Canwest Global Communications Corp F3Q08 (Qtr End 05/31/08) Earnings Call Transcript

Canwest Global Communications Corp (CWGVF.PK)

F3Q08 Earnings Call

July 11, 2008 11:00 am ET

Executives

 

Hugh Harley – Director Investor Relations

Leonard J. Asper – President & Chief Executive Officer

Dennis Skulsky – President and Chief Executive Officer, Canwest Publishing

Kathy Dore – President, Canwest Broadcasting

John E. Maguire – Chief Financial Officer

Analysts

Carl Bayard – Genuity Capital Markets

Jason Jacobson – GMP Securities

Scott Cuthbertson – TD Newcrest

Ben Mogil – Thomas Weisel Partners

Drew McReynolds – RBC Capital Markets

Tim Casey – BMO Capital Markets

Robert Burgin - Post Advisory Council

Presentation

Operator

Welcome to the Canwest Global Communications third quarter results conference call. (Operator Instructions) I would now like to turn the conference over to Hugh Harley, Director, Investor Relations.

Hugh Harley

Welcome to Canwest’s third quarter fiscal 2008 conference call. Earlier this morning we released our third quarter fiscal 2008 results. A news release and associate management discussion and analysis can be found on our website, www.canwest.com.

In addition, for holders of the Limited Partnership, the third quarter financials for Canwest Limited Partnership can also be found on the same website. Slides that summarized the prepared comments made during this call can be viewed on our website as well. Specifically, all financial information can be located within our website under Investors/Financial Reports/2008.

On the call this morning we have Leonard Asper, President and CEO; John Maguire, CFO; Kathy Dore, President of Canadian Television; and Dennis Skulsky, President of Publishing.

As is customary, I will remind listeners that statements made on today’s call may contain forward-looking statements. I refer you to Slide 2 for an explanation of the risks and uncertainties with respect to such statements.

The format of today’s call will include opening remarks by Leonard Asper, Dennis Skulsky, Kathy Dore, and John Maguire, followed by a question and answer period. We expect this call to be approximately an hour long and I would ask that in the question and answer period that each questioner to please limit the number of questions to respect time for others.

With that, I will turn the call over to Leonard.

Leonard J. Asper

Before we get into the quarter results I would like to provide my thoughts on the value of Canwest. Let me start by saying that given our diversity and strength of our properties I believe that Canwest stock is significantly undervalued. Our quarterly results demonstrate that we continue to produce strong results and we specifically generate content, we sell advertising, and we do this better than anyone on the continent. We are beating the competition both in publishing and television. But some analysts continue to focus almost exclusively on conventional television.

We have significantly expanded our reach with specialty channels that continue to grow in terms of popularity and profit. We operate 22 channels, 20 of them are specialty and 2 are conventional, and that gives us the opportunity to cross promote new programming and package selling. We are managing combined television businesses as one and look at overall group performance, while always looking to improve those that are underperforming and we know the conventional is underperforming.

We have numbered strategies in place to improve the conventional television model, as I’m sure CTV and NBC and all the others who are facing the similar challenges that we have are doing. However, as you all know, regulatory change has to be part of the solution in Canada and we have been consistent on the point for several years now.

Our publishing assets are also performing better than any other similar outfit in North America, due in part to expanding online revenues and in part to the strong cost containment and reductions. We are using technology to product the newspaper more efficiently while concentrating journalistic resources on building our local and online presence.

We also operate over 100 websites, including classified sites, the Internet site, Canada.com, and that allows us to participate in the booming Internet advertising market in a significant way and that is also supporting our growth. For more than eight years some have questioned our debt levels and we’ve always proven them wrong. To be clear, our leverage levels are made manageable.

Finally, let me say this, nobody in Canada is exploiting their asset mix to integrate content across all platforms better than Canwest. Combined with our size, this advantage will enable us, and already is enabling us, to make new connections to develop, present, and monetize content in an effort to deliver better value to our shareholders.

Turning to the quarter, let me tell you a couple of things before I get into the results. I am very proud to report that we exceeded expectations for operating profits. Intensive DBA was $163 million and we reported $177 million of EBITDA and its $181 million if you exclude the restructuring charges that are one-time.

I was struck by one figure of Canwest this week when the analyst made a very astute observation. In looking at Canwest he observed that, “The EPS is not at all relevant to this story.” As we proceed today, I challenge the analysts and the media listening to not get caught in what are today’s accounting principles and to take the time and look at the underlying operating strength of our corporation line by line and you will see that we have a strategy to transform this company, our plan is working, and Canwest profits are growing.

As one example of the accounting principles obvious in our numbers are right down on the score, investments, which had to be written off when we purchased the Alliance Atlantis transaction and was in the middle of a sales focus pushing the soft rights up at the time and it came back down to its previous levels. And yet that cost us $22 million in this quarter’s results.

The next slide shows our very strong and very profitable family of television assets. And on to Slide 5, it provides a summary of the financial results in the third quarter and year to date.

Turning to our financial results, you can see the consolidated revenue for the quarter rose by 15% to $852 million from the $738 million in the same period last year, and increased 11% to $2.422 million compared to last year.

Consolidated EBITDA was up 45% in the quarter to $177 million from $122 million in the previous year. This result included the one-time restructuring cost I referred to earlier of $4 million. For the year, EBITDA was up 20% to $491 million compared to last year. Included in the year-to-date EBITDA are one-time restructuring costs of $20.3 million, and excluding these costs consolidated EBITDA would have increased 25%.

Net earnings for the third quarter were negative $28 million, or negative $0.16 per share compared to $8 million, or $0.05 per share profit in the third quarter a year earlier. Net earnings year to date were negative $22 million, or $0.12 per share compared to a profit of $82 million, or $0.46 per share last year.

As we have said in prior quarters, our net earnings are being impacted related to: first, non-cash losses on interest rate and foreign currency swaps; number two, higher interest expense; restructuring expenses due to technology and innovation we are putting into the business; an increase in the long-term liabilities, this being the accounting of the Alliance Atlantis put option, and that drew $26 million non-cash accounting charges in the quarter, partly offset by the inclusion of the earnings of CW Media.

When you adjust the earnings, if you exclude the impact of the foreign currency and interest swap gains and losses, foreign exchange, investment gains, losses and write downs in restructuring expenses and discontinue operations, earnings were actually $13 million, or $0.07 per share, in the quarter. This negative $0.23 per share in the third quarter is primarily attributable to an investment write down, as I said before, of $23 million. On the same basis, adjusted year-to-date earnings would have been $52 million, or $0.29 per share, which is $74 million more than was reported.

And I encourage people to study this very carefully and if you get it right, it changes the story on this company, in a very positive way.

Slide 6 details of our segmented results for the third quarter, we saw flat revenue but impressive double-digit EBITDA growth in the quarter through our publishing segment. In the Canadian Television segment, third quarter reported numbers show overall growth in the revenue and EBITDA through the acquisition of Alliance Atlantis.

Media and specialty advertising increased 23%. This compared to just 2% reported by Corus just this week. On a pro forma basis, including Alliance Atlantis, in the third quarter of 2007, Canadian Television revenues and EBITDA would have been up 5% and 40% respectively, year-over-year.

Revenue for Australian Television, Out of Home, and UK Radio were higher year-over-year for the quarter. In the third quarter we reported, as I mentioned earlier, the one-time restructuring cost and this was associated with centralization as a result of technology change in the work flow in both our publishing and broadcast segments.

Slide 7 details our segmented results for the nine months ended May 31, 2008. We had 2% revenue and 13% EBITDA growth, year-to-date, for our publishing segment. In Canadian TV, we show overall growth in revenue and EBITDA, as I said, due to the Alliance Atlantis acquisition. And if you pro forma the Canadian Television segment by including Alliance year-to-date in 2007, revenues and EBITDA would have been up 3% and 15% respectively year-over-year. That’s 15% EBITDA growth.

Revenues and EBITDA for Australian Television and Out of Home were also higher year-over-year for the quarter. And I will come back to Australia in a minute. For the nine months ended May 31, 2008, we reported approximately $20 million of one-time restructuring expenses.

Given the manner in which Canwest has had to account the Alliance Atlantis acquisition, in trust and in non-trust, we wanted to provide better clarity to how the Alliance Atlantis assets are performing. On Slide 8 we show the comparative results for each of the quarter and nine-month period. Revenues totaled $99 million for the three months ended May 31, 2008, representing a 16% increase over the comparable period last year. Year-to-date revenues were $279 million, representing a 13% increase over last year. This reflects impressive increases in the quarter and year-to-date in advertising revenue of 23% and 18% respectively.

EBITDA for the third quarter was $38 million. $14 million, or 60% higher than the third quarter last year, after excluding transactional and non-recurring costs. Year-to-date EBITDA of $102 million was up 42% over last year.

July 3, CW Media issued senior notes private offering of US$312 million, which was about CA$308 million, and which the net proceeds from this issuance, together with cash on hand generated by the business, was used to repay approximately US$331 million that was outstanding under our CW Media interim and term senior unsecured federal facility, otherwise known as “the bridge.” The credit facility has been established in connection with our acquisition of the broadcast operation of Alliance Atlantis in August 2007 and that removes one more piece of uncertainty around that business; it is now securely financed.

Turning to Australia, Ten reported excellent third quarter results with revenue and EBITDA up 8% and 21% for the quarter respectively. Also they updated their outlook for the remainder of this fiscal year as a result of the softening market conditions and the impact of the upcoming Summer Olympic Games. And while it did paint a very dark picture for the quarter, for the fourth quarter of 2008, I remind everybody that 2009 coming up for Australia is a clean event per year, our ratings continue to be strong.

They are up slightly at the expense of Channel 7 and we have the AFL Grand Final. We will not have the Olympic Games in the 2009 year and we have the AFL Grand Final in that year, which is good for us. And in 2010 Channel 10 has the Commonwealth Games in Australia.

Ten also secured a new syndicated three-year $630 [million] loan facility and this replaced existing facility due to expire in September 2008 and we were very pleased to have achieved this in a very difficult credit market. It goes to the quality of Ten’s credit and the way it is perceived by the lending community in Australia.

Ten Network holdings announced a share buyback program to buy up to 10% of the issued shares and the nature of this buying will be opportunistic. Our Out of Home advertising operation, Eye Corp, continues to show growth as our 2008 investments begin to take hold and generate revenue and profit. This is a great example of a business that is growing profits and whose value continues to be underestimated.

And as a last point, I want to make one thing very clear. I have read several times, in both the Australian and the Canadian media, that we could have sold Australia for $1.5 billion, which puts a price tag of Australia somewhere in the 270-290 range. I want to make it very clear that is just not true. What we did, as you recall, is we had a process, we retained Citigroup, we reviewed our operations.

We sold New Zealand at a very lucrative price, in a very quick fashion, for very close to CA$300 million. We did not receive an offer, in writing, for Australia, so there was no such offer for $1.5 billion or $1.3 billion or anything close to that. You will recall what happened is the stock price ran away from what any purchaser was going to pay; it was trading at 14x EBITDA and that scared away all buyers. So I just want to make sure it was very clear, it would be very irresponsible to write that we had an offer of $1.5 billion, or one even close to that, that we turned down.

I will now turn it over to Dennis.

Dennis Skulsky

In spite of an unusually weak March, we were able to achieve modest growth in revenues and double-digit growth in EBITDA, results that we believe are better than the industry. Online revenues increased $1.9 million, or 16%, for quarter, and are running at $5.5 million, or 17%, year to date, compared to last year. Strong cost containment yields and improved EBITDA margins and year-to-date, they improved from 22% in 2007 to 24% in 2008.

Powered by our own community strategy and the brand value we hold on our market, our advertising lineage is up 7.2 million lines, or 2.7%, so far this year propelled by increases in classified and retail advertising categories. This provides evidence that our efforts to broaden our local advertising base are working. Although we continue to face some rate pressure, the volume of advertising in our papers is healthy and growing.

Our online properties continue to perform very well. On a combined basis Canada.com, local online display, and our FPinfomart delivered strong double-digit revenue growth in the quarter. Based on the successful growth of our online business over the last few years and the significant opportunities we see in the future we are accelerating investment in our online products and activities.

We have strengthened our digital management team. Graham Moysey from MSN Sympatico recently joined our team and is heading up the publishing digital group. We will be re-launching all of our newspaper websites this fall with a new design, functionality, and revenue opportunities that we see to follow.

We have recently re-launched and launched our HouseHunting.ca site, had great responses in Toronto and Regina and we have strong partnerships with local real estate boards. Our strong local presence has allowed us to secure these agreements with the local real estate boards for MLF listings on our HouseHunting website. This site provided one-stop shopping for all consumers’ real estate needs and will be rolled out to all other markets in the coming months.

We continue to focus on our core publishing activities by leveraging our strengths and generating content and using our strong relationships with local advertisers and leveraging our number of feet on the street. We will increase effort and investment in potential high-growth areas. In particular, as mentioned previously, we will be focusing on accelerating the development of our online business. This year we expect revenues from our digital properties to be more than 5%, and nudging 6%, of total publishing revenue and moving well above 7% next year.

We continue to improve the caliber of our management team. Over the last year we have attracted key senior executives from a variety of industries, including wireless, yellow pages, and online. These new leaders have deepened our management ranks and are bringing fresh perspective and bringing revenue ideas.

And finally, we have not lost sight of the importance of expense control and continue to review our operations to find efficiencies wherever possible. In the current year we have recently completed the implementation of a work flow changes resulting in reduced costs of $5.8 million in fiscal 2008 and $10 million on an annualized basis. We recently closed three niche publications because we found that our digital properties were reaching the same audiences more effectively. We are actively working to identify additional opportunities for 2009.

And finally, you have all heard and read about the rising newsprint prices and costs and the potential impact this could have on our organization. We must keep these increases in perspective. Yes, our expense may be higher when compared to 2008, but by historic levels, our total newsprint expense is expected to be par with 2007 and, in fact, still lower than 2005 or 2006.

With great pleasure I turn the call over to Kathy to discuss the Broadcasting segment.

Kathy Dore

On Slide 12 we turn to our Canadian Television segment, which includes Global, E, and the Canwest legacy specialty channels. Despite the challenging environment Canadian networks continue to face and the schedule disruption due to the writers’ strike earlier this year, we maintain consistent presence in the top 10 and 20 show rankings in the three major markets of Toronto, Vancouver, and Calgary. Audiences came back strong when new episodes of prime time series returned in mid-April. Advertising revenue followed.

Although conventional revenue for the quarter was only 98% of prior year, the trend line was quite favorable, with April at 100% of prior year and May at 104% of prior year. The month of June is showing continuing favorable trends at 107% of prior year, however, typically July and August are slower months and August particularly will be impacted by the Summer Olympic Games.

In the spring season, in the 18-49 demographic, for Toronto we had 4 of the top 10 shows, a slight improvement compared to 3 last year. In Vancouver we had 5 of the top 10 shows, an improvement from 3 in the top 10 last year. And in Calgary we maintained the number of top 10 shows compared to last year.

Going into the fall this year we feel we have a very strong line up of successful shows and with the addition of some very exciting new programming. All of our top performers are returning: House, Heroes, 24, Survivor, The Office.

In our fall launch, and I know some of you were in attendance, you got to witness first-hand our strategic focus of leveraging the size and scope of our combined specialty and conventional network to deliberately draw whole audiences from one network and show to an entirely different network with similar content. For example, we highlighted that Gordon Ramsay’s breakout hit, Kitchen Nightmares, is coming back to Global this fall and we’re going to us that to drive conventional viewers to the Food Network to see his new series, The F Word. And we’re taking HGTV’s superstar, Mike Holmes, and exposing him to a conventional audience by airing his Make It Right special on Global.

This strategy allows us to deliver the audience that advertisers want across a number of platforms. And as well, this fall, we will be offer viewers 40 programs which stream online. All of this is about strategically and selectively pricing platforms when it makes sense to bring in even more viewers. We also have an active cross-promotional strategy in place which has enabled us to quickly increase viewership on a number of our specialty networks.

I also want to mention that we have signed our major advertising upfront agency deals and can say that compared to last year their overall committed spend is up some 16%.

In addition, a successful implementation of our new revenue and inventory management system has enabled us to enter the network advertising market for the first time this year, with a limited market test, offering our national footprint to select advertisers. Initial response has been positive and has enabled us to secure advertising dollars from that portion of the market which buys only network. The size of that market is approximately $600 million. We expect to expand this initiative in the future.

Turning to our specialty channels on Slide 13: Specialty is delivering strong results, particularly in the ad revenue growth. The overall Canadian specialty market ad growth year to date is in the 8%-9% range. The CW Media networks delivered revenue increases of 16% and EBITDA increases of 60% for the quarter. Our Canwest specialty channels also produced strong results with revenue up 31% and EBITDA up 35%. TvTropolis saw significant increase in revenue and EBITDA for the quarter of 35% and 29% respectively. Specialty channels year to date now account for 40% of Canadian Television revenues and 72% of Canadian Television EBITDA.

Overall, Canwest’s share of total English specialty has increased by 6%-12% versus the same amount of time last year. In addition, we have the largest share among women viewers at 34%. We’ve maintained our dominance in the digital channels, with the top 8 of 10 channels, up from 7 of 10 last year. And versus last year, the average minute audience was up 25% in the top 10 digital channels, for adults 18-49.

On Slide 14 we update the combined Canadian Television segment cost initiatives. We are on track with our rationalization of costs in the merging of JA assets into Canwest. For CW Media and Canwest combined, we have realized integration cost savings of approximately $8 million to date and expect to realize approximately $13 million by the end of the current fiscal year. On an annualized run-rate basis, for CW Media and Canwest combined, we expect to achieve approximately $17 million of cost savings by the end of the current fiscal year. And by the end of fiscal 2009 we expect to achieve annualized run-rate cost savings in excess of $30 million.

We are on target with our plans for realizing cost savings from our transition to additional news environment in our local stations, as well. Additional news transition has resulted in some $10 million in savings to date.

We continue to develop and execute strategies for transforming the business model for conventional television as it continues to be a challenge. We will also continue to seek regulatory changes to improve the environment and make it fairer for conventional television, which will include seeking regulatory reform for fee for carriage, appealing Part II fees, distance signals, prescription drug advertising, and several other issues that limit our competitiveness.

With that I will turn it over to John Maguire to go over our debt position.

John E. Maguire

As usual, we have provided a snapshot of the company’s consolidated debt at the end of the third quarter. This can be found on Slide 15. This schedule presents consolidated debt at the swap rates and on that basis the debt totals $3.5 billion. We also show the adjustments that arise as a result of the new financial accounting policies that were introduced and effective for Canwest beginning in September 2007.

This results in adjustment to debt balances for debt issuance costs and to mark the debt to foreign exchange rates. The effect of these changes is also set out on slides and on that basis we have $3.3 billion and that ties to the financial statement presentation.

On Slide 16 we show the debt ratios for Canwest Media as of May 31, 2008. Total debt to EBITDA leverage ratio was 4.36x compared to our covenant of not more than 5x. Our senior debt outstanding was approximately $60 million and that results in the senior debt to EBITDA ratio of .26x at May 31, 2008, and that is compared to a covenant 3x, well under that covenant.

And our total interest coverage ratio was 2.55x as compared to a covenant of not less than 2x. Our restricted payment [inaudible] under the 8% note amounted to $498 million at the end of May.

Slide 17 shows debt ratios for Canwest Limited Partnership. Total debt to EBITDA leverage ratio was 4.3x compared to our covenant of not more than 5.75x. Our senior leverage ratio was 2.74x compared to a covenant of 3.75x. Again, our interest coverage ratio at 2.82x is well in excess of the covenant of 1.75x.

The Limited Partnership made distributions to Canwest totaling $43 million in the quarter and for the nine month that total was $128 million.

Now I will turn the call back to Leonard.

Leonard J. Asper

We have consistently delivered solid results in the quarter, no different. We are, and will continue to work on our plan and look for new ways to deliver business performance by growing revenues and containing costs with a goal of returning better value to our shareholders.

We will also continue to use our size and scope to make new connections to monetize content. This includes leveraging demographics and audiences in the Global and E networks to create new opportunities for audience growth and put specialty channels and to cross-promote specialty television. This is made easier by a strong Canadian Television schedule that has not only maintained its top 10 show rankings but added some of the hottest properties available in the fall.

Again, I want to remind you that we are continuing to exploit our asset mix and integrate their content across all platforms.

Onto Slide 19, looking ahead, we are confident that overall operating results will continue to improve in fiscal 2008 and this positions us very well for 2009. We will continue to focus on our core businesses, addressing issues facing certain operations, like conventional TV, and assessing the asset base we have. For example, we determined that UK Radio was no longer core and have announced that we are in formal negotiations regarding these properties.

On the Canadian Television side we will continue to integrate operations to obtain definity and generate incremental revenue and cost savings. We will look forward to the results of the BDU review that is happening in April and are now expected in the fall. And we hope the recommendations address competitive imbalances in the Canadian television system.

And I remind you that we have our license renewals coming up after that and will be using that opportunity, particularly if we are not satisfied with the results of the BDU hearing, to also reset the business model for conventional television.

We will continue to ensure that we hold our dominance in digital specialty channels and analog channels and continue to acquire content for all platforms, including conventional, specialty, video on demand, online, and mobile. I have to say, this was by far our most successful year in that regard; we have far more Internet and mobile rights to programs this year, going into the year.

We will also continue to invest in digital media on the publishing side, building out our local websites from Canada.com and perfecting our classified advertising sites.

We also continue to believe that there are further cost reductions and savings to be obtained from our publishing properties, and going forward we are focused on delivering business performance, as I said, by growing our revenues with the many leaders we have at our disposal and containing our costs.

This concludes my prepared remarks and we would be happy to take your questions.

Question-and-Answer Session

 

Operator

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

Carl Bayard – Genuity Capital Markets

Pro forma, Alliance Atlantis, what is your total exposure to advertising sell, I mean the total of your company.

John E. Maguire

Would that be including Australia?

Carl Bayard – Genuity Capital Markets

Yes, that would be including the whole thing.

John E. Maguire

I am going to say around 80%, including publishing and Australia. Carl, you’ve got to remember on the advertising categories, when people talk about advertising, advertising is not a monolith work. It ranges from Internet advertising in which the display is classified. Within classified there’s real estate, auto, and recruitment. Then you have national, you have local. You have national and local in Australia. And national for TV is not the same as buyers of national for publishing. And we’re getting access to, with the websites, a much more indepth, very much more broader group of advertisers, like dentists, who are now advertising on online sites, that could never advertise in the newspaper.

So I think, again, when people look at us and our exposure to advertising, these categories don’t all go up and down together. It’s the diversified nature of our advertising base that makes us come up through recessions, softenings, geographical disparities, in very good shape.

But it is about 80%. If you want I can get you an exact number.

Carl Bayard – Genuity Capital Markets

No, ballpark is fine.

Second, why was UK Radio determined to be non-core. Didn’t you guys just launch that business just recently? Wasn’t it 2005?

Leonard J. Asper

A couple of things happened. What happened was, when we owned the TV station in Ireland we had been looking for a way to expand in the region and we applied for these radio stations. We felt we had an opportunity to reduce our exposure to conventional TV that we had by selling the agreement in Ireland. And so after we sold Ireland, these applications started to become protested by the regulator there.

We got the licenses and we said we would give it a go for a couple of years and see how they turned out because at the time when we applied, the UK radio market was booming. Since that time the BBC has really strengthened its presence there, they have invested a lot of money in local radios and we just don’t feel that the prospects are very good there at all going into the future. We think other companies in the UK can do better with those assets.

And again, it just comes back to wanting to focus on the big assets that can really make a difference and generate profits. I know, if we hit the lights out in the UK radio it may make $3 million some day. And if we hit the lights out tomorrow we will make on an advertising sale in Canada, we will make $3 million. We’re not big enough to move the needle, won’t get bigger, time to move on.

Carl Bayard – Genuity Capital Markets

So basically it just sounds like you were left with an orphan asset, right?

Leonard J. Asper

Yes.

Carl Bayard – Genuity Capital Markets

The adjusted EPS figure, $0.07, does that exclude the putable interest to Goldman Sachs?

John E. Maguire

We did not make an adjustment for that accretion expense.

Carl Bayard – Genuity Capital Markets

I would like to hear your take on why the putable interest line on your P&L should be treated as an unusual. I mean, it’s going to be around on your P&L until at least 2011, right?

John E. Maguire

Carl, to be clear, in this quarter we did not treat it as an unusual item. We drew attention to it in Leonard’s comments, but we did not make the adjustment in the adjusted EPS.

Leonard J. Asper

When we listed all those things, we did not put that in. We were talking about swap losses, write downs, restructuring, that’s where we took out all those non-cash things. We kept that in there.

Carl Bayard – Genuity Capital Markets

So it’s in there?

John E. Maguire

It is in there.

Carl Bayard – Genuity Capital Markets

Could you just comment generally on why we should treat that as an unusual? If it’s going to be around for like three years?

Leonard J. Asper

I didn’t say it should be unusual. I said people should be reminded it is a non-cash item. But when people walk around saying when you look at the numbers people can conclude Canwest lost money this quarter, and the fact is we didn’t. And for all those reasons I referred to before, I certainly don’t disagree with you, that is a liability and it’s there and whether it’s on the balance sheet or the P&L, it’s not unusual in that sense. So we were just trying to point out, when we were talking about the cash versus the actual profits of the businesses, and the non-cash charges that go below that line and create the appearance of a loss, that should be included in that discussion. But we’re not saying it’s a one-time item.

Operator

Your next question comes from Jacob Jacobson - GMP Securities.

Jason Jacobson – GMP Securities

First on the Alliance Atlantis specialty assets, Corus had talked about a renewed interest from advertisers with the female demo. Clearly you benefited from that in the quarter. I’m just wondering if you’ve seen that carry through into Q4 and if that has carried into fiscal 2009 as well.

And secondly, I just wanted to ask a question, you talked about the commitments for spending on TV up 16%. Just wondering if you are referring to consolidate TV or whether that’s conventional alone, and then if you could elaborate as to how the pricing versus volume dynamic worked out.

Kathy Dore

Jason, first of all, your question on the female demo. Yes, we really feel that we have a dominant position with that demo, given both our conventional and specialty assets. It does seem to be in the current market, a strong demo, and we do see that into Q4 and into 2009.

In terms of the upfront commitments, that’s on a consolidated basis. That includes our specialty, online, and conventional assets.

And we see, in terms of pricing, some pressure on pricing in terms of the conventional segment but not a tremendous pressure in terms of specialty. We are continuing to see growth and continuing to see that gap narrow, between the conventional and specialty platforms. And we’re seeing good growth in terms of online.

Jason Jacobson – GMP Securities

And can we expect similar specialty ad growth in Q4 that you saw in Q3?

Kathy Dore

Yes.

Leonard J. Asper

I think it’s also worth pointing out again, for media especially, when we talk about ratings as well, when you compare Global to CTV, just remember CTV has about 10 more stations in Canada than we do. In smaller towns like Yorktown and you see in the Upton Report it says they had x number of the top 10 and you try to compare it, they’re using a demographic of 2+ people, which means everybody over 2 years old, and they are using it in defense of the fact that they have more stations in Canada and they do cover more of the country. So overall, on a national basis, their rating may look a certain way.

Our company has traditionally been successful by focusing on the big markets and the demographics where the advertisers are spending money 18-49 and 25-54, adults and sometimes the Latino demographic, which comes and goes in terms of popularity. But again, it’s just another myth out there that I think we get [inaudible] time after time and when we produce different numbers, in terms of our ratings, we just want to be clear: we’re looking at the big markets where most of the advertising dollars are spent.

I think also just with our specialties, we have a lot of specialties geared to women already and we are benefiting from that growth just be virtue of the strong position we have in that demographic.

Operator

Your next question comes from Scott Cuthbertson - TD Newcrest.

Scott Cuthbertson – TD Newcrest

Kathy, just wondered if you could help us out on the programming cost inflation in television for next year. We have got the writers’ strike reducing this line item in 2008 so it’s going to be a bit of a tough comp. What can we expect TV costs to do in 2009?

Kathy Dore

Yes, Scott, it is a bit of an odd year, year-on-year. We’re expecting, at this point, to be able to keep our overall programming cost increase for 2009 under about [5%].

Scott Cuthbertson – TD Newcrest

Under 5%. So the total cost line in the television division would be around what, then?

Kathy Dore

For 2009?

Scott Cuthbertson – TD Newcrest

Yes.

Kathy Dore

About half that.

Scott Cuthbertson – TD Newcrest

And switching to the newspapers, Dennis. Just wondered if you could give us any update on the National Post performance and/or your plans for that asset now that you’re taking a real hard look at everything, it seems.

Dennis Skulsky

Well I think what I would say that we continually look at all of our assets and the National Post has had some nice trend lines over the last couple of years and online is playing a bigger role in helping the revenue picture for the National Post, so we’re ongoing looking at 2009 and what our mix of assets are going forward. And that’s on an ongoing basis. But overall, it’s still an important part of our portfolio.

Scott Cuthbertson – TD Newcrest

And I just wanted to clarify, newsprint, I think in your prepared remarks you said that you expect newsprint prices in 2009 to be similar to 2008?

Dennis Skulsky

No, they will be a little higher than 2008. To put it in some perspective, 2008 has been an exceptional year for us. We had some strong negotiated agreements and the industry is going through some upside on the rates for newsprint and we will have some increases for 2008. But I was saying, to put it in some business perspective, it is similar dollars to what we were spending in newsprint in 2005 and 2006.

Leonard J. Asper

There’s another myth out there that I saw somewhere, it probably comes from the U.S., where people were saying that newsprint prices were at a 12 year high. And that, of course, remember for the U.S. newspaper companies, reflects the dollar drop for them. For Canada, newsprint price is actually lower. If you go back 12 years to where it was close to $1,000 a ton, I won’t say our specific pricing, but it’s been in the $600-$700 range in Canada, or $600-$800 range for a number of years now. And it’s in the high part of that range, but it’s quite manageable.

And also, we don’t sit back and just accept some of these things. We look at our tonnage and purchasing and how much we’re using and there are a lot of ways to manage around it. You can’t completely eliminate the cost rise but we don’t accept it in its full form. We find ways to reduce the effect, and we’re going to do that again in 2009.

Scott Cuthbertson – TD Newcrest

So, all in, for 2009, including any reduction in newsprint usage, any sort of inventory management and everything else, what kind of overall cost increase do you expect for newsprint in 2009 versus 2008?

Dennis Skulsky

Well, the good news is in the last couple of months we just secured remix that are going to take us with pricing that is solid and confirmed for the next seven months, until the end of December. So that’s going to blunt any significant increase. But we do have an increase there and it’s one that is built into our business plan for next year.

Scott Cuthbertson – TD Newcrest

You don’t care to share what that is? Could you ballpark it?

Dennis Skulsky

Well, it depends what you’re ballparking. If you’re ballparking off 2008 it’s a significant increase. If you’re ballparking it off there. So it’s in the $15 million range. But, as Leonard said, we’re always trying to be upfront on these sorts of things and we have a reduction plan that we’re looking at and expect that we’ll have some upside on the back end of next year, with that taken into account.

Scott Cuthbertson – TD Newcrest

But it would be safe to say about $15 million more in 2009 than on 2008 on newsprint?

Dennis Skulsky

Right.

Operator

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

Ben Mogil – Thomas Weisel Partners

John, in terms of the CW note that you guys just closed last week, two questions. There is a pick provision, I just want to confirm that, and secondly, am I right that you did not hedge out the FX exposure?

John E. Maguire

Ben, there is a pick provision. The default is to accrue the interest and not pay it in cash, although we do have the right to pay interest in cash should we so desire. And I think of note, just in the refinancing of the bridge, you should know that we actually did pay down the accrued amount by approximately $20 million on the refinancing.

And secondly, at this point we have not entered into any hedging or co-op arrangement.

Ben Mogil – Thomas Weisel Partners

Is the plan to do so?

John E. Maguire

We are attempting to do so, yes.

Ben Mogil – Thomas Weisel Partners

So strategically, that is your default option, if you will?

John E. Maguire

Yes.

Ben Mogil – Thomas Weisel Partners

In terms of Network Ten, we saw the share buyback announcement last week. I know that Ten is in the recapitalization, there was some talk about doing a special dividend, now there is a share buyback. Is the share buyback in lieu of a special dividend and if you don’t participate in the share buyback and there is no special dividend, I just want to get a sense if you expect any incremental cash to be on the normal dividends coming back to you this year.

John E. Maguire

I would just say, Ben, that the two are not mutually exclusive. One can do one while still doing the other. I think there should be no assumptions made about how much we do buyback and whether or not Ten must participate. It’s going to change day-to-day and month-to-month, our position on this and so I think it’s just a work in progress. And the capital return on the special dividend is always something that’s under review and possible. So we’re just watching the situation very closely and I wouldn’t make any assumption about one or the other.

Ben Mogil – Thomas Weisel Partners

You’ve got a couple of other sort of quasi-orphan assets in the French specialty channels. How core do you view the French specialty channels to the overall business?

Leonard J. Asper

I think right now we view everything as core. In the specialty channel business. They’re all growing at a significant rate and they generate good cash and a part of the portfolio where there is more depth than some of our other portfolios. So we have got a very high-growth set of assets that we like. Now, we did close down [[inaudible] TV, which was a bit of a drag on our income. We will continually reassess that portfolio but at the current time we’ve made no decision on any other channel. We’re not looking at selling any but we are looking at some of the underperformers and making sure we operating at the most efficient rate possible.

Ben Mogil – Thomas Weisel Partners

And the last thing, I know from a CRTC perspective you can’t take advertising out on VOD. When I go to watch on demand there is quite a lot of TV programming that they now have got out there. Am I right, do you have TV programming out there right now?

Kathy Dore

Yes, we do and we’re in ongoing conversations with Rogers with regard to expanding that. And a number of the deals that were concluded earlier this year with [inaudible] provided us with greater sensibility in terms of VOD rights on the conventional programming. And certainly on networks like Food and HDTV and other of our analog networks we have a very vibrant VOD content.

Leonard J. Asper

So just to be clear, Food and HDTV are current networks that are on demand, on Rogers. BBC Canada programming is on the Rogers on demand channel. It’s not it’s own channel but if you go to Rogers on demand you will get BBC Canada programming. And we will keep expanding that as we get more and more rights.

I know it came up at the BDU hearing, advertising is not allowed right now. We are all pushing to make it, including Rogers, because they realize one of the things that’s holding back there. Not just Rogers, but the cable industry, all the cable companies are looking at this thing. We want to get advertising there. It is currently prohibited but we are trying to find ways to at least monetize the content some other way and also we are working on some new technologies to measure ratings, which will improve the opportunity to advertise once we, and that’s a joint industry thing. So it’s a potential area for growth, we’re not there yet, but we’re girding ourselves for the day that it is.

Ben Mogil – Thomas Weisel Partners

So when, say something like Rogers on demand, is the rationale to have, say, BBC Canada programming up there even though there is no ad support, it is just sort of to build the brand in the hope that when VOD advertising is enable then you’re sort of going to benefit that way?

Kathy Dore

Yes, absolutely. I mean, it’s certainly, at this point, in our interests in terms of driving viewership to the network and maintaining the loyalty of the viewers that we have. So we view it as a positive, even prior to advertising regulation changes.

Leonard J. Asper

I think it’s also fair to say that what goes on now is kind of like the early days of the Internet where you say, “You’re buying the program on the linear channel, Mr./Mrs. Advertiser, but it’s also on demand now. You know it and we know it. We have our own statistics about who’s watching. It’s just not Nielsen’s seal of approval.” So we use those numbers to try to generate the additional dollars for a purchase of that program.

So like I say, about five years ago you would say, “Hey, give us a few extra dollars because you know there are some people on our website watching.” So that’s how it’s starting to be monetized. Once the measurement gets more formalized, and that’s a technological issue, and if the CRTC would open that door, it’s going to be small dollars to begin with. But the cable channels started out as small dollars to begin with and so did the Internet. So, it could be an area of real growth for us. I know we were asked at the BDU hearing and we said at the time, we are consistent on that, we don’t know what the size of that market is going to be in the long term but it is going to be there and we’re going to be there with it.

Operator

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

Drew McReynolds – RBC Capital Markets

First for John. Just on the overhanging swap, you mentioned scheduled payments in 2008 and 2009. Is this a lump sum in Q4 2009 or are you just referring to potential re-couponing payments or something else?

John E. Maguire

No, Drew, there are no re-couponing payments. There is a schedule, though, which takes us through to August 2009. Payments in each of the first and third quarters with the final balance at August 2009.

Drew McReynolds – RBC Capital Markets

And would you be able to disclose those amounts?

John E. Maguire

The overhanging swap in total was about $180 million at the end of May. Today it is actually down to about $165 million and that would break out $20 million in each of the first and third quarters and $125 million in Q4.

Drew McReynolds – RBC Capital Markets

And on the $27 million in restructuring, are those cash costs?

John E. Maguire

Ultimately they will be cash costs, yes.

Drew McReynolds – RBC Capital Markets

And just on the Hollinger arbitration, I see a settlement was agreed and just waiting for approval. Is there any cash impact from that?

John E. Maguire

Again, to be clear on that, there are elements of the very complicated arbitration claim that have been settled, but the overall claim is still in the hands of the arbitrator. All the hearings have been completed and the arbitrators have gone away and will come back after the summer with their decision. We do not believe there will be any negative cash consequences for Canwest.

Leonard J. Asper

I think it is fair to say that we would expect there would be a positive cash consequence. There is a lot of money at stake there. To describe what happened a little bit differently, is the arbitrator hired experts to opine on certain elements of the arbitration. The experts have opined and come to a conclusion about who’s right on certain parts of it. Then it goes back to the arbitrator and the arbitrator will look at the whole thing and make a decision.

Drew McReynolds – RBC Capital Markets

I guess when you look at the environment, certainly what we’ve heard from Corus and Astral is in their view, fears of an economic slowdown are greatly exaggerated. Just wanted to get your sense on what you’re seeing out there and particularly within the context of perhaps what we saw last cycle in terms of going into a slowdown in second or third quarter, two or three quarters in.

Leonard J. Asper

I’m trying to remember last cycle. The burst of the Internet bubble, that was one cycle and then there was sort of 1991-1993.

I think it’s funny, we are not seeing signs of a slowdown. You could look at little [inaudible] and clearly national advertising is not as strong as other parts of the sector. Local is very strong. And the upfront market in TV I would say is behind in terms of timing but the deals have just started to come in. So when you look at the breadth of the assets, you look at the Internet side, the local side, and even the automotive category, where we’ve been up significantly.

Automotive is made up of dealers and brand advertisers. Dealers are at the local level. So they’re still pushing out cars. If GM gets into more trouble, they’re still going to sell cars, whoever owns them.

And so we don’t see signs of it yet. Now we’re not saying it’s not going to happen so we’re girding ourselves for the eventuality. Very typically, our 12-18 months, going back to your question on the cycle, it could be a 12-18 month slowdown. That has sort of been our experience, going back to the 90s.

Certain categories are just not going to slow down. The Internet is not going to slow down. That’s why we keep investing more in it and kind of create more inventory to satisfy the demand.

Drew McReynolds – RBC Capital Markets

My last question for Dennis. We certainly get a lot of questions from U.S. investors, and it’s not specifically to Canwest but more broadly speaking, that the Canadian media sector, simply because some of the numbers down there on radio and newspaper publishing are just disastrous, from your perspective can you comment on where the Canadian newspaper, at least the assets that you own, operate in a different environment in what you perceive to be the case down in the U.S.?

Dennis Skulsky

Yes. You know, that question comes up a lot. I state it this way: the country is much smaller; our dominance in the country is easier to achieve in Canada than any media newspaper organization in the U.S. So we have been able to leverage that. But I think it all does come back to the economy and also our strength on the local front and the fact that we have been out front in transforming the business model from a cost structure, and there is no finish line to that, and we have been a little more successful in taking our classified business and expanding it online quicker and that has helped us.

So, I think the differences clearly are the economy is obviously better here, so that is helping us. But I do think the countries are so different, and I can point to Asia, I can point to Europe, and you can see newspaper companies and publishing companies that are prospering and they are growing. But there is no doubt the business is transforming.

Leonard J. Asper

I think it is also worth pointing out that the newspaper companies that you see in the United States are not national newspaper companies. They are large regional newspaper companies. Even though they may be bigger companies, you know, Gannett is a huge company, but they don’t have newspapers, like we do, in most of the major cities. They have newspapers in many major cities, but in the United States there are 210 what they call markets. So Gannet is in 40 of them, or 60, but they’re still a long way away from being a national company. So when they try to go sell national advertising they can’t, it’s a smaller part of their portfolio. So they don’t get as much access to that category as two or three big Canadian newspaper companies do. I think that’s another thing worth pointing out.

Operator

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

Tim Casey – BMO Capital Markets

I do remember the cycle in the early 90s and what strikes me as different about it at this time is the bifurcation in the regional economies. The West appears to be so strong. Could you provide us with color of what you are seeing in the newspaper business, particularly if there is a real difference in the regional performance.

Second, Kathy, can you confirm, the upfront market, you talked about 16%+. Is that an apples-to-apples comparison or does that reflect the fact that you’ve sold a lot more volume in there?

And then, Leonard, just on your regulatory comments, I’m curious what options you perceive you have if the BDU hearing isn’t satisfactory. What can you do when you’re approaching your license renewal process to try to get fee for carriage if it doesn’t come in the BDU hearing?

Leonard J. Asper

There are places like Hamilton, Victoria, I don’t want to go this direction, but where there is a commitment, produce 30 some odd hours a week of local television and that’s just not sustainable without some support. So I’m not saying there is a specific target but you’ve got to look at the local requirements, you’ve got to look at the overall Canadian content quota. Maybe 50% is too much. Maybe 50% in prime time is too much. Maybe doing 8 hours of Canadian drama on two channels, E and Global, is the wrong number. So there’s a lot of levers to pull and if you look at those licenses I could go on and on about some of the historical things that are in there. I think there is a content issue. We could go in and say why don’t we change the law. And start lobbying for that.

And prescription drug fees, category. $4 billion category in the United States, is it a $4 billion category in Canada? $400 million? It’s not always 10:1. Let’s say it’s a $200 million, it’s on a 20:1 ratio. It’s a big category. You know my complaints on that. You can watch a prescription drug ad for Viagra that tells you exactly what it is on CNN and then you watch a guy jumping around on a Canadian channel and they don’t mention anything.

There’s a long list of things that is still out there. Fee for carriage is one of them and it’s by far the most important. And we basically took the position that we will go for the big ones and the ones we think resonate the most with the commission and with the public. But if we don’t get satisfaction there we will just keep going. And there is a long list of things we can keep trying.

Dennis Skulsky

Regarding East and West on the publishing side, certainly the economies are different and one of our strengths is being diversified across the country. I would also say we have had a strategy of own the community that we have been rolling out and it is paying dividends for us. In Saskatchewan, for instance, where auto sales are at record highs, or in Alberta where real estate continues to be strong, or in BC where the Olympics are fueling a lot of investment and activities in the market place. So there is no doubt our Western properties are producing at a higher rate.

But I would also say that the Eastern properties, a good example is Windsor. The Windsor Star is a catalyst in playing that role and helping that community reinvent itself. And they have been developing local programs there and our revenues, in fact, in Windsor are doing pretty well. And you would think a market that might be devastated with what’s going on in the market place.

But we are finding ways to broaden our advertising base but there is no doubt, there is a significant strength for Ten West because we are diversified across the country.

Kathy Dore

And your question about the upfront agency deals. The 16% growth that I referred to is in terms of growth in our deals with major agencies for the upcoming broadcast year. So it is a commitment to spend that is up 16% across all of our assets. And it is a varying combination of price and volume. The significance is really, I think, in terms of increasing share and increasing desire on the part of major advertisers to put money into our properties. We have been very careful about our discounting at this point. Out strategy is to make sure that we have inventory for the scatter market and as decisions are being made, more and more closely to the actual date of campaigns, we want to keep as much flexibility as we can. So I would take that 16% as being most indicative of share growth.

Operator

Your next question comes from Robert Burgin - Post Advisory Council.

Robert Burgin - Post Advisory Council

Question for Kathy. Good quarter. With respect to the Olympics, what kind of revenue hedge should I expect on the broadcasting side and on the specialty side? Can you give us any guidance on that?

Kathy Dore

Generally, my sense is that you will see limited impact on the specialty side. It would be minor. On the conventional side, the impact will occur primarily in the month of August and we are anticipating that on our conventional network it will total somewhere in the mid-single digits. We had very strong June, as I mentioned. July seems to be slowing down a bit versus prior. Right now we’re running flat to prior. And August will be down.

Robert Burgin - Post Advisory Council

And when you say mid-single digits you are referring to the effect on the quarter due to Olympics?

Kathy Dore

No, I’m simply referring to, in August, the net change versus prior year in terms of the dollars.

Robert Burgin - Post Advisory Council

So spread out over the quarter it would be very low single digits, correct?

Kathy Dore

No, it wouldn’t be low single digits. It will be somewhere in the range of $4 million-$7 million of reduction versus the prior month of August. So if you spread that out over the quarter, the percentage impact will be less.

Operator

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

Carl Bayard - Genuity Capital Markets

On the Hollinger, let’s assume you win. Who are you going to collect from?

Leonard J. Asper

I think the party is Hollinger International but it’s owned by Chicago Sun Times. They do have a reserve, some funds in escrow for this.

John E. Maguire

We understand there is approximately $20 million that has been held in escrow.

Carl Bayard - Genuity Capital Markets

Let’s assume that it takes at least a year before the ad market in Australia turns around so conceivably the dividend you get from Ten is far lower than what it is now. Are there any other asset disposals you could be contemplating to give you breathing room on the total debt to EBITDA covenant?

Leonard J. Asper

Not at this time. And remember again, we also could do a special dividend from Australia as well.

Carl Bayard - Genuity Capital Markets

So UK Radio is the only asset that’s on the table right now?

Leonard J. Asper

Yes.

Operator

There are no further questions at this time.

Hugh Harley

That completes our call for today. Thank you for participating on the call and I can remind you that this call is available for replay and will be archived on our website, www.canwest.com.

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