Corus Entertainment (CJREF) CEO Doug Murphy on Q1 2016 Results - Earnings Call Transcript

| About: Corus Entertainment, (CJREF)

Corus Entertainment, Inc.B (OTCPK:CJREF) Q1 2016 Earnings Conference Call January 13, 2016 9:00 AM ET

Executives

Doug Murphy - President, Chief Executive Officer

Tom Peddie - Executive Vice President, Chief Financial Officer

Analysts

Adam Shine - National Bank Financial

Haran Posner - RBC

Vince Valentini - TD Securities

Aravinda Galappatthige - Canaccord Genuity

David McFadgen - Cormark Securities

Tim Casey - BMO Capital Markets

Robert Peters - Credit Suisse

Jeff Fan - Scotiabank

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Corus Entertainment, First Quarter 2016 Analyst and Investor 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, January 13, 2016.

I would now like to turn the conference over to Doug Murphy, President and CEO. Please go ahead sir.

Doug Murphy

Thank you, operator and good morning everyone. I am Doug Murphy and welcome to Corus Entertainment’s fiscal 2016, first quarter analyst call. In addition to sharing our Q1 results, we will also discuss this morning’s game changing news announcing our transformational acquisition of Shaw Media. This powerful and synergetic combination will give us the scale to compete and is a catalyst for future growth, but more on the acquisition later. First, we want to focus on Q1.

With me on the call today is Tom Peddie, our Executive Vice President and Chief Financial Officer. Before we read the cautionary statement, we like to inform everyone that there are a series of PowerPoint slides that accompany this call. The slide can be found on our website in the Investor Relations section. We’ll now run through the standard cautionary statement.

This discussion contains forward-looking statements that may involve risks and uncertainties. Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in the company’s filings with the Canadian Security Administrators on SEDAR. As well, please note our presentation includes a disclaimer and statement on Non-IFRS Measures related to our discussion on the transaction.

Turning to slide three of the presentation and a review of our Q1 results; on our last call we said that we would deliver growth in fiscal 2016 and we are pleased to report that our year is off to a good start with consolidated revenues up 1% to $228 million and segment profit up 3% to $96 million for the quarter.

Our television business delivered both top and bottom line growth. Also in the quarter we achieved impressive consolidated segment profit margins of 42% as a result of our ongoing focus on expense control. Adjusted net income attributable to shareholders was $42.5 million or $0.49 per share for the quarter compared to $51.9 million or $0.50 per share in the prior year.

Moving to slide four, as our Television results demonstrate, we are making very real progress advancing our strategic priorities with revenues up 1%, segment profit up 5% and very strong segment profit margins of 48% in the quarter.

Among the highlights in September, we launched the iconic Disney Channel and La chaîne Disney for the first time in Canada in nearly 10 million homes. We also optimized our entire portfolio of leading kids brands achieving broad distribution for Cartoon Network and repositioning TELETOON. Further, we were able to renegotiate our long term carriage deals resulting in broader distribution for a number of our networks.

The addition of Disney, coupled with subscriber gains on our French language channels contributed to a year-over-year subscriber revenue increase of 2% for the division. We saw another quarter of advertising revenue growth in our Woman and Family vertical, driven the rating strength of our original programming, as well as a lift in our kids directed advertising on our kids channels.

However lower demand for Co‐View inventory in our kids vertical offset these gains, resulting in an overall 6% decline in specialty advertising revenue for the quarter. We are very pleased with the growth in our content business, securing licensing deals for our growing slate of shows in both domestic and global markets.

Merchandising distribution and other revenues were up 33% from the prior year. We achieved merchandising growth from our new Nelvana properties, particularly Little Charmers. Impressive growth in distribution revenues from content licensing deals in the S5 market also contributed to these gains in revenue.

Q1 marked our entry into a new area of owned content as we introduced our unscripted lifestyle slate to the market. In October we announced our first deals for this new slate of programming with initial U.S. sales of Cheer Stars to ABC Family and W Network’s hit series Masters of

Flip to Scripps Networks in the U.S. Last week we secured additional commitments licensing Masters of Flip and Buying the View to broadcasters in Italy and Australia and we expect this momentum to continue.

While still early days, we are very excited about the growth prospects of this highly coveted content, which will deliver an important new global revenue stream for us over time. As part of our plan to strategically focus on women’s, family and kids verticals, in November we announced that we’ll be exiting our Pay TV business for a cash consideration of $211 million from Bell Media.

Turning to radio, revenues were down a modest 2% with the majority of the decline attributable to the soft economy in Alberta, particularly Edmonton, as well programming changes in markets such as Winnipeg have yet to translate into ratings gains. Among the bright spots, our Vancouver and Ottawa clusters delivered double digit growth outpacing the market with Vancouver seeing gains rate third consecutive quarter. Importantly Toronto revenues were flat relative to last year despite the Blue Jays playoff run which impacted the first part of the quarter. Radio continues to deliver excellent expense control resulting in segment profit margins of 29% up from 28% last year.

Looking forward to drive revenue opportunities at the local level, radio was introducing customized solutions for clients and on the national level radio is working with our television division to leverage ad bundling opportunities to optimize revenues.

In the television segment we remain focused on implementing our strategic priorities. Since the debut of the Disney Channel in September, we have stated to see a meaningful share shift in our kids portfolio. In December we launched Disney XD and Disney Junior into the market and now in the New Year we are the exclusive home to all Disney content on our Disney Channels in Canada and we expect further audience shifts to our services. Our new suite of kids’ channels will be a key revenue driver for the division going forward.

On the programming licensing front, we will be announcing additional international sales for our unscripted lifestyle content, which will contribute to product and distribution revenue increases in the second quarter. Merchandising growth in Nelvana properties will also contribute to revenue gains.

Turning to slide five, we are very excited to talk to you about today’s announcement of our transformational acquisition of Shaw Media. Before we move into the details of the acquisition, we want to remind all participants on the call of our disclaimer regarding forward-looking information.

Turning to slide six. This morning we announced our game chaining acquisition of Shaw Media, which gives us the scale to win in a rapidly evolving and highly competitive media landscape. This bold move brings together a winning combination of powerful media assets and creates a bright future for our company.

Collectively our scale, leading brands and content will solidify our position as an entertainment destination of choice in Canada. The time is right to unite these two strong media companies, which will ensure there are Canadian voices and choices in the evolving media landscape.

Moving to slide seven. This combination fits like a glove. With our highly synergetic assets we will achieve significant operating efficiencies and gain access to new markets to drive growth. At the national level we will leverage our significant purchasing power to obtain and deploy content across our specialty and conventional TV portfolio. As well there is a huge opportunity to share local content between Corus Radio and Global Television.

The combined scale provides a highly efficient platform to drive audience growth through cross promotion both nationally and locally. We can also now offer advertisers robust ad bundling solutions across the business, deliver great returns on their marketing investments.

Additionally our scale in woman’s lifestyle will accelerate our strategic initiative to own more content for domestic use and for international sale. And finally we’ll combine two exceptionally talented management teams who are we believe the best in the business. We are well positioned to win.

Moving to slide eight. The combined company gives us formidable domestic scale, accelerating our transformation into a powerful integrated media and content company. We are more than doubling our current size to create a company with combined fiscal 2015 revenues of approximately $1.9 billion, $619 million in EBITDA and $430 million in free cash flow.

Our combined 34.5% market share and 95% reach in English Canada positions us as a major competitive force in both conventional and specialty television. We will firmly establish our leading position with woman with six of the top six channels among woman when you exclude sports.

We will enter the national conventional market through the iconic global television brand. This important addition gives us the ability to secure premium first run and library content that we can leverage across all our broadcast assets. The broad reach covered with buyer advertisers and create powerful synergies between our local radio and conventional stations across the country. We remain a leader in kids, owning and/or controlling over 13,000 half hour episodes of content domestically, with 4,200 episodes available for international distribution with Nelvana.

Turning to slide nine. Our winning combination consists of 45 specialty TV channels, including leading woman, kids and family and general entertainment brands, a national network of 15 conventional TV channels and 39 radio stations.

We are internationally recognized creators and distributors of original content through our Nelvana studio and our Kids Can Press publishing house and we are expanding our capabilities with our growing slate of woman’s lifestyle programming to driver or domestic ratings and sell into the content hungry global market place.

We now have a substantial portfolio of digital assets to meet the changing needs of consumers and advertisers. These innovative TV Everywhere and radio streaming apps, websites, digital partnerships and video on demand capabilities will deepen our connection with our audiences and drive new revenues. Together we have the size and the right assets to drive growth as a strong future focused media company.

Turning to slide 10. We have a compelling opportunity to gain share in the massive TV ad market. Combined, this portfolio of leading brands delivers the scale to compete and win. Why? Excluding sports we’ll own seven of the top 10 specialty channels for adults 25 to 54.

As I mentioned earlier we own six to the top six specialty channels among woman 25 to 54. We will also own six of the top 10 kids’ channels for kids to 11 and are well position to make further share gains. As we mentioned earlier in this call, we launched Disney channel in September and last month introduced Disney XD and Disney Junior. We are confident that these powerhouse Disney brands will further strengthen our leadership position in the kids’ space.

As we outlined earlier as well, Global TV provides a strong entry into conventional television with its exceptional roster of first run content and preeminent news programming. We will leverage the purchasing power and the reach of Global TV to strengthen our content cross promotional and ad bundling capabilities across the portfolio at the both the local and the national levels.

Moving to slide 11. Our kid’s portfolio provides distinct offering for every age and stage of a kid’s life. Combined, our commercial brands represent 86% of the purchasable ratings for kids in Canada. In addition, these channels play a critical role in driving family audiences. When kids are watching TV, often so are their parents and we know through our consumer insights teams that watching TV together is the second most common family pass time and we can monetize these adult audiences through our co-viewing sales strategy.

Turning to slide 12. This winning combination not only delivers scale, it delivers differentiated scale. This means we over index with woman in large family households, providing highly valued audiences for our advertisers. This competitive advantage is further improved by our ability to offer enhanced advertising solutions. By providing advertisers with branded content and product integration opportunities, it will position Corus as the most innovative media partner in our space.

As this graph illustrates, on a large scale we reach woman who are the CEO of the household and influence and control upwards of 90% of household purchase decision. We reach moms who have the largest shopping basket and kids of generation X and millennials who’s parenting styles are inclusive and invite children’s participation in a broad range of family purchases. We are more than just scale, we are differentiated scale and this is our competitive advantage.

Moving to slide 13. Let’s now take a moment to take about the immense power of television. It has a proven track record as a great business with a formidable reach in the lives of Canadians. Nemours data conforms audiences continue to the watch a significant amount of television. In fact 97% of audiences 25-54 watch television of a weekly basis with an average time spent watching TV of 23 hours per week. Add to this the massive size of the TV ad market which represents $3.2 billion of spending in 2015.

We believe the television remains the most effective and trusted vehicle for advertisers as they seek to build their brands and drive results for their business. Industry studies such as those released by the Video Advertising Bureau and market share continue to validate TV’s preeminence in this area. TV is important to Canadians. We like the business and we like the relationship we have with advertisers.

Turn to slide 14. Not only do we have differentiated scale, but we have future focused advertising solutions to win in this massive TV market. Advertising models are evolving, and the ability to precisely target key demographics in a trusted environment is more important than ever. Our winning combination will enable advertisers to effectively build their brands. Not only do we have a proven track record for providing unique consumer insights, our expertise in the woman’s family and kids market segments is invaluable to our advertisers.

Now we can take this to the next level. With the addition of a technologically advanced next generation advertising platform, we can combine the intelligence of data with the power of television. Advertisers will now the ability to use our fully privacy compliant data and our consumer insights to more precisely target their media buy. Based on Advertiser Identify Demographics, this solution enables them to purchase audiences rather than shows and time slots. We are confident that this technology will support our efforts to increase our advertising share and drive revenue gains in the years to come, but there is more.

Moving to slide 15, our powerful position in television can drive growth in other areas of our business. For example Global Television pairs beautifully with our local radio stations. This strong combination delivers the ability to share content, cross promote brands and provide robust bundle solutions for our advertisers.

Global Television has news bureaus and correspondents in every major Canadian city, as well as in Washington DC and London England, which provides Canadians with an in-depth analysis and perspectives on important local, national and international events. Of course as the largest new talk radio operation in Canada, we’ll be able to leverage this content to drive audiences across platforms. These assets are stronger together.

Turning to slide 16. The media landscape is evolving and so are we. Our combined scale in conventional and specialty TV is the foundation of our business. In fact it powers our expanding presence across all platforms. Through TVs massive reach and highly engaged audiences we have an unheralded source of discover for the world’s best content and a megaphone to promote brands and content across platforms, be at linear or on demand, mobile or at home.

TV also delivers significant revenues and free cash flow, which we can reinvest to amplify our brands and our content. Our mobile apps build brand definity across TV and radio, providing consumers live streaming on the go. Our suite of TV Everywhere apps enables us to develop one-to-one relationships with our consumers and provides added value for our subscribers.

We are well positioned to leverage evolving video-on-demand ad models with a strong VOD presence and we have a proven track record of monetizing and growing our content portfolio through domestic over the top international cross platform players. We are everywhere our consumers are.

Turning to slide 17. TV fuels our investment in owned content. As you know we call this our Corus advantage. Our distinctive position as an integrated broadcaster, producer and distributor enables us to use our required Canadian Programming Expenditures or CPE to create valuable content for our domestic broadcast platforms and drive ratings. These same assets can then be distributed into the lucrative international marketplace as demand for content continues to grow worldwide.

The CRCT’s recent less talk TV decisions have established an even stronger ecosystem for the creation of quality Canadian content and we embrace it. This combined with the increased CPE through our acquisition of Shaw Media enables us to accelerate this strategic priority to own more content. Our original lifestyle content geared to women has proven to be a huge ratings driver for our networks and it has international appeal. We are leveraging our success in the kids space to extend this into the new area of content creation on search [ph] for reality. This is our vertical integration model. It is a key competitive advantage and it represents a huge opportunity for us.

Turning to slide 18. This winning combination strengthens our unique competitive advantages and fully aligns with our strategic plans, positioning us for a bright future. Our ability to own and control content has never been greater. We are gaining a strengthened portfolio of premium brands bolstered by new partnerships and output deals, exclusive first run content and an ability to increase our global scale and own content.

With this winning portfolio of brands and our huge cross promotional capability cross TV, radio and digital will deepen our engagements with audiences and augment our valuable consumer insights with fully privacy compliant data solutions. Through global television we will immediately gain meaningful scale and a powerful entry into an adjacent market. We will drive new revenue opportunities across our business to enhance content sharing, ad bundling, cost promotion and next generation advertising solutions.

Our laser focus and execution will enable us to capture significant synergies with an intense focus on delevering. We are excited about our new prospects and the fast evolving media landscape. This combination is a strong catalyst for growth we are ready to win.

Tom will now provide you with more on the financial details of the transaction as we move to the next slide, slide 19.

Tom Peddie

Thank you, Doug. With this transaction we are acquiring 100% of Shaw Media for $2.65 billion. Shaw Communications will receive $1.85 billion of cash and approximately $71 million of Corus Class B shares. This implies to 7.7 times fiscal 2015 consolidated reported adjusted EBITDA and it’s multiple before synergies. We expect to realize $40 million to $50 million of cost synergy in addition to immediate savings of approximately $15 million in corporate overhead charges no longer allocated from Shaw Communications.

As you heard from Dough, this is a highly strategic acquisition that will be immediately accretive to EPS and free cash flow per share. The deal will be financed with the combination of debt and equity. We will maintain a strong balance sheet and financial profile. We’ll have approximately $430 million of combined annual free cash flow. We’ll maintain our existing dividend of $1.14 for our Class B share and as mentioned, the pro forma debt to the latest 12 months adjusted EBITDA of four times is expected to delever below three times by the end of fiscal 2018 and this transaction is expected to close in Q3 of our fiscal ’16 year, which would make at March or April.

Turning to slide 20, the combined company provides significant financial scale with approximately $1.9 billion in revenues, $619 million in EBITDA and $430 million of free cash flow pro forma fiscal ’15. You should note that our Corus results for 2015 include our Pay TV business, which as we mentioned will be discontinued in fiscal 2016. This deal will enable increased revenue diversification and strong free cash flow generation across specialty and conventional television, radio, content and digital.

Moving to slide 21 in the financing structure, we have arranged for fully committed financing to prudently fund this transaction and refinance existing debts. RBC capital markets is providing $2.3 billion of committed credit facilities, including bridge financing of approximately $560 million to complete the transaction. The bridge loan will be replaced with the combination of private placement of senior unsecured notes and the issuance of public equity through subscription receipts. We intend to redeem the $550 million of outstanding 4.25% senior unsecured notes upon closing this transaction.

Shaw Communications is providing a strong financial commitment for this deal as well. Their Corus shares will be locked up for 24 months after closing. There the shares become freely saleable after 12 months and another third are released after 18 months and the final third are released after 24 months. 100% of the shares under the lock up will participate in the Corus’s Dividend Reinvestment Plan or DRIP until at least the end of fiscal 2017 and as mentioned the pro forma debt leverage for the last 12 months EBITDA ratio will be approximately four times and given our strong free cash flow, the company’s expected to delever below three times by the end of fiscal 2018, which is consistent with our financial policy.

Corus’s strong liquidity profile will be maintained with approximately $300 million of revolving credit capacity and strong free cash flow. The financing will enable Corus to maintain its current dividend of $1.14 for Class B share on an annual basis.

Moving to slide 22, as we mentioned, this transaction is expected to realize $40 million to $50 million of annual cost synergies within 24 months of closing, although our goal is to capture them as quickly as possible. In addition as mentioned, we will capture immediate cost savings of approximately $15 million in corporate overhead charges no longer allocated by Shaw Communications.

Our synergies will come primarily from operational efficiencies, consolidation of facilities, platforms and systems and other cost savings, including program optimization opportunities. Our model does not reflect revenue synergies, but as you heard from Doug, it could be significant as we benefit from ad bundling, next generation advertising solutions and leveraging our content sales on a global basis.

I’ll now turn to slide 23 for Dough to provide his summary of comments on this transaction.

Doug Murphy

Thank you Tom, and I think slide 25 is actually the right number. It’s the wrap up slide. I just realized we’re out of sync here. This is a winning combination for two iconic media companies. From a financial perspective we will significantly grow our company. The industrial logic is compelling. Combined revenues EBITDA and most importantly free cash flow will facilitate our focus on reducing debt, while enabling us to return significant value to our shareholders through stable dividend and a strong balance sheet.

From a strategic perspective we will achieve meaningful scale to deliver growth through; one, differentiated scale, giving us the scale to compete with the unique position with the women, kids and family that differentiates us from the competition.

Two, owning and controlling more content with the scale to accelerate domestic and global growth from a strong and growing content slate. At its core, this starts and ends with a strong position in television, engaging audiences everywhere with a strong portfolio of brands and unique audience insight to design offerings that will meet the class platform needs of a consumer first marketplace. Strong audience engagement benefits our advertisers and drives growth.

Diversity of revenue streams, generating multiple sources of revenue across platforms both at home and worldwide. This acquisition creates the future focused integrated media and content company that we have always envisioned and provides us with a super talented team to succeed. This is the right time and is the right time to do this deal. Bringing together these two great companies is a game changer for both of us.

We are very excited about our collective future and the opportunities that lie ahead. We’d like to thank our shareholders and partners for their patience and continued support. We hope you have found these comments helpful and now we are pleased to take any questions you may have.

Thank you, operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And the first question is from the line of Adam Shine with National Bank Financial. Please go ahead.

Adam Shine

Thanks a lot. Good morning. Obviously congratulations, kicking off the year in a big way. A quick question for you Doug; in the context of all these assets that you’re now aggregating, are there any particular assets that maybe it’s too early to ask, but any particular assets that you may consider shedding being deemed to be non-core?

Doug Murphy

At this stage Adam, our focus is going to be on a quick integration and to achieve the cost synergies we are looking for, simultaneously with a disciplined focus on growing the revenue, to top line. We are going to intensely focus on delevering and so to the extent to which these assets are cash generative and which virtually all of them are, we are inclined to hang on to all of our acquiring. That said, in the event that we can divest a group of assets and attractive multiple that’s accretive, we’ll certainly explore those opportunities.

Adam Shine

Speaking of delevering, obviously the free cash flow number that you’re highlighting is significant. It’s also a little backward looking just in the sense of a couple of qualifiers. Obviously as Tom mentioned you’re selling the Pay TV assets and there was also that GoPro proceeds. I know you don’t want to get into too much guidance, but I’ll hit you with a couple of questions on guidance nonetheless.

As we look ahead, notwithstanding those two qualifiers, the strength of the Corus numbers this morning would certainly suggest that free cash flow will remain quite strong as you guys continue to see or not continue, but begin to see some renewed momentum with the business. Is that a fair comment?

Doug Murphy

We’re really happy with our Q1 and you know Adam you and I have been talking for a little while. We’ve been saying for quite some time that we’re going to achieve modest EBITDA growth and we did that. So we have a value of course of accountability and we’re delighted with first quarter results and the cash flow profile continues to be very strong.

Adam Shine

One thing and this will be the last question. One thing that certainly stood out in the Q1 was as you said, the strength of the TV numbers. A bit of a surprise given that bit of weakness was otherwise telegraphed in the context of some of the timing of spend related to Disney and the expanded rights in Nickelodeon. Can you speak at all to some of that? Was that partly masked by the fact that you had such strength perhaps in the other side on the Nelvana side of the business?

Tom Peddie

Adam, its Tom. Yes, certainly the other parts of our business really helped to contribute. I think that also when we had our analyst call in October, we were looking at our bookings and I think our bookings came in a little better than we had originally thought they would be. Certainly our radio was a little stronger than we thought it would be and so as you know, it’s that last minute booking. So we are just really pleased with what happened.

Doug Murphy

I think we also – as you rightly noted Adam, the Nelvana business continues to deliver a strong revenue profile as regards licensing to over the top players, both domestically and internationally and we continue to see quite a bid there.

Adam Shine

Great. Thanks a lot.

Doug Murphy

Thank you.

Operator

The next question is from the line of Haran Posner with RBC. Please go ahead.

Haran Posner

Thanks very much. Good morning and congrats. Maybe Doug or Tom, can you maybe elaborate a little bit in terms of the accretion that you’re expecting on EPS and free cash flow. Can you give us a little bit more color maybe in terms of the magnitude there?

Tom Peddie

Haran, this is Tom. I think what we’re looking at is double digit on both.

Haran Posner

That sounds good. And then I guess moving onto the synergies specifically, I just want to make sure that I have this right. So we’re looking for $40 million to $50 million in operating cost synergies. So firstly, is that potentially conservative would you say?

Doug Murphy

I think the way we would answer that question is based on our track record. When we did the H&S acquisition we gave a particular cost synergy number and we exceeded it and as we said with H&S and TELETOON I should say, and so we beat those numbers. So clearly it’s a number that we believe that we can achieve. As we mentioned, when you look at it from an accounting point of view, we’ll pick up an extra $15 million in costs that won’t be allocated to the division. So that would be our goal. And as we mentioned in our comments, there will be revenue synergy’s which we’ve not built into the model.

Haran Posner

That’s good. And just Tom to qualify, so when we look at the combined EBITDA of the entity, we look at $619 million plus $40 million to $50 million of synergies plus $15 million from the corporate overhead in Shaw less the Pay TV divestitures, is that correct?

Tom Peddie

That’s correct, but as I say, we won’t get those synergies from day one, but we’ll get them.

Haran Posner

No, for sure. Okay, now that’s great. One final one from me before I pass the line. Tom, back to you, in terms of the bridge financing for $560 million, obviously in the press releases you alluded to a subscription receipt offering that you’ll have to do. Is there any additional color you can provide there in terms of a breakdown between sort of new notes and equity?

Tom Peddie

As you mentioned, there is about $560 million at this point in time depending on market conditions. I would think it might be kind of 50/50 between the subscription receipts. As you know we need to go subscription receipts because the transaction is conditional upon shareholder approval.

Haran Posner

That’s really helpful. Thanks very much. I’ll queue up again.

Tom Peddie

Thanks Haran.

Operator

The next question is from the line of Vince Valentini with TD Securities. Please go ahead.

Vince Valentini

Yes, thanks very much. A couple of just clarifications. First Tom, the four times debt to EBITDA figure, that is not adjusted for either Pay TV or the $15 million in corporate cost with Shaw. Is that correct?

Tom Peddie

No, it is adjusted.

Vince Valentini

You’re adjusting for both of those things in that number?

Tom Peddie

Yes.

Vince Valentini

Okay, but you’re not adjusting for the $40 million or $50 million of synergies?

Tom Peddie

That’s correct.

Vince Valentini

Okay, cool. Second clarification on the first quarter results; the TV revenue growth was nice to see, but I was more surprised by the EBITDA growth. Can you just confirm, did you have the full run rate of all your new content costs, especially Disney flowing through your numbers in the first quarter or is there a bit of a graduated increase in those costs?

Doug Murphy

No, we had the full costs running through. We ended up with the full cost – its Doug, Vince sorry. We ended up having a nice standard revenue growth of approximately 2%, which is driven by the launch of Disney in the quarter and the other thing I would note is our Nickelodeon deal. So what you’re seeing play out here in Q1 is the merits of both our big landmark partnership deals last year from Nick and Disney. They also had some significant [FY] [ph] sales of Nick content and of Nelvana content in the quarter.

Tom Peddie

Vince, its Tom. One of the other items that we’ve highlighted in our shareholders report is that we picked up approximately $1.4 million in lower amortization with respect to the disposition or the assets held for sale on Pay TV, we reduced the amort, so that helped the profitability by about $1.4 million in the quarter.

Vince Valentini

Great, and last question more on the deal. So you talked in the past year and two years about some of the issues you’ve had with scale versus the bigger media companies that had conventional and specialty to be able to bundle, especially as the Canadian dollars weakened and ad budgets for some of those U.S. consumer packaged goods companies are coming under pressure. Can you talk about how you think your sales force reacts now, now that they’ll have conventional and greater collection of specialty to bundle together. Do you think it gives you an immediate boost in relevance with the advertisers to try to negate those disadvantages you had?

Doug Murphy

Vince, I think what I would sort of sum it up in one sense, okay maybe two sense. Number one is, we now have the ability to offer a wider array of advertisement solutions for advertisers to reach their audiences, because we’ve got conventional specialty radio and digital and as a consequence of that, we have more ability to price strong pricing power. So it gives us the ability to bring scale to the pricing equation and that was the issue that we were talking about before, is that we would be up against in Corus with the 10% share of the market place, that’s specialty now. We’re up against the big [indiscernible] out there that could usually out muscle us because they have bigger reach and more pricing power. So we like our shape now. We now have the ability to compete head on with the other bigger players.

Vince Valentini

Great, good luck.

Doug Murphy

Thanks.

Operator

And the next question is from the line of Aravinda Galappatthige with Canaccord Genuity. Please go ahead.

Aravinda Galappatthige

Good morning. Thanks for taking my questions and congrats on the transaction. To start with a few maintenance issues, maybe Tom could you give us a sense as to what the cost of debt could be going forward when you factor in the redemption of the senior notes and the new $2.3 billion credit facility?

Tom Peddie

Well, certainly it will depend upon our market conditions. We decided to go for a fairly large portion of bank debt as opposed to bonds, simply because the price is cheaper and it gives us the capability of retiring as much debt as possible and taking advantage of our free cash flow. Certainly when we go to the debt for unsecured debt, the rate will be, I’d say significantly higher than what we would be paying for our 4.25% right now.

We’ve had preliminary meetings with both of our rating agencies. They will be issuing reports on this right now. They certainly see the merits of this particular transaction and we’ve been kind of given the indication that we would be – our corporate debt would be in the double DD range. So we don’t think that it will be much impact on our pricing on a go forward basis.

Aravinda Galappatthige

Okay, thanks for that. And then maybe for Doug, you talked about scale and how that helps you on the ad side, but given sort of the larger size that you have and the assets you control on a go forward basis, do you think that that would help you on the affiliate agreement side, as well you had mentioned that you’re in the process, sort of renegotiating some of the distribution deals and obviously with the new pick and pay environment, there’s probably going to be some adjustments on that front as well. Anything on the BDU agreements that you can comment on in terms of renegotiations and terms?

Doug Murphy

I’m confident that the revenue picture and the affiliate side is like at worst going to be flat and probably grow in the future. We used – let me just step back for a second. The Disney channel launch was pivotal for us because we were able to go in with a number of BDU’s and basically negotiate all of our network agreements with favorable results. So we are contracted now with many, many of our services that occurred just as we opened up the doors to talk about the Disney channel launch, first of its kind in Canada.

Now when you add all of these new great services from Shaw Media to bear where we have a number of great brands, we’re increasingly of the view that when it comes to talking about bundling and packages and thematic packages, we will speak to the fact that we deliver the most coveted audiences. The distributors increasingly are looking at power ratios. They want to pay for the best networks and we now have the best networks. We had great networks before, now we have even more great networks.

So our view has been consistent with all of you that the regulatory backdrop of Less Talk TV is not going to be the end of our business. It’s quite the contrary. We are optimistic that Corus before this announcement and now the new Corus integrated into Shaw Media assets is very well positioned to drive in the new environment.

Aravinda Galappatthige

Thanks Doug, and just one question on the – you know you talked a little bit about on the trip to reality and how the transaction would help on that front as well. Any comment on the magnitude in terms of the production that you’ve lined up over the next year or so. Does this sort of cause you to sort of step up production on that front of the women’s lifestyle content?

Doug Murphy

Well, by virtue of the fact that we want to double our revenues, we have effectively more than doubled our CPE spend and we will bring the bearer the same strategies we’ve employed at Corus to the combined entities, which basically if you recall what we’re effectively doing is taking money we have to spend anyways and that would be an expense to anybody that wasn’t wanting to own the content, and we produce it ourselves and distribute it internationally.

That is no further cost to our P&L, but it gives us a new diverse revenue stream for global sale and the fact to reality genre is the same relative investment on a purpose of basis that we’re comfortable with on the Nelvana kids side. It’s extremely attracted to advertisers for integration purposes, which of course happens to further differentiate and offer premium advertising solutions in an increasingly competitive ad economy.

And then finally the content itself travelled well. We can either version it. I think you heard me talk about Property Brothers on Espanol, so you can just version it with the foreign languages or you can sell the formats. So all of this comes forward just because our revenue pie has been increased and will by definition over time be able to increase the output of half the reality shows.

Aravinda Galappatthige

Thanks and then last question and it’s just back to the Q1 results. I was surprised by the programming costs. It fell 5% notwithstanding the incremental spend on Nickelodeon and Disney. I know that Tom referred to a $1.4 million benefit on the pay side, but apart from that, is there anything else that describes the decline in the programming spend regardless of the additional cost from Disney.

Doug Murphy

We’re always looking at scrubbing all of our costs on programming and we have gotten pretty good at matching our investment program into an ROI based on revenues, so the team was tasked with taking a skilled wool brush to our programming costs to make sure that we were able to deliver a good quarter, because we knew we had investment in Nick and Disney coming forwarded and I think you’ve seen the results of that discipline. Tom, do you want to add something to that.

Tom Peddie

I guess the one comment I would add to that is that, yes, our spend was a little lower, but that’s just the timing. If you recall we’ve had prior years where we’ve had big swings from the first half to the second half. It’s really managing the purchase of the programming and the payment of it.

Aravinda Galappatthige

Okay, thanks. And I’ll leave it there. All the best.

Doug Murphy

Thank you.

Operator

The next question is from the line of David McFadgen with Cormark Securities. Please go ahead.

David McFadgen

A couple of questions. So first of all when you look at the Shaw transaction, I know the CRTC has always viewed Shaw and Corus as one entity. But I was wondering if you could comment on the competition bureau. What’s your expectation there?

Doug Murphy

We have had some conversations and we are good with the competition bureau.

David McFadgen

Okay, okay great. So Doug in response to your earlier question you talked about the sub-revenue being up 2% due to Disney. I thought the Disney channel was on a free preview period in Q1?

Doug Murphy

Just to clarify that, revenues from the first day forward on Disney channel, there was a bit of a holiday in some of the deals, but we’ve got revenues from day one Disney channel.

David McFadgen

Some revenue from day one.

Doug Murphy

Yes.

David McFadgen

Okay, and when did the free previews end or have they completed ended?

Doug Murphy

I think we are basically done now, there was three months.

David McFadgen

Okay and then I don’t know if you can comment, just curious what the conventional TV exposure would be that you’re acquiring from Shaw Media in terms of revenue and EBITDA. If you can provide any color there?

Doug Murphy

We are not going to break out those numbers right now David. We obviously have got a lot of work ahead of us as we integrate these businesses and get shareholder approval first and the side show. We’ll do an Investor Day presentation next fall as has been our custom now that we have this exciting new development.

Tom Peddie

David, its Tom. Our revenue portfolio will change and that at Corus at this particular point in time about 46% of our revenue is ad and 40% would be subscriber. If I have the numbers correct on Shaw, they are about 72% ad, simply because of the large conventional play. And when you combine the two companies our ad exposure I think will be about 61% and sub will be about 30% and then the balance 9% will be from other sources. So that would be a mix of our revenue portfolios. So as Doug said, it gives us an opportunity to go after that big $3.2 billion ad pie and deliver great results.

David McFadgen

Okay, great, thank you. And just on the radio business, so I think you saw improvement in Q1 on the ratings. I was just wondering how that’s impacting revenue and what the outlook is for Q2 so far.

Doug Murphy

Yes, we are quite happy with the Q1 in radio. I want to give a shootout to the team, because many of them are listening on the call right now. They’ve been focused diligently on taking cost out of the business, while at the same time addressing our programming. You are right that we continue to see ratings improvement, not fast enough for my taste, but at least we are going in the right direction.

Some really, really – I mean Vancouver is just on fire. That market is really hot. And I just want to note that Toronto actually had a very good quarter. We were flat revenues year-over-year which correspondents as you imagine to flat EBITDA, although we don’t disclose that in the specifics. And despite the Blue Jays run we were able to hang in there.

So I think as a general statement we continue to move in the right direction on the ratings for radio. And the biggest issue right now we are facing is simply the macro economic backdrop in Alberta in particular. Obviously we are seeing challenges on a number of advertisers who are flowing back given the economic issues.

Tom Peddie

David, its Tom. The color I would add to that is that the Q2 is historically our smallest quarter from a revenue point of view for our radio, so I think Q2 right now is a bit of a challenge. But once again it’s a last minute business. We have a number of initiatives in place to help that. We are feeling more optimistic about Q3 and Q4 from a revenue point of view.

Doug Murphy

Yes, I’d just add there. Just in generally pacing in the back half of the year on ad on both TV and radio is looking surprisingly decent right now and its early days and not a lot of visibility. But I think you will – so far so good I guess we’ll have to say on that.

David McFadgen

Okay and then just lastly on the dividend, pro-forma net debt to EBITDA four times. I would imagine the dividends probably on hold and just wondering if you could comment on what level of leverage do you think you might move the dividend up against.

Doug Murphy

As you saw in our announcement this morning, we’ve kept the dividend flat at this particular point in time. We traditionally raise it at the AGM. We’ve not done that at this point. We’ll assess the dividend as we work our way through and see how we deliver, but returning value to our shareholders is important.

Tom Peddie

And just to add color on that a little more, we’ve said before and we’ll say it again, our dividend is [Indiscernible]. We appreciate that many of our shareholders are yield investors and income investors and that was a commitment we made and looking at this transaction was to protect the dividend.

On the flip side, we will be 100% intensely focused on delivering. We want to get back below three times as quickly as possible and that will be a key focus on management to get back to the three time zone and then I think you can likely expect that we’ll be able to be back on a dividend gross profile at that juncture, but for the sake of all those on the line, our focus is going to be on delevering.

David McFadgen

Okay. All right, thank you.

Doug Murphy

Thank you.

Operator

The next question is from the line of Tim Casey with BMO Capital Markets. Please go ahead.

Tim Casey

Thanks. Good morning. I got a few questions. Just first, can you remind us, there used to be a CRTC charge related to buying regulated assets? We always used to sort of factor in a 10% kind of – a lot of us prefer to do it as a CTRC tax. Is that still in place?

Doug Murphy

It is, but in our case there is no change of control and there is no proposed changes in Shaw Media conditions of license and therefore there is no benefits payable on this transaction.

Tim Casey

Thank you. Is there any implications from this for Show Me that we should think about, like our – are you considering becoming an equity partner or will they just be another arms length buyer of your content.

Doug Murphy

I think it will be more the latter Tim and percent to which Global Content is participating on Show Me will continue to be partners with the service. But at this juncture again, our focus is on the assets requiring. It will be a good partner to Show Me, but not an acquitter [ph] of it.

Tim Casey

Okay. On Global I’m surprised to hear you talk about it in optimistic terms. I mean that’s been a business that’s been very challenged. I mean if you look at the CRTC data for conventional, it’s not profitable and where does your enthusiasm for conventional come from.

Doug Murphy

The economics of conventional, clearly both of us in this business need to continue to look at cost structures and that’s a given for specialty cable Tim as it is for conventional. Every media company out there now needs to continue to make sure that they get the right assets, doing the right things and you are putting most of your investment on the screen.

Local television and conventional television has the broad reach that advertisers’ desire and its going to be always part of the national ad buy. And for us the questions becomes, how do you marry most efficiency the power of the local news and the stickiness if you would of local news programming with the broad reach of premium markey content that drives audiences.

And so we are optimistic about conventional, we are optimistic about local television. I know that many of those – may be some of you that don’t feel that way, but global is a great business. It’s a profitable business on its own basis and we are optimistic that there is lots more we can be doing with that asset.

Tim Casey

I guess Doug, I mean that speaks to the wider issue. I mean I think everybody on this call understands the cost synergies. But I mean the revenue synergies, the business you are buying seems to be even more tied to legacy business models than Corus as a stand along. So how can you take these assets on the creative side into truly incremental revenue growth opportunities? Can you help us understand that?

Doug Murphy

Sure. I mean Globals got a -- Global Live is an app that is extremely popular. I mean with the Global acquisition we are getting a huge digital platform that we didn’t have before when we were just Corus. So there is already a significant participation in play on the non-linear side for other Global conventional service. So that’s just kind of one note.

The other note I think is that we continue to need to make the smart programming decisions and if you look at the cost structure, programming is your number one cost and I think the Corus team has displayed – by the way has the Shaw Media team a smart and disciplined approached to making content investments and for us it’s got to be also making sure that we are putting the right money where we’ll drive the audiences.

So we are early days on this one Tim and we will certainly be following up with a lot more detail on the strategies, but the net of it would be the following. The broad base offered by conventional television is really valuable. We can package and bundle it now with our specialty services. We’ll bring a disciplined and intense focus on programming investment to insure that the ROI is there.

We already have global Go Live which is a fantastic app that will leverage and we are scaling all across other digital platforms with the assets we are requiring. And we have – this is something that I mentioned in my remarks, but I’ll hit on here again. We have huge cross promotional opportunities we didn’t have before and the ability to promote across all these different platforms at no additional cost and in fact in many ways reducing costs is extremely attractive to us.

Finally, we talked about the next generation advertising. That is also a game changer for us. The ability to kind of marry together return path data with our consumer insights and our desire to engage our audiences on a one-to-one basis will further I think give us opportunities to grow.

Tom Peddie

Tim, its Tom. The other thing you got to remember is that the regulatory provided more relief in the Let's Talk TV. They reduced the number of hours of Canadian that you had to air. We’ve talked about the benefit of group based licensing, so building on Doug’s point we can spend the money where we want to spend it. So if we want to capture a good show that’s going to deliver great audiences and therefore revenue, that’s a big win for us. So you don’t have to win all of the day parts on conventional, you just got to win the key ones and we believe that under the new regulatory environment we have the flexibility to do that and the people to drive it forward.

Tim Casey

Got you. Okay great, thanks for that. One last one for me, just Tom on the proposed potential subscription receipts, are you contemplating refinancing the entirety of the bridge loan or just a portion of it. Can you put any goal posts around how big that offering potentially could be?

Tom Peddie

We will refinance the entire $560 million that we referenced. And as I mentioned, it will be a combination of subscription receipts and bonds. We are not sure which amount I directionally said, maybe kind of 50/50.

Tim Casey

Got you. Thank you.

Doug Murphy

Thanks Tim.

Operator

Our next question is from the line of Robert Peters with Credit Suisse. Please go ahead.

Robert Peters

Hi. Thanks very much for taking my call. I think you’ve given us a lot of good color on the transaction, so maybe I’ll delve a little bit more into some of the operating results from the quarter.

When you talked about the subscription revenue gains you are seeing from the Disney channel, but you did mention that their free preview was ending in December. So I guess the question would be is kind of what percentage of those subscribers were on free preview versus what we are actually paying for. If you could give us any color around that, that would be great.

Doug Murphy

We lost a $10 million and we are going to settle into around $6.5 million, $7 million.

Robert Peters

Perfect, and I guess that dynamic being on free preview was so overseen in the sub revenue, what I was trying to understand is kind of are we seeing the full impact of the Disney launch in this quarter of is there more to come as the free previews end.

Doug Murphy

I think you have seen the full impact in this quarter. The run rate probably is going to play out for the rest of the year.

Robert Peters

Perfect, thank you. And on the cost side, I think you guys demonstrated strong cost control on the TV side. Just wondering, you mentioned that it’s kind of already at a steady state on the cost there and you’ve taken a lot of cost out to kind of offset the deals with Disney and Nickelodeon. Is there any incremental now that you are the sole owner of the Disney content in Canada or any other step-up or is that as you said previously it.

Doug Murphy

No, that’s it. That was just a phase there where we were sort of cohabitating with the incumbent with the content and now it’s all come over. So as of January 1 there is no Disney content where it used to be, it’s all over on our services, and that’s not at addition cost Rob.

Robert Peters

Perfect, fantastic, thank you for that. And then may be Doug, if you could talk – when we look at the advertising trends, they did see the improvement quarter-over-quarter. I was just wondering if there was any lift from the elections that helped on that.

And then maybe when we talk about the outlook for the rest of the year, obviously talking about the weakness in Western Canada, you guys have talked in the past about kind of CPG flu, especially when you see a weaker Canadian dollar and I think obviously that’s been persisting. So I was just wondering, how are you guys thinking about the trends you are seeing going forward right now and is there any impact from a weaker CAD on that?

Doug Murphy

So I’ll start with the first question. We did see some election revenues on television in obviously during the election timeframe. I’m not sure, our elections don’t run as long as they do in the states, it’s probably a good thing, but we did see some revenue there. We saw some revenue in radio as well. So there was a benefit in the first quarter on some of the elections. I wouldn’t say it was significant than in terms of having a meaningful impact, but it was there.

The softness I refer to really is principally Alberta focused and macroeconomic in nature. But the good news there is that we got, Calgary for example we got the number one radio station with Country 105, and so in Edmonton we’ve got the influence of very strong assets as well. So whilst we do have a soft economy, we still have really good programming radiant delivery which is going to help us protect against that.

The CPG Flu, I think there is still some softness in CPG out there, but as I mentioned in an earlier remark, we are seeing some really decent firming on the kids advertising and on women’s. And on women’s we continue to grow W. W continues to post growth and kudos to the programming team on the woman’s and family networks to continue to kind of launch new originals and drive more audiences.

Our issue only is on co-view and I shouldn’t say only. It’s an issue we have to solve. And that’s just continuing to go back and reminding our advertisers that when parents and kids watch together, their recall is two or three times greater. And we just came out of the field with some new family viewing research which would bring it out to market now, and so there is a triage going on right now at our co-view.

So when we get the co-view business rolling again with the firming we are seeing in kids and woman, and they say there is macro economic factors, but as I said on the prior call Robert, you might recall that we are not counting on GDP recovery to grow our business, we are going to do it through best-in-class execution and so I’m very confident that we’ll address our co-view challenges at the moment.

Tom Peddie

And Rob, it’s Tom. One comment I would add to what Doug just said is that on our co-view, on our consumer packaged goods, it was principally one client that we lost a fair bit of ad dollars on and that goes back to Doug’s earlier comment about scale. We weren’t able to compete from a scale point of view against some of our competitors and so that hurt us and so we’ve identified a specific problem. But co-view has still continues to be quite popular and critical to our success.

Robert Peters

Fantastic. Thank you very much.

Doug Murphy

Thank you.

Operator

And our final question is from the line of Jeff Fan with Scotiabank. Please go ahead.

Jeff Fan

Yes, good morning and thanks for taking my questions. A couple on the deal; are there any covenants related to the credit facilities that we should be made aware of. And then also on the synergies, can you just maybe give us a bit more color on the timing on how quickly you think the costs and the revenue synergies should be able to realize post closing.

Tom Peddie

Okay Jeff, its Tom. There are no covenants that you would need to be worried about. We had identified the synergies of $40 million to $50 million and we’d said that it would be over a two year period. Our expectation from a modeling point of view is that we’ll capture quite a bit of that in the first year, but as I said our goal also is to try to capture those as fast as we can.

Doug Murphy

Yes, and I can give you some more color on that Jeff. We see operational efficiencies; we see consolidation in facilities, platform and systems. There is programming expenditure efficiencies in there and we will look to move as quickly as is prudent. Integrations are very important to manage with careful touch, but with a quick one and so we’re going to not let any time lapse; time is everything on this one.

And then I would also add that we have identified a number of revenue synergies, but none of which we put in our models, because we want it to be conservative. So we’re going to be putting in place a plan with management and our team to incent the folks to go and extract some of these incremental revenue synergies which will further help us delever on a timely basis.

Jeff Fan

Great, and just maybe one quick one for you Doug. You talked quite a bit about ownership of content and control content being a key strategic priority. Can you just help me reconcile how this transaction with Shaw Media furthers that?

Doug Murphy

Again, think of it this way. We have a – and I use broad numbers and they are directionally accurate, but they are not in specific accurate. Let’s say we spend $100 in CPE on W for example. We would spend – and I’m just making this number up, $20 on programming that we would structure in such a way that we would own the copyright. So we would work with an independent producer, put together a deal based on the merits of the economics for both sides, but we would ensure that Corus would retain copyright for global exploitation.

Now we don’t have $100 in W, we’ve just gone to $250. So now we can spend $50 if you just take the same percentage on the very same production model and therein increase our exposure to the global content marketplace.

Jeff Fan

I see. Okay, great.

Doug Murphy

Yes.

Operator

And that was our final question. I will now turn it back to you Mr. Murphy for closing remarks.

Doug Murphy

Well, we are extremely excited as a management team to announce this game changing transaction today. We want to thank everybody for your support on the call. I especially want to thank our shareholders and all of our employees, current and future for all the great work and we look forward to speaking with all of you in the future.

Thanks very much and have a great day. Bye-bye.

Operator

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

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