Jan 10, 2020
Operator
Ladies and gentlemen, thank you for standing by. And welcome to the Corus Entertainment Q1 2020 Analyst and Investor Call.
At this time, participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.
[Operator Instructions] Please be advised that today’s conference is being recorded. Thank you.
I’d now like to hand the conference over to your speaker for today, Doug Murphy, President and CEO of Corus Entertainment. Please go ahead.
Doug Murphy
Thank you, Operator, and good morning, everyone. And welcome to Corus Entertainment’s fiscal 2020 first quarter earnings call.
I am 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 there are a series of slides that accompany this morning’s call.
You can find them on our website at www.corusent.com under the Investor Relations section and on our webcast. Now let’s move to the standard cautionary statement found on slide two.
Today’s 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 are contained in the company’s filing with the Canadian Securities Administrators on SEDAR.
With that, I will now turn to our first quarter results and offer some perspective on the positive operating momentum we are seeing in fiscal 2020 starting on slide three. As Canada’s leading pure play media and content company we are uniquely positioned for success with a powerful portfolio of channel brands driven by strategic Global partnerships and with our fast growing owned content businesses at Nelvana, Corus Studios, Kids Can Press and Toon Boom.
We are setting the industry standard in advanced advertising by pioneering new solutions to evolve how television is sold. And our team remains steadfast in the disciplined execution of our plan to continuously maximize audiences and in turn monetize those audiences as we rationalize and evolve our operating model.
This guide us as we make smart investments to grow our portfolio of businesses, be the advertising, distribution or content creation and licensing. This disciplined approach has endured time and again providing resilience when faced with the challenges of disruption as we identify opportunities and innovate to create solutions in a fast changing media environment.
At Corus, our diversified portfolio has delivered a solid start to the year with consolidated results in line with our expectations. We generated $468 million of consolidated revenue for the quarter, which includes the impact of changes made to our Specialty TV portfolio with the shuttering of smaller channels to strengthen our offering for viewers.
We are extremely pleased with this revenue results. Our Q1 consolidated segment profit was $184 million and our strong free cash flow of $53 million for the quarter demonstrates once again the powerful ability of our portfolio to generate cash, enabling us to pay down a notable $49 million of bank debt in Q1.
Ever improving financial flexibility funds the investments we are making in our business and the pursuit our revenue growth. John will take you through our detailed segment results later in this call.
Moving to slide four. Corus is an innovative entrepreneurial company with outstanding talent, cherished brands and great content.
We are optimizing our Television portfolio with fewer bigger channels that stand out in a crowded marketplace and attract valuable audiences. This has meant disposing of a non-core asset Telelatino last March and shutting down smaller services in our portfolio, such as Sundance in fiscal 2018, IFC, Cosmo and most recently FYI in fiscal ‘20.
In turn, we are investing in content to grow audiences on Global and our bigger Specialty Television brands providing increased value to our advertisers and our distribution partners with strong differentiated channels. Over to slide five.
Our ambition, of course, is to diversify our revenue base by pursuing the Global market for premium video content and build a third revenue stream beyond our Media business in Canada. These international growth ambitions are rooted and are very important and growing content business.
Nelvana animation studio is nearly 50 years old, employs hundreds of animators and is expected to deliver almost 200 half hour equivalent episodes in the fiscal year. Last year, we ramped up the investment in our owned content production slate.
Importantly, we have greenlit second seasons of Esme & Roy, Hotel Transylvania, the TV series, and Corn & Peg, given our success with audiences around the world. Corus Studios is also growing as a producer of premium lifestyle and factual reality content for our networks.
We are accelerating sales in the Global market and have 21 series in production for fiscal 2020, including new seasons of fan-favorites Island of Bryan, $ave my Reno and Backyard Builds. I am encouraged that so many of our series are going into second and third seasons, which is fundamental to brand building and increases the potential to create franchise IP worldwide.
The result of this strategy are apparent in the delivery of double-digit growth as promised in Q1. Moving to slide six.
As you know, we are focused on maximizing our audiences on all platforms and then monetize those audiences to achieve revenue growth. Last November, we hosted an investor education session here at Corus Key to provide a deep dive into our revenue teams’ go-to-market strategy.
The session reviewed current advertising and subscriber trends, as well as the many initiatives underway at Chorus. These include, innovations in advanced ad tech, building more advertising inventory, growing our presence on social and digital platforms, and delivering content to audiences in new ways, including the evolution of our Global TV app and the new distribution platforms such as STACKTV.
We won’t revisit these in detail today in our prepared remarks as the archived session is available in the Investor Relations section of our website under Events and Presentations. We are happy to take questions on our go-to-market revenue strategies.
Our confidence that we are on the right track to sustainable growth is unwavering. With that, John will now take us through the detailed Q1 results.
John Gossling
Thanks, Doug. Good morning, everyone.
I will start on slide seven. As Doug mentioned earlier, we delivered a solid start to the year with consolidated results that met our expectations.
Effective September 1, 2019, we adopted International Financial Accounting Standard IFRS 16 related to the accounting for leases on a modified retrospective basis, an approach which should not adjust the results of prior periods. The significant impact of the IFRS 16 accounting standard on our Q1 2020 financial results are as follows.
6 point, sorry, $3.4 million increase in segment profit, $3.9 million increase in free cash flow and our leverage moves to 3.08 times net debt to segment profit reflecting the addition of $157 million to total debt and only one quarter of the segment profit benefit. Excluding the impact of IFRS 16 net debt to segment profit would have been the same as it was at August 31, 2019.
Corus consolidated revenue of $468 million for the quarter, slightly ahead of the prior year. These results represent a positive start to our fiscal year, driven by our strong fall schedule on Global and the benefit of our overall revenue diversification strategy with significant contributions from new digital revenue initiatives and our content business.
Consolidated segment profit of $184 million for the quarter was down 4% over the prior year as we invested in more owned and controlled content, and absorb the impact of the TLN disposal, which was partially offset by the benefit of the transition to IFRS 16. We delivered consolidated segment profit margins of 39% for the quarter and that’s down from 41% last year.
Consolidated net income attributable to shareholders for the quarter was $78 million or $0.37 per share and that’s up compared to $60 million or $0.28 per share in the prior year. That’s primarily due to accelerated amortization of Television brand assets at the beginning of fiscal 2019.
Further details can be found in this quarter’s MD&A. Free cash flow of $53 million was ahead of the $40 million in the prior year quarter.
This reflects an improvement in working capital, reduced interest payments on bank debt, lower restructuring and integration costs, and the removal of base lease expenses under IFRS 16 and it’s offset by greater programming and film investments, as well as higher cash taxes. Now turning to slide six, our TV results for the quarter.
Overall, TV segment revenues were up 1%. We have provided a waterfall chart this quarter as there are a few items to highlight that contributed to TV revenue of $430 million in Q1 and that’s compared to $426 million in the prior year.
The disposition of TLN in March 2019 and the discontinuation of two specialty channels IFC and Cosmo on September 30, 2019 resulted in TV revenue decreases in the quarter of $4.7 million and $2.5 million, respectively. This was more than offset by the benefit of $2.5 million in retroactive adjustments driven by a large BDU distribution agreement renewal in the quarter and $8.5 million of combined growth from new advertising revenue streams, as well as merchandising, distribution and other revenues.
Our focus on delivering consolidated revenue growth is evident with these results. In Q1, we delivered a 1% increase in TV advertising revenue and that’s 2% pro forma TLN as we benefited from a strong fall schedule, growth in digital advertising and a continued uptake of our advanced advertising offerings.
Subscriber revenue was down 2% compared to prior year. Adjusting for the disposition of TLN in the prior year, subscriber revenue would have been essentially flat.
The 15% increase in merchandising, distribution and other revenues over the prior year quarter reflects the increased content licensing revenue for Nelvana and Corus Studios, as well as revenue from the relaunch of Bakugan. TV expenses in the quarter increased by 4% over the prior year.
Direct cost of sales were up 7%, reflecting higher programming costs, including new programming output deals, Nelvana film amortization and other cost of sales. G&A expenses remained consistent with the prior year as we invest in multiple initiatives to drive revenue growth.
Overall, TV segment profit decreased 3% in the quarter and TV segment profits were 42%, compared to 43% in the prior year period. Now let’s turn to Radio results as outlined on slide nine.
Radio segment revenues were $38 million, a decrease of $3.4 million for the quarter and that was impacted by softness in entertainment and retail advertising environment, as well as continued economic and ratings challenges in Alberta. Radio segment profit was $12 million, a decrease of $1 million in the quarter given the challenging market conditions.
However, our segment profit margin of 32% was consistent with the prior year, reflecting our continued focus on expense control. We have made a notable change to our capital allocation policy November as seen on slide 10.
With our strong free cash flow and the weakness in our share price we took the opportunity to implement a Normal Course Issuer Bid to buy back up to 5% of our public float of Class B shares. We believe this will provide yet another mechanism to return value to our shareholders.
At December 31, 2019, we had repurchased nearly 1.7 million shares under the program. As detailed in our press release this morning, we declared a quarterly dividend of $0.06 per Class B share, providing a highly market competitive dividend yield of approximately 4.3%.
Our investments to optimize the core and build for the future are working. We have delivered double-digit growth from many of our new digital and short form video content initiatives, and are starting to see tangible benefits from our Own More Content strategy.
Lastly, we continue to strengthen our balance sheet through our strong track record of debt reduction. This continues to be a key priority as demonstrated by the $48 million in bank debt repayments for the quarter.
With that, I will turn it back to Doug.
Doug Murphy
Thank you, John. I am now on slide 11.
It’s the start of a new year and a new decade for that matter and I can’t help but reflect on the momentum we have built to-date. We bought Shaw Media on April 2016 because we recognize that size, scope and scale were essential to compete and win.
Today, we remain focused on delivering consistent, albeit modest consolidated revenue growth from our portfolio of businesses in order to pay down our bank debt and make smart investments for the future. Our strong fiscal 2019 results along with the solid results delivered today validate that our plan at Corus is working.
I am confident we are on the right track. At Corus, we are doing everything in our power to create new opportunities as we position our company for the future, while working within the confines of the current regulatory system.
We are setting the standard in ad tech and see a compelling opportunity ahead for our industry, reflecting the unique market structure in Canada, with three large broadcasters, two of whom are vertically integrated and owned by distributors and those distributors are bringing to the Canadian market two distinct video distribution platforms X1 and media kind, which will both improve our viewers experience but also provide us with a genuine opportunity to align as an industry to better serve the needs of our advertisers. Corus has been and will continue to advocate for the need to work together on an industry solution in Canada.
This includes the adoption of common audience segments, improving the viewer experience and value proposition both linear and on-demand, creating more revenue opportunities with ad insertion on VOD, for example, there are others, and sharing data within the industry ecosystem to strengthen our business and help us compete with the foreign owned unregulated digital media broadcasters. There is a real opportunity right now to create a more robust business broadcast ecosystem for advertisers and agencies to target audiences for maximum campaign impact and accelerate the transformation of how we sell television.
Last year Corus won Waterstone’s coveted Most Admired Corporate Culture Award, as a result of our values based culture. One of these values at Corus is to think beyond with challenges us to imagine less possible event opportunities and create new solutions.
Our industry has made significant strides and is doing its part to grow and evolve our business model. Now it’s time for Ottawa to come to the table.
The broadcasting and telecom legislative review panel will deliver its long-awaited report later this month. We encourage the newly elected government to think beyond and quickly implement change, it is important that we work together, government and industry to build a new policy framework that works for all of us.
Canadian media companies must be able to move faster and to invest where we want to invest. Canadian broadcasting policies still do not allow us that flexibility.
At Corus, we maximize audiences through great storytelling, as do other Canadian broadcasters. In fact, Canada has created some of the biggest stars in the world.
Our industry needs the freedom to grow and evolve, and to take Canadian talent and content to the next level. In this quarter coming, next quarter and the quarter behind that we will continue to advocate for policies, which enables a competitive Canadian media and content industry, but one that is driven by market forces.
Finally, moving to slide 12, I want to close our call today by reiterating the confidence we have in our portfolio of businesses at Corus. You have heard us speak a revenue diversity today, every business at Corus is important and contributing to our topline results, whether it’s advertising on TV or radio, both nationally across the country or in 39 local markets and communities or whether it’s our subscriber revenues, the recurring business from our distributors for our leading portfolio of specialty channels or whether it’s our content business now growing at double digits as expected or our rapidly growing digital business resulting from our many smart investments over the last couple of years, each component of our portfolio contribute to the pursuit of consistent albeit modest consolidated revenue growth quarter-after-quarter.
We will see ups and downs in various parts of the business from quarter-to-quarter, but it is the sum of the parts that matter. We are off to a solid start in F’20 with ongoing momentum and as we celebrate our 20th anniversary year as a company, we will continue to apply the same disciplined approach to provide value for our audiences, partners, clients and shareholders.
We will now be happy to take your questions. Thank you, and over to you, Operator.
Operator
Certainly. [Operator Instructions] Adam Shine with National Bank Financial.
Your line is open.
Adam Shine
Okay. Thank you very much.
So happy New Year, and obviously, Doug, with respect to regulation, good luck with, I think, you are what fourth Heritage Minister in the last five or so years.
Doug Murphy
Yes. Definitely.
Adam Shine
So, hopefully, if you stick around.
Doug Murphy
Thank you.
Adam Shine
With respect to the Q1, I mean, when we last had the Q4 call, sorry, yeah, the Q4 call, I think, you were talking about maybe flattish type of results in advertising. So did things sort of pick up a little bit in the back half of the period?
Can you speak a little bit maybe too federal election spending as an incremental contributor, but also maybe importantly, any changes at YouTube vis-à-vis Kids related advertising, whether you saw some flow back into the conventional space or specialty as well?
Doug Murphy
Thank you, Adam, and happy New Year to you as well. First of all, the elections were not really material to our revenue whatsoever.
The Federal Government introduced the Elections Act, which actually restricted spending this election cycle versus the one four years earlier. So that wasn’t really a factor unfortunately, it would have been nice if it was.
In terms of the YouTube change in regulation on Kids, that hasn’t affected us either, that’s effectively a calendar 2020 item and it’s relatively de minimis for our business model. We don’t rely on YouTube to generate revenue in the same way.
In terms of the first quarter, I would say, the notable one there is, continued progress in audience segment, selling is now north of 26%, which is our metric. I know it’s hard for you guys to track that, but we track that as a percentage of our national business and it continues to grow, uptake continues to be extremely impressive and this underscores my comments about how we are setting the standard for advanced advertising in Canada.
So, I think, it work, as you know, Q1 was a tough comp. So we are thrilled with the result and our team is staying focused on executing our plan.
Adam Shine
With respect to, I guess, tough comp, and obviously, you held up in a seasonally strong and important Q1 period. As we look ahead to Q2, you didn’t really comment at all in regards to early trends, but can you maybe speak to those at all in the Q2?
Doug Murphy A - Doug Murphy
The only comment we are going to give going forward now is on consolidated revenue growth and we are confident we can get stable albeit modest growth in consolidated revenue and that’s the real note I am trying to make today is we are a portfolio of businesses, Adam, and all of them are important to us. We are investing in diversifying our revenue base and the results, I think, are quite apparent in Q1 with the strength in our content business.
So our focus -- the whole team’s focus, of course, is to deliver consolidated revenue growth.
Adam Shine
No. I agree with that statement, it just gets you into trouble with the other stuff anyway.
Maybe one question quickly for John. Just vis-à-vis the TV spend, I think, it was a little incrementally higher than anticipated and maybe there were some timing issues, but you did call out the fact that there was some added staffing because of your digital and technology initiatives and presumably…
John Gossling
Yeah.
Adam Shine
… some additional amort costs related to the Bakugan sales. But anything else maybe from a timing perspective in regards to modeling for the rest of the year?
John Gossling
Sure. I will kind of go through that the pieces for Q1 and that will -- I will add some commentary on what we see going forward.
So if you look at, I said, cost of sales was up 7% in TV. So that’s roughly three pieces in about a third each.
The first one is program amortization and I talked about foreign programming costs that can be subject to timing. Q1 is the heavy period for new episodes.
But we do have output deals from Adult Swim, Hallmark and Discovery. So that is part of the increase.
So I’d say, to the extent that we can ever be precise on foreign programming for Global. Yeah, there could be some timing effects there.
But on the specialty side, that’s pretty locked. So part of that increase will be sustained.
If I look at the Nelvana film amort, I’d say that’s temporary. The slate is bigger, Bakugan is there and because production is ramping, we have seen an increase in amort on the film amort.
That looks like it’s going to continue into Q2 and then, probably, go back to kind of prior year levels for Q3 and Q4. And then on the other stuff kind of revenue-related, you could almost consider pass-through type costs that stick to some of the revenue.
Again, that’s probably a Q1 impact and likely to return to prior year levels going forward. So there’s sort of a mixture in there of what will continue and what was specific to Q1.
And then on the G&A side, you mentioned headcount, salaries benefits. Yeah, that’s up a little bit in Q1.
That’s partly some new headcount to support those initiatives. It’s also just annual regular merit-type increases that we see.
Now, on the flip side of that, commission costs will be down a little bit year-over-year, because we are not seeing the kind of growth that we had through last year. So that’s going to helpful and we will continue to have other maybe platform related costs, you want to call it that for some of the digital initiatives as well.
So that’s the mixture.
Adam Shine
Okay. Great.
Thanks for that color.
John Gossling
Okay. Thank you, Adam.
Adam Shine
Appreciate it. Thanks.
John Gossling
Yeah.
Operator
Vince Valentini with TD Securities. Your line is open.
Vince Valentini
Yeah. Thanks very much.
Sorry, John, I am not sure I caught what that third bucket was of costs that stick to the revenues? Are you talking about commissions or?
John Gossling
Not necessarily. It could be -- some of the revenue comes with a higher related costs associated with it, right, sort of right out of the gate.
That’s why I called it pass-through. It’s not always that.
But it’s -- think of it as lower margin revenues that we have and saw some pretty good growth in Q1. So that’s what that category.
It’s sort of our other cost of sales, if you want to call it that. But it was fairly significant.
Mostly because in the prior year we just didn’t have a lot of that revenue, that didn’t kick until Q2 last year.
Vince Valentini
So this would be some of the digital initiatives within TV. It’s not part of the content division.
Is that correct?
John Gossling
Correct. Yeah.
Vince Valentini
Okay. And on the global side, just to clarify, so there were more episodes delivered in Q1 this year versus Q1 last year from all your primary partners in the states and that caused a bit of timing issue.
But Global -- specific cost related to Global’s foreign programming should come back to more normal levels in Q2 and Q3. Is that correct?
John Gossling
For Global, yes, and I guess, the one kind of bigger unknown for this year and the back half is going to be Olympics. So we saw in 2018 that with the Winter Olympics that created a real change in the pattern of deliveries in the back half of that year.
I mean, it moved out of Q2 and the Q3 and into Q4. So that’s a little bit harder to predict right now for us.
We don’t know how the competitive networks. We are a big CBS carrier if you will call that in terms of our prime time programming.
So how CBS is going to program against NBC during the Olympics, I don’t think we have a very clear view of that right now.
Doug Murphy
I will also say, Vince, this is Doug, that we had more hours in simulcast Q1 this year than we had year prior, there would have been some incremental cost increased accordingly.
Vince Valentini
Okay. And another clarification for you, maybe, Doug is, the -- I appreciate the lack of segmented detail in terms of guidance and I agree that’s a prudent approach.
But can you clarify, were you saying consolidated revenue growth will be stable or slightly positive in Q2 or are you just saying that’s for the full year?
Doug Murphy
Quarter-over-quarter, that’s what we are shooting for, Vince. So, I mean, Q2 is -- that’s the next quarter we are targeting or we are working our tail off on that and the team has aligned around working all those lines of business and the portfolio to get that to consolidated results.
Vince Valentini
And is that -- are you adjusting for TLN, Cosmo, IFC…
Doug Murphy
Yeah.
Vince Valentini
…when you say that...
John Gossling
Just TLN on that, that’s the only pro forma adjustment we will make. I guess, Vince, I mean, the reality of it is the other headwind is radio right now, right, and we are not trying to dodge that.
So that’s why we talk consolidated not TV.
Vince Valentini
No. No.
But even given the Cosmo and IFC shutdown and given that very strong advertising comp last year, I mean, even stable on a consolidated basis would seem quite, I want to -- I don’t want to say heroic but quite good.
Doug Murphy
Yeah. I can -- I will say heroic.
We are thrilled to that, but that’s exactly we are trying to accomplish. I mean, we want to make sure everybody realizes that we are very confident.
We can get to stable consolidated year-over-year. And that’s kind of like the base case, and obviously, we are guiding for modest growth year-over-year and as a sum of the parts are considered, that’s what we are going to try to deliver.
Vince Valentini
And last clarification on that, is the renewal of the large carriage deal, is all of the retro revenue related to that booked in Q1 or could some of that spill into Q2?
Doug Murphy
No. It’s all in Q1.
Vince Valentini
Okay. Perfect.
Just -- and I just want to clarify on IFRS 16, if I could. So the $3.4 million EBITDA boost in Q1, is that indicative of what we will see every quarter, so it’s in the range of $14 million for the full year.
John Gossling
Yes. It’s pretty straight line.
Vince Valentini
Okay. And then on free cash flow, some companies, there’s no impact on free cash flow, some companies, there’s a boost, you seem to be recording it as a boost.
So you can just -- can you just walk us through what makes free cash flow go up $3.9 million, are you not reporting the financing charges as a drag against free cash flow?
Doug Murphy
No. I think, it’s not that.
It’s that if you look at the definition of free cash flow for us, it’s a GAAP definition. So it takes the operating subtotal and the investing subtotal off the cash flow statement and that’s the basis for the free cash flow calculation.
So with IFRS 16, the lease payments become debt repayments and they end up in the financing section. So they have been effectively moved out of operating down into financing and you can see them they are identified on separate lines in the cash flow statement.
So that what’s happening, we are just moving it within the cash flow statement and that’s because of our definition of free cash flow, that’s why the number goes up and that’s about a $15 million increase for 2020.
Vince Valentini
So $15 million for the full year just because of the shell game of where things show up under IFRS 16.
John Gossling
Yeah.
Vince Valentini
In your earlier commentary on the last call being around $300 million of free cash flow, maybe even slightly below, did you take into consideration that potential $15 million boost?
John Gossling
Yes.
Vince Valentini
Okay. Thank you.
Doug Murphy
Thanks, Vince. Happy New Year.
Operator
Maher Yaghi with Desjardins. Your line is open.
Maher Yaghi
Happy New Year to you as well, Doug. I wanted to ask you about your ad tech endeavors.
And you have been talking about the need for industry to coalesce around a system or everybody can get upside working together. How much of your revenue in advertising is flowing from these at new TV ad revenues that coming from the new tech platforms that you have launched so far?
Doug Murphy
Well, the -- I think, as I said before, it’s a growing portion of our national TV ad was 26%. I am not sure, Maher, we have broken out the actual number for all of you.
So I am going to -- maybe we will follow-up with a call after the fact on that one once I clarify what we have disclosed. But the real opportunity here -- there’s a couple of notes I want to make, the real opportunity here first of all, is to acknowledge what we are hearing from our agency partners, the five major agencies, the direct 95% of the national money in Canada and that is, they love the audience segment selling, they would love to see the industry on some common definition of segment selling.
So they could more -- with more agility move the money into the TV segment selling to better kind of defend against the digital players who are hyper targeted, so that’s kind of one note. And we are not yet in a position to announce more partners in the common segment selling, but there are a number of the big players in Canada, who are kind of working with us now to consider how to do that.
The second thing, which is a pointed comment I made in my remarks is and that is that the industry in Canada, quite frankly, is really doing some, I think, some outstanding work. The two new video platforms are going to be fantastic reviewers.
We are working together on ad tech. We are working together on a variety of initiatives.
We need Ottawa to get going. And the industry can only do so much but we are all shackled together on some of these age old confines and part of the note here is, at some point in time, we need this new government to step up and make change that is authoritative and impactful and immediate.
So that’s the other piece of the note that I am trying to make.
Maher Yaghi
Okay. And so, where do you see as a percentage of your, let’s say, ad revenues, ending the year if you are talking about one quarter right now.
Do you see that moving a lot before the end of the year or it’s a multiyear, let’s say, let’s be…
Doug Murphy
Yes. It’s hard to tell.
Here’s what I will tell you, okay? If you look at Q1 over the last three years, in 2018, it was 10% of our national business, a year ago was 17%, now it’s 26%.
So that trajectory, I would say you could just extrapolate that.
Maher Yaghi
Okay. Okay.
Perfect. And on Nelvana, clearly, I love watching Hotel Transylvania.
So kudos to you for continuing that series.
Doug Murphy
You can thank Adam Sandler for that, quite honestly, but you can just go ahead.
Maher Yaghi
Wanted to more know about the cost involved in improving and launching these series worldwide, as you mentioned and trying to get another bucket of revenues coming from worldwide sales. What are we looking at in terms of cost to get an important position to deliver on that project?
Doug Murphy
Well, and when we every time we ramp up a new series is always front-loaded production in amortization costs in the film P&D side. So that is kind of like the scale and once you get -- once you start delivering, then the front-end production investment is behind you and you start capturing margin.
And it’s always better to be, as I made in my comments, second, third, fourth seasons are always better than did one season, one and done is now we are trying to do, our content team has been given a very clear instructions to have subsequent seasons that everything we are making, because we want to try to build franchise IP worldwide. So, there is a bit of a front-end load on the production investment.
And once you start scaling it, it then kind of comes. And John, if you want to add anything on that?
John Gossling
Yeah. I mean, back to the cash flow statement, it seems like today’s call brought to you by the cash flow statement.
Net film investment in the quarter it was about $15.5 million that was up from $10.6 million last year. So that’s a line you will see every quarter.
You can see what we are investing. Now that can be net of tax credits depending on timing.
But that’s an indication of the ramp-up in investment that we have seen and that’s what’s going to drive the topline.
Maher Yaghi
It should be steady at these levels.
Doug Murphy
Yeah. And then I also say that the economics of Nelvana are one thing and we are happy to have conversation separately in this one.
The economics of Corus Studios are a different model. So Corus Studios case, we effectively have a virtual studio where and we work with independent producers happily and we co-create content.
And so the investment in that regard is kind of a lighter investment than is the kind of captive studio model we have at Nelvana. So there is a number of different kind of models we employ to build our content business and that then gets us to Toon Boom, which is the -- one of our unheralded businesses, which is an international business, it’s having some very nice growth.
It’s the dominant animation software for 2D. So, I mean, there is a recent movie launch called named Klaus, which was on Netflix, which has been heralded with a number of awards and that was made using Toon Boom, which we are very proud of.
So, we have a really nice little emerging content business here, and it’s one that, I made a comment over the summer that we will be at double-digit growth for the rest of my life and it was a bit of a bold statement, but I am pleased to say that we are going to be there.
Maher Yaghi
Okay. And so, that gets me into the point of all this, I guess, for me in terms of you are targeting flattish to improving -- slightly improving revenue year-on-year, hope for the second quarter, and I guess, for the year as well.
What does that mean to segment profit? How should we look at segment profit and when do you think segment profit will turn, let’s say, the same kind of flattish to increasing trend as you get that investment done and move forward with the revenue generation that you can get from it?
John Gossling
It’s a very good question and we get it sometimes in the form of margin outlook type questions as well. I’d say, if you look at what I have said earlier on the call about the cost of sales line and that’s where we are going to see pressure and that’s both from what we are just talking about the ramp up in the film investment and the amortization that will come from that and also on the programming side and I think that’s what’s going to that put some pressure on the margin for sure.
When that starts to really turnaround, it’s driven by timing of a whole bunch of things. It’s a little bit hard to predict because we don’t know exactly how some of those costs are going to flow from quarter-to-quarter.
So, I guess, with -- I know you like to try to get me to give quarterly EBITDA guidance, but it’s something that we really can’t do.
Maher Yaghi
No. No.
Just more trend wise. So, let’s say, if I adjust for IFRS 16 and we should not hold our breath in terms of EBITDA for 2020 in terms of flattish the cost on these investments is going to off be more than IFRS adjustments that you have or you are going to benefit from, right?
John Gossling
Yeah.
Maher Yaghi
Okay. Perfect.
And the last question on free cash flow utilization. So, as you mentioned in your presentation, you have a few items that you want to invest in or deploy capital and as you mentioned, production as one, you also have NCIB and debt repayment.
Can you put them in order of priority for us please?
John Gossling
I would say, the first priority is to make sure the needs of the business are being funded. Our team has brought us a number of great opportunities over the last couple of years, our social digital agency, so.da, Complex Media, STACKTV.
So, we encourage a culture of entrepreneurialism, and as I mentioned in my comments, the think beyond value is our -- the value that underscores our operating plan this year. So we will make funded investments in ideas the team brings us.
That said, we are not confused in both the importance of deleveraging. And so, I think, when you look at your models that, what I’d encourage you guys think about is the equity value increases going to occur as we keep paying down bank debt over the coming quarters and years.
Our business remains highly cash generative. And so, I think, bank debt repayment is -- have to be funded the needs of the business is the next priority.
Of course funding the dividend is there. The NCIB was added because we just fell, quite frankly, that there is -- the market reaction after the last quarter was surprising and we wanted to take advantage of that, because we think we are still grossly undervalued given the cash that we generate and given stable topline performance and ongoing delevering.
And so, that’s an item that will see through for the rest of this year. We can buy up to 10 million shares.
And then M&A, we are kind of sitting on the sidelines. We are watching with interest a number of distressed assets out there.
But we have no intention of moving quickly at the moment, we are pretty focused on our plan.
Maher Yaghi
Okay. So you are below the 3 times net debt-to-EBITDA that you had set yourself to be under a few years back and do you have another objective that you want to achieve in terms of reducing your leverage going forward?
John Gossling
So, Maher, we were certainly heading down that path coming off of last year. The IFRS 16 change pushes back up over 3 times.
So we won’t be able to report kind of an old versus new metric going forward, that’s something that...
Maher Yaghi
But you are at 2.8 times, if we use the same type of...
John Gossling
Yeah. If we do.
But we are technically not using that anymore.
Maher Yaghi
Right.
John Gossling
So the target of under 3 times is now being compared to that 3.08 times number that we are reporting. So, I think, as long as we are over the target, the first step is to get back under the target and then do we revisit the target, will be what we look at once we get there.
So there is no sense revising the target down right now, given that we are already above the target. Now, others have done the other -- the opposite when this change happened and they pushed their leverage up.
They actually took their leverage target ranges up.
Maher Yaghi
Correct.
John Gossling
We don’t have to do that. So, I guess, the answer is, we are happy to stay at under 3 times being the target for now until we get back under that on the new definition.
Maher Yaghi
Doug Murphy
Yeah. In this -- I mean, the other thing that you are trying to get at is we want to keep delevering.
John Gossling
Yeah.
Doug Murphy
So our -- so, clearly, our goal is to keep paying down bank debt, because we appreciate the modeling of the equity value accordingly. So every time we look at internal investments, we always look at a cash-on-cash return and it’s a very disciplined process.
And we don’t have confidence we can get cash back in the door from cash out the door then we are going to pay -- repay bank debt. That’s our default and so that’s the discipline with which we operate the business.
Maher Yaghi
Okay. Thank you very much, guys.
Doug Murphy
Thank you.
John Gossling
Thanks, Maher.
Operator
Jeff Fan with Scotiabank. Your line is open.
Jeff Fan
Good morning, guys. Happy New Year.
Doug Murphy
Thanks, Jeff.
Jeff Fan
Just a quick clarification on the free cash flow to Vince’s question, so similar to like the $300 million, if we take out the IFRS quote-unquote benefit that’s $15 million. There is also, I guess, this year, roughly $20 million related to Canadian CPE spend, is that still expected to be paid, I know you have asked for some relief on timing, but that we should consider for 2020.
John Gossling
I think right now we should, that’s our base case. And that’s $20 million when you read the fund, that’s $20 million of amortization, not necessarily cash.
The cash could be a bit more than that. But timing on CPE cash is spread, right?
I mean, some of the 2020 programming that Doug talked about, that was already being invested in 2019. And on the flip side, some of the money will go into 2021.
So it’s a bit of that continue in the way that cash moves. But, yeah, in the base case, we have us funding that additional CPE obligation in ‘20.
Jeff Fan
But ‘20, like, I guess, net-net, I mean, and $20 million is the kind of net number that we should be thinking about once we consider timing and amort and cash?
John Gossling
Sure. If you are blending all those lines together, I think, we have said in the past that we do see the cash line for programming and film moving up this year.
Jeff Fan
Yeah. Okay.
John Gossling
And it’s for that reason, as well as some additional foreign costs, as well as the Nelvana investments.
Jeff Fan
Okay. Just on the new output deals, you mentioned, Adult Swim, Hallmark, the revenue related to some of these output deals, and I guess, if you can talk about the potential operating leverage off of these new output deals, not only in ads, but also what you are doing with STACKTV.
Can you talk a little bit about that as you kind of look out the next either few quarters, few years, just how you want to kind of talk about how that may trend?
John Gossling
Yeah. So it’s hard to really pull apart discretely, but I can give you two specific examples with regards to both those output deals.
Once again, W is the number one channel in the country over Christmas, including conventional stations. You might remember that we have all of our specialties now on floating rate cards, which gives us the opportunity to price more dynamically, and so just those two realities together and you get a nice incremental revenue bump, because you have got the leading specialty channel with pricing flexibility and number -- and great content.
The second example would be Adult Swim, Rick and Morty, which was a massive breakout hit. It helped -- not only did it help us on our specialty channels, but it helped to propel STACKTV through the season, obviously, with the Christmas shopping season upon us and the kind of network effect of the Amazon system.
We saw a nice leg up. We are not going to disclose anything about subs, so I will get ahead of that question.
But let’s just say that Rick and Morty service on Adult Swim is one of the most watched episodes on our STACKTV product line. So it’s very evident to us that those investments, while they are showing up as inflation in the foreign programming, they are necessary and important as we strengthen our core business and use those to deploy content on new platforms.
John Gossling
I guess, just -- I will give you a specific kind of numerical example, Jeff. On Adult Swim, in Q1, the ad revenue was up 60% year-over-year and that’s comparing to action, obviously, a year ago and then sub revenue was up 14% in Q1.
So there’s real growth there coming from that programming.
Doug Murphy
And if you wouldn’t mind me just extrapolating a little bit because the other piece that that I think everyone is aware of, but we are really trying to have fewer bigger channel. So in some regards, we are purposefully walking away from weak services that don’t matter to anybody, IFC Sundance, Cosmo, FYI in favor of making investments in content that do matter, either specific channels like Adult Swim or branded blocks like Hallmark on W and that’s part of how we are positioning the business for the future.
Jeff Fan
Okay. And then just maybe a bigger picture question.
I guess, next week, Comcast is going to launch their Peacock. I think it will be one, if not the first at lease traditional broadcasting unit to really focus on the AVOD opportunity in the U.S.
with ad tech and advanced advertising platforms. Doug, what’s your view about that opportunity particularly in Canada?
And how do you think Corus maybe positioned or can be position for that opportunity?
Doug Murphy
That’s a great question. The -- I think the AVOD is a real big opportunity in Canada.
I think the SVOD business is a crowded space quite frankly. There is already lots of research out there about subscription fatigue.
So we are looking at all these platforms. We talked about during our go-to-market investor education session about investments we are making to launch a new Global Go app.
We will be providing more information on that in the months’ ahead. We think there is a lot of opportunity in the AVOD space.
We hear from our agencies all the time, they want more premium video, long-form premium video on digital to monetize. There just not enough of it out there and most of the premium TV content that’s online is on a sub -- an SVOD basis.
So I quite frankly think that Peacock is on the right track. We are partners with NBCU on a number of fronts.
So we are obviously working together on understanding what they want to do and we are mindful of the fact that there’s a lot of viewing that happens outside of the current bundle system. We have learned dramatically about that from our STACKTV experience and so finding ways to get our content to new users on new platforms is clearly an opportunity for us and whether it is AVOD or SVOD or some hybrid we are looking at all those scenarios.
So I think Peacock’s on to something and we are learning a lot.
Jeff Fan
Okay. Great.
Thank you.
Doug Murphy
Thank you.
Operator
[Operator Instructions]
Doug Murphy
All right. So, Operator, it sounds like we are done for today.
Operator
This concludes the Corus Entertainment Q1 20202 Analyst and Investor Call. We thank you for your participation.
You may now disconnect.
Doug Murphy
Thanks everyone.
John Gossling
Thank you.