Corus Entertainment Inc. (CJRB) Earnings Call Transcript & Summary

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 Corus Entertainment Q2 2023 Analyst and Investor Conference Call. [Operator Instructions] 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 Corus Entertainment. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Welcome to Corus Entertainment's Fiscal 2023 Second Quarter Earnings Call. I'm Doug Murphy and joining me this morning is John Gossling, 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.corusent.com under the Investor Relations, Events and Presentations section. Now let's move to the standard cautionary statement found on Slide 2. We note that forward-looking statements may be made during this call. Actual results could differ materially from forecasts, 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 Corus' second quarter 2023 report to shareholders and the 2022 annual report, which can be found on SEDAR or in the Investor Relations, Financial Reports section of our website. I will now start on Slide 3 and provide our latest observations on the macroeconomic environment and its impact on Corus 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 for 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 continue 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. Now some supply chains are opening up such as automotive, with U.S. advertising forecast 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 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 4. 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 a 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 investment to support our streaming portfolio platforms and channel networks. Advertising is a cyclical business. And at some point in the quarters ahead, we expect to 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 5. I want to take a moment and share with you what I believe is the go-forward business model for the big U.S. studio majors who provide Corus 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 4 corners of the box model, a smart, sustainable strategy for our U.S. studio majors that gives us confidence in Corus' 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 channels businesses. All the U.S. studio majors have massive owned and operated linear channel of 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 channels 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 the streaming services as opposed to a subscriber growth at all cost mindset. In the fourth quarter is that the U.S. studio majors want to support their very profitable content licensing businesses around the world. The success that Corus 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 4 corners is now the consensus winning approach of our U.S. video major partners and proof of the long-term sustainability of our business model in Canada. Over to Slide 6. 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. Corus is pursuing a partner-led capital-light streaming strategy. We do not need to invest billions of dollars in their production of content. Rather, we can access what we need from the content licensing market, as described a moment ago in the 4 corners model. Our leading portfolio of streaming platforms, in Canada include STACKTV, the Global TV App, our Global News over-the-top apps, TELETOON+ 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 channels platforms and STACKTV. As part of an additional channel we ran, Corus introduced a new kids television channel from our partners at Warner Brothers Discovery with the debut of Boomerang. The TELETOON brand remains alive and well as TELETOON+ available on Amazon Prime Video and Bell platforms. And is now Canada's leading kids SVOD streaming service, made possible by our multiyear all rights deal with Warner Brothers Studio and Cartoon Network, viewers can stream popular series like Teen Titans Go!, Looney Tunes Cartoons, Scooby-Doo, Batwheels and Bugs Bunnies (sic) [ Bunny ] Builders. 1.5 year ago, STACKTV launched dynamic ad insertion on video-on-demand in partnership with Amazon Prime Video. This popular offering for advertisers has become a significant revenue contributor to our digital advertising portfolio 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 Brothers Discovery, and Lifetime from our partners, A+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 Goodrich, 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 Corus 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 7. We have been priming the pump in Nelvana and this is evident in our second quarter as deliveries ramp up. Our strong partnerships and investments in core production frameworks highlight the international appeal of Nelvana's creative capabilities. In 2021, green lights for 2 exciting properties were announced as part of Nelvana's coproduction framework with Nickelodeon Hamsters of Hamsterdale and Zokie of Planet Ruby. These shows are now in the delivery stage, contributing significantly to our results this quarter and expected to premier on Treehouse and globally on Nick later this year. We have deepened our coproduction 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 coproduced with Nelvana. At Corus, we are also focused on leveraging our owned IP to the Corus 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, The Kids Can Press book by Ashley Spiers and Nelvana's award-winning short film, The Most Magnificent Thing. Corus 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, Corus Studio's 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, the Hallmark in the U.S., opening the door to an expanded 2-way strategic content partnership for both Canadian and worldwide audiences. As Chorus Studio looks ahead to Q3, we're excited to bring new and highly anticipated titles to buyers, including Pamela Anderson's new food focus series, Pamela's Cooking with Love; the competition renovation series, Renovation Resort starring both Bryan Baeumler and Scott McGillivray; and Bryan Baeumler's new series Bryan's All-In. As operators and streaming platforms look to balance their production and investments with more cost-effective content acquisitions, this is a perfect setup for our owned content ambitions at Corus. 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 8. We experienced a sequential improvement in the rate of TV advertising revenue defined 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 revenue, 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 3.59x at February 28, 2023 compared to 3.02x 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 Corus 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 revenue and position Corus 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 investments in U.S. studio output deals, and increase in original programming deliveries, which compared to last year, which was a [indiscernible] 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 1/3 of this driven by the CRTC's catch-up decision. TV G&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 are making in marketing and content development. So if we exclude these 2 items, TV G&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 some 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 fee of advertising and subscriber revenue in the second quarter and that was up 4% from the prior year quarter. The continued growth reflects the disciplined 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 explored the benefits of our targeted and automated advertising solutions. And 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. That 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. Now 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 haven't continued 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, delevering our balance sheet and providing an attractive return to our shareholders. And with that, I'll turn it back to Doug.

Thank you, John. Moving on to Slide 13. Well, we do not know the depth nor the duration of this advertising recession and/or whether a larger macroeconomic contraction awaits the Canadian economy, we are confident in our company and in our plan. This team has successfully managed through a pandemic, keeping our people safe, laddering out our balance sheet, revising our capital allocation priorities, launching our streaming portfolio and building our cross-platform monetization capabilities as we advance our strategic plan and its priorities. Fiscal '23 is an especially challenging year for Corus as we contend with the double whammy of an advertising recession and the unexpected decision by the CRTC requiring us to catch up the production spending and hiatus during the COVID induced shutdowns. As I've said many times, both of these pressures will pass, what our headwinds today will become tailwinds in time. We are, as noted, conducting a thorough review of our operating model, asset base and cost structure. And once complete, this will result in a streamlined operating model well positioned for the years ahead. What we are doing to navigate the current environment is not at the expense of our strategic plan. We are making smart decisions as an independent company with a clear direction. We know exactly where we are going with a well-articulated plan, expansive relationships with all the U.S. studio majors and the best talent in the business. We are also, at long last, on the cusp of some much-needed regulatory changes in our industry. Bill C-11 gets the big things right and has reached the final stages of the legislative process. While we do not know all the details of future broadcasting regulations, we know this Bill will make modern and equitable rules more attainable. We urge the CRTC to move very quickly to implement the new legislation after it passes, including by revisiting obligations on Canadian licensees. Establishing new rules for foreign players and recalibrating existing rules on Canadian players will be necessary to truly level the playing field, the outcome which is at the heart of this legislation. While we await the new regulatory regime, we are being very prudent stewards of capital. We are prioritizing paying down our debt while investing in the business to create future growth opportunities even during this downturn. We are purposely moving from being a television broadcaster to a multi-platform video aggregator, delivering content everywhere our audiences are and standing up the ability to monetize our inventory of advertising impressions across all platforms. And we are building an affiliated studio business, through which we will direct future required Canadian content spending to serve our networks and platforms in Canada and grow our content licensing revenues the world over. I'd like to take a moment and thank our team across Corus and the country. And with that, I'll turn it back to you, operator.

[Operator Instructions] And we'll hear first from Vince Valentini at TD Securities.

One first question is on these content deals that you've extended with many of your partners. Do you have visibility and certainty on inflation in what you are going to have to pay for that content in years 2, 3 or beyond for any multiyear deals? I'm just wondering, is this like a onetime step-up and then you flat line? Or do you know that next year and year after, it's actually going to be even more expensive because of all the new digital rights and safe security you have?

Vince, yes, we have visibility on all of the years. And they kind of all vary in certain instances, there was a kind of a year 1 increase and then flat line for the subsequent years. Another case is there, the same increase year-over-year. So the pricing is kind of a deal-by-deal negotiation. And we have very good visibility to it. So that's helpful. And accordingly, we are able to then plan for the premium digital video revenues that would attach to those new rights we're acquiring. Less visibility was accorded to the CPE decision. Of course, that came out of left fields. And we had to kind of recalibrate to accommodate that.

Yes, for sure. I understand that one, Doug. So I wanted to ask that first because I don't want to -- hopefully, this isn't that tricky of a question, John, that you can try to give us some framework on. But what I'm thinking of is here is, if we take the uncertainty in predicting revenues totally out of the equation, just assume 1 year from now in the second quarter of 2024, your TV segment revenue is exactly the same as it was this quarter. What would EBITDA look like given the cost cutting you're already doing on your own G&A, the better flow-through on the CRTC catch-up stuff offset maybe slightly by second year inflators on the U.S. content deals and your segment profit is way down this quarter. Your margins are way below what we normally would see. I'm just wondering how much visibility you have to take revenue out of the equation. I mean do you see segment profit up 10% or 15% this quarter next year if you can keep revenue flat?

I don't have enough visibility. I think there's, quite a few variables in Q1. Although, I think as you're getting at it, it will be an easier comp. Clearly, given that we've listed our third quarter of a pretty tough outcome. So I think there's, a couple of things that are hard to predict. One is the sort of the cadence of deliveries of especially primetime programming in the fall, that's completely unknown at this point. That particular buy activity will be happening in the next month. So we'll have a better view of that coming up. And I'd say beyond advertising revenue, subscriber and the content business are pretty big contributors. And I don't know that we have a good handle on timing of content deliveries at this point for Q1. I mean, we would have certainly a view, but it can change quite a bit between now and then. So I guess, a short way -- or short answer is I'm not really that certain right now. There's just a lot of moving pieces. But yes, we would certainly think that ad revenue should be able to be stable, but there's a lot to happen between now and then, including the fall schedule.

I'll give you -- I've answered that similar, but maybe a little different. I think we can expect Canadian programming to obviously with the CPE tax behind us. That's a tailwind, which we value, nearing $20 million in the last couple of years. And then the foreign programming, we have a very clear line of sight. So to extent to which the revenue remains the same, you can intuit through there that we're trying to get to a spot with streamlined margins given our cost activity both on work through the CPE piece and our non-U.S. programming line items.

Okay. Fair enough. One last one for me, and I'll pass the line is just the subscriber revenue. The 2 questions, I guess. One, I get you on the Q3 retro item from last year that we need to make sure we factor in our models. But is there anything coming this year on the positive side of that, I know it's lumpy. It happens from time to time, are there any renewals that could hit in Q3 or Q4. And just maybe just unpack the minus 2% a bit more. Is that just simply what it is of linear declines are accelerating a little bit. So the revenue you're getting from STACK and other streaming sources is not quite offsetting the decline rate anymore?

Yes, I think that's right, Vince. So the linear decline isn't accelerating. But the STACK and other streaming subscriber revenues has flattened quite a bit, just given that the growth flattened going back now into Q3 of last year. So I think you got that right. In terms of anything in the pipeline, look, there's, always renewals in the pipeline. So there's a potential for some big ones in the back half of the year. But they're very hard to predict exactly when they're going to happen. So as much as we'd like to see those done for certainty and other reasons, they may or may not happen in the back half.

Maybe happen in the back half then, John, it would happen at some point. It just could be -- this is timing or maybe it slips into next year?

Yes.

And just some more color on STACK. So, STACK as you know, the last few quarters is kind of sort of a trajectory has kind of flattened out. And so the year-over-year comps that John roughly noted has been kind of less meaningful as a contributor to the overall sum of traditional pay TV subs and STACK subs. That said, we still have our target of 1 million subs on STACK. We've been greatly improved the value proposition with the addition of the Disney channels and Lifetime in recent months. And most recently, we have had a very aggressive marketing campaign in market. And we've seen some renewed positive momentum with obviously a modest trend change back up to the right, in the good direction with our STACKTV marketing campaign and the launch of that campaign with the spring schedule, which shows like Survivor, which has been another great season. Big Brother in Canada and Bell has been helpful. So we have 400 hours of Peacock programming that lives on STACK and that continues to distinguish and differentiate that service. So we're still really working hard on getting that business back to a more steady growing profile.

Our next question today comes from Scotiabank in the line of Maher Yaghi.

Doug, I wanted to ask you, you indicated today for Q3 that you expect the year-on-year growth to be similar to Q1. But is there any -- are there any signs that you're seeing that we could begin to see improvement in the year-on-year growth decline, let's say, in Q4 or early next year. Just trying to see, we're kind of hitting this low minus 10% year-on-year. But are there signals that if you hope that the decline of minus 10% might get better for Q4. And this is something hard for us to get a view on. And maybe you can help us, of the 10% decline in advertising that you expect in Q3 approximately, how much of it is related directly to general ad spending decline versus maybe market share shifts that are happening between broadcasters getting different allocations of the dollars that are in the market for advertising. I have a follow-up question, but I'll leave it there for now.

Those are 2 very good questions. So let me take the second one first and I'll try to give you some color. So the media mix question, like what's happening in terms of the shared TV versus share of digital versus share of outdoor. That remains still very much a sort of very fluid dynamic based on campaign ROI calculations. I am of the view, and it will remain to be seen in the coming quarters. But I'm of the view that with the advent of ad layers on premium video platforms, not just Pluto or Global TV, but also Disney+, Netflix, Discovery that we are going to see a shift of dollars out of other digital user-generated platforms back on to tried and trusted long-form premium video content. Advertisers have been asking us for more impressions as Al typical linear television for years now and it's only been the last 18 to 24 months that all of us. And that's why I took particular time today to describe my 4 corners model and our shared alignment with U.S. studio majors as to how they're pursuing monetizing their video now. That we think that that should bode well in the coming years for a reallocation of the digital media mix back to premium long-form video and away from social, away from user-generated content. So that's just one thematic personal perspective. As regards to the visibility, as I say, it's really limited. If you think about it, it's very logical. I mentioned that we're all dealing with younger generation wanting to work from home, health and beauty category is down massive year-over-year. There's a bit of an uptick last year in advertising because folks are coming back. But now people have realized that they'd rather stay at their home. Retail is also down, certainly in Canada. And that's showing up in our category, given the 450 basis points increase in interest rates, financial services and mortgage advertising is down. That's another category. Government is down. So we're just in a situation where, as I said, we think it is still primarily pandemic-related, are the behavioral or supply chain affected. And the question that we worry about and hence the limited visibility comment is whether there's a further macroeconomic speed bump to hit the Canadian economy. The Canadian economy seems to be holding in there pretty well, thus far. Labor market is good. But that could be covering up some changes and things going on beneath the surface. So we're purposely not being very predictive on the outlook other than to say, it's kind of quarter-to-quarter with limited visibility. And we're managing our expenses to offset the advertising to clients to the best of our ability, but not at the expense of continuing to push hard on our strategic plan.

Okay. Okay. That's fair. And my last question is on the subscriber revenue. And this also has very little visibility for us here to get inflow on. As the BDU operators continue to struggle with declining video subscriptions on their end. Are you seeing any pressure on the rate cards that could be coming up for renewal with some of these BDUs that could add pressure on your subscription revenues going forward?

I think that's normal course, Maher. That's not a new thing. That's what our content distribution team deals with all the time. So I think if you look at the track record, we've been pretty successful in those negotiations. But yes, there's definitely a decline happening. And as I said to Vince, it's not accelerating at this point. And so, what we need to do is we need to get STACK and our other streaming products reinvigorated to provide some growth to offset that.

Just I'll add some more color. The truth of it is that we've been working hard ever since we bought Shaw Media to optimize our channel portfolio with strong brands. And we just upgraded, for example, with the swap TELETOON rebranded Cartoon Network and the old Cartoon Network rebrand of Boomerang. So we continue to improve the value proposition that we bring to the BDUs. We're very clever and work hard to ensure that our services that get all the audiences are getting appropriate share of subscriber revenue. In most of the cases, the share of audience we get is not the share of overall countrywide revenue, and that we look to correct that imbalance. Of course, sports, is over delivering in terms of its cost in the system. So we work hard at that. We're generally able to get inflation on all renegotiations. We usually have to do some portfolio negotiations, i.e., reducing services. So we've gone from at the time of acquisition for 45 channels, now down to 33, I believe, is the current count. And then I think we've done probably 8 or 10 rebrands in that time. So we appreciate that we're in the business with our partners and distributors to provide compelling entertainment to our subscribers. And we work hard to make sure we attract the appropriate audiences. And then in turn, that we negotiate the appropriate wholesale revenues.

Our next question today comes from Adam Shine at National Bank Financial.

So John, first question for you and then one for Doug. John just you highlighted again the mid-single-digit, increase in the context of program spend. Could you just highlight again the sort of H1 versus H2, just to emphasize again, I think that the spending has incrementally skewed to the first half of the year. Could you give any incremental color around that?

Yes. No, you're right. We're running a little harder than that through the first half. There's no question. And I think that probably caught some a little short with their Q2 estimates. So I would say the back half to achieve that mid-single-digit type of number, the back half has to be lower. There's a couple of competing things there. One is Canadian tends to be higher in the back half and it will be. We've talked about the $20 million and the $50 million catch-up, so the first half has been a little lighter on Canadian, so the second half is going to be heavier. But then, of course, that means that the -- what we call foreign or the U.S. programming should be lighter, particularly in the back half of the second half. So Q4, we would think that the U.S. would be lower. So we're still okay with that. That's why I repeated it. But it is going to skew a little lighter towards the end of the second half.

Okay. And then just for Doug, this is a more difficult question. We're 2 weeks away from the Writers' deadline in terms of their contract with the U.S. Studios and the venom is starting to percolate and prospect of a strike hopefully gets averted. But there is that prospect that it could arise and then it's a subject of duration in terms of implications for deliveries going into, I guess, the fall. Anything that you can talk around this issue? Obviously, scripts are being stockpiled to allow for some production activity heading into the spring and summer. But any way you characterize what could happen?

Well, it's a good question. We -- it looks like -- I would have said a couple of months ago, 50-50. It looks like there might be higher odds of something happening. Obviously, there needs to be for the creators and needs to be an appropriate economic model for how they participate in streaming economics. So there is a problem to be solved there between the various stakeholder groups, which we acknowledge. And you're right. The studios have been proactive, because it's not our collect the first rodeo here and doing things like quarters ago. Early renewals on multi-season shows that are working and funding writers' rooms in advance, stockpiling unscripted content and that was one of my comments is that our unscripted content continues to be extremely well received and rolled over. And it's very likely not dissimilar to what happened during the pandemic when people couldn't get content and we had a nice uptick in our sales, of course, Studios product. We'll be in a good spot to take advantage of any demand changes in that regard. And the other piece is people are sort of delaying their first-run originals and they're looking to use more repeats. And because the ad economy is kind of soft right now, you don't have to use your first run content, because the demand for your supply of inventory is not as much. So I think we've all been adjusting the last number of quarters for the potentiality of some interruption. But I think the general consensus is that there should be a resolution in relatively short order. It's in everybody's self-interest. We don't want a protracted Ryder's strike. It's not good for people viewing television. But the other comment I'd make is we're kind of now all in the same boat with the streaming businesses and the broadcasters if you want to delineate it that way. And so there's, I think, pretty good alignment around the fact that a protracted shutdown is not helpful for anybody. That helps you.

Right, yes. Okay. We'll leave it at that. I guess the context would be in the context of a low advertising environment, there is the prospect that lighter deliveries and/or cheaper deliveries could help some of the costs, at least in the Q1 debatably. Beyond that it's more of a wait and see. And as you said, hopefully, it's not a repeat of the 100-day strike of a decade plus ago, right?

And the other more recent example we had of that, Adam, was our Q1 '21, which was the fall relevant, right? We got very few deliveries on Global that quarter.

Moving on, we'll hear next from Aravinda Galappatthige at Canaccord Genuity.

I just wanted to go back to sort of the programming inflation point. John, if you were kind of talking about maybe attack the cost side more holistically on the television segment. I mean we obviously saw the programming inflation for television as kind of a high single digit and I think it was in the first half. But your TV OpEx was up roughly 5% or Q1 in Q2. And given some of the moving parts you've talked about, do you see the prospect of fact 5% potentially being flat? Would you consider some of your cost reduction initiatives and obviously the lower U.S. spend? Is that something that is achievable given those moving parts?

Aravinda, it was pretty hard to follow you there. You were kind of breaking up. When you're saying to be flat, you're talking about the G&A costs?

Yes, total TV OpEx, right? Because what I'm referring to is the total TV OpEx was 5% inflation in both in Q1 and Q2. I'm just wondering whether with the step down in or the moderation in programming inflation and some of your cost reduction initiatives, where that 5% can potentially go to 0 in the second half?

Yes. I'd say, again, given the comments on the programming kind of the flattening out being towards the back half of the second quarter, I think that would then translate into what you're suggesting. And as well, I think we'll have better momentum on other G&A in the fourth quarter, some for sure in Q3 and then more in Q4. So I think it's going to be a little bit more back-end loaded on that total concept. And Q3, we should -- we're working hard for Q3 to be down as well.

And for the coming years to have a sustainable improvement in the basic cost structure. That's the key piece here that we're making smart and necessary investments in U.S. programming. Some of that's front-end loaded for the question of Vince over the multiyear deals that stabilizes. Then, we're making marketing investments which are key to get into revenue growth on STACKTV with our 1 million sub targets still within reach and that's key to get the revenue picture. Pluto is sort of a rev share model and looks very promising. And we're just early days there as we kind of scale the impression that's really over-delivered on impressions. And then you add to that the CPE piece, which in your modeling is relatively straightforward. When you think about what we've shared with you in terms of 2010 over last year, this year and next. And then you work through the revenue declines of this year, which is going to take pressure off of the spending next year. So what is it -- is acutely painful this year becomes relatively helpful next on the CPE profile. So some of the parts is continue to push on the digital video growth opportunity, whilst at the same time managing through the game programming spending, accepting the modest investment increases in U.S. and then looking for ways to take cost out of the non-programming and non-marketing parts of the business. And that's while we also ensure cross platform monetization momentum, because that's critical, right? You see it in our metrics, 52% on optimized advertising revenues. It's essential that we're able to monetize every impression, whether that's linear, nonlinear, on-demand streaming seamlessly and that's part of the bigger longer-term picture.

So Aravinda just to come back to your questions. I think the challenge of that total TV spend, in Q3 is going to be the Canadian that Doug just talked about, right? There's a big slug of Canadian in Q3. It's going to push the programming costs higher. But certainly, we're aiming for G&A to be down in every -- across the board in total for the back half. So once we get to Q4, with some of that Canadian pressure not with us, then, I can see what you're suggesting.

Okay. Okay. That's helpful. And then, John, just connected to that, I know it's different this year in terms of the actual cash spend on programming. Is that last year in the first half, amortization is running ahead of the cash, if it's the opposite. To what extent should we expect that to perhaps offset in the back half of the year? Just to kind of make sure that we are kind of generally landing in the right zone with respect to cash flow?

Yes. Look, it's certainly been a big change in that relationship in the first half. The cash is up a lot more than normal. I think that's, again, a function of what happened last year where things were quite slow out of the gate. I think we're through that now. I think there was a lot of catch-up that was happening on late billings. We talked about this in the last call. The back half of the year should return to normal would be what I would expect.

[Operator Instructions] Next, we'll hear from Drew McReynolds at RBC Capital Markets.

First for you, John, and my apologies. I think this was probably answered, but just in terms of modeling kind of the content delivery side within TV for the back half of 2023. Presumably, you're still expecting some decent year-over-year growth, although versus our forecast, Q2 certainly was quite strong. So just wondering how we model that one.

Yes. Good question, Drew. So yes, we see a very strong back half. Now, Nelvana has got a lot in the pipeline. Corus Studios is comping against some pretty big numbers last year with the Hulu deal. But I think Nelvana will more than compensate for that in the back half.

Okay. Super. And just one follow-up for me. Just -- it's more of a bigger picture one maybe start with you, Doug, on the upfront market in Canada. Like, obviously, not ideal timing here given all the uncertainty out there. So just what are your thoughts in terms of like #1, how important are the up-fronts for Corus relative to what it's previously been? And then second, is that a concern that all of these kind of commitments are being done at a point in time where there's probably going to be the least visibility here in the cycle?

Well, it's -- I'd prefer to be going into the upfront with a more robust economic backdrop, obviously. Yes, our team right now is in Los Angeles. And we're in deep discussions with our content partners as to what the premier's schedule is going to look like in the fall and in mid-season and through the spring. We really like our key partnerships on conventional. We continue to have more of the top shows in the top 20 in both specialty and unconventional on any other broadcaster when you exclude sports. And that lifestyle entertainment positioning is attractive to a lot of advertisers. Especially, when you look at the CPMs compared to what sports, is extracting, which is relatively expensive by comparison. So I like our competitive shape. If we start seeing some categories coming back, I mean, I did mention the report by Magna in the U.S., which is -- and I was reading somewhere that the average person's car is almost 13 years of age. And yes, leasing costs are up, but people are -- that's a huge category. Automotive is one of the biggest categories out there and we'd like to see something come back in the coming future. So maybe that category steps up as part of their relationship with their advertising agency for the up-fronts. Interestingly, you're probably noting that the entertainment category, I'm talking about the box office. Yesterday, you might have saw, one of the discovery was announcing their new streaming product. And their CEO is very specific about the importance of box office results that. And that's, by the way, a signal to the Ryder's strike discussion I just have with Adam, is that the economics. This is like the people are realizing that the windowing strategy is fundamental to running a smart studio major company. And you're seeing that across all of the windows, linear streaming in theater, et cetera. So that category, I expect to see coming back. So I think the way I'm thinking about it is, and our sales team is we're working the categories hard and then understanding how the categories fit within the 5 major advertising holding companies. And we don't do an upfront like the way the U.S. does. We have corporate deals we do with the major agency groups and those are kicked off at the upfront, but typically are concluded by the end of our fiscal. And so the setup is a little bit different. But yes, it's a softer environment to go into an upfront. But it's not our first time we've gone through this before. So we have a game plan that we're going to execute. And the good news is we have a lot of premium video digital inventory now that we didn't have only a couple of years ago. So we can offer more impressions going into the selling season.

Scott Fletcher at CIBC, your question is next.

I wanted to ask a question about the sales and marketing spending and how you're looking at that strategically, because obviously, so much of your strategy depends on driving more eyeballs to the streaming platform and the digital platforms. So when you're talking about increasing net sales and marketing spend, is there a different strategic approach to how you're allocating that dollars? Or is it sort of a matter more of putting more money into what you've already been doing in the past, just curious on the strategic approach on sales and marketing?

Well, the first thing we're trying to do, right, our principal focus right now is trying to be sort of strategically ambidextrous. We're looking at cost everywhere. And we're hoping to -- in the net of it, take out as much cost as we can, redirect some of those savings to marketing, but be net to the good, while we're going through this soft revenue environment. So that's sort of like the quarter-to-quarter approach. But we are spending quite a bit of time, Scott, trying to understand, what's the optimal intersection of marketing investment and returns? This is the classic attribution model that all of our advertisers speak to us about. How much advertising do we want to invest beyond our own network footprint? And we are getting smarter and smarter as each quarter goes by. And I referenced the recent STACK TV advertising campaign. If you haven't seen it, you can find it out there. It's very compelling, really speaks to the features and benefits of the service. The fact that it's got 16 linear channels, full on-demand stacks and a better value than what is being paid for typically within the first channels packaging bundles in Canada. And I think that's a winning offering. So as we continue to get smarter about the cost of acquisition and the ROI on these investments, we'll get more comfortable with ramping up the spend, especially we're going to try to time that with the debut of fresh content, which is kind of a key part of the acquisition mass. But we're not forgetting about the need to continue to be very diligent on expense control. So we're playing that game at the moment. And once we begin to see either more demonstrable effect of our investments that drives definitive growth, then we'll probably amp that up and/or when the outlook begins to firm, that will give us some more conviction to invest more on the STACK marketing, if that helps.

And ladies and gentlemen, that was our final question for the conference today. Mr. Murphy, I'll turn it back over to you for any additional or closing remarks that you have.

Thank you, Jim, and thank you, everyone. I see we're right on the hour. So that was a 60-minute well spent. We're always available for any follow-up questions. So please feel free to reach out. Thank you for your time and have a great day. Enjoy the beautiful weather. Take care.

Ladies and gentlemen, this does conclude today's teleconference. And we thank you all for your participation. You may now disconnect. And as Doug had said, we hope you enjoy your day.