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Executives

John Cassaday – President and Chief Executive Officer

Paul Robertson – President, Television

Tom Peddie - Senior Vice President and Chief Financial Officer

John Hayes – President, Radio

Doug Murphy – President, Nelvana Enterprises

Analysts

Carl Bayard – Genuity Capital Markets

Bob Bek – CIBC World Markets

Scott Cuthbertson – TD Newcrest

Ben Mogil – Thomas Weisel Partners

Tim Casey – BMO Capital Markets

Avrinda Galipettes – Cormark Securities

Drew McReynolds – RBC Capital Markets

Jason Jacobsen – Griffiths McBurney Partners

Randal Rudniski – Credit Suisse

Eric Bernofsky - Desjardins Securities

 

Corus Entertainment Inc. (CJR) F3Q08 Earnings Call July 9, 2008 8:30 AM ET

Operator

Welcome to Corus Entertainment’s analyst and investor conference call. (Operator Instructions) At this time I would like to turn the conference over to John Cassaday, President and CEO.

John Cassaday

Welcome to Corus Entertainments third quarter report and analyst conference call. Thank you for joining us today. I will take a moment to run through the standard cautionary statement before we begin.

This discussion contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1955. Some of these statements may involve risk and uncertainties. Actual results may be materially different from those contained in such forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company’s filing with the U.S. Securities and Exchange Commission.

We would like now to introduce you to the Corus Entertainment team that is available with me on this call: Tom Peddie, our Senior Vice President and Chief Financial Officer; Paul Robertson, President of Corus Television; John Hayes, President of Corus Radio; and Doug Murphy, President of Nelvana Enterprises.

Before we review our results we would like to advise everyone that we have once again put a series of power point slides on the Web that accompany this call. The link to the slides can be found on the Investor Information page of our website, www.corusent.com.

So to begin, we had an excellent quarter and we are pleased to have this opportunity to discuss our results. As Slides 3 and 4 show, revenues were up 5% and segment profit was up 11% versus year ago.

Our net income for the quarter was $37.7 million versus $29.6 million last year with an earnings per share of $0.45 basic versus $0.35 basic a year ago. We would like to spend the next few minutes providing you with some additional context to these results.

Starting with television on Slide 5: Our revenues on television were up 5.0% and our segment profit was up nicely at 8.0%. Our margins for the quarter also improved, from 42.2% last year to 43.3% this year. Specialty advertising was up 2.0% this quarter, led by double-digit growth on the W Network. Subscriber revenue also grew by 2.0%. In terms of subscriber numbers, Movie Central grew in the quarter, surpassing the 890,000 submark. And lastly, we had an increase in other revenue in the quarter, based largely on double-digit growth from our website sales driven by our updated Treehouse.com.

As implied our adult-targeted networks did very well, extremely well. Our kids business was soft in the quarter. There were three reasons which we highlighted in our report to shareholders. One was the fact that the Easter selling season came into Q2, and this of course affected the toy category to a degree in Q2.

Secondly, the entertainment category was less robust in this quarter, and I know some of you were looking for some specifics on that. And specifically, there were seven theatrical and ten DVD releases this quarter compared to 11 theatrical and 16 DVD releases in the same quarter a year ago, so that was the second contributing factor to our somewhat softer kid revenues.

And then third was the loss of a key property on Teletoon which we referred to which is having a continuing negative effect on our year-over-year comps, and of course, that will get sorted out going into the next fiscal year.

The other thing that I think is important to mention is, is that the specialty ad category continues to be quite robust. According to TVB, specialty ad growth for the first eight months that is to the end of April this year was 7.6%; still in our mind very, very impressive growth in that category and something that we expect will continue.

Looking forward on the ad sales side, we are seeing strong bookings versus year ago with mid- single-digit growth over all. We are in the midst of our negotiations with all of our major agencies regarding our upfront commitments for fiscal 2009 and we can announce that we expect to renew all of our major partnerships with volume at least at year ago levels.

So, the important message here is that we are continuing to see a high level of confidence in our networks and a high level of confidence on the part of our agencies that their ad volume and business with us will remain at least at the levels that we have been at historically and that is despite the obvious doom and gloom that we hear and read about each day about the economy. At least as it relates to Corus and the markets that we participate in, we are continuing to see substantial evidence that our optimism is well founded.

We are also receiving an encouraging response to our new services. Teletoon Retro has been widely distributed and is doing extremely well in the ratings. Cosmopolitan Television is off to a good start, largely in Western Canada; we’re still sorting things out here in Ontario. And we are excited about the possibility of launching and re-branding CLT. We are waiting for approval from the CRTC, which we believe is imminent.

On the pay side, just to repeat once again, we are pleased to see continued growth in Q3. Our increased marketing efforts to reduce churn and sign up high-definition customers ended in May and we believe this will provide us additional growth in Q4.

And beyond Q4, the fall is looking exciting with the return of all the big guns to our schedule, specifically Entourage season five, Californication season two, and Dexter season three. So, while the pay numbers are somewhat less than what we had anticipated, I think we have to realistically assess the impact of the writers’ strike and the lack of significant news to our schedule, so I think in retrospect we shouldn’t be too disappointed, but rather optimistic about the impact of these new shows coming back into our schedule for next year.

On the radio business, if we turn to Slide 6, our revenues were up 3.0% with relatively flat segment profit. Our results in the West continue to be exceptionally strong, led by double-digit growth in London and Kitchener. We continue to have great growth in Edmonton, Calgary, and Vancouver, and that looks like it is continuing into Q4 and into the first quarter of next year.

We were pleased overall with our results in Ontario. I mentioned London and Kitchener particularly performing well, but generally throughout Ontario we had a very strong quarter, although we did experience some softness in the Toronto market.

In Quebec, this market remains challenging for us right now but we continue to execute on our Quebec turnaround and we continue to be very positive about our prospects for the future. CHMP, which is our recently re-formatted news/talk station in Montreal is doing very well and showing solid growth, as is CFOM, our FM in Quebec City. The re-format to sports/talk of CKAC in Montreal is showing very positive results this quarter with double-digit growth versus year ago, so that’s extremely promising for us.

We also have recently announced the sale of our CHRC-AM in Quebec City and this was approved conditionally by the CRTC and we remain confident that this will close quickly and that will relieve us of a money-losing operation in Quebec City and we look forward to next year with a slate of hopefully two strong FMs in the Quebec City marketplace.

Our CJRC signal expansion was approved in Gatineau and this will allow us to cover the entire Ottawa and Gatineau region going forward and again offers, I think, good promise for us there.

And as you may recall from previous conversations, we have also applied for an English news/talk in the Ottawa region and we are hopeful of getting a favorable outcome on that one from the CRTC as well.

Also in the quarter, or recently rather, subsequent to the quarter, we re-formatted and restructured our 940AM Montreal station. That was an English news/talk. We downsized this station’s headcount and we switched it from the news/talk format to a greatest hits format, which will improve the profitability of that operation going forward.

So Quebec continues to be the major challenge for us in our radio division, in large part due to market conditions, but we are being confident that we will get this business on track and demonstrate marked improvement in our fiscal 2009 results.

On Slide 7 you can see that our content business experienced its sixteenth consecutive quarter of profit with revenues up 12.0% and profits well above year ago. We concluded a significant music rights deal; we had some high-margin library sales in our merchandising sales led by our three Bs. Backyardigans, Bakugon, and Babar, all contributed to a great quarter within Nelvana Enterprises.

Internationally, our KidsCo venture also continues to grow impressively, with an increase to five million households versus roughly four million just a quarter ago.

So before we turn it over to your questions, we wanted to address the issue of Part II fees. Last year these fees were ruled in a legal tax. As a result, in Q4 of last year we reversed our accrual for fiscal 2007 and in Q1 and Q2 of this year we had not been accruing for these fees. As Slide 8 summarized, on April 28 of this year, the Federal Court of Appeal reversed last year’s decision and ruled that Part II fees are a valid regulatory charge.

The Canadian Association of Broadcasters, of which we are a prominent member, has filed an application for leave to appeal to the Supreme Court of Canada and until this issue is resolved, which we continue to hope will be resolved in our favor, Corus will accrue for these disputed regulatory fees. As a result, we booked a $9.7 million accrual in this quarter. $4.9 million of this accrual was for the full fiscal year 2007; the remaining $4.8 million was for the first nine months of this fiscal year. For both 2007 and 2008, the accrual for these disputed fees will be excluded from segment profit.

So we hope that these comments have provided some clarity on this issue of Part II fees and we would now like to turn it over to you for any questions that you might have.

Question-and-Answer Session

 

Operator

(Operator Instructions) Your first question comes from Carl Bayard - Genuity Capital Markets.

Carl Bayard – Genuity Capital Markets

Obviously you have done a great job cost cutting, but going forward can you share with us where you still see opportunities to cut costs a little further?

And second question, on pay TV, any update on how you can get the distributors to start off selling pay TV a little better?

John Cassaday

First of all, we’re always looking at the organization from the standpoint of how we can operate more efficiently.

We have an initiative underway right now in our television group where we’re looking at activities that we are involved in on a day-to-day basis. All of them are important, otherwise we wouldn’t be doing them, but some are less important than others are. And we want to make sure that we just don’t continue to put pressure on our people as we look for ways of operating more efficiently, so we would like to try to eliminate some activities and streamline our processes, so that’s one example.

I think that the other area in our radio group is just continuing to look at the stations on a station-by-station or profit center-by-profit center basis. We are doing a lot of benchmarking and best practice work to make sure that we have good alignment across the network of stations that we have to make sure that there are all operating as efficiently as possible.

What we have said to our Board is that good cost control is a part of our culture; it’s an ongoing part of our business and we will, and do believe, that we continue to have opportunities to manage our costs. We have to do that because we have got to continue to invest in our business. This year we made a number of investments; for example, to accelerate the sales of our Web platform in radio, we invested in a major sales platform that was developed by our colleagues at Emmis in the United States. That was a significant investment. We are investing in a new traffic system in radio right now, Wide Orbit. We continue to invest aggressively in programming to accelerate our ratings at W, YTV, CMT, and the movie business.

So, I just wouldn’t want to give you the impression that this is all about cutting costs. What we are trying to do, we call it “weed and feed” and that’s weed out costs where we can and feed investment into the business where we think we can accelerate our growth. And we see ourselves in a very, very favorable rating position right now, with well-trained and motivated staff and we think we can take advantage of the opportunities that present themselves to us going forward.

On the pay TV side, we think that as a result of a number of conversations that we’ve had with our largest partner, which is clearly Shaw, who operates both the Shaw Cable and the Star Choice business for us in Western Canada, and our franchise is, of course, in Western Canada, that there is a recognition on both parties’ parts that the icing on the cake, as the successfully roll out their digital households, is to penetrate pay TV subscribers to a higher level.

And I can simply say that we are committed to put in place the incentives and the marketing support to help them accelerate the penetration levels of pay within their digital universe. And they are committed to getting this back into being a dynamic growth business for them as well.

And I think that we’re fortunate that so much of our business in this particular case is concentrated with one customer, who happens to be extremely committed to a digital roll out and committed to working with us to make sure that the pay TV business achieves its full potential.

Carl Bayard – Genuity Capital Markets

On the radio side, is there any chance you could maybe sell some AM stations in Quebec that for whatever reason you won’t be able to switch to FM?

John Cassaday

We are doing a major strategic assessment in Quebec right now and it would be premature to indicate that we will exit certain markets. But I can tell you that our assessment is based entirely on determining whether or not we think we can win going forward and if the results of that win are going to be worth the trip. And if we conclude that they aren’t then we would sell off stations that we do not think fit strategically for us going forward.

Carl Bayard – Genuity Capital Markets

How about bargaining agreements with unions in radio? Is the picture better or worse or the same as six months ago, one year ago?

John Cassaday

I think the situation is much better right now. I think the environment at TQS has sent a warning shot to the unions in Quebec that it can’t be business as usual, that these businesses have to operate profitably. We are in the midst of discussions right now with our unions in Montreal and we feel confident that there is a realization that we need to work cooperatively to make sure that the Corus properties in Quebec operate on a profitable basis, on a sustainable basis. So I think the environment is quite conducive to us working well together.

Operator

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

Bob Bek – CIBC World Markets

John, on the Movie Central and pay TV sell-through, I think you spoke last quarter about being a bit more aggressive as far as targeting some of the sell-through on the digital side from Shaw and given the series are coming back in the fall, would you have been as reasonably aggressive in Q3 or is that really going to be a Q4 event, to sell into perhaps ratcheting up the campaign there?

John Cassaday

Well, we had a campaign that ended in May. I’ll Paul describe it to give you some color on that, Bob, and hopefully that will satisfy you on this point.

Paul Robertson

We have a real focus against two things: Really reducing the churn on the pay side, which is always part of the business; and of course, then bringing new subscribers into the market. The marketing efforts are really focused through a period that ended in May and June. So we had a mall tour going on at that point, we had subscriber rebates in the store so that the call centers could work with customers on those. We targeted HD subscribers that didn’t have Movie Central so we were able to get specific lists that would tell us who those folks are so we could target them with direct mail. So it was a pretty comprehensive program. It was probably the first effort that was highly targeted to key prospects.

In the response, Shaw had a wonderful quarter for digital growth, building about 36,000 subs between Shaw and Star Choice, and we saw really good lift in the Shaw/Star Choice business. Some of the other on the other customer side was a little softer but we could see the results of our efforts there.

So we are encouraged that with the specific targeting and the ability to go straight in on the highest prospects that we can continue to grow the business. Because of the timing of this effort, it should spill over into the fourth quarter and provide some stability there.

Bob Bek – CIBC World Markets

On radio, could you give us a bit of an update on the Toronto situation? I know some of the weakness was ratings driven, so that takes some time to work through, but if you can just give us an update on what the outlook for Corus in Toronto is, please?

John Hayes

The Toronto outlook is getting better. We have had a bit of [inaudible] some ratings issues, primarily at the edge, number one. And secondly, the advertising shift towards greater ask by advertisers for female demos, which with our wall-of-men strategy, is not exactly our strength.

In addition to that, we had a couple of self-inflicted wounds regarding our sales department and sales practices, which we have addressed. We have made some management changes in the sales department: We have parachuted our Vice President of Sales into the position of Director of Sales at the Toronto location. We are in the process of reorganization and segmenting our work efforts, aimed at transactional and retail, in new business and we will be announcing some changes shortly in the sales department.

So, in general, we think that we are past the rough patch. However, if you look at the Q3 performance as it relates to trim, the market was up by 1.5% and we were under our performance last year in terms of revenue. And being that Toronto is the largest market in the country for radio revenue that puts a drag on our division performance as a whole.

But to sum up, we know what the issues are; we have addressed them. It’s been a great run in Toronto for about the last six years and I think that we just had to make a transition to a new way of thinking about how we sell.

Bob Bek – CIBC World Markets

On the overall radio market, I know it’s a bit of a crap shoot, but do you still think 4.0% for the overall market for the year is reachable? Or is the pace in the East holding back some of that?

John Hayes

Well, the pace in Quebec certainly is holding that back for the year but the West continues to be strong. And Ontario seems to be pretty good. I’m just hesitant to say yes because although Q1 and Q2 were pretty strong, things started to slow down a bit in Q3 and the business is spotty. It’s week-to-week and it’s tough to predict. I would think that it won’t be too far short of 4.0% for the industry for the year. If it falls short.

Bob Bek – CIBC World Markets

Could you just remind us are there future tax recoveries to deal with in Q4 or are we done with those adjustments?

Tom Peddie

I think, Bob, we are pretty well done with them. We initiated a tax planning strategy a few years ago and we were able to recognize the benefits in this quarter. So I think that if you are doing your modeling for Q4 you can go back to using the 35.0% rate.

Operator

Your next question comes from Scott Cuthbertson - TD Newcrest.

Scott Cuthbertson – TD Newcrest

Your comments on the upfronts, you said you were encouraged by the fact that the volume demand remains at least similar to last year. I just wondered, implications for revenue, what is the pricing outlook and what does that mean in general in your mind, what you expect for your overall outlook for specialty television advertising demand?

John Cassaday

Well, I think we’re certainly getting more sophisticated at the whole area of the science, if you will, of yield management; our customers are, as well. And our view, going into this year, is that what we would like to do is go in with a relatively stable upfront and then take our chances on the spot market going forward. So I think the pricing environment this year was modest. We did see some price inflation but I would say you would characterize that as less than, or in around, 3.0%.

But our feeling is that the fact that a large block of customers are willing to lock in firm commitments, and this is one of the beauties of TV is, John talks frequently about the lumpiness and unpredictability of radio being so locally focused, one of the beauties of TV is the fact that we have a relatively tight list of major customers who are able and willing to commit to longer-term deals. It gives us a stability there that is comforting and allows us to win or lose on the spot market based on our success in programming and getting the ratings that we know drives results for our advertisers.

Scott Cuthbertson – TD Newcrest

Turning to radio, the difference between local and national trends continues to be fairly wide. I just wondered if you could throw out any comments on that. Are we seeing radio taking share from other media and that explain the national growth remaining pretty robust? And what are the primary drivers on the local side?

John Cassaday

Well, radio continues to be an intensely local medium and I think if I were to attempt a broad-brush answer to that question, Scott, it would be misleading, because what we’re feeling is that major advertisers who are nationally focused continue to be very confident in the ability of radio to reach and influence audiences as to their products, but on the local side I would have to break that answer down into a market-by-market discussion of what’s going on with numbers of stations, what’s going on with the local television market, what’s going on with the local print market, and it really is a variable on a market-to-market basis.

Scott Cuthbertson – TD Newcrest

Maybe you could just touch on Toronto and Vancouver, then, and talk about the local situation there?

John Cassaday

We think that Vancouver is holding up pretty well; modest increases and decent growth in Q3, as a market. Toronto, a little bit more challenged and hard to get our arms around exactly why; late business that hasn’t come in and in a sense that Ontario might be slowing down a little bit due to the manufacturing sector. And that’s about as much as I can intelligently comment on.

Scott Cuthbertson – TD Newcrest

John, just automotive, what do you see in terms of demand there? Any dig points that we might find helpful.

John Hayes

Not too bad, automotive last year year-to-date was 12.0% of revenue for radio; this year it’s 11.0%. And in fact, in Q3 it held up equally to last year for us and so not a lot to comment on. Again, spotty. Winnipeg seems to be off in automotive; domestic seems to be down a little but imports are up. And then when you throw Quebec into the mix, everything is off in Quebec. So, again, market-by-market situation.

Scott Cuthbertson – TD Newcrest

On the writers’ strike and on the overall impact that it’s having on your business, I know it’s really having an impact on the conventional television business, but there are some schools of thought that say if there is a relative dearth of new shows this fall, that might help payers especially. Can you comment on that?

John Cassaday

Well, we’re hoping that just the juice that we get from announcing the return of these high-profile shows, as we mentioned, Entourage, Californication, Dexter, gives us benefits to talk to our subscribers about and keeps them in the loop and gives us incentive to bring new people on to the network. So we think that these shows coming back has got to be a positive for us and as I said in my opening comments, we are optimistic about the impact these new shows, our programs with our important customers, Shaw, and the appetite that we think we both share to really make sure that we at least hold the historical levels of penetration as they bring new digital subscribers on board going forward.

Scott Cuthbertson – TD Newcrest

Did you see any viewership trends at all that were interesting through that whole period that would indicate that people were getting frustrated with conventional and setting up for pay more or watching more of your specialty channels?

John Cassaday

Not really, we get periodic viewership data on pay but we’re not getting overnights like the networks do. So I really couldn’t give you an honest comment there. It’s just anecdotal and I think we see the numbers as clearly still a shift from conventional to pay and we expect that that will continue, not just because of the writer’s strike, but just because of the specialization, niche-orientation of the specialty and pay business.

Operator

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

Ben Mogil – Thomas Weisel Partners

First of all on the Cosmo and getting better carriage on Cosmo, is this a view that if you could show better growth or good subscriber growth with Shaw that Rogers and Cogeco will come on board, or is there something systematic that’s leading them not to want to pick up a channel?

John Cassaday

I think it’s just a lot of channel pressure on them right now, a lot of important decisions. Make no mistake about it, they want Cosmopolitan Television and have offered us a reasonably good level of penetration. We have taken the view that this is not like a new pet channel, that this is an important brand that is being launched. It’s being supported with outstanding programming. It has a great brand and good parentage.

And both Hearst and Corus are absolutely 100% committed to making sure that this is a brand that’s going to have showcase-type numbers. So what we continue to do is just negotiate for a position that we think is justified given the level of commitment that we have to the brand and that is what’s taking so long. But our belief is that, like most things in life, not settling is the right strategy.

We could have been on February 14, like we were with our customers in other parts of the country but we have just not been willing to settle on this one and we think ultimately we’ll work something out with them. They are a great and supportive customer of ours; we are a good partner of theirs. And we will get a breakthrough here.

But our hope and expectation is that this channel, when it’s fully served by all the distribution partners in the country, will be in the five million plus range and that will give us a great base to sell advertising and a great opportunity to serve that young, female demo, which is of value to them as much as it is to advertising partners and us.

Ben Mogil – Thomas Weisel Partners

Secondly, the comments you made about the theatrical releases and the DVD releases being down from the number of releases from last year, if I look at what played in the second quarter of the calendar year in the Kenya box office, there were a lot of strong children’s titles, Iron Man, Hulk, Indiana Jones, Kung Fu Panda, and more importantly, when I speak, because I cover some film distributors as well, when I speak to these people, they’re telling me increasingly that they’re moving money, their advertising spend away from traditional media.

Newspapers being the first casualty, but they are increasingly putting more stuff online and more stuff on non-traditional media and taking stuff out of traditional media and newspapers, but TV to a lesser degree. Are you seeing that? Like is this not just a function of the number of releases in a quarter, are there not some secular trends going on here?

John Cassaday

Well, I think there are secular trends going on, not just in entertainment. I think everyone is being more experimental now, if you will, and is looking at opportunities to experiment with mediums on all forms of webs and different websites. But I think the reality of it is that you’re right, there were a significant number of kids/family features and DVDs released in the quarter, but the specific data that we provided indicated that there were, in the case of DVDs, about six less titles launched in the quarter, and in the case of theatricals, four less. So if you just do, on a linear basis, the impact of those four titles and six DVD titles, I think you end up with an entertainment number which is below a year ago. And that’s exactly what happened to us.

So, I still believe that to launch successfully a new kid title, you need to buy through us and we are convinced that given the success of some of these kid and family titles that this is going to be an exciting growth area for us in the future, even if they decide to put some of their funds onto other sites like Facebook and other opportunities they have to reach younger audiences.

Ben Mogil – Thomas Weisel Partners

I know that CineFlux has been very vocal about going to the U.S. studios and getting them to spend more than they’ve traditionally spent in the Canadian market and just from some of our channel checks we are seeing a significant hiring ramp up in terms of the U.S. studios up here on the marketing and promotional side. Are you seeing the studios, when you speak to them as advertisers, being equally as adamant about spending more in this country?

John Cassaday

May I will just ask Paul to talk about some of the things that we did to specifically target this segment because I think there were some really good, innovative things we did from a sales-structure point of view to tap into this trend that you’re talking about.

Paul Robertson

We took an effort about six months ago to meet with everyone of the major studios and talk to them about their programs and priorities, so we got a lot closer to them over the time and have been looking to your point, Ben, about trying to extend beyond the television side. We are executing now across the Web and our various other platforms at the same as we’re executing in television. So we are able to broaden out the offering that we have for them because we’ve got a little more advance on the relationship and the release schedules.

I think what happened at some point in time, as the dollars came closer to par, is that initially some of the U.S. studios were spending less in Canadian dollars per release. And of course, as they caught up to that and recognized they needed to, in Canadian dollars, retrench their spending and come out stronger, that they’ve been able to increase those budges per release.

Ben Mogil – Thomas Weisel Partners

The guidance you gave back in the fall, I’m presuming that still holds?

Tom Peddie

That’s correct.

Paul Robertson

Part of the focus in on the major studios, we have a group that focuses just on the studios. So instead of this being blended within each bag of the individual sales executives, there is a specialty area that we have created to go after this market. So I think our knowledge of their business is increasing; our relationships are getting better. I think they are realizing they need to spend the right amount in Canadian dollars and I think that this will be a robust category for us going forward.

Operator

Your next question comes from Tim Casey - BMO Capital Markets.

Tim Casey – BMO Capital Markets

John, I’m just wondering if you could give a little more color on your comments regarding the outlook. You’ve expressed confidence in your properties but I’m getting the sense, or should we have the sense that the outlook is for stability rather than growth? Judging by your comments there was a little bit of price inflation on the upfront market but it doesn’t sound like there’s a lot of growth there. Am I reading too much into what you’re saying or is stability really the expectation we should have?

John Cassaday

Our focus is on growth and that is the theme for our company for this year. What I was trying to suggest in the comments about the upfront market is that I think that to be able to lock in upfront-year-ago levels and then rely on the spot market to grow, is a compelling strategy for us and for our customers. They hedge somewhat the current economic uncertainty.

We have the opportunity to sell in at higher rates on the spot business going forward. So, what we have right now is tremendous ratings momentum at W, we have good ratings momentum at CMT, we are convinced that we are getting YTV back on track, we’ve got Teletoon going into next year without the year-over-year comp against Family Guy, which is an important show that we lost in the past year.

What I was trying to suggest is that unlike many people who are predicting dire consequences for ad sales companies like ours, we’re just not seeing that. And I’m not going to suggest that this is going to be the most buoyant period but I am going to suggest that we do believe that we have real good growth prospects, particularly on a segment basis, going forward.

Tim Casey – BMO Capital Markets

If I could just follow that up, John talked about a deceleration in radio, looking at it through the first three quarters of 2008. Have you seen that in specialty? You talked about 7% growth through the first eight months. Has specialty been stable through that period or has it slowed, as radio has?

John Cassaday

Again, I think we are dealing with terminology here and when John talked about deceleration he still said that it’s still possible that we’ll have 4.0% growth in radio this year, which I think is extremely good growth for that sector.

And when we talk about specialty growing, I think I quoted a number of 7.6% or 7.8% for the first eight months. There aren’t many consumer categories in North America that are growing at that rate, so I think that’s a pretty good rate.

And, Tim, one of the things that we’ve been talking to our shareholders about in our various exchanges with them over the last little while, is that the specialty segment, now in excess of $1.0 billion, is one that I think we have to start segmenting to some degree because it is not an amorphous mass anymore; there are some very discrete segments within specialty and one of them, for example, is the female-targeted business, and with specialty growing at 7.6%+, we would expect the female-demo-oriented stations to continue to grow in the mid-double digits, so in the 12% to 16% range I think is a realistic target for those.

So I think that being positioned in the right segment within this specialty space is going to be an important factor for various companies going forward, as well. We may see some softness in the male-oriented demos. As John mentioned, we saw that a little bit in Toronto. I think you will see that spread into the specialty television business going forward.

And of course, we’re dealing with some societal issues and demographic issues on the kids space, so we’ve started to guide down on kids revenue going forward, as that being more in the 3% to 5% range as opposed to upper-single digits as a result of the impact of the concern that food advertisers have about leading with their chin, if you will, against the obesity issues and concerns and the fact that there are less kids going forward. That’s just a demographic reality.

Tim Casey – BMO Capital Markets

Why is the female demo so strong?

John Cassaday

Well, I think part of it is the good work that we’ve been doing demonstrating the influence that women have on buying behavior. I only half-jokingly talk about the fact that in my family, growing up as a kid, it was not uncommon for my dad to come home and say, “Hey, come on and look at what’s in the driveway; brand new car.” Well, there’s nobody stupid enough to do that anymore. Women have an important input on virtually every economic decision that’s made in the household and advertisers are recognizing this and the focus is shifting largely to these female-oriented campaigns.

We’re seeing this on radio, we’re seeing it on television, and it’s just a function of the increasingly strong economic impact that women are having on purchase decisions on virtually every category.

Operator

Your next question comes from Avrinda Galipettes - Cormark Securities.

Avrinda Galipettes – Cormark Securities

Firstly, on the television programming cost inflation, I think you mentioned earlier on in the year that you expect a flattening out in the latter part of the year. I just wanted to check if you are still looking for that going into Q4? And also if you can talk a little bit more whether you have any better visibility on how programming costs would trend going into 2009.

Paul Robertson

We did, during Q3, see that lower growth against a year ago comps on programming amort. In fact, it was about 6% a year ago. The reported number is a little bit higher, which includes some other service expenses and that kind of thing, but the pure programming was up 6%. That’s the level that we would expect going out the year at, so it’s less than we saw on the front half.

As we look to next year, realistically we’re still thinking that programming is going to increase more than our revenues and we think mid-to-high single digits. We know that this is the way that we need to remain competitive, keep our revenues up and the revenue will follow. So we’re trying not to take our foot off the gas relating to the strength of our program schedule.

So, John’s earlier comments about the necessity to be very, very trim and prudent on other expenses remains true. So we keep it all in balance but that’s the outlook on the programming front.

Avrinda Galipettes – Cormark Securities

And I also had a question on the digital channels. Specifically Scream and Discovery Kids and obviously they were breakeven last year in 2007. Could you talk a little bit about the EBITDA contribution that that’s offering coming into 2008 and how you see those channels trending.

Paul Robertson

It is positive; it’s in excess of about $1 million and maybe over the next year or two we can double that, that’s probably the magnitude of it.

Avrinda Galipettes – Cormark Securities

And finally, on corporate costs, are you still looking for about $23 million to $25 million for the year? Is that reasonable?

Tom Peddie

Yes. The number would be closer to $23 million than it would be to $25 million.

Operator

Your next question comes from Drew McReynolds - RBC Capital Markets.

Drew McReynolds – RBC Capital Markets

First on the television growth of 5% in the quarter, underlying that was 2% ad growth, 2% subscriber growth. What’s the difference between those two?

Tom Peddie

Web advertising, that’s the big piece. We had some service work out of the studio that contributed. Those were the bulk things. We are experiencing really awesome growth on our web properties right now, so that’s the gap between the two and the three.

Drew McReynolds – RBC Capital Markets

John, just on the pace of growth. Broadly speaking, I think in the past you’ve said you still believe this is a mid- single-digit growth business. Just want to confirm that that’s still your view and that there isn’t anything obvious out there with respect to changing conversion rates among digital subscribers.

John Cassaday

I’m still confident that we can get this thing into that, 5%, 8%, I don’t know what it is. But I do not think that we’ve run out of gas on pay. I think this digital conversion opportunity for us moves us from simply ships rising with the tide to one where we just have to be great marketers. We have to take advantage of the fact that people have shifted to digital and people are shifting into high-definition, big screen, flat screen televisions. There should be an increasing appetite for the quality programming that we offer, particularly the movies on pay TV.

Our view is we just have to make sure that we have the right programs in place with our customers to incent them to convert people to pay when they move them off the analog to the digital platform.

I look at a digital base that is still only around 50% and has that upside and then a pay base that’s 50% of the digital base and I say how can you look at that market and not still think that there are extraordinary opportunities going forward. As a result, we remain, despite the fact that admittedly we’re going to be modest 2% to 3% growth this year, we remain convinced that this is a dynamic growth business for us.

Drew McReynolds – RBC Capital Markets

Tom, just looking at the Part II fees for all of 2008, can we just annualize year-to-date 2008? Is that a fair assumption?

Tom Peddie

Yes, I think the number is about $1.2 million to $1.25 million.

Operator

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

Jason Jacobsen – Griffiths McBurney Partners

There was a nice EBITDA pick up in the quarter. You spoke to a couple of deals that contributed to that. Just wondering if this is indication of a positive trend that we can expect going forward, due to some of the performance of particular shows, or would it have just been more timing-related due to some lumpy sales?

And then on the Part II fees, as well. Just wondering what timing you are expecting in terms of when the appeal decision should come down.

Doug Murphy

There was a significant one-time music rights transaction in the quarter which would be non-recurring, but there also is growth in our merchandising business. We are feeling some very good wind at our back on our Bakugon properties. In addition to that, Backyardigans and Babar continue to trend nicely. So there in this quarter there is a one-time non-recurring event but we do feel positive with some of the trending we’re seeing in our merchandising licensing business.

John Cassaday

Doug, could you just expand a little bit on what we’re seeing on Bakugon globally?

Doug Murphy

Bakugon at the moment is the number two or three rated boys’ toy in the North American marketplace and it’s rating strong in terms both network performance and toy performance. So we’re really quite optimistic that we have a good shot at a big win here in North America. The focus now for the team is to place the series on international free-terrestrial broadcasters. We’re launching on Cartoon Network internationally in August of this year and the toy roll out will probably begin in the spring of next. So it’s a real keen focus of ours now to continue with the feed that this is a potential hit for us and we remain optimistic for a really good business here.

Tom Peddie

Jason, on the question regarding Part II, obviously the first stage is to get the Supreme Court to respond positively to our application for a leave to appeal and we expect that that would happen in the fall. Subsequent to that, assuming they review the decision, I don’t think we’re going to have a BCE-type lightening speed decision given the magnitude of this relevance to the BCE decision, but we would hope that some time in the next fiscal year we would get this thing sorted out. I don’t think anyone has any firm time table on that at this particular point in time.

Operator

Your next question is a follow up from Carl Bayard - Genuity Capital Markets.

Carl Bayard – Genuity Capital Markets

On the pay TV side, we keep on talking about growth all the time. Could you just comment on the retail price and trends you’re seeing there? Is that about to change?

John Cassaday

Every one of our customers has a different approach on pay and I think this is largely in response to the emergence of teleco. We’re offering skinnier packages, if you will, and many of which include pay. So it’s really a commercial decision that’s made by the MSO and it really relates to what their strategy is in terms of the competitiveness of their offering versus satellite and versus teleco.

If you look at Shaw, for example, they made the decision to retain Encore on a digital tier but also move it into an analog, movie-oriented package to really leverage, their recognition that their customer base has a huge appetite for movies.

So I think you see prices generally from $12-$16 retail and I think you’re not seeing any reluctance on the part of the BDUs to price this efficiently when they feel a need to maintain their margins. So I don’t think they’re feeling any price pressure right now and as a result we’re not seeing any lack of enthusiasm in continuing to advance our interests, along with theirs, in building pay subscribers.

Carl Bayard – Genuity Capital Markets

And could you just refresh our memory, how do BDUs make money with pay TV?

John Cassaday

Essentially the model is about one third, one third, one third, to just put it in the simplest terms. The aggregator programming receiving a third, the studios a third, and the BDU receiving a third of the retail price in terms of their profit margin. As you will recall, our margins have been widely acknowledged. In fact, I saw them in the paper this morning, in the low 20 range. It’s a nice profitable business for all parties.

Carl Bayard – Genuity Capital Markets

John Hayes, I notice the growth in retail sales has been weak in Western markets since January and I know that retail sales correlates pretty strongly with radio. Is that something that is worrying you? You’ve been posting great growth in your Western markets.

John Hayes

No, it’s not anything that concerns us. The Western markets have been very, very strong. I think the only comment I would make if that we’ve got some substantial number of new competitors in Edmonton and Calgary, which some people might view as a negative. I look at it as a positive. It might hurt us a little bit short term, but long term you’ve got more people on the street talking about the advantages of advertising on radio. And that’s a good thing.

I know that there is some fear that things might be slowing down a little bit in Alberta, that furniture sales and automotive sales are toppling a little bit. We’re not feeling that at our stations. And in Vancouver, I think Vancouver is a pretty stable market, so I know that national has been stronger this year than local but I think that is just a cyclical thing where some years national exceeds local growth and some years local does the other. So, I think I disagree with your question.

Carl Bayard – Genuity Capital Markets

If you had to ballpark, retail as a percentage of radio industry revenue, would you have that figure off the top of your head?

John Hayes

No, but I have it in my book here. Bear with me. I can give it to you by the quarter.

John Cassaday

Maybe we could just get back to you on that.

Carl Bayard – Genuity Capital Markets

That’s fine.

Operator

Your next question comes from Randal Rudniski - Credit Suisse.

Randal Rudniski – Credit Suisse

On Part II fees, will you be making a payment for Part II fees this fall or will it depend on whether the Supreme Court agrees to hear the appeal?

Tom Peddie

Until a decision is made we will not be making any payments. So we accrue for it, but there are no payments, no cash flow impact until a firm decision is made.

Randal Rudniski – Credit Suisse

And if the Supreme Court did not agree to hear it, would you have the 2007 and 2008 payment to make?

Tom Peddie

Randall, there has been no determination of that. What the CRTC has said is that they are not going to invoice anybody for this until there is a resolution so we don’t what the status of that is.

Randal Rudniski – Credit Suisse

Relating to the television segment, the ancillary revenues up strongly based on Web advertising and increased amount of service work at the studio. Can you describe what’s happening within that content thing that’s in the television division? And why the service work is up so strongly?

John Cassaday

Basically it’s one series. It’s a series called Handy Manny and we’re doing it for Disney. But I would say 90% of what we’re going to do out of the studio now and into the future is going to be to exclusively to meet the needs of our television networks in Canada and around the world. The amount of service work that we do is going to be minimal. Clearly there was an incentive on our part to really solidify our relationship with Disney and that’s why we are participating in the production of Handy Manny and it’s done on a basis that is profitable to the company overall.

Paul Robertson

And just to add, on the website, we re-designed the Treehouse website. And Treehouse has such a wonderful following among parents that when we re-designed the site it attracted a lot of new revenues that was even somewhat unexpected. So a big driver in the quarter was additional revenues on Treehouse web which we obviously enthusiastically will continue.

Operator

Your next question comes from Eric Bernofsky - Desjardins Securities.

Eric Bernofsky - Desjardins Securities

Going back to Teletoon Retro, which you mentioned. Just wanted to get an idea of your plans going forward with that. Obviously the ratings have been very successful and the uptake on the subscriber front. But just want to get a sense of your plans from a revenue perspective, when we might see their advertising or subscriber revenue really flow through to a material sense that we would be able to measure.

Secondly, if there are any acquisitions out there, either in specialty or radio, your feel for the market, if there are any properties that might be available and what your feeling is in terms of acquisitions going forward.

John Cassaday

On Teletoon Retro we got off to a good start because we secured an excellent distribution base. Teletoon Retro is available in over five million homes. We are already seeing the impact of that on advertising. Our strategy was to essentially line extend Teletoon in a way that would allow us to attract more adult dollars. And this retro business is basically targeted at the adult, 18-49, as opposed to kid-oriented business, and it is proving to be quite an effective brand. So, what we would expect is that we will start to see the impact of Teletoon Retro having a positive impact on the overall numbers for the Teletoon brand next year for sure. I think suffice to say we are off to a much better start than even we had anticipated.

As it relates to the questions of M&A, we’re just going to continue to look for tuck-ins. We successfully integrated two radio stations, The Groove in Winnipeg, and The Beat in Kitchener, that was secured a year and a half ago or so. We did this deal with CTB to acquire CLT, which we talked about in the last call.

I personally hope and think that there will be more willingness to swap assets and increase the strategic complimentarity of our various properties and that people will say, “Yeah, I think this one will be better with Corus.” And maybe they would be willing to swap me that. And during what I think is going to be a lull in the big deals that there will be a willingness to try to improve our businesses by doing rational exchanges in the foreseeable future.

But I don’t think a big one, but the CLT one that we will hopefully get approval for in the next few days, should kick in for us early in the fall. We are working hard right now on our plans and we are optimistic that targeting this at women 35-54 provides a nice complimentary third leg of the stool in our women’s franchise.

Eric Bernofsky - Desjardins Securities

Is the willingness to swap your perspective or are you sensing that that is beginning to become an industry-wide trend?

John Cassaday

I would say it’s our perspective but I hope that the more we talk about it, the more people will think about it and come to the conclusion that we shouldn’t fall in love with everything we have, and we should look at our businesses from the standpoint of how they compliment each other. I think there is a clear recognition that being able to acquire programming in packages or bundles is the way to go and when you’ve got an outlier that doesn’t really in any way support your core franchise, it’s probably not contributing as much as it could. So I’m hoping that more and more people will start to say, “Okay, let’s really put our efforts into this area where we can buy programming in a complimentary way. We can bundle our sales efforts and we can be more efficient overall.”

Operator

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

Ben Mogil - Thomas Weisel Partners

When you talked about the economics of pay TV for the cable operator, any concerns that you’re having that the cable operators, particularly Shaw, are more of the view that because they’ve got better economics in terms of rolling out home telephony and there’s a limit to how many services they feel they can realistically push through onto consumers, that they’re simply focusing their marketing and their attention and their focus on services like home telephony where they keep 100% of the economics and not services like yours where the economics are split?

John Cassaday

Well, I think that so much of the business of all of the BDUs depends on bundling off a strong video platform that there is a more than ample incentive for them to continue to do a great, great job on the video. I think they would all be worried that if they did not have a satisfied customer on video that they would not be able to bundle high-speed Internet or telephony.

I think that it’s in their enlightened self-interest that despite the obvious comment that you made about share margins versus 100% on some of the other properties, that the real driver here is having a highly satisfied video user who is willing to then let that wire extend into high-speed Internet and telephony. I think they would be extremely concerned about loosing the video portion because I think the other pieces could fall off quickly without that. So, I think your hypothesis is perhaps faulty on that front.

Operator

There are no further questions at this time.

John Cassaday

Well, thank you very much. Appreciate all the questions and the interest in the company and hope you all agree that it was a pretty terrific quarter for Corus in Q3 and that our outlook for the future is quite positive.

We look forward to seeing you at our Investor Day, which is on September 25, location to be determined. It will be in Toronto; we’re just looking for an appropriate site right now but please mark in your calendars Corus Investor Day, September 25.

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Source: Corus Entertainment Inc. F3Q08 (Qtr End 05/31/08) Earnings Call Transcript
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