Corus Entertainment Inc.

Good morning, ladies and gentlemen, and welcome to today's conference. My name is Jim, and I will be your conference operator. At this time, I would like to welcome everyone to the Chorus Entertainment Q2 2023 Analyst and Investor Conference Call. All lines have been placed on mute to prevent any background noise, and after the presenters prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, simply press star and then the number two on your telephone keypad. Thank you. As a reminder, today's session is being recorded, and it is now my pleasure to turn the floor over to Mr. Doug Murphy, president and CEO of Chorus Entertainment. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Welcome to Chorus Entertainment's fiscal 2023 second quarter earnings call. I'm Doug Murphy, and joining me this morning is John Gosling, executive vice president and chief financial officer. Before I read the cautionary statement, I'd like to remind everyone that we have slides to accompany today's call. You can find them on our website at www.coruscant.com under the investor relations events and presentation section. Now let's move to the standard cautionary statement found on slide two. We note that forward-looking statements may be made during this call. After results could differ materially from forecast projections or conclusions in these statements. We'd like to remind those on our call today, in addition to disclosing results in accordance with IFRS, Corus also provides supplementary non-IFRS or non-GAAP measures as a method of evaluating the company's performance and to provide a better understanding of how management views the company's performance. Today, we'll be referring to certain non-GAAP measures in our remarks. Additional information on these non-GAAP financial measures, the company's reported results, and factors and assumptions related to forward-looking information can be found in KORUS' second quarter 2023 report to shareholders and the 2022 annual report, which can be found on CDAR or in the investor relations financial reports section of our website. I will now start on slide three and provide our latest observations on the macroeconomic environment and its impact on KORUS as well as a few financial highlights from the second quarter results. Our results this quarter reinforce that we are in an advertising recession. We are not alone, as evidenced by recent comments from media and entertainment companies that rolled over, experiencing weak advertising demand and revenues. There remains limited visibility and much volatility across all advertising categories, some of which we believe remain pandemic-related, while other emerging trends could portend a larger macroeconomic contraction, given restrictive monetary policy from central banks to combat inflationary pressures in goods and services. Let me provide some further color for you. Similar to last quarter, almost all product and service categories showed declines as advertisers continued to hold, reduce, or cut spending compared to the year prior. There were some exceptions, however, with ongoing advertising strength in iGaming, gambling, some strength in consumer packaged goods advertising, as well as recent improvements in travel-related advertising. Households who are facing higher food and mortgage costs are pulling back on discretionary spending at home, with notable declines in durable goods, such as furniture and electronics, as well as reductions in home renovations, all of which are impacting those advertising categories. Some supply chains are opening up, such as automotive, with U.S. advertising forecasts from media intelligence firm Magna highlighting an expected 10% increase in car sales for calendar 2023 as the benefits of more inventory flow to more auto dealer marketing investments. And finally, we are all aware of the persistent desire of workers for remote and flexible working arrangements, meaning that days in the office remain well below pre-pandemic levels, which has affected certain categories such as beauty and fashion, with retailers witnessing the closure of Nordstrom's in Canada. So as expected, we experienced sequential improvement in Q2 with a decline of 8% in television advertising revenue compared to an 11% decrease in Q1 and a 14% decrease in Q4. Currently, the company expects its year-over-year television advertising revenue in the third quarter will be relatively consistent with the year-over-year performance in the first quarter of fiscal 2023. Our consolidated revenue of $344 million was down 5% for the second quarter, resulting from lower television advertising and subscriber revenues. These revenue declines when combined with higher amortization of program rights resulted in lower total segment profit of $59 million for the quarter with free cash flow of $28 million. Over to slide four. This is a particularly challenging year for our business as we are contending with declines in advertising revenues while at the same time experiencing an increase in programming costs. We are investing to ensure the long-term viability of our traditional channels business while simultaneously pursuing streaming opportunities in the growing premium digital video marketplace. The successful renewal, extension and broadening of the rights acquired through our content supply agreements are foundational to this growth strategy. We are working our way through the additional $50 million in mandated Canadian programming expenditures, which was originally delayed by public health measures that resulted in COVID-19 related production shutdowns in 2020. This unfortunate decision by our regulator is having a significant impact on our financial performance this year and last. As we turn the corner on fiscal 23 this summer and enter into fiscal 24, we will begin to put this additional annual $20 million expense behind us. Our enterprise-wide cost review is in motion, the goal of which is to streamline our operating model and attain lasting run rate cost savings beyond our programming investments while balancing our near-term realities with long-term value creation as we execute our strategic plan. Each and every expense line item is under scrutiny as we seek to improve our operating margins and or redirect those savings to marketing investments to support our streaming portfolio platforms and channel networks. Advertising is a cyclical business, and at some point in the quarters ahead, we expect a rebound in advertising demand and revenue, and we will enter this rebound with a streamlined cost structure and significant reductions in our CPE spending. Moving to slide five. I want to take a moment and share with you what I believe is the go-forward business model for the big US studio majors who provide chorus with our leading supply of content. Our partners, as you are all aware, are also streamlining and reinventing their operating models. What is emerging is what I refer to as the four corners of the box model. a smart, sustainable strategy for our U.S. studio majors that gives us confidence in Cora's strategic plan and long-term business model. Allow me to explain. The first quarter is investing in more content, more television, more films, more franchises. Content production budgets at these U.S. studio majors are at record levels as everyone actively engages in the content arms race. Second, they recognize the importance of protecting their core channel businesses. All the U.S. studio majors have massive owned and operated linear channel businesses around the world that generate significant revenue, earnings, and free cash flow. Third, they have built streaming products that are distinct but also similar to their channel's businesses, such that linear subscribers can stack the direct-to-consumer product on top of their channel subscriptions while also providing a compelling worldwide streaming value proposition. As an important side note, I'm certain you have all noticed that the U.S. studio majors now have a shared recent focus on the profitability of these streaming services as opposed to a subscriber growth at all costs mindset. And the fourth corner is that the U.S. studio majors want to support their very profitable content licensing businesses around the world. The success that Chorus has had in recent years to extend the term and simultaneously broaden the rights grants from our U.S. studio majors to enable our pursuit of premium digital video opportunities underscores the content supply remains secure. As I've said before, it is not a winner-take-all model. It is not either-or. It's and. And the smart management of the Four Corners is now the consensus-winning approach of our U.S. studio major partners and proof of the long-term sustainability of our business model in Canada. Over to slide six. We see significant opportunity ahead with a large and growing total addressable premium video advertising market. We are expanding our premium digital video business with additional platforms and content offerings as we in parallel invest in cross-platform monetization capabilities and marketing. Chorus is pursuing a partner-led capital light streaming strategy. We do not need to invest billions of dollars in the production of content. Rather, we can access what we need from the content licensing market as described a moment ago in the Four Corners model. Our leading portfolio of streaming platforms in Canada includes Stack TV, the Global TV app, our global news over-the-top apps, Teletoon Plus, and now Pluto TV. This highly complementary portfolio addresses SVOD, AVOD, and fast channel market segments and appeals to premium video subscribers, cord cutters, cord nevers, and advertisers that want to reach them. We are actively pursuing new distribution partners to support the continued growth of these services. Let me spotlight a few notable recent developments. We have taken a significant recent step to optimize our kids' portfolio. Our long-lived heritage network, Teletoon, was rebranded as Cartoon Network on linear channel platforms and Stack TV. As part of an additional channel rebrand, of course, introduced a new kids' television channel from our partners at Warner Bros. Discovery with the debut of Boomerang. The Teletoon brand remains alive and well as Teletoon Plus, available on Amazon Prime Video and Bell platforms, and is now Canada's leading kids' S5 streaming service. Made possible by our multi-year all rights deal with Warner Brothers Studio and Cartoon Network, viewers can stream popular series like Teen Titans Go!, Looney Tunes cartoons, Scooby-Doo, Bat Wheels, and Bugs Bunny's Builders. A year and a half ago, Stack TV launched dynamic ad insertion on Video On Demand in partnership with Amazon Prime Video. This popular offering for advertisers is becoming a significant revenue contributor to our digital advertising portfolio. It has really taken off in fiscal 23. The Global TV app is a first-of-its-kind TV Everywhere product designed to amplify the viewing experience for cable subscribers with live and on-demand access to our most popular networks and brands anytime, anywhere, in one app. With the recent additions of Magnolia Network Canada, also from Warner Bros. Discovery, and Lifetime from our partners A Plus E Networks, the global TV app now provides 11 channels for authenticated subscribers in Canada. And for those who like free, we introduced an all-new free play section featuring free 24-7 access to fan-favorite series and movies such as Big Brother Canada, Rookie Blue, and The Good Witch, which has meaningfully improved the value proposition. And finally, Pluto TV, now available in Canada with the most robust content launch from Paramount Global and a channel lineup that pairs with content from Course Entertainment's original Canadian content, Pluto TV is off to a great start. Pluto TV advertising inventory is now broadly available to all advertisers following an exclusive and successful launch window with select advertising partners. Moving to slide seven. We have been priming the pump at Nelvana, and this is evident in our second quarter as deliveries ramp up. Our strong partnerships and investments in co-production frameworks highlight the international appeal of Nelvana's creative capabilities. In 2021, green lights for two exciting properties were announced as part of Nelvana's co-production framework with Nickelodeon, Hamsters of Hamsterdale and Zoki of Planet Ruby. These shows are now in the delivery stage, contributing significantly to our results this quarter and expected to premiere on Treehouse and globally on Nick later this year. We have deepened our co-production partnership with Mattel following the successful debut of Thomas and Friends, an animated kid series based on the beloved Thomas the Tank Engine brand. Production is now in progress on subsequent seasons of this popular show. And in addition, in February... Mattel announced it will relaunch the iconic Barney franchise with a brand new 3D animated series co-produced with Nelvana. At Chorus, we are also focused on leveraging our own IP through the Chorus Advantage, where we use our Canadian programming expenditures to create content for our networks and for sale internationally. This past January, Nelvana announced the green light and start of production on its new 3D animated series, Millie Magnificent, inspired by the best-selling Kids' Camp Press book by Ashley Spires and Nelvana's award-winning short film, The Most Magnificent Thing. Chorus Studios continues to grow its distribution output, with over 200 hours of content sold during the second quarter. Inclusive of 18 titles across the lifestyle, factual, and scripted space, Chorus Studios' recent sales reflect the appeal of the breadth and multi-season depth of our production slate and catalog. We are especially excited about the sale of The Love Club to Hallmark in the U.S., opening the door to an expanded two-way strategic content partnership for both Canadian and worldwide audiences. As Chorus Studios looks ahead to Q3, we're excited to bring new and highly anticipated titles to buyers. including Pamela Anderson's new food-focused series, Pamela's Cooking with Love, the competition renovation series, Renovation Resort, starring both Brian Balmer and Scott McGillivray, and Brian Balmer's new series, Brian's All In. As operators of streaming platforms look to balance their production and investments with more cost-effective content acquisitions, this is a perfect setup for our own content ambitions at Chorus. Our growing slate of content in production and for sale will benefit from this demand in the international marketplace. With that, I will now turn it over to John to discuss our Q2 results.

Thanks, Doug, and good morning, everyone. I'm starting on slide eight. We experienced a sequential improvement in the rate of TV advertiser revenue decline within the challenging advertising environment that Doug described, as well as lower subscriber revenue. That was partially offset by positive results from our content business which contributed to consolidated revenue of $344 million in our second quarter, and that represents a 5% decrease from the prior year. Consolidated segment profit was $59 million for the quarter, and that reflects the lower TV advertising and subscriber revenues, coupled with increased programming costs and marketing investments for our streaming services. Consolidated segment profit margins were 17% for the quarter. Consolidated net loss attributable to shareholders for the quarter was $0.08 per share, and we delivered free cash flow of $28 million in the quarter. Net debt to segment profit was 3.59 times at February 28, 2023, compared to 3.02 times at the end of the last fiscal year, and that reflects the impact of our lower segment profit. Now, let's turn to our TV results for the second quarter, and that's on slide 9. The TV advertising revenue declined 8% in the quarter. subscriber revenue was 7% lower compared to last year. And as a reminder, in Q2 of last year, we did benefit from approximately $6 million of retroactive adjustments from the renewal of distribution agreements. When you adjust for this, subscriber revenue would have been down 2% with streaming subscriber growth from expanded distribution partially acting to offset declines within the traditional linear distribution system. I should also highlight that in our third quarter last year, we had a retroactive adjustment of approximately $2.5 million from the renewal of a distribution agreement. Distribution, production, and other revenue delivered impressive growth of 28% for the quarter, and that was driven by content deliveries at both Nelvana and Core Studios, as well as the addition of aircraft pictures in February of last year. The positive momentum we have in new platform revenue, increased adoption of optimized advertising, and sales of our slate of original content underscores the progress we are making to diversify our revenue and position course for longer-term growth opportunities. Direct cost of sales was up 8% for the quarter, and that was driven mainly by a 7% increase in amortization of program rights, which resulted from the investment in U.S. studio output deals, an increase in original programming deliveries, which compared to last year, which was an Olympic quarter, and higher Canadian spend this quarter. On a full-year basis, we continue to anticipate that programming costs will grow mid-single digits, with approximately one-third of this driven by the CRTC's catch-up decisions. TVG&A expenses were consistent with the prior year quarter, and in the current quarter, G&A mainly reflects an increase in marketing investments to promote our streaming services and higher development costs in our content business. That was offset by lower compensation costs. General and admin costs are down across categories, all categories, other than investments we were making in marketing and content development. So if we exclude these two items, TVG&A costs are down approximately 5% in Q2. Overall, TV segment profit was down significantly in the second quarter, primarily as a result of the contraction in advertising demand and the reduced subscriber revenue, as well as the higher amortization of program rights and film investments. TV segment profit margins were 20% in the current year quarter, and that compares to 27% last year. Now, moving on to slide 10, despite the impact of the challenging advertising environment, we continue to see encouraging growth in our new platform and optimized advertising revenues. New platform revenue was $34 million, or 12% of total TV advertising and subscriber revenue in the second quarter, and that was up 4% from the prior year quarter. The continued growth reflects the discipline execution of our strategic plan, as we benefit from expanded content rights deployed across our streaming services to drive audiences and incremental advertising impressions. As a reminder, this metric demonstrates some seasonality from quarter to quarter due to the higher linear advertising revenue mix in Q1 and Q3. compared to the lower demand quarters of Q2 and Q4. Optimized advertising revenue was up significantly in Q2 at 52% or $88 million of total television advertising revenue for the quarter. This is an increase of 14% or $10 million from the prior year quarter, as more advertisers explore the benefits of our targeted and automated advertising solutions. Let's turn to our radio results, which are outlined on slide 11. Radio did benefit from resiliency in key advertising categories in the quarter, including travel and entertainment, but was offset by softness in professional services, communications, and home products. Radio segment revenue increased 1% for the quarter as a result of stronger local and podcasting revenues, and that was partially offset by the impact of broader macroeconomic conditions on national sales. Radio segment profit increased slightly in the quarter, benefiting from this revenue growth. Over to slide 12, we exited the second quarter with $58 million of cash and cash equivalents and $241 million available to be drawn under our revolving credit facility. In the second quarter, we renegotiated the covenants under our bank credit facility to address the persistent headwinds in the current economic environment. We made a prudent decision to take proactive steps which provide additional flexibility under our credit facility. We also reduced our dividend in March, recognizing that an attractive dividend remains important to our shareholders. As we continue to make strategic investments in the business to drive future growth, the redeployment of capital from dividends is expected to be redirected to debt repayment. We declared a quarterly dividend of $0.03 per Class B share, which was paid on March 31, 2023, and took the opportunity to realign the dividend payment schedule to reduce the gap between the declaration and payment dates. Fourth quarter dividend is scheduled for its regular review in conjunction with the release of our Q3 results and subject to board approval would be payable in August. As Doug noted, we have and continue to take serious cost reduction measures which will be captured over the next several quarters. While we navigate the ebbs and flows of this low visibility environment, our foremost priority is to advance our strategic plan and priorities as well, sorry, as we aim to maximize our revenues and carefully manage our expenses and cash. We are very confident in our team's ability to streamline our costs and optimize our assets while delivering our balance sheet, sorry, delivering our balance sheet and providing an attractive return to our shareholders. And with that, I'll turn it back to Deb.