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Edited Transcript of CJR.B.TO earnings conference call or presentation 6-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Corus Entertainment Inc Earnings Call

CALGARY Apr 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Corus Entertainment Inc earnings conference call or presentation Thursday, April 6, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas D. Murphy

Corus Entertainment Inc. - CEO, President and Director

* John Richard Gossling

Corus Entertainment Inc. - CFO and EVP

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Conference Call Participants

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* Adam Shine

National Bank Financial, Inc., Research Division - Research Analyst

* Aravinda Suranimala Galappatthige

Canaccord Genuity Limited, Research Division - MD

* David McFadgen

Cormark Securities Inc., Research Division - Director of Institutional Equity Research

* Jeffrey Fan

Scotiabank Global Banking and Markets, Research Division - Analyst

* Phillip Huang

Barclays PLC, Research Division - Senior Equity Research Analyst

* Tim Casey

BMO Capital Markets Equity Research - Equity Research Analyst

* Vince Valentini

TD Securities Equity Research - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Corus Entertainment Q2 2017 Analyst and Investor Call. (Operator Instructions) As a reminder, today's call is being recorded, Thursday, April 6, 2017.

Now I would like to turn the call over to Doug Murphy, President and CEO of Corus Entertainment. Please go ahead, sir.

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [2]

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Thank you, operator. Good morning, everyone. I am Doug Murphy, and welcome to Corus Entertainment's Fiscal 2017 Second Quarter Analyst Call. Joining me on the call today is John Gossling, our Executive Vice President and Chief Financial Officer.

Before we read the cautionary statement, we would like to inform everyone that there are a series of PowerPoint slides that accompany this call. The slides can be found on our website in the Investor Relations section.

We'll now run through the standard cautionary statement. This discussion contains forward-looking statements that may involve risks and uncertainties. Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in the company's filings with the Canadian Security Administrators on SEDAR.

Turning to Slide 3 of the presentation. This week, we celebrated the 1-year anniversary of the new Corus, and what an incredible journey it has been. We are right on target with where we expected to be at this stage of the integration, with momentum building across many areas of our business. Our ratings have been bolstered by the power of our strong brand and content, the successful cross-promotional heft across our portfolio and an unwavering commitment to creating a great experience for our audiences wherever they are. As we strive to own more content, we continue to invest in growing our slate, both for use on our domestic networks and for sale in the international marketplace.

Last week, Corus Studios announced further sales of Masters of Flip, now in 147 territories, and Buying The View, now in 55 territories, as well as the introduction of a number of new unscripted lifestyle series for sale, ahead of MIPTV in Cannes this week, including $ave My Reno, Backyard Builds, The Baker Sisters, Home to Win Season 2 and Worst to First, as we continue to expand our lifestyle content footprint worldwide.

Further, Nelvana will ramp up its slate as the year progresses, delivering episodes of the new franchise properties such as Hotel Transylvania, licensed by Disney; and Mysticons, licensed by Nick; as well as Episodes of the Zhu Zhu, which continue to perform well on the Disney Channel. Our success in placing this content with strong global broadcasters positions Nelvana and Corus Studios for growth in line with our priority to own more content, both in the back half of fiscal '17 and into fiscal '18 and beyond.

Television advertising revenue is trending as expected, with sequential improvements materializing as the impact of our calendar agency deals come to bear and as we reap the benefits of the strong performance of our schedules to date.

And lastly, as I said off the top, we are one, and I mean this both literally and figuratively. We have adeptly managed the integration of our structure, our systems and processes right on schedule. This, coupled with strong expense controls and integration cost synergies, have translated into solid margins this quarter.

Now let's turn to Slide 4 and a discussion of our results. Our consolidated segment profit for the quarter was $103 million, up from $80 million last year. Consolidated revenue was $368 million, up from $198 million last year.

On a pro forma basis, including Shaw Media and excluding Pay TV in the prior year, consolidated segment profit increased 6% in the quarter, reflecting the continued realization of cost synergies, which resulted in strong expense savings of 9% for Q2. Our improved cost structure translated into impressive consolidated margins of 28% in the quarter, up 3% compared to 25% in the year prior.

As anticipated, Q2 was challenging from a top line perspective, with the timing of calendar year agency contract renewals and tough comparables in the prior year, which included significant multiyear SVOD deals. As a result, our consolidated revenues were down 5% in the quarter compared to the prior year.

With that, I'll now turn the call over to John, who will provide further detail by segment.

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John Richard Gossling, Corus Entertainment Inc. - CFO and EVP [3]

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Thanks very much, Doug. Turning to Slide 5. On a pro forma basis, which includes Shaw Media and excludes Pay TV in the prior year, segment profit for Television increased 3% in the quarter. Television segment profit margin for Q2 was 30%, and that compares to 28% in the prior year, again on a pro forma basis, reflecting the benefit to our improved cost structure that Doug mentioned.

Segment revenues for Television decreased 5%, with total Television advertising revenues declining 4% in the quarter compared to the prior year, again on a pro forma basis. The advertising revenue decline is principally a result of the timing of the agency contract renewals, which, as we mentioned on our last call, was expected to negatively impact the first part of the second quarter. This was partially offset by year-over-year growth from sales of advertiser brand integrations within our original shows. While visibility remains limited, we are encouraged by the sequential advertising revenue improvements that we have seen to date.

On a pro forma basis, total subscriber revenues increased 1% in the quarter. With the full suite of Disney channels now reflected in the prior year quarter, our Q2 results demonstrate the continued positive impact of our powerful brands reflected in annual wholesale fee increases in certain carriage agreements.

On a pro forma basis, merchandising, distribution and other revenues decreased 44% for the second quarter. The prior year did include higher service work in Nelvana studios as well as several large multiyear SVOD demand content deals, which amounted to approximately $8 million in the comparable quarter.

Initially, deliveries of new properties at Nelvana were lower in the quarter as some shows shifted from Q2 into Q3 and Q4 of this year. As Doug mentioned earlier, we expect to see a return to growth at Nelvana in the back half of the year and into fiscal 2018 as our exciting slate ramps up with increased deliveries to our broadcast partners.

Moving on to the Radio segment. Revenues decreased 6% in Q2. The Ontario markets remain stable, driven by strong growth in Ottawa and Kitchener, while Toronto held steady the last year. However, this was offset by continuing declines in the West as a result of ongoing softness in Vancouver and Alberta, primarily in local sales as well as ratings challenges in Winnipeg. We've taken steps to reverse the ratings trend in this market with the recent relaunch of our 2 FM stations, the Power97 and Peggy@99.1.

Radio delivered impressive segment profit of $6 million, which is up 22% compared to last year despite this revenue softness, which was attributable to our restructuring the divisions, strong ongoing cost controls and the benefits we're realizing from the integration of Global News with Radio.

We continue to remain intensely focused on our financial priorities for fiscal 2017, which are: One, ensuring we identify and capture all revenue and cost synergies. As we mentioned last quarter, we are progressing very well against our stated targets, and we are now at the mid-range of our $40 million to $50 million in annualized cost savings. We expect our revenue synergies to impact the back half of fiscal 2017 and then continue into fiscal 2018. Two, delivering solid free cash flow to reduce leverage to below 3.5x by the end of fiscal 2017 and below 3x by the end of fiscal 2018, while simultaneously advancing our strategic priorities. And three, maintaining our dividend of $1.14 per Class B share. We continue to track well against each of these priorities as we move into the second half of fiscal 2017.

I'll now turn the call back to Doug.

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [4]

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Thank you, John. We've now begun our second year as a combined company. I'd like to take this moment to thank each and every member of the Corus team for his and her significant contributions to our company. It has been hard work indeed, but everything is coming together. Our integration is almost done. Our cost structure is vastly improved. Our competitive performance, notable. And we continue to invest in our strategic priorities to: one, own and control more content; two, engage our audiences; and three, expand into new and adjacent markets.

Allow me to elaborate. On the ratings front, Global continue to perform strongly, with many of our mid-season premieres returning higher than the fall '16 average. Global has 9 shows in the top 20 ranking for adults 25 to 54. That's up from 5 of the top 20 a year ago.

On the specialty front, turning to Slide 8. Corus continued to maintain the largest cumulative specialty television audience in Canada, excluding sports, with 4 of the top 5 networks amongst adults 25 to 54, all of the top 5 networks for women 25 to 54 as well as all of the 5 networks for kids.

Slide 9. In Radio, our share of tune-in grew in the majority of our markets. The Winter PPM audience ratings were released subsequent to the quarter, and highlights in the adults 25 to 54 demographic segment are as follows: in Vancouver, Corus Radio had a remarkably strong performance where our overall share of the commercial Radio markets key adults 25 to 54 demo was up to 28.1% from 23% a year prior. Corus now has the #1, the #2 and the #4 ranked morning shows in the market with CKNW, CFOX and Rock 101, respectively.

After a very strong fall, Toronto's Q107 saw a ratings decline in the winter book, partially due to the seasonal Christmas competition from other formats. Corus has retooled the Q107 morning show, however, with Jennifer Valentyne joining Derringer in the Morning, and we're already seeing positive trending in this brand. Our new morning show, AM640, combined with the addition of content from Global News, has led to a 20% increase compared to last winter.

And in Calgary, the company continues to hold the #1 station across all demos with Country 105. This past quarter, in support of our strategic priority to engage our audience across platforms, we launched Radioplayer in partnership with a number of other Canadian broadcasters. This new streaming app is an industry initiative that follows our audience, bringing almost 500 radio stations across the country to listeners on the streaming platform. With more than 100,000 downloads already, it's the most successful launch ever for the Radioplayer app worldwide.

Slide 10. As our industry continues to evolve and AdTech remains a promising area of investment at Corus as we benefit from the changing media and technology landscape, we continue to roll out new initiatives and enhancements, which further enable our advertisers to reach Corus' premium audiences in an integrated, customized and automated way.

Slide 7 (sic) [ 11 ]. We also continue to invest in our own content, both through Nelvana and Corus Studios. We remain on track to more than double the episodes with available for sale for both slates versus prior year deliveries by the end of this fiscal.

As we look to 2017 and the second half of our fiscal year, factors such as our expanding content pipeline, our competitive audience share improvements, the successful renewal of our calendar year agency deals and lapping some tough comps for last year, all point Corus towards revenue growth as we enter the higher-demand seasons of calendar 2017.

As every month passes, we get better. We learn more about our capabilities as a company, but equally important, our capabilities as a team. I acknowledged the outstanding work of the Corus team earlier, and it's fitting to conclude with a comment about our people.

As much as we've been focused externally, we've been equally focused on building our culture and establishing a shared vision and value that will further unify our people, create a competitive advantage and set a strong foundation to drive our business forward. As you can see, it's been an eventful quarter and an exciting first year. It's amazing to see how much we've accomplished as a new Corus, and we're excited by the potential that is in front of us.

With that, we'll take any questions you may have. Thank you, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll get to our first question on the line from Phillip Huang from Barclays.

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Phillip Huang, Barclays PLC, Research Division - Senior Equity Research Analyst [2]

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I wanted to talk to you guys a bit about cord cutting and cord shaving. From speaking with the telcos and the cables, it certainly seems like cord cutting has -- had relatively muted impacts so far. I know it's still early days given the whole pick-and-pay has been implemented only a little bit more than 3 months, but what are you seeing on your end? Do you see any signs of cord cutting or shaving acceleration on that front?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [3]

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Phillip, thanks for the question. It's Doug speaking. No, we've seen no change in the trend. We're still seeing 1% to 2% cutting, which has been what we've seen for the last number of years. And I'll just remind everyone that our rate cards are penetration based with certain pricing protection should we break certain tiers. So to this point in time, it's been a relatively de minimis impact on our business.

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Phillip Huang, Barclays PLC, Research Division - Senior Equity Research Analyst [4]

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That's very helpful. And then maybe a quick question on the owned content front. Obviously, it's an area of focus for you guys with Corus Studios and Nelvana. How much do you expect the mix of own content revenues to be in the longer term? Is there like even a broad target in your mind, Doug, as you look to the potential in this segment?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [5]

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We -- in the past, we've cited 20% of total revenue in 5 years as a broad target. We're now in the throes of thinking about the future state of Corus, and obviously, our aspiration is to become an integrated media and content company. And that means winning at the media business in Canada, generating healthy cash flows to delever, maintain our dividend and fund our strategic priorities, the first of which is to own more content. We're looking at, frankly speaking, at the moment, more of an organic strategy, investing in our sales via Nelvana Studios and on Corus Studios, to get to growth. To get to a large goal, such as I just mentioned, would probably require some more active M&A work. And at this juncture, that's not on the horizon because of our focus to delever by the end of fiscal '18. So I would say, as the year rolls off, we can give you more specifics about longer-term targets. But if you needed to put something on paper, I'd use that as a guide.

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Operator [6]

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We'll get to our next question on the line from Adam Shine with National Bank Financial.

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Adam Shine, National Bank Financial, Inc., Research Division - Research Analyst [7]

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Doug, maybe we can start with advertising. I know you're focused on the business on an integrated basis, but any additional color that you can talk about, both looking back into the Q2 and looking forward into early H2 trends regarding specialty versus conventional?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [8]

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Sure, Adam. We're actually very focused on revenue. Revenue -- integration work, I think, as has been demonstrated by management, is proceeding very well. So a lot of the energy of management right now is on the revenue line. Global is having a stellar year, and kudos to the team on their fantastic work in driving the competitive strength of that network. And as a result, we're having opportunity to grow our revenues on Global and expect continued growth as the year plays out. Specialty, equally from a competitive ranking position, is stronger than it's ever been. And we continue to feel very comfortable that with the agency deals now concluded and rolling into the higher demand parts of fiscal -- or of calendar 2017, excuse me, that we'll start to see some meaningful revenue growth year-over-year in the rest of calendar '17. So I'd say, the summary of my answer, and I'm happy to take a follow-on question if you've got one, Adam, is that everything is playing out, by and large, as expected, and we still remain optimistic and confident, in fact, that we're going to return to growth in the back half of fiscal '17.

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Adam Shine, National Bank Financial, Inc., Research Division - Research Analyst [9]

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I think it was John in -- on the prior call that sort of isolated some of the effects in the Q1, both related to federal election and the absence of that 1 agency business. It was like $20 million sort of split half, half. We extrapolate that, let's say, into the Q2, you only would have been off by 1 month in the absence of that 1 contract. So maybe you can just -- maybe John could touch on was that maybe a $2 million impact? And then building on Doug's comments as we roll into Q3, Q4, the layering on of that additional agency business, that one that wasn't there last year, adds maybe $10 million per quarter and sort of helps with some of that ad sales momentum?

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John Richard Gossling, Corus Entertainment Inc. - CFO and EVP [10]

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Sure, Adam. It's John. I think your numbers are directionally correct. But I would say, rather than just isolate that one particular factor, there's a lot of moving pieces when it comes to the agency business. And Q2 being a relatively low-demand quarter, there are many ups and downs that happen across that entire portfolio. So we're -- as Doug said, we're expecting sort of stronger, consistent performance going forward. I think that's the key message here. I think that within Q2, yes, there's a little bit of noise, just ups and downs of the various deals that we have. But that really is explained by -- of how the quarter tends to play, which is being that low-demand situation.

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [11]

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And maybe if I can just elaborate upon that. Our business has got some tried-and-true seasonal characteristics, and there's 2 quarters of low demand and 2 quarters of high demand. So the calendar Q2, our Q3, calendar Q4, our Q1, are the high-demand periods. And as such, January and February does not equal 2 over 12 in terms of an annual volume commitment. So the nice thing about our competitive strengths thus far this year is when the demand comes in, we've got the audiences that are most coveted on behalf of our agencies and our clients. So I think that's a little bit of color for you, Adam, that might help I hope.

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Adam Shine, National Bank Financial, Inc., Research Division - Research Analyst [12]

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No, that's great. And I'll just throw one last one. You do mention it as an item in your MD&A, and there's a lot of noise out there in the context of what's going on in Hollywood with the writers' negotiations with the producers. It's very hypothetical. It might ultimately be resolved, and hopefully, it will be. Any color in terms of, obviously, you're taking a wait-and-see approach and hoping nothing happens, but at the same time, anything in regards to what moves you may or may not be making or need to make?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [13]

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I'd say, no one's got a crystal ball on these things. I'd say that it's really about money and -- obviously. And from the network's perspective, and our team was just down in Los Angeles last week for the LA prescreenings, the networks are all pretty confident that our reasonable economic actors will prevail and will not have a strike like we had a number of years ago. Certainly, it's in the best interests of the television industry to proceed and not engage in a lockout in any manner. And so I think for us, we're going to just basically stay close to our partners in the U.S. and just observe and be ready for what we expect to be a satisfactory outcome. But as I say, there's no crystal ball, so we're just going to have to be on the balls of our feet as we watch this evolve.

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John Richard Gossling, Corus Entertainment Inc. - CFO and EVP [14]

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I think, Adam, a couple of other things on that, just to hopefully make you feel a little bit better about it. In terms of what happened last time, which was in '08, I think a lot of the team here at the Global folks and others are quite aware of how that all played out and what had to happen in terms of trying to mitigate that. So I think this isn't going to be something new for the bulk of our team. I guess the other thing is, since that last strike, the cost model for how we acquire U.S. prime time programming has changed significantly. So to the extent that there's potentially audience and revenue impact, the cost impact will also be different than it was last time.

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Operator [15]

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We'll get to our next question on the line from Jeff Fan with Scotiabank.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

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I've got a couple of questions. Doug, I want to just touch on your comment about returning back to growth and maybe dig a little bit further into the segments, specifically TV. If we can just kind of look qualitatively and directionally on those main line items, on advertising, subscriber and merchandising, can you just give us a little bit of flavor comparing maybe what you think second half may look like versus the first half? So the starting point would be advertising pro forma in the first half was down 6%; subscription revenue was positive, driven by Disney; and then the merchandise was down heavily. So if you can just kind of give us some color on each of those lines, that would be really helpful.

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [17]

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Okay. I would say, advertising growth, back half, low single digits, lower Q3, higher Q4, still low single digits. Sub growth, low single digits, and then I would -- Nelvana, I think, you're going to see a nice leg up, double digits.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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Okay. That's very helpful. The second question is more broad, big picture. Our Heritage Minister's -- looks like she's going to be releasing some findings from the big media studies that she's been embarking on for the last year or so. It's probably going to happen it sounds like midyear. Wondering if there are any thoughts on whether anything potentially meaningful could come under that, that could affect the business. Wondering if you can just give some insights on that.

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [19]

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The -- well, again, my crystal ball is not in front of me at the moment, but there's a lot of -- obviously, this week, there's been a lot of conversation about putting everything on the table, Broadcast Act, Telecom Act, et cetera, foreign ownership. So what we always try to do is be available and stay close to all of the policy conversations on the hill. As to what specifically we can expect, the Minister has been extremely consistent with a view that she wants to help the Canadian Content business grow from an export basis. Furthermore, there's been a consistent support for the digital content aspect of the business, both of which we completely support and concur with. So in those 2 cases, we think it's nothing but beneficial for Corus. And the budget kind of hinted that something was coming but was somewhat veiled in that regard. So again, we try to stay as close as possible to the goings-on in Ottawa. We expect the report to be generally positive given what we've heard both in public and in private from the Minister, but we'll have to wait and see what's the final decision.

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Operator [20]

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Anyway, for our next question on the line, from Vince Valentini with TD Securities.

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Vince Valentini, TD Securities Equity Research - Analyst [21]

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A couple of things. One, just maybe clarify the synergies. So I understand you're at the midpoint; that would be $45 million annualized, so basically, $11.3 million or so realized in the second quarter. Is that fair?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [22]

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Yes, that's great math. That's exactly the right number, yes. Bingo.

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Vince Valentini, TD Securities Equity Research - Analyst [23]

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Excellent. Sorry if Jeff just asked this, but I just want to make sure I clarified it differently. You've got, in the third quarter, the new agency deals are in place for a full 3 months. Your ratings, as you've pointed out, have been very strong across Global and specialty. You also have the AdTech stuff that I may follow-up on in a second. Do you think you can take the minus 4% TV advertising revenue in Q2 and turn that into a flat or even positive number in Q3? Or is that too quick and optimistic?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [24]

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No, no, no. I think our -- we'd be disappointed if we didn't get to flat. That's clearly our goal. We're hoping to get to above flat. That's been our kind of rallying cry in the seventh floor here now for quite some time, so -- and the team is intensely focused on that result, Vince.

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Vince Valentini, TD Securities Equity Research - Analyst [25]

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Excellent. And -- but I just want to caution that John did use the words limited visibility in his opening comments. Do you actually have bookings in place that would give you a pretty high degree of confidence in achieving that goal? Or is it still pretty much week to week?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [26]

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It's been -- it has been limited, but I'll tell you, in March, the pacing has been, I would say, remarkably improved. So when you look at March of this fiscal versus March of last year, on a pro forma basis, we've been extremely encouraged. It looks like the weight of the volume deals are starting to come in, and that would be, again, very consistent with our comments around the high-demand Corus fiscal Q3 quarter. Would you add anything to that, John?

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John Richard Gossling, Corus Entertainment Inc. - CFO and EVP [27]

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No, I would agree with that.

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Vince Valentini, TD Securities Equity Research - Analyst [28]

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No, that's fantastic color. And so maybe I'll have to just follow up again on the AdTech. Not needing you to go through a whole dissertation of all the things you're -- the great things you're doing, but can you just give us an update on how the advertisers are reacting to these new solutions you're providing? Are you starting to see some pretty good bookings and uptick?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [29]

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Yes, and I will wax on here a little bit because I think it's important for the call. We always say that as a pure-play media and content company, Corus had to do only 2 things well: number one, grow our audiences; number two, monetize our audiences. And the monetize our audience piece gets to regardless of where the audiences go, we think we can segment inventory, we can price CPMs in a more surgical basis, we can improve our yield management and squeeze more value out of our existing impression base. So any growth is just incremental. How do you do that? Well, data is at the root of everything. This is obviously an oft-heard strategy for many industries these days. It is the same in ours. And with both data that we are able to secure from set-top box or we have our own data from our audience intelligence platform, from the 1.5 million Corus Loyalists who have opted in to hear from us and to participate in our -- in the work we're doing, we are now able to more specifically package audience segments against certain consumer profiles, either using third-party data, such as Environics or Sapient, or using first-party data from a client or advertiser, and then help that client or advertiser reach in a higher yield, more ROI-efficient basis, their audiences. They're delighted because their marketing investment goes further. We're delighted because we save inventory to sell higher CPM rates on late-breaking money, which is typically things like theatrical releases from movie studios and the such. So it's a yield game, and I would say the uptake has been extremely buoyant. And for us, as we look into the future, it clearly is an area for ongoing investment as we realize that monetizing our audiences are everybody is important as growing them.

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Operator [30]

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And we'll get to our next question on the line from Aravinda Galappatthige with Canaccord Genuity.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [31]

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Doug, with respect to the subscriber revenues, I know you alluded to sort of low single-digit growth in the back half. We've obviously seen that growth on the slide from near double digits to it's about 1%, not surprisingly given the dynamic of the Disney channel. So, I guess, what you're calling for is for sort of the current levels to be held. Are there any other sort of dynamics that you think would kind of help that maintain the kind of the sub revenues in sort of positive territory considering that there are obviously underlying subscriber declines? Or is it just that there is more sort of upside from the newer channels that could offset that?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [32]

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It's a combination of the both. The newer channels, Disney in particular, clearly is a powerhouse brand, has done everything that we said it would do when we announced the launch of the services 2 years ago for us. But the other thing I would just note is, we have got a whole bunch of powerhouse brands, and that's the comment we're making about top 5, top 5, top 5. It's a pretty remarkable performance. And so when we go to negotiate our carriage agreements with our BDU partners, we are seeing increases in sub rates. So we have moderate single-digit inflation on a sub rate basis, which will also help to explain growth now that we've lapped the launch of the Disney channels.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [33]

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Okay, Doug. And just can you remind me where you stand on those agreements? Is the majority of Corus legacy and Shaw Media now sort of renegotiated? Or is there a couple of more to go?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [34]

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I would say, we're in a very good place. We've got a couple outstanding negotiations that are smallest in nature, but we feel very confident that we've been successful in taking advantage of the new scale of Corus to work in partnership with the BDUs to advance their strategic interests and ours simultaneously.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [35]

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Okay. And then just quickly on Nelvana, I mean, obviously, you've talked about sort of the potential upside on the production and distribution side, but on the merch front of -- on the merch side of things, any sort of prospective titles that you kind of look to the next 12, call it, to 18 months that are emerging that you see as, potentially, brands that can start to give you that kind of merch licensing revenues that will be meaningful down the road?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [36]

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Yes, and I'm happy to comment on that. I'm also thrilled with the work that our Nelvana team has done in kind of repositioning the studio. We had to do a pretty thorough spring cleaning there about a year and a bit ago, but now the fruits of our labor are appearing. All 3 of the -- what I would describe as a franchised properties, have some optionality on the merchandise licensing front. All 3 of them have master toy partners in tow, which is your first step. Some of the shift you saw in this quarter on merch was simply a timing change. For example, of Mysticons and in partnership with Nickelodeon, we decided to move the launch of that show to fall of calendar '17 from spring, and so that causes us to kind of move the timing of the advances on the master toy and other merchandising licensees. Zhu Zhu Pets has performed well on the Disney channel. It'll be coming back again in the fall. There will be toys on shelf as well for that property, and that's encouraging. And then Hotel T, which we're really excited about and wasn't initially thought of as a larger merchandising opportunity, has started to pique the interest of a lot of the major categories. So that's another opportunity we're going to have. So we've learned over the years to be cautiously optimistic. As you know, Nelvana has demonstrated in the past the ability to launch billion dollar toy franchises. We know we have a number of opportunities here. We're not going to declare them homeruns at this point in time, but we'll certainly get it back and have the right -- we have the right launch setup for all 3 of those. So we're going to continue to execute, while we then look at the next sort of slate of shows coming behind it, which include, as you know, the Esme and Roy property, which is a preschool coproduction with Sesame Workshop and HBO. That'll be later, but that's one, and there's a couple more coming that we'll be talking about in the future.

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Operator [37]

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We'll get to our next question on the line from David McFadgen from Cormark Securities.

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David McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [38]

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Okay. So a couple of questions. Let me just first start off with the sub revenue growth. Was the 1%, is that reflective of anything abnormal in the quarter? I would have thought it would have been more like 2% to 3%. And what's the outlook going forward? Is it 1% or is it more in the 2% to 3% range?

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John Richard Gossling, Corus Entertainment Inc. - CFO and EVP [39]

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Dave, it's John. No, there's nothing unusual in there. Obviously, we've lapped the big impact of the Disney channels now in Q1. I think we were pretty clear about that on the Q1 call. Going forward, there will be a little bit of volatility in there, just depending on the timing of some of the distribution deals and how they get renewed and what that does to any immediate revenue, but that will be relatively small. So I wouldn't tell you it's just 1% necessarily, but it's going to be in a fairly small range of, as Doug said, low single digits. It could be as high as 4% or 5%. It could be 0% or 1%. It just depends on if anything's going on. But there was nothing really unusual in Q2.

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David McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [40]

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Okay. So I'll just ask kind of that further. Do you think that 2% to 3% range is reasonable? Or we should more think about 1%?

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John Richard Gossling, Corus Entertainment Inc. - CFO and EVP [41]

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I think it feels pretty reasonable right now based on everything we know. I mean, the negotiations are ongoing, as Doug mentioned. They -- for as much as we renew certain of the agreements, other ones come up for expiry and renegotiation. So each one is a different story. And each distributor has different packaging, and they're making different packaging changes all the time. So that potentially has much of an impact as any cord cutting or shaving impact has just the way that we get packaged. And of course, we work very hard with our distributors to make sure that we're in the right places for where the audiences are. So I think we've got a fairly -- and I think consistently, have had a fairly stable view on the subscriber revenue line.

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David McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [42]

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Okay. And then just on the advertising growth. So Doug, you talked about the fact that you expect growth the back half, and you indicated that you saw Q4 ad growth would be better than Q3. I'm just wondering why that would be the case. Can you provide any color there?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [43]

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Just momentum I think is really the one word I would say. I mean, it's a smaller quarter. So as the volume comes in and agencies work to make their deals, we expect to see it coming in.

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John Richard Gossling, Corus Entertainment Inc. - CFO and EVP [44]

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And the comps were different last year.

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [45]

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Yes, and tough comps in last year Q4. That's right, too.

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David McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [46]

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Okay. And then lastly, just on the DRIP, can you provide us any update on Shaw Communications' intentions on the DRIP? Is there any update there?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [47]

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There isn't. It's business as usual at this point. So I'd say on the DRIP generally, and not specific to Shaw, our DRIP participation has moved up in the last couple of months. So from a cash perspective, that's obviously positive. But the -- call it the non-Shaw share DRIP participation is trending about 30% right now. So that's something that's pretty high watermark for us in terms of where that participation has been.

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David McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [48]

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And why do you think that's the case?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [49]

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Hard to know. I mean, obviously, there's changes in the shareholder base all the time. There have been some large blocks that have traded in the last couple of quarters. How people decide to participate or not, we don't have a lot of visibility on that.

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Operator [50]

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(Operator Instructions) And our next question on the line is from the line of Tim Casey from BMO.

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [51]

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A couple for me. Doug, what are you seeing on the Radio side? I mean, the revenue number in the quarter, I mean, understanding that it is seasonally a weak quarter, how confident you can turn that around? And there's been a lot of noise regarding the integrity of YouTube and some of the digital platforms with respect to ad placement, and there's some concern that there may be a short-term hit to those. Have you seen any migration? Or are the agencies talking about migrating any volume out of the digital platforms back to legacy platforms?

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [52]

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Thanks, Tim. So just on Radio, yes, it was a disappointing revenue quarter, and we are still contending with the recession in Alberta and the foreign buyer's tax in Vancouver, which puts quite a damper on real estate advertisements as well as mortgage advertisements and all the related supply chain in that regard. So that's -- and I think also, we've done a pretty radical reinvention of our local selling teams in those 5 markets where we have both Global and Radio. I think there's been some learning curve opportunities there, which we're beginning to see improvements. For example, we continue to grow at a high percentage rate the amount of duplicated accounts now that we had that we are moving from Global to Global and Radio, or from Radio to Radio and Global. And they're experiencing some very good early success. So from a bottoms-up perspective, the merits of the local bundling, we think we're validating and -- but there clearly has been a bunch of learning going on at local level, which is a core specific issue on top of the macro. But we expect and have plans in place to address that in the rest of this fiscal and rolling into '18. So that's, I think, well in hand. The other piece I would just remind everybody about is, we are, by and large, continuing our gradual yet upward sloping trajectory on our ratings improvements. It's been a multiyear project to reposition our networks, our stations in the major markets. We're thrilled with the success we're having in Vancouver and in Edmonton, Calgary. As we mentioned, Toronto is a bit of a slip given the Christmas formats that get played out during the seasonal time, but we're focusing on getting those rankers back up. So those all, I think, bode well for Radio, although it's sort of steady as she goes. The -- I would just characterize the news about the environmental risk with digital as very consistent with what we've been saying for a number of quarters now; that if you want a safe place for your brand that is tried-and-true with reach and frequency, Television or Radio, or Radio on the go and Television in the event of video imagery. And yes, we are seeing some advertisers basically pulling up their tent and just redirecting some buys over to Television. I don't expect Google or Facebook to not have an answer to these issues. These are massive companies with big balance sheets and huge tech teams. So they're going to find ways to protect against that, I would imagine. So I don't know if it's a permanent shift or some of the ongoing swing back and forth. And what we're kind of seeing in the ad market really is, we talked in the past about there was a perception 1.5 years ago that it was either or. You're either going to be in linear or you're going to be in digital. Increasingly now, it's a mixed game, Tim. And so I think within the notion of a marketing mix and traditional media versus digital, it swings around at any point in time from 65% traditional, 35% digital, to 10% in either way of that, and that is a function of both the agency, the client, the season and the kind of platform opportunities that exist. We're seeing, for example, remarkable growth, double-digit growth in our product integrations, what we call our client marketing world, where we can integrate products and services into the lifestyle shows that we make on HG and Food. And that is a real premium advertising location for any agency or client, and that's attracting some money that's being moved out of digital. And we package that up with a brand sale with a 30-second spot, with some digital, with some Radio, and so we try to offer a compelling substitute or complement to digital as and when possible.

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Tim Casey, BMO Capital Markets Equity Research - Equity Research Analyst [53]

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Is product integration though -- in relative terms, is that a meaningful piece of your revenue line? I would have thought that was a relatively niche segment.

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [54]

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No, I'd say it's 5% of our advertising line.

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John Richard Gossling, Corus Entertainment Inc. - CFO and EVP [55]

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And growing.

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [56]

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And growing.

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John Richard Gossling, Corus Entertainment Inc. - CFO and EVP [57]

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Growing at a very high rate.

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [58]

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And it's something that only, really, Corus can do well, setting aside sports integration. It's like beer and pickup trucks. But when you look at stuff like Samsung and Town & Country minivans and mortgage service providers and all those things that fit so well for property shows or cooking shows, furniture, I mean, we're the first port of call with that business, and we like our shape there.

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Operator [59]

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And, Mr. Murphy, we have no further questions on the line. I'll turn it back to you.

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Douglas D. Murphy, Corus Entertainment Inc. - CEO, President and Director [60]

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Thank you, operator, and thank you, everybody, on the line for your interest and your questions. We look forward to speaking to you in the summertime. In the meantime, enjoy your day. Thank you.

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Operator [61]

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Thank you very much. And, ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you disconnect your lines. Have a good day, everyone.