do that. We do think there are some rather dramatic differences in Q4 that will lead us to achieve the level of performance that we’re sort of projecting here in this call.

Adam Shine - National Bank Financial

A point B to that last question would be if I look at the guidance that you gave for the run rate for corporate costs, in the back half of the year, you sort of suggested that the Q2 $3.6 million would in fact be a good run rate so again from a timing perspective if you’re suggesting that the Q4 corporate costs from last year are going to be reduced by about two thirds going into Q4 this year, is that again a timing issue where you just had a few extra costs in Q3 and so those sort of from a timing perspective, some Q4 got pushed into Q3.

John Cassaday

Well I think it’s a lot about our cost reductions. So for example if you, take me for example, as a member of the senior management team, we took a 5% wage reduction. Then we took 5% unpaid leave days which were for the whole year but we only had one quarter to take them. Whether you take them or not you don’t get paid for them. So effectively management took a 10% reduction in salary. A lot of that will be realized in the fourth quarter.

We agreed that we would not take any bonuses for this year, again that was a significant saving in Q4. And those would be two of the most significant items. But a lot of it is just about significant cost containment versus the same period a year ago.

Operator

Your next question comes from the line of Paul Steep - Scotia Capital

Paul Steep - Scotia Capital

Maybe we can go on the new channels and I guess it’s for John or Paul, your heavy already in the women’s demographic. If we look at the positioning there it looks like the licenses that were originally out there have a fair bit of latitude to them, I’m just wondering where are the extra dollars to sort of bridge what you paid for the channels and then what we’re going to need to move the channels and second to that, how much more of a hit does it sort of come Q4, Q1 in terms of extra programming because I assume you’re going to have to buy some product to reposition the stations.

John Cassaday

First of all let me just give you a bit of a frame in terms of the degree of room that we have to grow in the women’s business. We have on those women’s channels less than a three share. So we’ve got huge, huge upside and we see that particular segment continuing to grow. You all would have heard me talk many times over the past about starting to look at the specialty ad business as a segmented business with women’s being a distinct segment within specialty.

So we think (a) our competitive position is still relatively modest and (b) that the segment itself still has considerable growth potential so I’m not at all worried at this point in time in fact, the thought of exponentially growing the women’s business over time is still very appealing to us and I think you can understand what I’m saying there.

You went on to say that these channels look like they’ve got a fair bit of stretch in them and good for you for taking the initiative to look but just to give you an example, Sex TV was originally licensed in 2001 as a category two television service and it was known as Relationship Television and the service is described by its nature of service as “programming related to love, romance, marriage, relationship theme, game shows, sexuality and gender issues, family planning, relationship breakdown, and magazine style programming featuring romantic vacation resorts”.

So in our view unlike what it said in the Globe and Mail this morning we didn’t buy a soft porn channel. We bought a channel with decent distribution and a license that given our programming focus is one that we can expand mightily going forward. So we think there are certainly opportunities to be more advertiser friendly, more viewer friendly, more BDU friendly with this service going forward.

We think there is significant distribution upside and we think there’s significant ad upside. And then you asked about pricing and just so that you all have some sense of how we value these things. We’ve been on record saying that we think that the sort of pricing range for digitals is eight to 10 and that it would be in the 10 to 12 range for analogs and these services were acquired in the low end of those ranges.

Just to give you some sense that the combined earnings of these two stations for 2009 based on our latest estimate is approximate $3 million. So again, I think these things are priced reasonably relative to the market conditions we’re in and we think there are tremendous synergies both on the revenue side and on the cost side.

As it relates to Q1 and Q2 I don’t think its going to be a real issue. Maybe Q2 will start to see some impact but I think its probably going to take us six months to get these approved by the regulators so there will not be any change in our programming expense in the early going of this year as a result of that.

I just have to correct one thing that I said there, the combined number in terms of EBITDA is approximate $4.7 million not $3 million.

Paul Steep - Scotia Capital

The last one for me would be the obligatory Y TV question, I guess the co-viewing I think people seem to recognize that’s resonating, what’s the planning assumption at the end of this year and into next year, is it that the co-viewing is going to help hold us flat or get you back to where you were versus actually recognize a gain or do you think you’re actually going to manage to eek out a gain on the co-viewing side with the reposition of women’s.

Paul Robertson

That’s a good one. In terms of balance of the revenues three quarters of the revenue would still be in the kid’s area and maybe one quarter in kind of mom’s or co-view. So we’ve seen some really good growth during 2009 in the grown up side of sort of high single-digits and of course kid’s has been the real soft side.

So what we’re targeting as we get into next year is a performance on Y TV that’s kind of [inaudible] to a year ago or showing some moderate growth and that really calls for that co-view component to continue to drive growth in the high singles or low doubles and but also we’re expecting that we can move the dial on the kid’s business.

And I can’t tell you how big a priority it is at our place to be developing the customer base in kid’s. We’ve reported in the past that we’ve been kind of hit on a couple of key categories, namely toys and food, but there’s lots of other categories out there that we can continue to develop.

So we have a thrust on government business. We have a thrust on health and wellness and also as John mentioned in his opening remarks the Power of Mom and how she interfaces with the child when they watch Y TV. So I think we’re just in the new combination of Nelvana together with Y TV we’re really being creative in coming up with new ways to develop this business so and we’re encouraged.

We think that there is upside here and that we can return Y TV back to growth.

Operator

Your next question comes from the line of Scott Cuthbertson - TD Newcrest

Scott Cuthbertson - TD Newcrest

I wondered about, what’s going on with radio a little bit, I’m just wondering if you can give some color on the local versus national airtime revenue declines and also was hoping you could provide some color on the whole rate issue. It seems like there are some price wars going on out there and I just wonder if you can help us at all with the dynamics. Its something that I find concerning because I know in the past it can take some time to get advertisers used to getting back to where the rates were before these types of activities occur and I just wondered if you could provide a bit of color on that whole situation for us.

John Cassaday

The national versus local ad scenario is a little bit convoluted because we made some decisions to repatriate some business out of CBS into our local clusters so I’d be more inclined to just look at the radio business in general as being down in the sort of 15% range and how we got there in terms of national versus local I think is probably not that relevant given some of the account changes that we initiated.

So that would be one comment. In terms of price sensitivity or rates or cost per point erosion, we have been looking at that and quite frankly in some markets, there has been some considerable price erosion, in other markets pricing has held up pretty good. So one of the things that we are anticipating is that we are going to have to be very, very focused on radio costs over the next two years because its going to take us some time to rebuild our pricing levels going forward.

Scott Cuthbertson - TD Newcrest

And while you’re on the radio costs, I just wonder the cost declines that we saw in the radio division this quarter are those, can we reasonably expect you to be able to hang onto those or was that or was there a component of that which was just sort of trying to address the weakness this quarter so the costs will maybe go up a little bit going forward.

John Cassaday

No, you can absolutely expect those costs to stick to the ribs, cost reduction stick to the ribs.

Scott Cuthbertson - TD Newcrest

Thomas, just a CapEx question for you, I wonder if you could help us with the timing a little bit. I know that you are keeping your powder dry for when you move into the new headquarters but you’ve only spent $10 million of the $45 million that I had for this year and I think your previous guidance was for about $140 million over three years, so is next year around $70 or something like that. Can you help us with the pacing.

Thomas Peddie

I think that what will happen is that this year the number will probably be more like $35 and that the number next year would be more in the $90 range. We talked about as you said $140 over a three year period so if you were $35, $90 and $20 that’s how you would get to that particular number.

You’d probably, saw our topping off ceremony in the news and we’re making really good progress on the waterfront and our cash needs on that will start to increase over the fall.

Scott Cuthbertson - TD Newcrest

And you alluded to the synergies, with the new acquisitions. Can you flesh that out a little bit for us, 4.7 is not a bad starting point but obviously with the movies there should be some synergies with your other movies buys for Dusk and Movie Central etc. What can we model for synergies on this acquisition.

John Cassaday

I think I’d certainly be comfortable in modeling some decent revenue synergies. I think that there are clearly some opportunities to broaden the penetration of these services from their current levels and secondarily on advertising from a programming synergy point of view what will happen is we will acquire new programming for these services but there will also be shows that are in our library that we can deploy on these two services and that will allow us to mitigate some of the increases that we would ordinarily hold.

So they’re highly synergistic but I don’t have a precise number in front of me right now except to say that we do think that we will be able to grow these businesses from day one.

Scott Cuthbertson - TD Newcrest

The wholesale rate increase that kicked in May 1st.

Thomas Peddie

That’s correct.

Operator

Your next question comes from the line of Drew McReynolds - RBC Capital Markets

Drew McReynolds - RBC Capital Markets

Just three additional questions here, just first, just obviously in the MD&A you have a section on just the SEC discussion, just a little bit more color on that situation.

Thomas Peddie

Sure, as you’d expect in today’s environment the regulators are really focused on issues of valuation and you know in the US over the past few years there’s been a significant number of write-downs recorded by broadcasters particularly in the radio business and as you know the radio experience in the US has been much different from the experience here in Canada which has led to impairment issues in that particular market.

As a company we’re listed in the US and therefore subject to the review from the SEC and earlier this year we received a comment letter as have a number of other Canadian companies who are listed in the US asking for clarification and justification of our methodologies for valuing our intangibles particularly broadcast licenses and goodwill.

Its obviously their job to protect shareholders so that the a company like Corus, they want to make sure that we haven’t avoided recording impairments by using inappropriate methodology so that’s really the nature of their question. We’ve been corresponding with them and we expect to bring this matter to close in the fourth quarter.

The risk that we identified in the MD&A is related to the possibility that we have to restate prior periods to reflect impairment not taken. For example, we test radio on the total level. If we were required to test it at a lower level, there may have been impairments some time in the past and a portion of that impairment that we have just taken here in Q3 might have to be restated or reflected in a prior period.

However we’re confident that the impairment that we did record in Q3 is appropriate and using alternative approaches would not have resulted in a larger impairment either now or at any time in the past. So that’s really where we’re we at on that particular issue.

Drew McReynolds - RBC Capital Markets

Just a point of clarification on the decline in corporate expenses in Q4 by a third, I just missed what base, what’s that based on, is it year over year or is it.

Thomas Peddie

Yes, its year over year. There were about $6.5 million in Q4 last year and that number will be down about a third. As John said in his particular comments, there’s been reduction in compensation. There would be no bonuses accepted by management even if we were able to earn them and we are hitting our targets. We’re hitting our targets on our free cash flow. As John said we’re doing a particular good job on that and even though we were able to hit that particular target, management has said they would not accept a bonus.

So that number is not in there so as a result that’s why we’re relatively comfortable that the overall corporate expenses for the year will probably be at about $18 million range.

Drew McReynolds - RBC Capital Markets

Just looking at the television OpEx in the quarter obviously lots of moving parts here but it was down year over year in terms of overall expense growth just any sense of going forward either what direct cost savings are happening in that segment or alternatively are these kind of lower year over year expense growth trends going to continue over the next three or four quarters.

Paul Robertson

It was a particularly tight month in terms of the overall expenses. We were able to include Cosmo and VIVA in the lineup this year and still come in with overall expenses in the 2% range so, but those kind of levels I think are pretty aggressive. We do see some increase in the programming expense as we look out into the fourth quarter and into next year just based on the new HBO contract and the new channels that we referred to.

So I think that based on the run rate it would be a little bit aggressive to include the expense amounts that we saw in the third quarter. But from an overall standpoint we really are working hard at the overall operating expense line which we think we can continue to keep down from year ago and a lot of the corporate expenses that then get allocated to the divisional level of course all come through plus moves to hold down our overall headcount with the hiring freeze that John referred to.

So programming expense up a bit, more in the future than you saw during the quarter but operating expense down from year ago level.

John Cassaday

Just to give you some additional color one of the things we’re really trying to do is offset the cost of these incremental initiatives with reductions in other areas so in Q3 if you were to exclude VIVA, Cosmo and HBO our expenses would have been down 6%. So I think we’re showing obviously good restraint on all of the other elements within the cost mix.

Operator

Your next question comes from the line of Bob Bek - CIBC World Markets

Bob Bek - CIBC World Markets

On the Sex TV, Drive-In acquisition, how many bidders were there for those assets, can you—

John Cassaday

To the best of my knowledge we were dealing with CTV on an exclusive basis on those assets.

Bob Bek - CIBC World Markets

And just back to the radio I think you said broadly speaking you’re hoping to be somewhat better in Q4 than Q3 and I’m not trying to pin down that comment, but do you think you’d be better than the market or at least in line with the market in Q4. Because I think in Q3 it looks like you were a touch below and obviously you’ve got a lot of moving parts on restructuring and reformats in Quebec and such. Would you think you’d be fairly in line with the market in Q4.

John Cassaday

We would hope so. I mean clearly this quarter there was a couple of things that affected us. We were just so darn strong in the west and the western economy has been so battered obviously because of the oil and natural resource impact in BC and Alberta. The other thing is more through serendipity than strategic intent, we ended up with a real strong arsenal of rock formats in our mix and the male demo brands have been hurt because of the absence of automotive almost entirely in the quarter.

So we actually booked some GM business last week so we’re seeing, I hate to use the green sprout analogy which we’re all getting bored with, but we are seeing some positive signs. We also think that the telecom sector which has been quiet recently is about to get reignited as a result of the new wireless competitors that are coming on board.

So our goal is always to perform at least at level with the market. There have been some reasons why that didn’t happen in Q3. We don’t feel at all good about that but we believe we have great brands and great people and we’ve just got to do a better job in developing new business because perhaps we’ve been too reliant on the steady consistent old business that we came to rely on over the years.

This is certainly proved to all of our people that you can’t expect our customers to always be back at the same level they were in the previous year.

Bob Bek - CIBC World Markets

Just turning to television, always very strong growth continuing the subscriber side, I think you’re at 63,000 year to date, your target was sort of 50,000 heading into the year so obviously well above that pace, any thoughts on where you can get to. You seem to be consistently doing about 25, 26% of the Shaw net ads in their territory on the digital television boxes so I mean is that still a reasonable gauge given the current pacing.

John Cassaday

Yes, I think so. Shaw is going a spectacular job in adding digital subscribers. Our partners are doing a spectacular job in bringing new programming to the market. Nurse Jackie and Hung are two very exciting new programs that I think are going to create a buzz and then we’ve got the opportunity working with our partners to drive penetration within the digital base and as you rightly point out even though we’re adding nicely, the penetration rate is a little lower than its been historically because we’re now talking about later adaptors.

So we think we’ve got significant opportunities to grow and something with seven digits going forward seems quite realistic for us in terms of our sub base.

Paul Robertson

I would only add to those that we’ve been really supportive with the SBOD offering by Shaw in major markets in the west. I think that combination of having HBO, new programs premiering and seasons coming back plus the SBOD offering has been really an unstoppable combination so we’re, and we’re very in on those new digital subscribers. It’s a high priority, get those converted into Pay subscribers.

So yes, 20, 25% of that total base as they come that would be an aggressive call on the year but that’s what we’re trying to do. And we see them coming in kind of in the range of 100,000 subs a month, that kind of thing. John’s right, we got a target to be in excess of a million subscribers and if we can really get at those new digital subs, we can do better than that.

Bob Bek - CIBC World Markets

Can you remind us a bit on some of the effect of the new building, the new head office and I guess its all 2010, you’ve talked about the CapEx, but anything else we should know as far as timing and any costs or outlays, basically looking at 2010 estimates if I have to reflect much at that point yet.

Thomas Peddie

Our plan at this particular point in time is to move into the new facility in May of next year. So you’ll really see the facility in the increased costs in the fourth quarter of next year. We’ll have increased cost with respect to depreciation in the fourth quarter. We negotiated a very attractive lease with the city. We’ve said before that our lease and operating costs will be comparable to what we’re paying at the present time.

However what we have done is we have acquired more space than we currently need to give us the flexibility going into the future. So on the lease operating costs you’re going to see a number that’s going to be a couple million dollars higher each year until we take advantage of that particular space.

John Cassaday

We’re going to have, I think we’ve already sent out a notice on this, but our Investor Day will be on September 29 and we’ll certainly give you a lot of color on our CapEx and our operating expenses related to the building as well as to the normal operation of our business and I think significant detail on our two new acquisitions at that time as well.

Operator

Your next question comes from the line of Tim Casey - BMO Capital Markets

Tim Casey - BMO Capital Markets

I want to go back to the write-down on radio and you mentioned that it’s a DCF analysis that leads you to review these values and you’ve cited that the third quarter downturn was an impact on the reevaluation, are you not implying that you have significantly reduced your sustainable growth rates in radio. How else can that not be the case given the size of the write-down you’ve taken.

Thomas Peddie

Well as I said the size of the write-down is not really relevant to the erosion of the value because what we said was if we missed our fair value only by $19 million. As I said our problem is, is that the allocation of the original purchase price between goodwill and broadcast licenses and as I say when we use the methodology our broadcast licenses are on our books at a lower value than what they should really be at.

And so that’s the reason that we have such a big write-down. The other comment is that we’d said that we test for goodwill on an annual basis but from an accounting point of view you are required to test it, if you think there are indicators that maybe there’s been a change in market conditions and the market conditions in the radio sector in North America in the last 12 months have been really quite significant particularly in the US.

And then when we had looked at our particular business in Q1 and Q2 we didn’t really see what the, that there were any indicators that would cause us to say that we needed to do a test. But when your business drops by 15% in a quarter and you start looking at how quickly is that going to start to recover, you say, well maybe we should go ahead and do the impairment test.

And as I say, you either pass or you fail and in this particular case we did. We still really believe that radio is an outstanding business to be in. It’s not capital intensive, it generates an awful lot of free cash flow. We’ve had outstanding success in the west which is, and Ontario, which has really driven our particular business. We’ve had a lot of focus on the province of Quebec which has clearly underperformed.

But when the west sneezes, we get a cold here because it impacts our value. So we think its temporary and when we also look at the recovery ad revenue on radio is dependent upon the growth in the GDP and we just didn’t really see that so we felt that it was prudent to do it and not wait until Q4 because the other issue that you have let’s say from a regulator point of view is that if you did an impairment in Q4, they’d say well why did you do the impairment in Q4 as part of your annual test, are you sure it shouldn’t have been done in Q3 or Q2.

And as I say the indicators were we had to do the test.

Operator

Your next question comes from the line of David McFadgen - Cormark Securities

David McFadgen - Cormark Securities

So first of all, I think you said that you expect to book merchandising advances in the fourth quarter, could you tell us how much that would be approximately.

John Cassaday

No, all I can tell you is that we basically have fired up these two brands both relaunches, Babar and [inaudible], and as a result of that we’re able to go out to merchandising partners, apparel and the like and they provide us with advances and then they go about trying to earn money from these properties going forward.

So it’s certainly less than a million dollars but its, I can’t be specific on the number, first of all I don’t have it, secondly I’m not sure it’s that relevant. Sorry I can’t help you on that one.

David McFadgen - Cormark Securities

Would there be any costs associated with those advances or would flow right to the bottom line.

John Cassaday

They’d flow to the bottom line.

David McFadgen - Cormark Securities

So when you look at the fourth quarter of 2009 versus 2008 and you talk about some other factors that would [lend] you from a trend line, wouldn’t the two biggest factors be the corporate expense and that merchandising advance, or what would the other factors be.

John Cassaday

The full quarter of HBO for one. Full quarter of VIVA, the general cost containment that we talked about. The advances, the acceleration of P&D. All broadcasters around the world are in the same squeeze that we are. They’ve been putting off the acquisition of programming until the last possible moment. They’re contractually committed so those will come in in Q4. Movie Central subs continuing to grow. So those would be the bulk items. But again, we are a little bit more expansive on this description than we would normally be.

We haven’t really been in the habit of being that specific in terms of guidance on a quarter to quarter basis but we just realized that it would be helpful to you all to understand why we continue to be talking about a miss in the 2% range and not something greater given the growth that we would need in Q4 to get there.

David McFadgen - Cormark Securities

And then just on the corporate expense for 2010, this year I think you indicated it should probably be in the range of $18 million, would that kind of be a good number for 2010.

Thomas Peddie

I think the, I’m thinking the number might be closer to a 20.

David McFadgen - Cormark Securities

For 2010.

Thomas Peddie

Yes, as I’ve mentioned I think in response to Bob’s question, we will have additional costs associated with the waterfront to a number in the 20 to 21 range would probably be a better number than 18.

David McFadgen - Cormark Securities

Just on the third quarter TV other revenue, I know it was down, can you give us an idea how much it was down on a percentage basis.

Paul Robertson

It was down about a quarter from what it was a year ago, it was basically deliveries in production and distribution from Nelvana. It was particularly soft in the quarter and really led to kind of a shifting timing wise into the fourth quarter which John has already talked about. The merchandise is showing a great improvement on the run rate but it wasn’t enough to offset the P&D declines.

David McFadgen - Cormark Securities

And so how many episodes do you think you would deliver or recognize in the fourth quarter for Nelvana versus last year.

Thomas Peddie

Just recall we don’t really look at it that way any more because we’re producing episodes really for our TV operation and then Nelvana Enterprises will then sell those on an international basis so most of the, there’s very little revenue associated with the episodes that we produce for television because its television satisfying their conditions of license by acquiring the programming.

David McFadgen - Cormark Securities

What’s a good tax rate to use going forward, like 35% I guess.

Thomas Peddie

No, I think a number probably in the 33% range would be better.

Operator

Your next question comes from the line of Eric Bernofsky - Desjardins Securities

Eric Bernofsky - Desjardins Securities

Just circling back onto radio for a second, just wanted to clarify you mentioned in your presentation that Q4 was pacing better than Q3. Just to clarify are you talking about an absolute basis relative to Q3 or are you talking about the year over year performance.

John Cassaday

I don’t think we’re going to be minus 15 in Q4.

Eric Bernofsky - Desjardins Securities

And then just shifting to where your leverage currently stands and sort of your comfort level, I guess you’re in the 2.5 range, might tick up a little bit with the acquisition upcoming, what’s your comfort level. Has that changed and what’s sort of your top range on further acquisitions that you might go to.

Thomas Peddie

I think we’re being fairly consistent on that. We said long-term that there’s advantage to a leverage of 3 to 3.5 times. We historically have said that we’d be prepared to go 5, 5.5 times for the right acquisition but that really depends upon the growth levels. It’s not a level that we would want to stay at.

Interestingly in the current bank market, the bankers really don’t want you to go to that particular level so if you were to talk to a banker they’d be, wouldn’t want it over four and would prefer to have it closer to three. So we’re comfortable in the 3 to 3.5 range and as you say right now we would, we’re under three and with the acquisition of the additional channels we would still stay under three.

Eric Bernofsky - Desjardins Securities

What’s the status of any buyback activity that you might have given where the stock price is at, how much consideration do you have for buybacks at this point.

Thomas Peddie

We did not renew our normal [inaudible] when it expired in February. We do not have an intent to renew it at this particular point in time. We feel that we should be using our cash for investing in the waterfront, investing in acquisitions as opposed to shares notwithstanding the price that the shares are at.

Operator

Your next question is a follow-up from the line of Adam Shine - National Bank Financial

Adam Shine - National Bank Financial

I hate to do this to you but you’ve said a few times now on this call that you think you’ve got sort of downside risk to your guidance of about 2% which would sort of I guess put you closer to what 250 than the 255 but if we flush out the nine months in terms of what the results are and we look at the implied Q4, that’s sort of $56 million in Q4 for EBITDA which is about a 19% upside or thereabouts and sort of going back to David’s question earlier if you’re only getting an incremental less than a million dollars from at least the merchandising advance and you’re only getting an incremental let’s say $2 million or so from corporate costs, then obviously there has to be a pretty significant delta coming out of the timing push on some of the Nelvana related deliveries. Is that ultimately what it is or am I simply missing something.

John Cassaday

No, I think it is a combination of things but if you take the $2 million alone, I think that gets you down to, you take the $2 million corporate cost reduction versus year ago, I think you’re down to about 13% growth and then we start adding on the HBO money, the VIVA money, the cost containment initiatives, just I guess in our little waterfall, all those elements in isolation give us some comfort that we can get there.

There’s also, it’s just a combination of things, all I can tell you is that we’ve been through it with a fine tooth comb. The single biggest risk is that the volume that revenue rather that we’ve anticipated and we think have been fairly have de-risked, that’s the one bogey. I just don’t, I can’t give you with any 100% certainty that that’s going to materialize but I can tell you that we wouldn’t have gone on to the extent that we did if we didn’t expect that you would be challenged by this number.

Adam Shine - National Bank Financial

I appreciate that and we’re half way through the Q4 as it is so that, your disclosures have to be to a certain degree set with obviously a lot of substance to them, but just from the math perspective it certainly looks eye popping after a tough nine months that we’ve seen, right.

John Cassaday

Yes and we said two to four, I think we’d probably all agree if its four, that’s pretty easy to get there mathematically, but what I’ve been saying on this call is that we’re hell bent for leather to get this within 2% which gets us to the 250 and that’s our goal.

Adam Shine - National Bank Financial

You’ve given the disclosures previously regarding VIVA which I know is small but just for some tables that I put together sort of organic growth for subscriber revenue and then—

Thomas Peddie

I’m not sure that we’ve given any numbers on subscriber growth on VIVA.

Adam Shine - National Bank Financial

No, just for organic, ex VIVA. I presume its 4 to 5%.

Thomas Peddie

That’s correct.

Adam Shine - National Bank Financial

And then just lastly, vis-a-vie the Pay TV rate hike that came into effect in May, are all your BDU partners paying you the increase or are there some still outstanding potentially.

Paul Robertson

No, we had to line them all up for fairness.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

John Cassaday

Thank you very much for your interest in our company and appreciate the questions today. We’ll look forward to seeing you on or before our Investor Day on September 29. Have a good summer, bye for now.

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Source: Corus Entertainment Inc. F3Q09 (Qtr End 05/31/09) Earnings Call Transcript
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