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Executives

John Cassaday – President and CEO

Tom Peddie – SVP and CFO

Paul Robertson – President, Corus Television

Analysts

Drew McReynolds – RBC Capital Markets

Adam Shine – National Bank Financial

Paul Steep – Scotia Capital

Scott Cuthbertson – TD Newcrest

Bob Bek – CIBC

Ben Mogil – Thomas Weisel Partners

David McFadgen – Cormark Securities

Tim Casey – BMO

Randal Rudniski – Credit Suisse

Sanford Lee – Genuity

Corus Entertainment Inc. (CJR) F2Q10 (Qtr End 02/28/10) Earnings Call Transcript April 14, 2010 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Corus Entertainment Q2 2010 Analyst Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator instructions). As a reminder, this conference is being recorded, Wednesday, April 14, 2010.

I would now like to turn the conference over to Mr. John Cassaday, President and Chief Executive Officer of Corus Entertainment. Please go ahead.

John Cassaday

Thank you, operator, good morning, everyone. My name is John Cassaday. Welcome to Corus Entertainment’s 2010 Second Quarter Report and Analyst Conference Call. Again, 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 Web site www.corusent.com in the investor relations section. We’ll 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 filing with the US Securities and Exchange Commission.

We would like to introduce you to the Corus Entertainment team available on this call. Tom Peddie, our Senior Vice President and Chief Financial Officer is with us, as well as Paul Robertson, President of Corus Television.

We are very pleased with our continued strong results. Turning to Slide #3 and #4 in our PowerPoint presentation, our revenues for the quarter were $192.7 million, up 6% from year ago, while our consolidated segment profit was $55.4 million, up 9% from a year ago.

Our net income for the quarter was $14.6 million or $0.18 per share compared to $29 million basic or $0.36 per share last year. However, our Q2 results include a charge of $14.3 million associated with our successful $500 million debt refinancing.

And a reminder that last year’s results included again on the disposition of our Max Trax audio service. Removing the impact of both of these items net income on an adjusted basis was $0.30 per share in the quarter compared to $0.31 per share last year.

As we turn to Slide #5, we are pleased to report that our Television division has an outstanding quarter with revenues of $137 million, up 11% versus last year. And segment profit was up 12%. Overall subscriber revenues were up 14% while total specialty advertising was up 5%. Other revenues were up double-digit this quarter, including growth from merchandising revenues associated with our Bakugan and Backyardigans brands.

Our Kids business had a very strong quarter with overall revenues up 10%. Subscriber revenues were up single-digit with growth coming from all our kids’ channels.

From an ad sales standpoint revenues were up 10% with both YTV and Teletoon seeing double-digit revenues and rating games, particularly, with co-viewing. YTV continues to see strong ratings growth which we have successfully converted into advertising revenue growth.

Recent PPM data shows that YTV’s average minute audience ratings for kids 2-11 and kids 6-11 are up 20% to 30% compared to a year ago. And our co-viewing strategy continues to see success. Average minute audience ratings for adults 18-49 and women 18-49 are up more than double the prior year.

Key shows that contributed to our strong ratings growth included iCarly, SpongeBob SquarePants, The Penguins of Madagascar and our new Canadian live action series How to be Indie.

Toys, Food and Entertainment continue to be the top three advertising categories. And this quarter both toys and food saw double-digit growth.

Our strong ratings performance at YTV has been enhanced by the addition of Nickelodeon to our Corus Kids network portfolio and our complementary scheduling strategies.

As mentioned previously, our merchandizing business continued its positive momentum with double-digit growth in Q2, driven mostly by the success of Bakugan and Backyardigans. For Bakugan, toy sales continue to grow in 2009 and the brand enjoy a strong Christmas selling season. The brand finished calendar 2009 as a No. 2 boys’ action property globally.

Turning to our Pay and Specialty business. Overall revenues were up 11% versus year ago. Subscriber revenues were up double-digit with all specialty channels and Movie Central seeing increases. Key drivers for Pay TV included strong performances from returning series, Big Love and the premier of The Ricky Gervais animated series and of course, the Steven Spielberg and Tom Hanks miniseries, The Pacific.

Strong marketing campaigns around key shows such as these and the continued strong push by our distribution partners saw Movie Central subscriber numbers rise another 15,000 from last quarter to 973,000, a 5% increase from the same period a year ago.

Specialty advertising revenues within the segment were up 1% versus a year ago. Cosmo, VIVA and DUSK, all saw double-digit growth in advertising revenues in Q2 with key gains in health and beauty, consumer package goods and retail categories. These services also saw large rating gains. The latest AMA ratings for Cosmo, VIVA and DUSK, saw 44%, 25% and 32% increases respectively in each of their demographic targets.

Moving to Slide #6, our Radio division continues to trend in a more positive direction. And in cities where we own stations Corus outperformed the overall market in the quarter and on a year-to-date basis according to TRAM.

Overall, Corus Radio revenues were down 4% versus a year ago, which represents a slowdown in the decline compared to the prior three quarters. Though there are regional differences the top five advertising categories in Q2 were retail, automotive, professional services, entertainment and restaurants.

And the categories with the largest percentage gains were automotive and beverage versus last year. We also did a great job controlling costs in Q2 which help deliver a segment profit increase of 21% versus a year ago.

Looking at our regional results, Ontario had a very strong quarter, outperforming the market and achieving a 4% increase in revenues versus a year ago. Fueled by favorable PPM results for the Edge and AM640, in particular, the Toronto cluster saw double-digit revenue growth this quarter and we also saw positive gains in London, Kitchener, Cornwall, Guelph and Peterborough.

Two key categories that saw growth in Ontario were beverages, specifically beer, and automotive. One of the big three automotive companies returned to radio spending in Q2 and the sector in Ontario in our view is poised to see further growth with the recent addition of capacity at several car assembly plants in Southwestern Ontario.

Turning to Quebec, overall revenues were down 2% versus last year, but airtime revenues were up 3%. The Corus Quebec stations also outperformed tramp led by Montreal French and Quebec City. We drove ad sales against very positive rating results on CKOI 98.5, CKAC Sports, CKOI Quebec City, CFOM and CIME.

In the West, revenues were down 12% versus a year ago, which is an improvement over the previous nine months. Across the region the top growth categories for the quarter including banking, utilities, drug stores and home electronics.

Our Winnipeg cluster continues to outperform the market and in fact enjoys revenue growth versus last year. Top growth categories for Winnipeg this quarter were the federal government and foreign automotive.

Our Vancouver clusters saw a large swing in momentum in Q2 with revenues down low single-digits, the cluster is performing well under PPM and key growth categories in Q2 were domestic automotive and home electronics.

In our Q1 call, we had predicted improvement in Radio revenues in western Canada in the second half of the fiscal. And while we are seeing some positive trends developing, Calgary and Edmonton remained challenged in Q2 with double-digit declines.

We expect that Calgary and Edmonton and the Alberta economy in general will lag the rest of Canada in the economic recovery. While these markets have been hardest hit by new entrants and an economic slowdown there are some positive indicators of improvement and we do see as previously predicted the recovery of these two clusters beginning in the second half of this year.

One focus across the country but in these markets, in particular, has been on generating new business. In Calgary, at the conclusion of our recent new business drive, the cluster added 102 new accounts with a 12-months revenue value of $2.3 million. And in Edmonton, the development of new business categories has allowed us to add almost $1.5 million, new revenue so far this fiscal.

In closing, we would like to provide you with some comments on the outlook for the balance of the year, so if you would turn now to Slide #7. We will continue to be disciplined in managing our expenses, and we will continue to invest in the launch of new channels. W Movies and Sundance Channel launched on March 1, 2010. And the initial response from advertisers has been very positive. We are projecting in fact that we will exceed our sales targets.

With respect to our revenue outlook for Q3, overall, specialty ad revenues for the Television division are currently projected up mid-to-high single digits. For Corus Kids we expect that subscriber, advertising and merchandising revenue will all show continued growth in Q3.

For our advertising revenues we will continue to build off of improved ratings at YTV and Teletoon. Our co-viewing strategy has delivered double-digit ad growth in the first half of this year and we expect the strong trends to continue in the back half. We also expect merchandising revenues do another strong quarter in Q3. Bakugan Season-3 toys of launched in North America where Season-2 Bakugan toys now released internationally.

For our Pay and Specialty brands, based on our current pacing, we will continue to see subscriber revenue growth from Movie Central and our specialty ad channels as a whole and expect to achieve our target of 1 million Movie Central subscribers by the end of this fiscal year.

For Movie Central there is a strong slate of programming in Q3 including returning series such as Nurse Jackie Season-2, United States of Tara Season-2, and new series including HBOs acclaimed Treme, a dramatic series that takes place in New Orleans, post-Katrina.

Marketing support will continue in Q3 with key campaigns, including a Shaw and Shaw direct welcome campaign for new digital customers, and of course a strong campaign around The Pacific that is running from February through to April and includes bill boards, radio, online, direct mail campaign and an on-demand and online free view of the first episode of Pacific.

Finally, our Radio revenues are currently pacing well ahead of last year in Q3. Canadian broadcast sales reports that they are seeing a strong increase and request (inaudible) in Q3 and Q4.

In Toronto, we are pacing up double-digits in Q3 and the PPM rank positions remain stable for all three stations in the release of the first four weeks of spring PPM. And of the nine Ontario markets, eight are tracking ahead of last year’s Q3 revenue results.

In Quebec, the overall pacing for the region is up double-digit versus a year ago with Quebec City and Montreal French stations all seeing gains at this point in time.

In the West, Winnipeg is pacing ahead single digits. And Vancouver is finally pacing ahead double-digit in Q3 while as previously reported Calgary and Edmonton remain behind last year.

So we hope that you have found our comments helpful in providing an overview of our Q2 results and our outlook for Q3. We’ll now be pleased to take any questions that you might have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions)

John Cassaday

Operator, is there a question?

Operator

We have a question from Drew McReynolds from RBC Capital Markets. Please proceed.

John Cassaday

Morning, Drew.

Drew McReynolds – RBC Capital Markets

Yes, good morning. Thanks very much. Congratulations on a good quarter. Just a couple of a smaller questions to start on, just for you, Tom, the corporate costs in Q2 a little higher than what we’re looking for, just wanted to get a little color on the compensation accruals. And then more importantly, are you still looking for kind of 20 to 22 million in corporate costs for fiscal 2010?

Tom Peddie

Yes, Drew, it’s Tom. In 2009, as you noted, our costs were down in the corporate side, because we had lower incentive costs and our share price performance last year was poor, so we had lower share price compensation. And so as a result we had a historically low number last year. In 2010

In 2010, our performance has improved, so you see that our costs have increased. And at the half way point, our corporate costs were $12 million. I would say right now that our forecast for corporate costs would be about $25 million to $26 million for the year.

And to put it in a perspective, in 2008, our corporate costs were $23 million, 2009, they were $18 million for some of the initiatives that we undertook and that we see the costs came probably in the $25 million to $26 million range. One of the other items that would contribute to that is towards the end of Q3 will occupy Corus key, we will have some incremental transition costs on that as we’re paying double rent on some facilities.

Drew McReynolds – RBC Capital Markets

Okay. And so just to kind of flush you that issue obviously, in the quarter, that the double rent in other expense, can you just kind of quantify how this works from now until you move in?

John Cassaday

Well, we’re paying some rent right now on the facility and that we had our leases under other facilities, to try to terminate in 2010 and 2011, so that we would minimize our costs in that particular area. But we’re really in a situation where we’re keeping our facility at a Liberty Village until the end of August. So that’s where we would have an extra few million dollars that gets add into our costs in Q3 and Q4.

Drew McReynolds – RBC Capital Markets

Okay, okay, that’s great. Just a bigger picture, television obviously is very, very strong across the board, I believe at the last call you were still looking for flattish margins year-over-year, just wondering if that still a target for the fiscal 2010 some of your achieving?

John Cassaday

Yes, we were pleased that we had a bit of a bump in our margins this quarter, but generally speaking, that’s impact the case, that we’re looking to maintain our margins this year.

Drew McReynolds – RBC Capital Markets

Thanks, John, and just maybe a final one on Radio, can you comment as to whether Alberta is growing in absolute dollars or are we still kind of declining, in fact, getting better off easier comps?

John Cassaday

It’s still declining in absolute dollars. In March, just looking at Alberta, Calgary, we saw some increase and Edmonton so far, in March, we saw for the first time, Calgary and Edmonton up versus the previous year as reported by TRAM and this is data I just saw yesterday, so, what we got in Alberta is the sort of compounding effective of two factors:

One, the general economic malaise that we saw throughout the rest of Canada and then two, just the result of over licensing of radio stations in this market, which has caused some rate compression, which we anticipate will take some time to recover from. But clearly, we are seeing better results in Calgary and Edmonton and we remain convinced that the back half will be much better for us in Alberta than the front half of the year has been.

Drew McReynolds – RBC Capital Markets

Okay. And if can just push you a little more, John, you’ve been certainly helpful in the past has giving kind of broad strokes year-over-year tracking for the current quarter, so for Q3, when you put all the regions together are you kind of low single-digit up, mid-single-digit up, if you can give us a little kind of color and that will be great?

John Cassaday

Drew, as of today, we’re pacing up high single-digits. I can tell you we have our board meeting later today we are not forecasting and up high single-digits in the quarter and I guess, perhaps we’re still a little bit tentative because of what we’ve been through but as we said in our press release we’re quite confident that the ad recession is behind us. Certainly, the pacing for our Radio division and our Television division would indicate that that’s true. I suppose we’re just still a little bit cautious until we see this thing true for few more quarters, but the pacing today is up high single-digit across the country.

Drew McReynolds – RBC Capital Markets

Thanks very much.

Operator

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

John Cassaday

Hi, Adam.

Adam Shine – National Bank Financial

Hi, good morning, thanks a lot. Just maybe a couple of follow-ups on Drew’s initial questions. To be very clear for, Tom, with respect to the duplicate rental costs which I guess appeared below the EBITDA line from the other expenses that’s exactly where they will remain, they will now creep in, where there will not be Corus key related incentive costs within the corporate costs line, correct?

Tom Peddie

In Q3, they’re below the line, but in Q4, more of the costs will be above the line and that’s why (inaudible) corporate.

Adam Shine – National Bank Financial

Okay. So that’s part of the incremental delta you’re guiding as to at the corporate costs line, correct?

Tom Peddie

That’s correct.

Adam Shine – National Bank Financial

Okay, fair enough. And just be clear, it’s clearly not related to rental costs per se at the corporate costs line, we’re still seeing those duplicate costs below the EBITDA line, correct?

Tom Peddie

I mean in 2011, we will have additional rental costs compared to what we currently have because we moved into a larger and improved facility. Those are costs that clearly we will manage to try to maintain and improve on our margins on each of the division.

Adam Shine – National Bank Financial

Right. And you always disclose that at the context of your Corus key initiative. If I can flip over to TV, the results obviously were very solid and strong, I do want to try and differentiate at least in the context of what appears to be slightly lower growth than I would anticipate in terms of the adults skewing services, where I think you grew sort of 1%, so if you talk maybe a little bit about W or CMT and whether anything was going on there on a transitionary basis?

John Cassaday

Paul, I know, will be able to provide some good color on this, but you’re absolutely right, there are some issues that we’re dealing with on W and CMT. First of all, I’d say that they are largely PPM related and secondly, I’d say that they’re fixable. And in the case of W, for example, we found that as we move to PPM, the impact of having programming that both the male and female household viewers were willing to watch was very positive. So we had a schedule it was largely based on transformation show.

So beauty shows were the protagonists were transformed to the course of the show and I think our view is that in PPM, quite frankly, men just weren’t willing to sit through that and watch it with their wives whereas in the case of other lifestyle (inaudible) such as home improvement. There was a greater willingness to do that. So we have suffered some ratings erosion on W, our rank position has declined, however, we believe that is very fixable.

As it relates to PPM and CMT, the bottom-line is here that video flow just doesn’t perform as well and PPM did with the old mark two rating system. So these are, I would say, evolutionary issues that we got to deal with the result and moving from one rating methodology to another and I think that we demonstrated for quite some time now our ability to respond effectively and quickly to changes in the marketplace and these two will be no exception. VIVA, Cosmo, DUSK, all performing very well. A double-digit rating gain, double-digit revenue gains, but we got to get W movie, again, and that’s a job one.

Adam Shine – National Bank Financial

Just a follow-up, are the advertisers reacting that quickly to the new measurement system because I was sort of initially under the impression that they will do sort of wait and see and resist?

John Cassaday

No, I’d say it’s instantaneous, I mean, this is a business where revenue follows ratings, there is no period of forgiveness, you pay for it right away and you benefit from it right away. So that’s just part of our lives. And we see that particularly, in our radio business where it almost turns on a dime but it’s also equally true in television. Paul, do you want to just make a couple of additional comments?

Paul Robertson

Yes, thanks, John, I will build on the point about responding immediately to ratings changes because I mean ours is a side we have seen in our co-view revenues up about 30% a year ago. So that was all new since September and getting the PPM bad, and so, we’ve been able to have a win there. Perhaps the only other point on W terms are articulated, some of the challenges that we got. Certainly, the Q3 trend on Ws, looks more positive, but it’s going to be back end or a reasonable level of growth. So, hopefully, we’re starting to signal that retooling, renewing is getting some traction.

Adam Shine – National Bank Financial

Okay. And just one last follow-up and that will be the end of my question, but as you are doing the retooling, should we anticipate increase programming relate to expect those you recheck the line up?

John Cassaday

We continue to manage our programming expense as a portfolio. And don’t get me wrong we have incredibly powerful shows on W, it’s just about some fine-tuning as opposed to retooling. Clearly, our movies, which is an area that we dominate, continue to perform exceedingly well, we have some new lifestyle programs that we’ve added to the schedule in Q2 that we’re confident, we begin to perform well. So let’s not misconstrue what’s happening to W, it’s still performing well, growth rates of 1% or not, what we got accustomed to on W, where we’re more used to double-digit, that’s where we got to get it back to, so this is far from being a problem child, it’s just particular challenge that we have right now to return it to the spectacular growth that we’ve enjoyed for the last number of years.

Adam Shine – National Bank Financial

Yes, I think that was the context of the question. Super, thanks a lot.

John Cassaday

Thank you.

Operator

Our next question comes from the line of Paul Steep from Scotia Capital. Please proceed.

Paul Steep – Scotia Capital

Great, morning, guys. So why don’t we take three quick things on radio? First one in Western Canada, we talked about for a couple of quarters now, but maybe just get John to elaborate here. The plan someway stay the course, don’t look for cost cutting, you talked about the overall licensing, is that there like you’re not going to take any tough actions in Edmonton and Calgary other than focus on the top line?

John Cassaday

We’re going to focus on the top-line; we’re also going to look at our cost structure. We believe that some of the changes that we’re experiencing in Alberta are not going to be fixed in the long-term and we will respond to the challenges that have been created for us, A) to a small degree by the economic downturn, but to the impact of these new stations that were licensed in. You got in this market alone 10 new stations to 12 new stations between Edmonton and Calgary that has come on over the last two years.

And that’s had an impact on rating point, cost per point in these markets and we don’t anticipate that once we get clear victory on the ad recession being over and the overall economy improving that advertisers are going to say, well, then I am prepared to go back and pay what I paid in 2008. So you will see us respond on the cost side as well as continue to sharpen our saw on ratings and try to improve our performance versus our competitive set.

Paul Steep – Scotia Capital

Okay, fair enough. Why don’t we move further West and I’ll sort of throw the last two questions together? You closed your stations at the end of January in Quebec, we’ve seen a pretty big lift in margins, maybe Tom or John can both talk about the ramp we can expect there just on fixing the AM issue and then moving forward from there on the rest of Quebec?

John Cassaday

First of all, we remain totally committed to improving our margins. Certainly, our performance in Quebec is improving quite nicely. We’re absolutely delighted with the job management that’s done there, both in terms of ratings and in terms of cost control, so full marks to Mario Cecchini and his team in Quebec. But right across the country, our goal is to continue to improve our margins which we feel we can do because of the progress that we’re making on. Some of those loss making stations that we’ve talked about historically.

The most important example that I can point you to is 640AM in Toronto, which has been a significant beneficiary of PPM, our ratings have been up substantially and our ranking has been up substantially in this new reaffirming, what we always believe and that is that there are more people listening to this radio station that was being reported in the diaries. So here is the station that had been losing as much as $2 million a year that we’re confident would be in break-even and move to profitability into the future.

And just to remember my point, put in your mind the fact that it’s our understanding that 680 News in Toronto which is an extremely successful, highly profitably station, was a money loser for seven years before it began to turn profitable and it is not uncommon for a start up magazines to be in an investment mode for six years to seven years. So some of you maybe all we’ve been too patient with 640, but this is a $220 million radio market, we believe in our product, it’s been reaffirmed in PPM and we’re confident that we can get a big lift there and that will add significant uplift in terms of our ability to improve our margins.

Paul Steep – Scotia Capital

Okay, fair enough. Last one then you answered that you sort of touched on the final point, so outside the top five markets such as Toronto, you got maybe five AM licenses left. What sort of the game plan there? And how should we think about in terms of lifting the bottom-line? Thanks, guys.

John Cassaday

Well, first of all, largely, our AM stations in the West are highly successful both in terms of ratings and profit. So if you look at CKNW in Vancouver, CHED in Edmonton, QR in Calgary, CGOP in Winnipeg, I mean, these are stations that any group would be proud to have.

We got a couple of development stations. One in Vancouver Traffic Station and i880 in Edmonton that are under the microscope right now and we will be looking to the general management group that our upcoming operating plan to make a case for continuing to invest in these properties. The other two AMs that we have that are on the watch list, if you will, CHML in Hamilton, and CFPL in London, we’re working hard to move those stations into a profitable situation and we’ll evaluate those as we move into the new fiscal. Other than that I think we’re in good shape right across the board.

Paul Steep – Scotia Capital

Great, thanks, guys.

Operator

Our next question comes from the line of Scott Cuthbertson from TD Newcrest. Please proceed.

Scott Cuthbertson – TD Newcrest

Thanks very much. You mentioned that you are seeing that kind of had a budget on W Movies and Sundance had a very good initial response. Just wondering if you can help us at all with through broad expectations for of how is it going to impact your P&L in the second half of this year?

John Cassaday

First of all, because they’ve got a locked-in subscriber base they will make a small contribution right out of the box. In both of these networks when we acquired them had distribution bases of around 800,000 subs that both be in excess of 2 million. W Movies is clearly a property that will generate ratings quickly because of the movies that we offer. So I think it will generate ad revenue and relatively straightforward way there. Sundance is more of perhaps a sponsorship sell and an ad sell and we’re probably pace towards the goal, so we have for that a little slower than W Movies, but these will not be big bleeders at all in the back half, in fact, they should be very close to break-even in the back half of the year.

Scott Cuthbertson – TD Newcrest

Good stuff. And looking at your (inaudible) business, good job there, I mean, your subs are up nice 5%, that’s a better than households of 2%. You did mentioned that Shaun was doing some stuff and I think you intimated that that looks to be sustainable, just wanted to confirm that that’s a reasonable run rate, seems pretty robust you see that continue in the second half of the year?

John Cassaday

Well, we really have two strong wins helping us here. One is the fabulous job that Shaun particularly is doing on the digital transition. That is a big contributor to our success. Secondly, the programming coming out of show time needs to be always is just spectacular. Paul can give you some insight into the new programming that’s coming in the spring. But we just have so many promotables and I think that combine with the move to the subscription video on-demand model that we have now in all of our western markets, makes us a very, very compelling property for us and for our viewers and for our distribution partners. So we’re still convinced that we can get to a million subs this year and sustain this 5% growth rate to the back half. Paul, do you want to make a few additional comments, perhaps about the momentum?

Paul Robertson

Sure, John. I think what’s going to help us in the third quarter and in the fourth quarter is the Pacific. It’s really major, major push behind a ten hour timings miniseries. So, that’s on the air now. And from everything we can tell is doing really, really well is the sub builder. And then as John said we got all the major big names coming back on the fourth quarter, True Blood, Hung and Entourage. And the new programming, there’s a miniseries, Colors of the Earth that we will see in the fourth quarter. We turn to Dexter first quarter next year. So I mean that what’s happening now on the business is that there’s just a contemporized programming so it doesn’t provide any downtime for somebody who want to consider switching off. And that’s really the key, is to get that churn rate down so that we’re constantly adding new subscribers and they’re stepping to the rooms.

Scott Cuthbertson – TD Newcrest

Great, thanks. Thanks for the package and the color on the call, I think it’s certainly very helpful but I just wanted to we did a slightly different way and give some color on just kind of national versus local advertising trend, I think we’ve seen so far that national kind of ticked a person, and locals been a little bit so I just wanted if you could provide some color from that point of view?

Tom Peddie

Okay. I’m going to answer you a little bit different way because probably the best place that I think radio is probably the most indicative of the ad recovery. I view radio as being sort of the proxy because it really reflects what is going on up and down, and Main Street. Scott, if I could answer your question a little bit different way, let me give you just some sense of some of the category growth that we saw in the second quarter. And as I have indicated to you that we’re seeing even stronger growth in Q3, but these are Corus numbers.

And just to give you some sense of the depth and breadth of this recovery, retail is up 9.4%, automotive is up 20.9%, professional services is up 8.7%, entertainment is up 2.5%, restaurants is up 8.7%, general services, whatever heck that is up 8.1%. So that sort of the big chunks of business that we do, those are the top six categories and those are the growth rates for them. So again, our view is, is that there is a breadth and depth to this recovery that gives us some comfort that it sustainable.

Scott Cuthbertson – TD Newcrest

And to just see national come back first and then local or was it pretty much the same?

Tom Peddie

I’d say we saw local start to come back first and then nationals really started to kick in, in the last couple of weeks where Patrick Grierson, he is the President of CBS, the rep shop that represents Rogers and Corus and a few of the other larger independents is now reporting significant demand and we’re starting to see a whales issues in some markets.

Scott Cuthbertson – TD Newcrest

Great. Last point I just wanted I mean obviously the content of Bakugan and Backyardigans, etc., first, one question just, is there a new initiative in Backyardigans and secondly, I just wanted, it seems to me I was thinking about this year is kind of a little bit of a hand-off from Bakugan into maybe BEYBLADE and some other properties that you had in the pipeline. Just wondered if you could talk a little bit about the dynamics and what that means for the pacing in from that source of revenue?

John Cassaday

Well, these businesses are difficult to predict because they are hit driven businesses. You alluded to the, Scott, we make sure that we have ideas and merchandising opportunities in the pipeline. So are we hopeful that we can get multiple additional years of revenue growth out of Bakugan? Yes, we are. And as we indicated I think in the last call based on the feedback that we’ve gotten from Target and Wal-Mart, they see two years to three years of additional license perhaps beyond that. So we’re very optimistic. We launched a new game through Activision this year. That’s been a best seller. We’re launching a MMOG, a platform for Bakugan in the next few months. The guys has been master, try to get this into a major feature films.

So there’s a lots of initiatives to continue the momentum of Bakugan. Backyardigans is perhaps one of those sustainable core properties like we need to prove. Who knows? That could be something that generates revenue for us for quite some time. With Doug Murphy and the guys in the kids group who have got coming is a BEYBLADE, the relaunch with a full support of Hasbro behind that. That will go a back on YTV and a number of major partners including Cartoon Network in the UK.

So we’re very excited about the prospects for the relaunch of BEYBLADE and then something that has been a long time coming is the relaunch of Babar. That was featured at the international licensing show in Paris, just a couple of weeks ago, extremely well received and our program sales executives are saying that the sale of the Babar property at least throughout Europe is one of the easier sales that they have had in quite some time. So we got two sustainable properties and a couple of things in the pipeline that give us lots of reason to be optimistic that we can keep that merge line solid for several years to come.

Scott Cuthbertson – TD Newcrest

That’s great. Thanks very much.

Operator

Our next question comes from the line of Bob Bek from CIBC. Please proceed.

Bob Bek – CIBC

Thanks, good morning guys. Just to beat the dead horse, Tom, on the other expense line, just trying to clear because I was a bit confused on the answer. So in Q3 we’re going to see some of these additional sort of overlap rent expenses in the other expense line and then in Q4 once you are into the building move up to the corporate line, is that correct?

Tom Peddie

More or less, yes.

Bob Bek – CIBC

And in Q3, would we see a similar type of number sort of 3 million-ish would that be a fair, fair place to stick the pin?

Tom Peddie

Yes.

Bob Bek – CIBC

And just a bigger picture question I have left, I guess, John, you have done a great job in keeping cost, you are getting cost so does we bore through this recession I know you spent a fair bit of time at the Investor Day in September, talking about, finding a way to run leaner once the recovery is back in, is fully back in at some point and clearly, we get to that point, if not there already, your thoughts given the radio now ramping up in your Q3 and TV continuing to improve greatly, your thoughts on the ability to keep costs out and given you are still a growth company once the ad market is back?

John Cassaday

Well, thanks for making a point that we’re still a growth company because what I would not want people to think is that our preoccupation is with costs. We are equally committed to having one foot on the gas and another foot on the break to control costs at the same time so they both loom very large in all of our thinking so you know evidence of that the purchase of SexTV and driving classics to repositioning to W Movies and Sundance, we continue to trough for new opportunities in regard to growing our business.

But we also believe that with the move to Corus key and the investment that we’re making in that that there are significant opportunities to increase the productivity of our organization and we’re spending a lot of time thinking about how we can deliver a more robust product to our customers and make working in Corus a more enjoyable experience because people have great role definition, lots of accountability, and we will continue to keep a close eye on the cost line, while we try to drive the top-line through organic and M&A growth.

Bob Bek – CIBC

Okay, thanks for that. That’s it for me, thank you.

John Cassaday

Thanks, Bob.

Operator

Our next question comes from the line of Ben Mogil from Thomas Weisel Partners. Please proceed.

Ben Mogil – Thomas Weisel Partners

Hi, guys, good morning and thanks for taking the call. So, John, one question, you obviously talked a lot about the new licenses in the Alberta region, in particular. Do you have any sort of view that number of those new licenses that are owned by certain large guys like yourselves, potentially, actually fault?

John Cassaday

Well, they never hold, Ben, but they always sell. And that’s the one complaint that we have with the commission is that what they believe is an attempt to add diversity to the system, only turns to enrich non committed broadcasters and we’ve been pushing for expansion of the MLO policy, we believe that organizations like Corus, Rogers, CTV, Astro, that are committed to this business should be allowed to control more of the shelf space and that this practice of providing licenses to people that turn around and flip them in five years is not good for anybody.

Ben Mogil – Thomas Weisel Partners

Okay, so but unfortunately barring anything from the CRDC this, we are not going to see station reduction, we are just going to see Peter move into Paul kind of thing?

John Cassaday

Absolutely, these licenses are valuable and they may not be valuable and they hands somebody with a standalone station, but if they can be pulled in to a company that has synergies in that market with production, sales, marketing, etc., they become valuable instantly. So unfortunately that is just the factor that we’re dealing with. The good news is that in many of the major markets, Spectrum is exhausted, and we won’t see this preoccupation with over licensing in markets like Toronto, but we certainly been hit hard in Edmonton, in Calgary and I think to the extent of the committed long-term broadcasters that have served these communities so well for so long.

Ben Mogil – Thomas Weisel Partners

Okay. And then last question this maybe more down to Tom’s alley, can you provide us the 3Q '09 Radio breakdown by the three major geographical regions so at least we got I’m sure if everyone is on the call is well with regards to the benchmarking which should go up against sort of model out going forward?

Tom Peddie

Simple answer, no, you will get the Q3 breakdown when we issue our Q3 results.

Ben Mogil – Thomas Weisel Partners

Okay, fair enough. And I think –

John Cassaday

'09.

Tom Peddie

Yes, specifically for '09, you will get '09 when we issue 2010.

Ben Mogil – Thomas Weisel Partners

Okay, okay so just like what you’ve done in this quarter basically?

Tom Peddie

That’s correct.

Ben Mogil – Thomas Weisel Partners

Okay. And I think for the last one on Television front I mean, what’s your view from a cable inflation prospective on, how much sort of pricing you’re going to continue to be able to get sort of not to the services, sort of on to a more discretionary services like what’s your sort of view on cable inflation which obviously sort of increasingly an issue with the cable operators given what all of us are facing on our video bills?

Paul Robertson

Yes, Ben, its Paul here. I mean we’ve been able to selectively get some additional pricing and it comes in the form of things like providing video on-demand packages in YTV and Treehouse or it comes in the form of providing HD versions of Movie Central format. So it’s a work around the edges in this and find a way to get some pricing upside. Overall, trying to take a large well distributed service and crank up the pricing has been very, very difficult. We haven’t had much success in that.

We think we are well positioned that the market unfolds to the kind of digital transition, given the price value of our services, so we think we can continue to negotiate good overall deals that give us some revenue upside on each of the key accounts. That’s really what we look at it, how do we continue to show growth overall whether that’s through expansion of the subscriber base or changes in the packaging. All these helps to enhance the revenue not just the price point per service. So we think we got good plans going forward that continue to grow revenue. It’s unlikely to come from rate increases on some of the largest services.

Ben Mogil – Thomas Weisel Partners

Okay, great. That’s great, thanks Paul, thanks, guys.

Operator

Our next question comes from David McFadgen from Cormark Securities. Please proceed.

David McFadgen – Cormark Securities

Yes, hi, a couple of questions, first of all just a clarification, John, in your commentary you gave rating gains for a bunch of the channels like 45, 25 and 32%, but I wasn’t able to write them all down. Could you go over that again what those channels were?

John Cassaday

Okay. It might take me just a second here. Paul’s got it, go ahead, Paul.

Paul Robertson

VIVA plus 25, Cosmo plus 44, and DUSK was 32.

David McFadgen – Cormark Securities

Okay. And then the other question just on the radio business. Some of the other analysts actually interacting but I will just ask I guess more directly for Q3 when you start to see revenue up, pricing up, do you think that you can maintain your cost where they are right now or are they going to creep up just because revenue is growing?

John Cassaday

Well, certainly some of our variables will increase, particularly, sales commissions and we’re delighted to pay more sales commission, but our fixed costs are an area that we’ve had under a good control and so, basically, the beautiful thing about radio is incremental revenue, there is a multiply effect in terms of its impact on EBITDA. We saw the other way last quarter as you well know, but this quarter, we had a little bit of softness in revenue, but still have, I think pretty strong earnings performance because largely a significant reduction in our fixed costs.

David McFadgen – Cormark Securities

So would it be safe to assume that the fixed cost stay where they are, maybe there is obviously the variable cost will go up to the sales commission of size on that that’s kind of the outlook to the cost?

John Cassaday

That’s it.

David McFadgen – Cormark Securities

Okay, all right, thank you.

Operator

Our next question comes from the line of Tim Casey from BMO. Please proceed.

John Cassaday

Good morning, Tim.

Tim Casey – BMO

Thanks. I am going to one on TV, one on radio on the television side with the contributions from the new channels in the second quarter were they enough to move the dial, did that really accelerate your growth rates?

John Cassaday

No, they are modestly contributing to them, but the big items here are pay business and the substantial contribution not made to our subscriber growth and then just the extraordinary performance of YTV and Teletoon were the big contributors to our growth rate on the revenue side.

Tim Casey – BMO

Right. In your release you put in a line that you are going to continue to invest in the new channels. Should we imply from that, is there a bit of margin direct from those investments or once again is it too small to move the dial?

Paul Robertson

Its Paul here, no, the new ones are net contributors to EBITDA, and they came with some revenues associated with and we have been able to build on the distribution so we never had a vision that they would go into investment mode.

Tim Casey – BMO

Got you, okay. And switching over to the radio side, John, you made a point of talking about how 640 is a winner on PPM, but when you own 50 stations, you had talked about earlier that PPM was more like going from imperial to metric. When you own 50, is it not fair to say that it’s going to be a bit of a wash but you are going to have winners and losers in PPM, how do we look at that?

John Cassaday

Well, I think that’s a fair statement that there are winners and losers. The key is to try to get more in the winning category than losing category and continue to move your revenues up and get more than your fair shares. So the key thing for us on 640 was just that we needed to get that turned around and into profits. And on some of the smaller brands they don’t attract national dollars, you’re just fishing in the local pond and that represents granted 75% of the total revenue potential for radio, but we needed to outrank say, CFRB to be able to begin to pick up the dollars needed to make that profitable so it was an important step for us.

But again one of the things that we have talked about historically is you got essentially five markets and about ten stations that represent about 90% of our earnings here so if you really want to cut to the chase the things that really, really matter in terms of the performance of our radio company going forward, Toronto, Edmonton, Calgary, Vancouver, by and large, that’s it and so, looking at the ratings performance there, is the key to understanding what the likelihood of us being able to continue to put numbers on the board is going to amount to.

Tim Casey – BMO

And are you calling yourself a net winner in those four key markets?

John Cassaday

Yes.

Tim Casey – BMO

On PPM?

John Cassaday

Yes.

Tim Casey – BMO

Okay, and lastly, the Commission seems preoccupied with television and I guess for an ownership to some degree. Is it fair to say that any hope of deregulation on radio is still a few years out?

John Cassaday

Well, I think it’s at least two years though. Unfortunately, we had hoped based on some discussions we’ve had at a hearing in Quebec City a little over year ago that we are going to get some attention, put on radio this year, but as you point out and its quite understandable, the Commission has been quite preoccupied with the issues in television, specifically, around local TV, so radio has been put on a back burner.

And quite frankly, I don’t think everyone in our space is committed to change as we are in our discussions with our colleagues and competitors. A lot of them like the status quo and we perhaps the one voice and acquire looking for major change in the MLO policy right now that could change over time, but we are pretty much leading the charge on that one and hopefully, we can make some inroads there, because we see that as the key to us being able to grow a business that’s important to us.

Tim Casey – BMO

Right, thanks for that.

Operator

(Operator instructions). Our next question comes from the line of Randal Rudniski from Credit Suisse. Please proceed.

Randal Rudniski – Credit Suisse

Thanks and good morning. I think I have three questions. The first one is sort of similar to Tim’s, but I was hoping we can focus a little bit on the Toronto market and you did raise AM640 as a specific example the last position PPM, leading to a high ratings rank and we have established a PPM is having an immediate impact. Does it then follow AM640 should be what that transition to breakeven and profitability later in 2010?

John Cassaday

I think we will see in 2011 profitability on 640, we may be close to breakeven this year, certainly, we will more than have the loss from last year this year.

Randal Rudniski – Credit Suisse

Okay, and then –

John Cassaday

Generally, Stanley Cup finals that station would be quite popular.

Randal Rudniski – Credit Suisse

That’s for sure. And then second of all, can you comment on how Q107 and Vinyl have done?

John Cassaday

Q107 is doing fine, it still dominates men, 25 to 54, we were down one ranking in the latest book on adults 25 to 54 because of the success of Boom and new sort of Rock Station that was launched, replaced easy rock in Toronto, but Q still very, very strong, must buy station. Vinyl, we don’t have any numbers from Hamilton which is its home market because that’s not a PPM market, it’s a BBM market, but in terms of PPMs, the numbers were up nicely on Vinyl and our rankings were up and it's not transformational at this point in time so Vinyl still are work-in progress, I guess the summary statement is better than we were performing in the country format and potential whereas we just felt the country format in Toronto had limited upside.

Randal Rudniski – Credit Suisse

Okay, thanks. And then lastly, pertaining to Quebec radio, you indicated total revenues were down to percent, airtime revenues up to 3%, what is the delta between those two numbers?

John Cassaday

Change in our contra policy and really, diminution in our interest in attracting contract. We really are focused on cash revenue and that’s where the changes, little bit, little bit web but mostly I’d say 80% of it is a reduction in contract advertising.

Randal Rudniski – Credit Suisse

Thanks for the color, thank you.

Operator

Our next question comes from the line of Sanford Lee from Genuity. Please proceed

Sanford Lee – Genuity

Hi, good morning, thanks. Just a quick question on I guess on the regulatory front, just your thoughts on carriers and timing potential and when sort of government come back with a decision given (inaudible) potentially to implement?

John Cassaday

Talking about the value for service.

Sanford Lee – Genuity

Yes, yes sorry about that.

John Cassaday

I think we are looking at, at least a year.

Sanford Lee – Genuity

And then also I guess recently in the news for ownership of Canadian broadcasting shift to see recommending potentially I guess increasing to 49% from 47%, your general comments about reviews on ownership?

John Cassaday

Well I think we saw in the speech from the throne that there is generally a sentiment amongst the federal government to be more open minded about foreign ownership, there is a white paper coming to that effect and we will see I think a lot depends on what kind of government we have after the next election, if it’s a very small minority government, I think you will see minimal action on this file if there is a majority government, we may see more dramatic action, I think particularly as it relates to the pipes, i.e. telecom sector. As it relates to the programming sector I think there is going to continue to be a strong call for sovereignty and I see that movement happening at a more gradual pace than some of the other sectors within telecommunications.

Sanford Lee – Genuity

Great, thanks. Can I ask one more last one? With TELUS TV making a big push in Western Canada and the broadband, TV as well as satellite deal with, can you tell us if you are seeing any maybe potentially uptick in your growth related to specifically to TELUS or Shaw, and then at the same point having increased competition from TELUS, is that improving your pricing as far as program?

John Cassaday

Well, first of all, we are pretty agnostic as it relates to where our business comes from we try to serve all of our BDU partners equally well. Any information that we have about their success with us or others we keep confidential so I can’t comment specifically on what we’re seeing within TELUS, I can tell you that our subscriber revenue was up 14% this quarter. That was a function of growth amongst all sectors of the BDU population, satellite, telephony and cable operators that are offering video services so I leave it at that.

Sanford Lee – Genuity

Great, okay, thank you.

Operator

Mr. Cassaday, there are no further questions at this time. Please continue with your presentation or closing remarks.

John Cassaday

Okay, well, thank you everyone. Seems that there are no more questions so once again thanks for your positive comments on our results in Q2 and for your continued interest in Corus.

Operator

Ladies and gentleman that concludes the conference call for today. We thank you for your participation. You may disconnect your lines now. Have a great day, everybody.

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Source: Corus Entertainment Inc. F2Q10 (Qtr End 02/28/10) Earnings Call Transcript
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