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Executives

John Cassaday - Chief Executive Officer, President, Director and Member of Executive Committee

Thomas Peddie - Chief Financial Officer and Executive Vice President

Douglas Murphy - Executive Vice President and President of Corus Television

Chris Pandoff - Executive Vice President and President of Corus Radio

Analysts

Colin Moore - Crédit Suisse AG

Paul Steep - Scotia Capital Inc.

Robert Bek - CIBC World Markets Inc.

Scott Cuthbertson - TD Newcrest Capital Inc.

David McFadgen - Cormark Securities Inc.

Tim Casey - BMO Capital Markets Canada

Adam Shine - National Bank Financial, Inc.

Drew McReynolds - RBC Capital Markets, LLC

Corus Entertainment (OTCPK:CJREF) Q2 2011 Earnings Call April 14, 2011 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Corus Entertainment Second Quarter Analyst and Investor Call. [Operator Instructions] I would now like to turn the conference over to Mr. John Cassaday, President and Chief Executive Officer for Corus Entertainment. Please go ahead, sir.

John Cassaday

Thank you, operator. Good morning, everyone. I'm John Cassaday, and welcome to Corus Entertainment's fiscal 2011 second quarter report and analyst call. Thank you for joining us today.

Before we read the 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 at corusent.com in the Investor Relations section.

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

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

On Slide 3 of the PowerPoint presentation, you'll see that we are pleased with our excellent top line growth for the second quarter. We finished the quarter with consolidated revenues of $191 million, up 8% from year ago. Our strong revenue growth was driven by both our Radio and Television divisions. Radio revenues were up by 5% led by Ontario, which was up 11%. Television revenues were up 8% with Specialty advertising up 14% and subscriber revenue up by 6% compared to year ago.

Moving to Slide 4. Our strong subscriber and advertising growth, coupled with disciplined cost controls, translated into superior segment profit growth for both our Radio and Television divisions. We delivered consolidated segment profit of $61 million, up 11% versus Q2 in the prior year, which demonstrates the power of leveraging our top line growth into great results.

Our net income from continuing operations for the quarter was $27 million or $0.34 per share compared to $0.18 per share last year. However, last year's results did include $14 million in costs associated with our debt refinancing. The removal of this item results in adjusted earnings per share of $0.30 for last year.

Moving to Slide 5 and our Radio division. Radio performed well in the second quarter, with revenues up 5%, reflecting continuing recovery in the overall radio ad market. According to TRAM, Corus outperformed the radio market in Calgary, Winnipeg, London, Kitchener and Toronto. Ontario drove our growth with segment profit up an exceptional 62% and revenue increases of 11%, largely from our Toronto and Hamilton clusters. While revenues in the West remained flat to last year, Calgary and Winnipeg did post strong gains compared to prior year.

Radio delivered impressive segment profit growth, up 18% from a year ago. Ontario's strong revenues, coupled with effective cost-containment strategies, enabled the increases to positively impact our bottom line. It should be noted that our Radio results exclude Quebec Radio, which was sold February 1, 2011. Therefore, Quebec Radio results have been retroactively restated as a discontinued operation.

Moving to Slide 6. Our Television division delivered excellent results in Q2 with revenues up 8% and segment profit up 11%. A buoyant advertising market paved the way for continued growth in our Specialty portfolio with an increase of 14% for the quarter, led by our Kid networks and CMT.

Subscriber revenue for the division also experienced strong growth, up 6% versus prior year, building on the growing subscriber base for our newer offerings: Cosmo Television, Nickelodeon, Sundance Channel and W Movies.

Our Kids portfolio continued to perform exceptionally well, with ad revenues up 21% in the quarter, capitalizing on strong ratings growth and increased market demand for our co-view audience. The Kids portfolio also saw subscriber revenue increases up 6% compared to year ago. Our merchandising revenue saw significant double-digit growth this quarter, driven by our boys action properties, Bakugan and Beyblade. Bakugan continued to deliver good results, particularly in Europe where it is one of the top five boys action properties in a number of countries such as the U.K. and France. We are also seeing significant traction from the Beyblade franchise in major international territories. In Germany and Spain, for example, Beyblade is the number one toy brand in its category. It is also ranked among the top three brands in France and Australia in its category according to industry data.

Total revenues from our Specialty and Pay segment were up 3% versus prior year despite the closure of Corus Custom Networks and the associated elimination of that revenue source. Specialty advertising revenues in this segment were up 8%, largely driven by CMT, which saw ad revenues up 25% year-over-year.

Our Pay business saw a lift in paid subscribers for a third consecutive quarter to 989,000 households coming out of an aggressive three-month preview campaign that ended in November. The service benefited from a number of high-profile series, including Spartacus: Gods of the Arena from Starz, the final season of the hit HBO series Big Love and an exclusive slate of Showtime program launches that included the return of Californication and two new highly anticipated series: Shameless, starring William H. Macy; and Episodes starring Matt LeBlanc.

Moving to Slide 7 and our outlook for the next quarter. Overall, the ad markets are performing well. Our pacing remains strong, and we are confident that the momentum from Q2 will continue into the next quarter.

For Q3, we are forecasting good growth from our Radio division with mid-single digit revenue increases led by Ontario, in particular from Toronto, Hamilton and our London stations. In the West, we are anticipating continued growth in Calgary. In Edmonton and Vancouver, we are implementing programming changes in response to extensive market research findings. With these modifications, we expect to see improvements that will deliver increased audiences and positively impact revenues going forward. With our exit from Québec, we are also expecting Radio margins to meet our 30% target by year end.

Turning to our Television division. We expect to deliver a solid quarter with significant upward momentum expected from increases in our subscriber base, a strong ad market and the launch of OWN. The division will benefit from the continued strength in Specialty ad revenues, which are forecasted to achieve double-digit growth led by our Kids brands, CMT, Cosmo Television and OWN.

In our Kids portfolio, YTV continues to rank as the number one specialty channel for kids two to 11. Strong ratings on our Kids services, combined with the ongoing demand for co-view inventory, suggest a solid growth profile for our Kids services. On the merchandising front, the relaunch of Beyblade is off to a great start. Early strength this fall in Europe has been matched by performance in the United States over Christmas and into the spring. These early signs of success indicate that we are building a good foundation for the next big boys action hit. Bakugan continues to perform well for us, and our Babar brand has secured distribution in all major international markets. The new Babar series debuted earlier this year in France, the U.K. and on Disney in the United States and has generated impressive early ratings.

We continue to leverage the advantages of our new Corus Quay facility, making more of our content available in high definition, most recently launching an HD offering of OWN following the successful launch of YTV this past January and Movie Central 2 in the fall. Our IP-based broadcast facility allows us to compete in a fully digital IP-based media environment and positions us competitively with all of the players in the system, both regulated and unregulated in Canada and around the world.

The March 1 launch of OWN in 6 million households across Canada represents a great opportunity for us to grow our women's portfolio. Along with W Network, we look forward to building OWN into a powerhouse brand. The Canadian advertising community has responded very favorably to the service, and we have a number of charter advertisers on board. The indicators for growth are good. We are on target with our revenue projections and expect the service to deliver more than 3x the advertising revenue in Q3 compared to VIVA last year. With the brand equity of Oprah and more new original programming rolling out, we are confident that OWN is a strategically vital addition to our women's portfolio.

Also we are very pleased to announce that subsequent to the second quarter, we achieved a major milestone in Pay TV at the beginning of Q3, reaching our goal of 1 million paid subscribers. This accomplishment demonstrates the exceptional value that our customers place on premium television as a unique offering in the marketplace.

The extensive mix of exclusive original series from partners like HBO and Showtime, as well as current theatrical titles and original Canadian series, creates a strong value proposition and an unmatched viewing experience for our customers. Our long-term agreements with HBO and Showtime, plus content and output deals with studios such as Warner Bros., Sony and Disney, offer customers a range of original high-quality content delivered in a commercial-free environment on any platform.

We expect the great lineup of new premium content offered in Q3 will be very attractive to our Pay subscriber base with a number of high-profile launches including: Mildred Pierce, starring Kate Winslet and Guy Pearce; the HBO film Too Big to Fail based on Ross Sorkin's best-selling book about the Wall Street financial crisis and starring William Hurt, Paul Giamatti and James Woods; HBO's Game of Thrones from a series by best-selling author George R.R. Martin; Season 2 of the critically acclaimed series, Treme, about post-Katrina New Orleans; and new seasons of the Showtime series Nurse Jackie, starring Edie Falco and United States of Tara starring Eddie Izard and Toni Collette.

In summary, we expect solid top line growth in the third quarter, driven by strong increases in specialty ad revenue in our Television division and growth in our Radio division, led by our Ontario stations.

We hope that you have found our comments helpful, and we will now take any questions that you may have. Operator, over to you.

Question-and-Answer Session

Operator

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

Paul Steep - Scotia Capital Inc.

Good morning, guys. So first off, maybe why don't we start with Over-the-Top just in terms of post the Paramount announcement, maybe understanding the timing on your output agreements on movies and then TV just in terms of -- you've hit a big milestone in Pay. What that looks like in terms of securing the series content and then separately maybe the movie side going forward.

John Cassaday

Well, first of all, I would say that we do have a new competitor. We will have many more, I'm sure, in the future. But it's important, I think, to remember that video consumption is not a zero-sum game. We believe that there is virtually an insatiable appetite for consumers to consume more media on a multitude of platforms, and all of the data demonstrates that video consumption is, in fact, growing. So point number one, our belief is that new competitors will prove to be additive to the system as opposed to serving to carve up the pie. Secondly, as we referenced in our opening comments, we believe that we have an excellent value proposition with Movie Central. We have extensive access to HBO programming and their library and Showtime, and these properties are exclusive to our Pay window. These contracts are also in place for quite some time into the future. So as a result, we're extraordinarily confident that we'll be able to maintain that competitive advantage going forward. It is true that as an industry we're going to need to continue to add value to our proposition. At Corus, we are huge believers in the proposition of TV Everywhere, which is essentially a promise to our subscribers that we'll make the content that you pay for, once available, on whatever platform you choose whenever you want it. There are some software issues associated with the proposition of authentication, but we believe that as an industry, we can successfully meet the needs of a changing consumer with the TV Everywhere proposition and Corus is all in, in making those digital rights available to our distribution partners to ensure that they can continue to compete effectively. And unlike other industries, which have been disintermediated, we think that there is a absolutely tailor-made solution to the proposition of content accessibility in our particular case. As it relates to Paramount, Paul, I guess I think the most important thing I would say is that we have never had all of the studios in the Movie Central portfolio at one time. It has always been our choice to pick and choose. And in this particular case going forward, we will not have Paramount. But as we said, we have a very strong offering with Warner Bros., with Disney, with Sony, and I know that we'll continue to grow going forward. So the proposition is compelling. The TV Everywhere solution is real. And a fundamental premise we have is that we will continue to increase the consumption of video going forward. So are we responding to this? Yes. Do we think it's life threatening? Not at all. Doug, I don't know if you have any additional comments that you'd like to make on Over-the-Top.

Douglas Murphy

Thanks, John. I'd just add that we're working extremely strategically with our BDU partners to implement an increased number of some content everywhere strategies, which we'll be rolling out in the months to come. In a number of cases already, we have broadband offerings of Movie Central, and that's as critical as some of this Over-the-Top competition. I think that the performance of our sub-growth speaks to the value proposition to our consumers. So we're just delighted with the results of our acquisition campaign. The fact that it has substantiated the fact that what we believe to be true is, in fact, true, that the consumers value and relish movies and the exclusive series content. We continue to work hard to market, to retain and to deliver our content across all platforms with our BDU partners.

Paul Steep - Scotia Capital Inc.

Fair enough. Just one clarification. John, you didn't -- or Doug, you didn't mention Starz at all. Arguably, they've only got 25 hours, but looks like they're going to go to 50 to 60 in the next couple of years. Is that also in sort of your point, too?

Douglas Murphy

You mean in terms of content acquisition or a partnership?

Paul Steep - Scotia Capital Inc.

Yes, in terms of exclusive and long term.

Douglas Murphy

That's a great question, Paul. We're actually speaking with a number of the U.S. production entities, Starz being one of them, to explore potential content coproduction idea. So Starz is distributed by other various entities in Canada, but they have a number of great properties that we're talking to them about. So they are, of course, on our shopping list.

John Cassaday

Starz is a little different from HBO and Showtime because they're just getting into new production. So effectively the studios that they have, we have the rights to those studios in Canada. And we have worked with them. For example, Spartacus would be good example of a property that we licensed when they made it available to their subscribers. And as Doug said, we think that there's a terrific coproduction opportunity with them and they have indicated a willingness to talk to us about developing series together. So the relationship with Starz is growing and is important one to us. So we look to them as being an important part of the puzzle as well.

Paul Steep - Scotia Capital Inc.

Great. I'll hit one other and then pass the line. I guess, Tom, as cash builds into the back half of the year, how should we think about sort of cash redeployment? You did a little deal with B5Media, is it more along the lines of tuck-ins or is it directed to the debt? How should we think about where the excess cash goes?

Thomas Peddie

I think that it's a combination of both. We will continue to looking for tuck-in acquisitions as we grow the business. As you know, our free cash flow guidance is $100 million. At this particular point in time, we're on target for that particular number. We'll use about $60 million of that free cash flow for dividends. So in theory that would leave about $40 million for bank debt reduction. But as you also know, with the disposition of Québec, we picked up $75 million. So I think overall, you'll probably see our bank debt number dropping by about $100 million from last year.

Operator

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

Robert Bek - CIBC World Markets Inc.

I just want to go back to the Over-the-Top for a couple points. John or Doug, perhaps you can talk to your concerns over the programming cost side of things. I mean, obviously, new competitor in the market and as you say probably some more new competitors to come in, you'll hold your own. You've got long-term deals in place, but at the margin, the implication would be that you'd end up having to fight a little harder on your future deals. Any thoughts on that side?

John Cassaday

I think our objective is to maintain our margins. This will be through a combination of mix. As you mentioned, we have a number of deals that are in place. We've renewed a number of deals fairly recently at favorable rates. One thing you need to remember is that our deals with the studios are in Canadian dollars. So if you were to look at a studio relationship with us that was entered into five years ago, they're going to get a pretty nice increase just on currency going forward. So I think the combination of mix, continued subscriber growth, possibly some additional sub-revenue growth going forward and the productivity improvements that we're going to be able to get out of Corus Quay, we're hopeful that we can continue to hold our margins on Pay going forward. Tom, got any additional comments? Anything else on that, Bob?

Robert Bek - CIBC World Markets Inc.

No, that's fine. Also the next question related to that, the series content's obviously the key here and your partners at HBO and Showtime have shown -- well, have not partnered with some of these Over-the-Top ones as of yet. Just anecdotally, John, do you think -- where do you think the risk is at some point that some of the series content starts to become more current on the Over-the-Top issues than what we're seeing now, which is sort of library stuff?

John Cassaday

Well, I think in the case of Time Warner and HBO, Jeffrey Bewkes is pretty much on the same page as we are, and that is that he considers his value proposition to be about providing exclusive content to his BDU partners and to making the programming available on HBO GO. So I can't read his mind, but I think there's very low probability that, that boat will leak anytime soon. And we have a long-term deal with that, with multiple years to go. So I guess if your question in terms of long term is in the next five years, do you think there will be any leakage from HBO? The answer is no because our contract extends beyond that time period. So we're very hopeful and very confident rather that we're going to be able to maintain that series availability on an exclusive basis. Showtime, same thing. That's longer-term deal with multiple years to go. Again Bob, I don't know what you're planning horizon is, but I think in terms of five years and three to five years, we think that our value proposition is bulletproof.

Robert Bek - CIBC World Markets Inc.

Five years works for me, too. Just on a separate issue. Your friends at Shaw -- your partners at Shaw introducing the Shaw Personalizer Plan [Shaw Plan Personalizer], so a little bit more moved to an á la carte situation. You've obviously got very strong properties on the TV side to participate in that kind of a model. But your thoughts on whether or not this does offer up any kind of an issue for you or perhaps even opportunity as we see other distributors move to this type of plan.

John Cassaday

We've certainly been aware for quite some time with digital migration that there was going to be more personalization. We think that it's very important that consumers have choice and are allowed to make discrete decisions as it relates to the programming services that they secure. But the packaging system has worked well. The packaging system is in the interest of both programmers and distributors, and we believe that, that will continue to be the predominant way that services are delivered in the future. So there is no question that there will be more à la carte. But our view is that given the ease of purchasing bundles of services in well-packaged tiers will result in business being pretty much as it's been again over the next three- to five-year term.

Robert Bek - CIBC World Markets Inc.

And just lastly, you talked about the early success for the OWN and now you'd mentioned the Q3 revenue pickup sort of 3x where you were with VIVA. I don't want to pin you down on the cost side of things, but can we get a bit of perspective as far as the margin implications on that revenue gain? Even just broadly would help.

John Cassaday

Well, broadly speaking, we have been successful in securing rate increases for OWN. Our media partners were as interested in us securing the property as we were on the basis that we are the most willing partner in terms of making digital rights available to them. Tom or Doug, I don't know whether you can comment specifically on margins, but...

Thomas Peddie

I would just say that it was our goal, and we're achieving this goal to effectively self-fund the increased cost in programming with our lift in revenue. So we're happy that we're where we are and where we plan to be, and we're pleased that we see some nice growth in the revenue line going forward.

Operator

Our next question comes from the line of Drew McReynolds of RBC.

Drew McReynolds - RBC Capital Markets, LLC

Just following up on Bob's earlier question. Just on OWN, there's obviously a lot of attention paid to the ratings in the U.S. and just wondering how we should look at that relative to the programming lineup in Canada and how ratings here trend. And I know it's a little bit of an awkward question, but certainly the ratings coming out of the gate don't seem to be as high as what was originally expected and just wondering versus your expectations what the dynamic has been in Canada.

John Cassaday

Well, just to kick things off, there are a couple of components to it. First of all, the degree of advertiser reaction or the level of advertising reaction to it has been very positive. Secondly, the distribution communities reacted very positively. So we've got, I think, two real strong check marks there. As it relates to ratings, the one thing you'll remember even from the opening video from Oprah, she said, hey, this is just the beginning. This is going to take some time to build. So we're in a time when we got a lot of repeat programming. We're in a time when Oprah is still on the air, syndicated on CBS across the United States and mostly through CTV in Canada. That will dry up at the end of May, and we'll have her exclusively on the network and they will continue to introduce new programming. Discovery Networks in the United States just announced recently they're pumping another $50 million into programming. I think they're up to about $250 million in programming investment so far. So we think we've got a great brand. We've got strong support from advertisers, good distribution and this thing's just going to ramp up over time. I'll let Doug give you a little bit more color on some of the programming opportunities that are coming forward.

Douglas Murphy

Just to clarify, we are meeting our estimates from audience delivery that we originally set when we signed up to the service, so we're pleased with where we're sitting from a delivery point of view. What we're learning, and we're in very close dialogue with our OWN U.S. partners -- incidentally, this afternoon in New York is the OWN upfront, so you'll probably be seeing some press coming out of south of the border. What we're learning is that there's been a high level of repeat on some of the original programming, so that has challenged -- less so our OWN Canada, but it's challenged some of our U.S. partners in terms of holding their audiences. That said, however, there's been a commitment, as John noted, to larger investment in more programming and we're just getting to the second wave of really great new programming coming in beginning now. We have The Judds launch, April 15, tomorrow on OWN; Why Not? with Shania Twain, May 13, which we're kind of cross-promoting aggressively across CMT, CMT.ca using the Corus synergies to really drive awareness and traffic there; Finding Sarah with Sarah Ferguson, June 17, coming off the back of the royal wedding next week. So we feel like we have a nice, new thrust of great OWN programming coming to the fore in the coming six to eight weeks. And we're continuing to see some traction on these shows. So I think, as John alluded to, when Oprah comes off conventional as only able to be found on the OWN networks in Canada and the U.S. that'll be another shot in the arm. And we are continuing to be very bullish on the prospects of this service as a complement to the main flagship, W. So we're delighted so far. There's no doubt the press has been taking the opportunity to talk about some of the challenges on the ratings delivery in the States, but we're exactly where we plan to be with OWN Canada.

Drew McReynolds - RBC Capital Markets, LLC

That's great context. Just maybe while I have you, Doug, the output deal with Showtime I think we know when the HBO one expires. Can you let us know when the Showtime one expires? I believe it's not as long as the HBO one, but still obviously a number of years.

Douglas Murphy

Without being actually specific, we do have a number of years ahead that while we're exclusive there.

Drew McReynolds - RBC Capital Markets, LLC

And just shifting gears a little bit. Just maybe for you John, when you look at how Q3 is pacing, is there any election impact in your outlook or current pacing right now?

John Cassaday

Very little. Because of the nature of our services, we don't secure a lot of ad revenue on the TV side and the campaigns have basically been using media quite strategically and specific writings where they feel they have an opportunity to win and they got to hang on. Chris, I'd say that from our perspective, some radio advertising in the next couple weeks would be welcome, but it's not necessarily expected in a big way. Can you just perhaps add some color there?

Chris Pandoff

Yes. This is Chris. We're actually seeing some movement by elections in Canada. Obviously, giving people the information required to vote in May. But on a selective basis, some candidates have already booked radio, recognizing the geographical targeting the medium.

Drew McReynolds - RBC Capital Markets, LLC

That's great. And maybe, Chris, while I have you, obviously, Ontario and the Toronto, Hamilton markets and London markets as you alluded to have been very, very strong on radio. Presumably part of this is all coming on slightly weaker comps. But maybe you can just comment on just the strength of your stations, the strength of the market. How sustainable is it? Is this all surprising you on the upside or did you anticipate this coming down the pipe?

Chris Pandoff

Well, actually we did anticipate a recovery in radio largely on the severity of the downturn a couple years ago. But just to give you a sense of the recovery, it's across a broad base level of categories and things like the standard ones like automotive and retail, but also new categories emerging like professional services. So a couple of things, I think, are helping drive it. The manufacturing segment in Ontario and the automotive industry, in particular, has been really strong. And we're seeing that in our nonmetro markets around Ontario and then sort of the overall population growth and the positive impact of electronic ratings of PPM, I think, has also been an impact for us in markets like Toronto, which is up low double digit for the year. So barring anything dramatic happening in the economy, I would see that the broad-based recovery to continue.

Drew McReynolds - RBC Capital Markets, LLC

Okay. That's great. And maybe the last question. Just on the merchandising side, you gave some pretty good color in terms of what you expect on that front. I believe a couple of years ago you just disclosed a breakdown of your Kids business and merchandising seemed to be 3% or 4% of the total revenue pie. Are we largely in that quantum today?

Douglas Murphy

I guess I would answer that question by saying relative to three or four years ago, we've grown the business quite smartly. So I couldn't give you the exact mix number right now. But that business has continued to sort of grow, and our expectation is it will continue to do so in the coming years.

Operator

Our next question comes from the line of David McFadgen with Cormark Securities.

David McFadgen - Cormark Securities Inc.

A couple of questions. First of all, just on the Oprah Winfrey Network. So when you talk about Q3 ad revenue is going to be more than triple, I know you said you expected to be able to have higher revenue to compensate for the higher costs of OWN relative to VIVA. But can you give us a little more color, like is the EBITDA going to be positively impacted or it's going to be about neutral when you factor in the higher revenue?

John Cassaday

We expect the EBITDA impact will be positive, but not hugely. I mean, we're in a launch here, but I think it's really quite an accomplishment that we were able to secure this brand, spend several million dollars to launch it and come out the gate without any dilution. We're pretty proud of that.

David McFadgen - Cormark Securities Inc.

Okay. That's great. And then just on the Radio business. Can you just provide us with some more details on the programming changes you're effecting in Edmonton and Vancouver, and when do you expect the impact from those to be made?

Chris Pandoff

Yes, this is Chris. In both markets, because of a couple of dynamics -- a bunch of new licenses in Edmonton and sort of the churn that's caused any time there's a new entrant in the market, making sure that our music is on target, primarily on JOE FM. So that one really is got to work its way through the system as the market digests the new entrants. And if you look on a sort of a month-by-month basis, the ratings are reflective of the churn that we're seeing in the market. In Vancouver, it was more of a strategic process that we went through in terms of balancing our two FMs there in terms of the demographics that they provide and sort of aligning it more strategically the way we are in Toronto against adults 25 and older in classic rock and modern rock. So that, in addition to adding Mike Reno from Loverboy in the morning show and some other promotional and imaging features, we're fully expecting to see, certainly, the signs of recovery in ratings in the June book, which will be 13 weeks of the spring but really taking hold in the fall of next year, which, of course, will impact our revenues next fiscal.

John Cassaday

David, just to clarify something. What we're talking about is refinements to the music and our presentation as opposed to rebranding or reformatting. So we're not going to be looking at blowing up a radio station, starting all over again with additional launch costs, et cetera. These are simply solid, research-based enhancements to our music and our presentation.

David McFadgen - Cormark Securities Inc.

Okay. And then just on the TV business. The Kids revenue was up 15%, but yet EBITDA was only up 3%. Can you provide some additional detail why we didn't see as big an EBITDA lift as the revenue or more closer to that?

Douglas Murphy

That's likely due, I'm not sure what you're looking at, David, but that's likely due to the mix we have with studio service work. The studio we're currently doing couple of projects for, some of our key partners on a service basis, we tend to have a lower margin. I can tell you that the margins on the Kids networks isolated continue to be extremely robust. But as we said in the past the kind of the tos and fros of the Kids revenue pie tend to move around a lot with merchandising, studio service work, PND [ph] sales, et cetera. So that's likely what's driving that.

Thomas Peddie

David, it's Tom. The other comment I might also add with respect to timing, if you look at our margins on a six-month basis on the Kids side, they're pretty good. But in this particular quarter, they weren't as good for the reasons that Doug had highlighted.

David McFadgen - Cormark Securities Inc.

Okay, and then just on the Specialty pay side, there the revenue was up 3%, but EBITDA was up 17%. So was that just due to some timing differences? Just wondering what was driving that.

Thomas Peddie

That's a combination of program amort controls, being really disciplined on how we're managing our program amort budget line. We've had some great growth in our diginets, all of our W Movies, Cosmo, DUSK. They're all having fantastic years, so that's been contributing as well.

David McFadgen - Cormark Securities Inc.

Okay, and then just the last thing, one for John. When you talk about Q3 it looks -- it seems like Q3 looks like it's going to be pretty strong. Do you think that the TV EBITDA is going to be up another double digit in the quarter?

John Cassaday

It's hard to say. We certainly think that our TV revenue is going to be up double digit in Q3. On the earnings side, a lot of variables. So we're very confident that we can continue the momentum. But I don't want to make a firm commitment to double-digit growth in earnings at this particular point in time. I am, however, comfortable in committing to double-digit revenue growth on the Specialty side.

Operator

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

Adam Shine - National Bank Financial, Inc.

Just maybe starting with the Radio sale. It looks like you're actually getting more in proceeds potentially than the original $75 million. I think it's about $84 million with $9 million going into next year. Is there anything on that $9 million predicated on earn out for certain metrics being achieved, or is it a guaranteed $9 million?

Chris Pandoff

No, it's just a combination of -- it was basically cash flow management on their part, part of it's working capital, and the other part is just the additional amount between the purchase price of $80 million and the actual cash payment of $75 million.

Thomas Peddie

Adam, this is Tom. It is effectively a guaranteed amount.

Adam Shine - National Bank Financial, Inc.

Okay. Excellent. And just going back to couple of David's questions. In as much as obviously there was some timing issues in the first half, can Doug maybe address any particular servicing or studio service-related work in that and related timing issues in the second half of the year?

Douglas Murphy

Honestly and specifically, no. Not specifically because I'm not totally clear on the delivery cycle here. But I can tell you that the studio is continuing to look for projects that are moving away from service. Service does provide an important role for our business when we don't have opportunities to make investments in our own kind of IP. But the Kids business continued to have a lot of traction internationally. We just got off the markets and met recently and are coming back with a whole bunch of great ideas for future investments. So while I won't be able to speak to you about the question about margins in the back half, I can tell you that the opportunities are right about there for Kids business for continued growth in the future.

Adam Shine - National Bank Financial, Inc.

Okay. Great, and John, usually we talk regulatory issues on some of these calls. I hesitate to say that maybe there's nothing imminent of significant materiality, but can you just talk in terms of what you see on the horizon that you're thinking about from a regulatory perspective?

John Cassaday

Well, the big thing is the decision coming out of the group-based licensing hearings that we participated in last week. We're very confident and hopeful that we will get an outcome that we're looking for. We went to the CRTC with a very simple proposition and that is that with all the uncertainty around us, we're prepared to commit to a certain level of spending on Canadian content in return for specific areas of regulatory relief. And what we're looking for was a normalization of our Canadian content requirements across our system, and we were looking for the elimination of certain conditions of license that reduce our flexibility without enhancing any of the objectives of the Broadcasting Act. So we think that our ask is very reasonable. We think that the prospect of some certainty for independent producers in terms of what they could expect to receive from Corus going forward offers real hope and promise for the system. It's our expectation that the commission will make a speedy decision and that we will go into next year with the flexibility that we need to compete in an environment where there's obviously a lot of consumer choice. The chairman asked us why we were so committed to group-based licensing and we said that we simply want to be able to make allocations of capital in a strategic way on the programming side like we do in every other part of our business. They seemed to be very understanding and empathetic to that point of view, and we'll wait and see. But we're very optimistic that we'll get a positive outcome coming out of that. On the other, I guess looking forward, one of the things that we're really hopeful for is that there will be a policy review on multiple license ownership. Corus continues to believe that the system could benefit from being able to own more than two FMs in a market. We believe we're starting to achieve a degree of industry consensus on that, and we're hopeful that in the next 12 to 18 months, we'll get a chance to advance that case.

Adam Shine - National Bank Financial, Inc.

Would you argue on the latter front, though, that you kind of achieved that by default or you don't view the Montréal context of the Quebec Radio sale as any precedence there?

John Cassaday

I think the Montréal radio station decision had a number of moving parts to it. But it did indicate that there was a flexibility there. And I think that decision will precipitate a public policy review to consider the question more broadly. That's a positive indicator as opposed to a precedent-setting decision.

Adam Shine - National Bank Financial, Inc.

Understood. And John, just a point of clarification, though. Nothing yet has been said on the CRTC agenda, correct? From a timetable perspective?

John Cassaday

No, not that I know of.

Adam Shine - National Bank Financial, Inc.

Okay. And just lastly, obviously, we've seen some degree of weakness on a number of stocks across the Canadian media landscape. Any thought on the context of buyback in as much as Tom alluded earlier to a significant reduction in your debt. But what about buybacks?

John Cassaday

Well, we never say never. But as we've said for the last number of months, our priority is on dividend increases and on bank debt repayment. We'll see what the future holds. As you know, our company is doing a fabulous job in generating increasing amounts of free cash flow and it remains a top priority for us going forward. But we're operating right now at about 2.7x debt to EBITDA. Not an uncomfortable place. But we do think that over the next little while, we'll be able to reduce our debt and as a result our interest expense going forward and increase the profitability of our company.

Operator

Our next question comes from the line of Scott Cuthbertson with TD.

Scott Cuthbertson - TD Newcrest Capital Inc.

Good morning. Just wondered about -- wanted to get a little bit of color on the trends in Radio costs. Obviously, there's a lot going on in that division. But just broadly speaking, do you expect what we saw in the first half to basically continue in the second half?

Chris Pandoff

From a Radio cost perspective, and we had a couple of changes in the first half of the year. Some regulatory and/or copyright key changes and in addition to that, the reentrance of our cost containment from the previous two fiscals with regard to unpaid days for our staff and pension funds. So obviously, those things are now baked into the back half of the year and will be there in the next fiscal as well.

Scott Cuthbertson - TD Newcrest Capital Inc.

Okay, but other than that, I mean, those have been pretty well disclosed. Is there anything else -- any particular initiatives or any other cost pressures like -- sort of sensing in line with your comment, Chris, that where you had some austerity measures in the downturn and you've got compensate people accordingly, but there's nothing special going on in the second half related to that?

Chris Pandoff

No, if you're referring to any sort of unique events or anything of that sort, that's correct. It's more of the same.

Scott Cuthbertson - TD Newcrest Capital Inc.

Okay. And John, I just kind of wondered if -- you've obviously continuing to push and get more out of your brand new facility there. Just wondered if you could provide any additional color on the potential for filling up some of the excess capacity that you do have at Corus Quay. Any prospects for doing anything with Shaw? And also just for Tom on a related -- on the same topic, are we finished with the moving costs and associated restructuring charges with this quarter?

John Cassaday

In terms of the space, we have made an arrangement with the Pan Am Games and ultimately, they will take over the entire seventh floor and ultimately, they will begin to make a positive financial contribution to our results. Right now the Pan Am Games is operating with a staff level of less than 50, leading up to the game, so it'll be approximately 410 Pan Am employees in our building. We do have some additional space. Our objective is to basically look at the facility as an opportunity for outsourcing for others. It doesn't necessarily mean there would be people moving in, but rather services being taken on to the benefit of the system and to ourselves, given the investment that we've made. So that's really all I can say on that front right now. Tom, in terms of additional costs, we remain convinced that the guidance that we gave you in terms of our average CapEx over the next little while is going to be lived up to. There'll be no surprises there. Scott Dyer who managed this project for us so ably will be presenting to the board later today with kind of a wrap-up on it, and we're delighted to say that we ended up completing this monumental project on time and on budget. So we're delighted about that. All of our signals are now being distributed from Corus Quay. All of our external facilities have been closed and are now being sold off and sublet. So on that file, all good.

Scott Cuthbertson - TD Newcrest Capital Inc.

Okay. And just -- I mean, there's some speculation in the marketplace about maybe some exacting some efficiencies by working with some of your media partners with some of their content assets. Can you provide any color on that topic at all?

John Cassaday

No, I really can't provide any additional comment on that.

Operator

Our next question comes from the line of Tim Casey with BMO Capital Markets.

Tim Casey - BMO Capital Markets Canada

John, can we just go back to the regulatory side briefly and talk about subscriber fees from two angles. One, there seems to be a growing consensus that fee-for-carriage will get relabeled as value for service, and given the ownership changes on some of the off-air broadcasters, the commission is going to put through something that will return some sort of equivalent of a subscriber fee to the off-air broadcasters. I guess one, do you believe that? Do you think it's inevitable? Any comments there? And two, do you think there's a scenario where existing specialty deals could be at risk? So in effect, I'm asking do you think there's a risk that CRTC would take the money out of specialty pie and put it into the conventional pie? Or will it just be an incremental charge going through conventional? And further to that, is there any likelihood that you get a little more pricing power in terms of fees? And I'm thinking of something like YTV where you've asked over the years repeatedly for the ability to raise prices there, and the commission has denied. I'm just wondering if you see any opportunities on that side.

John Cassaday

Well, really three things that you're asking. First of all on fee-for-carriage or value for service or whatever you want to call it, we still do not believe that dog will hunt. We are absolutely convinced that, that is not going to become a reality in our business. There is a Supreme Court ruling on this coming forward. So time remains -- it remains to be seen what will happen. But in our opinion, we do not believe, particularly now that these services are funded by well-financed BDUs, that this is going to happen. But again, one person's opinion, one company's opinion. On the issue of whether or not it'll end up coming out of the hides of our existing services, well, clearly, if you don't believe it's going to happen then that's not a risk that I really have anything additional to say on. But I don't believe there's going to be a subscriber fee for over-the-air services. Therefore, I don't believe that the specialty services will be impacted. On the third point, as we move into digital migration, there will be no regulation of fees by the CRTC. So as a result, any increases that we can get in our services will be as a result of negotiation with our distribution partners. And the basic approach that we're getting or we're taking rather is that we will try to add value and generate incremental revenues by growing the pie, number one. But number two, making sure that we make available to them as extensive array of digital programming as we can. And that we attempt to negotiate additional fees for the digital carriage as opposed to additional fees for our specific linear services.

Tim Casey - BMO Capital Markets Canada

What's the timing on those type of negotiations -- a more market-based fee structure?

John Cassaday

They're ongoing. We have a number of deals locked in. We're negotiating a number of other ones. But I would say that Corus is in a relatively good position. We have a very, very strong suite of Kids services. I don't think there's any question about the value that they bring to the table. And our W, OWN and Cosmo services are again, very well branded, very well positioned. So we feel we're in good shape. And of course, as we demonstrated last year or two years ago with the HBO offering, we can command the attention of our distribution partners and secure additional rates. We bring incremental value to the table. So those discussions will continue. And even though we're not the strongest and perhaps mightiest of all of their program providers, I do think we have the best position and we punch above our weight in terms of the audience we deliver versus the revenue we take out of the system.

Tim Casey - BMO Capital Markets Canada

So to put another way, there's no kind of drop dead date on existing deals where everything flips over to a negotiated rate. It's across the portfolio, it changes over time?

John Cassaday

Exactly. And again, a number of our brands are into long-term affiliation agreements. So we have no cliff vesting, to use another term that's kind of appropriate in this context, that would cause us to feel any sense of urgency here. Just ongoing negotiations with good brands and great relationships, and we're confident we can pull it off.

Operator

Our next question comes from the line of Colin Moore with Crédit Suisse.

Colin Moore - Crédit Suisse AG

Most of my questions have been answered, but I just had one question related to your strategic outlook for Specialty television and more specifically growing potentially your portfolio. And I ask that in the context of you've been focused clearly on classes of women and children with some categories opening up now onto the digital conversion, such as news and sports or some potential opportunities there. And I believe you've actually looked at one potential application. And the second piece of my question is just arguably given your infrastructure, your relationships with the distributors, you're potentially a little more better positioned in this new world than some of the smaller broadcasters, and if you do see an opportunity for some pickup in M&A broadly in this sector.

John Cassaday

We think that the next couple years are going to be -- well, maybe not in the next couple years, the next little while is going to be a little bit quiet on the M&A front. Who knows, but that's our current assessment. So our real focus from an operating point of view is really to try to improve our operating effectiveness. We do think there's tremendous opportunities for us to grow our kid brands internationally. We are excited about the prospect for various partnership opportunities and we see, I think, tremendous potential there. We've got a great library. We've got tremendous expertise. We've got a plant that allows us to distribute signals anywhere in the world seamlessly. So we're really focused on that opportunity at this particular point in time.

Douglas Murphy

I'd add to that. Colin, it's Doug. We had segmented a great new business which is the co-view side of our equation. So when you think about our suite of services, we really think about them in terms of kids, family and women. And we're seeing some great performance on the family-targeted content on both YTV and CMT. And it's a continued focus for us from a programming side. So as John said and obviously internationally, I think it's a huge opportunity for us. But domestically, our objective is to make our existing assets work harder to continue to build share as we're doing across all the networks, to continue to work the great brand equity we have in our existing services, either ones that are YTV or W or brands that we're stewarding from key partners in the U.S. to basically offer a very strong value proposition both to our audiences and to our BDU partners.

Colin Moore - Crédit Suisse AG

Got it. So it sounds -- not to put words in your mouth, but more of an emphasis on focusing on your core brands as opposed to specifically branching out at this point?

John Cassaday

Exactly. And we think there's still lots of potential in building out our core brands.

Operator

I'm showing no further questions at this time.

John Cassaday

Thank you, all, very much for your interest in our company, and we look forward to talking to you in the days to come. Bye for now.

Operator

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

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