Apr 11, 2013
Executives
John M. Cassaday - Chief Executive Officer, President, Non-Independent Director, Member of Executive Committee, Member of Audit Committee, Member of Corporate Governance Committee and Member of Human Resources & Compensation Committee Douglas D.
Murphy - Executive Vice President and President of Corus Television Chris Pandoff - Executive Vice President and President of Corus Radio Thomas C. Peddie - Chief Financial Officer and Executive Vice President
Analysts
Michael Elkins - TD Securities Equity Research Paul Steep - Scotiabank Global Banking and Markets, Research Division Aravinda Galappatthige - Canaccord Genuity, Research Division David McFadgen - Cormark Securities Inc., Research Division Haran Posner - RBC Capital Markets, LLC, Research Division
Operator
Ladies and gentlemen, thank you for standing by. Welcome to Corus Entertainment's Q2 Analyst and Investor Conference Call.
[Operator Instructions] As a reminder, this conference is being recorded, Thursday, April 11, 2013. I would now like to turn the conference over to John Cassaday, President and Chief Executive Officer.
Please go ahead, sir.
John M. Cassaday
Thank you, operator. Good afternoon, everyone.
I am John Cassaday. Welcome to Corus Entertainment's Fiscal 2013 Second Quarter Report and Analyst Call.
Thank you for joining us today. Before we read the cautionary statement, we would like to remind everyone that there are a series of PowerPoint slides that accompany this call.
The slides can be found on our website at www.corusent.com in the Investor Relations section. So we'll now run through the standard cautionary statement.
This discussion contains forward-looking statements, which may involve risks and uncertainties. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's filings with the Canadian Securities Administrators on SEDAR.
Now we would like to introduce you to the Corus Entertainment team joining us on the call today. Tom Peddie, our Executive Vice President and Chief Financial Officer; Doug Murphy, our Executive Vice President and President of our Television division; and Chris Pandoff, our Executive Vice President and President of our Radio division.
Turning to Slide 3 of the PowerPoint presentation. Our second quarter, which is the smallest quarter for Corus from a revenue and earnings perspective, was soft as anticipated.
Consolidated revenues were $184 million, down 11% from prior year, and segment profit finished the quarter at $55 million, down 12% versus a year ago. On a consolidated basis, merchandising, distribution and other revenue represented 75% of the decline, whereas advertising and subscriber revenues were down 4% and 3%, respectively.
Despite these revenue challenges, a number of notable gains were made on several fronts during the quarter. Let's turn to Slide 4 for some of those highlights.
Our adjusted net income attributable to shareholders for the quarter was $24 million and $77 million year-to-date. We finished the first half of the year with a significant increase in free cash flow, up 12% year-to-date, and our consolidated segment profit margins increased to 36% year-to-date.
In the second quarter, we also completed the successful refinancing of our $500 million senior unsecured guaranteed notes, which resulted in a 300 basis point reduction in our interest rates. Our March 4 -- on March 4, subsequent to the quarter, we entered into a series of significant transactions, certain of which are subject to CRTC approval with Bell and Shaw Media, which will enable us to, first of all, extend Corus' presence in Radio into Ottawa, consolidate our ownership of ABC Spark and TELETOON and finally, enter the Québec specialty television market with the popular services, Historia and Séries+, as well, of course, as TELETOON's French language offerings.
Substantial gains will also be realized with the sale of our 20% share in Food Network and the revaluation of TELETOON. These transactions represent terrific growth opportunities for the company on a go-forward basis.
Turning to Slide 5 and our Radio business. We were pleased to see ongoing strength in the quarter in the West from our British Columbia and Alberta markets, which are benefiting from impressive rating performances and strong economic conditions.
However, this upside was not enough to offset soft market conditions in Manitoba and Ontario, which while stable in December and January, were negatively affected by a shorter broadcast month and overall ad sales softness in the month of February. Despite a revenue decline of 5% in the quarter, our Radio division successfully managed their costs.
Segment profit was only down 2% for the quarter, and we remained up 9% year-to-date. Strong performance in the West, coupled with disciplined cost controls, delivered impressive margins for Radio of 31% year-to-date.
Turning to Slide 6 and our Television business. Television saw a significant drop of 39% in merchandising, distribution and other revenue, which was expected following Beyblade's tremendous run in the previous year.
Specialty ad revenues saw a modest decline of only 2% in Q2, and that 2% drop was due primarily to softness in kid ad demand, particularly, and this is important to note that the Kids segment remains relatively strong but particularly soft in the entertainment category. As well a free preview period for ABC Spark contributed to the overall revenue decline of the division of 12% for the quarter.
In our Kids vertical, we saw ongoing ratings momentum, solidifying our leadership position with Kids 2-11. We have also seen a accelerated demand for co-view audiences with 3 out of 4 services in our Family vertical showing year-over-year audience growth in Q2.
In December, YTV ranked highest among Canadian specialty networks in all of its key audience demos. In addition, we are encouraged to see that 2 of the 3 categories for Kids -- 2 of the 3 dominant categories for Kids advertising, toys and food, have recovered nicely, and both are up year-over-year.
Our Women's business and ABC Spark performed extremely well with continued strong ratings and ad revenue growth. In addition, we were pleased to see further gains from our Pay Television business, which finished the quarter with over 1 million subscribers, up 37,000 subscribers year-to-date.
The division delivered strong segment profit margins of 41% year-to-date. Moving to Slide 7 and our outlook.
Overall, we are seeing improvements in the ad markets going into the third quarter, and our forecast for Television and Radio are favorable for the back half of the year. In our Radio business, while visibility remains a challenge beyond 60 days, we are expecting modest growth for the quarter as our Western markets are currently pacing nicely ahead of prior year and we are seeing improvements in Ontario.
While advertisers continue to make shorter-term buys, strong economic conditions in the West, rating improvements in Ontario and ongoing rating momentum in other key markets are expected to drive low single-digit revenue growth in the back half of this year. In addition, we expect to see gains later in the year from the reformatting of our Edmonton station to the Fresh FM brand, which is an important part of our business growth strategy.
And on that particular matter, just yesterday, we announced that we are transitioning a fourth station in our portfolio, which covers the Hamilton and Golden Horseshoe market, to the Fresh FM format. These reformatting initiatives should contribute to further audience growth in 2 important Radio markets.
Moving to Television. With strong pacing in the back half of the year and our investment in programming translating into impressive ratings performance, we are forecasting high single-digit specialty ad growth in the third quarter.
Our adult-targeted businesses are performing very well and are expected to remain that way for the remainder of this year. W Network is as strong as it has ever been, and it is currently ranking #1 with women 25 to 54.
Momentum on the Oprah Winfrey Network continues, with the network benefiting from its built-in constituency and more tentpole programming featuring Oprah. Audiences are up 44% year-to-date on this fast-growing service.
W Movies is also contributing to the portfolio success with consumers responding positively to its appealing format and free previews, which bodes well for the service's recently expanded distribution on the Shaw Cable system, extending its reach significantly. ABC Spark, with its highly coveted audience demo, continues to perform well.
And our Kids flagship network, YTV, not only leads with Kids 2-11, but it is also seeing significant growth with our co-view audiences. With rating gains across our core services, specialty ad revenues are pacing ahead of prior year.
Strong specialty ad growth in Q3 will be driven primarily by our Women's portfolio, our co-view audiences and ABC Spark, which has doubled its audience composition in Toronto since Q1 with its broader carriage and slate of original programming hits. We expect rating gains and strong demand for co-view audiences to drive advertising growth on our Kids Television services despite continued softness in the entertainment category.
With Target's entry into the Canadian retail market and over 60 stores opening across Canada this spring and summer, we expect increased ad spend activity in the toy category in particular. Overall, we anticipate a return to revenue growth on our specialty networks in the back half of the year.
The growth will be offset somewhat by our continuing investments in quality program to maintain ratings momentum. Merchandising, distribution and other revenue from our international Kids business is anticipated to be flat in Q3 versus prior year as Beyblade revenues continue to level out after an exceptional performance in the prior year.
While the Beyblade brand will continue to make an important contribution to the business, emerging brands like our CG animated series, Mike the Knight, will provide new revenue opportunities for the business in the future. To support the growing momentum for Mike the Knight, which is broadcast in more than 25 territories around the world, a new 52-episode season will be delivered this spring and a global Master Toy program will roll out this fall with Mattel's Fisher-Price.
Moving to our progress on the digital front. We expect to capitalize on the increased demand, both domestic and international, for digital On Demand Kids content.
We recently finalized a number of digital content deals, and we'll continue to aggressively extend the reach of our deep library of brands across multiple platforms and territories to monetize these emerging opportunities. Returning to our broadcast portfolio.
We expect to further grow our Movie Central and HBO Canada subscriber base in the upcoming quarters with the rollout of more exceptional and exclusive programming, including new series of HBO's Game of Thrones; Veep, starring Julia Louis-Dreyfus; and Showtime's Nurse, starring Edie Falco. We are confident that the upcoming lineup of high-profile series and movie premieres, combined with compelling acquisition and retention offers, and additional on-demand offerings such as Shaw Go will attract new subscribers and drive further uptake for our pay business in the coming quarter.
This growth, coupled with the expanded distribution of ABC Spark, which we spoke of earlier, and Nickelodeon, which has also benefited from expanded distribution from Rogers Digital VIP, and W Movies expanded distribution on Shaw Cable are all expected to drive low single-digit increases in our subscriber revenues in the third quarter. In summary, while we had a challenging quarter on the earnings front, we also made some significant advances which position us well for a strong back half of the year, particularly with respect to our fourth quarter.
We see exciting new growth opportunities ahead resulting from our recent M&A activity. Receiving clearance on transactions requiring Competition Bureau approval was the first step in the completion of these acquisitions, certain of which still require CRTC approval.
Finally, as part of this call, we would like to reiterate our annual guidance as announced at our Investor Day, which was held on November 29, 2012, our consolidated segment profit guidance targets for fiscal 2013 are $293 million to $303 million, and our free cash flow guidance will -- was in excess of $140 million. We hope you've found these comments helpful, and we'd now be delighted to take any questions that you may have.
Operator, we'll turn the call back over to you. Operator?
Operator
[Operator Instructions] Our first question comes from the line of Mike Elkins with TD Securities.
Michael Elkins - TD Securities Equity Research
So on specialty subscriber revenues, that's great color on your script. In the MD&A, you mentioned that there was some pressure from rates and package changes.
Can you just provide a little more color there and whether these trends are expected to continue in the back half of the year.
John M. Cassaday
One of the things that affected our subscriber revenue in this quarter was the fact that we were in free preview on ABC Spark. So in the back half, as you mentioned, we'll start to benefit from that.
The only real significant impact that we had was with one carrier this year on one brand, and we are currently in discussions with them about that. So bottom line, Mike, is that we have, for quite some time, continued to take the view that subscriber revenue growth for us going forward will be relatively modest, basically in line with population and subscriber growth.
We are using a value-added on-demand content as a basis for essentially reestablishing the value of our services, but we do not expect to see significant increases in pricing of our services. We don't expect to see significant reductions in the subscription levels of our services, and we don't expect to see significant reductions in any of the values.
In fact, we don't expect to see any of our services reduced in value going forward. So as we said, we're looking at getting back to our historical levels of subscriber growth, low single digit in Q3 and 4.
And obviously, when we get going in Québec, we'll have a nice little uptick on a kind of a onetime basis, but that's the only real extraordinary item that I can comment on. Doug, do you have anything to add to that?
Douglas D. Murphy
No, you've done well, John. I would just add that one of the other areas, Mike, that we're focused on is what we've been talking about product innovation in this space.
The affiliates have a high degree of interest in our digital video content, more specifically from our Nelvana library. And so we're trying to see some really meaningful new business being developed with the licensing of our Nelvana content.
We initially licensed Shaw in the fall, and now we're in very progressed conversations with other BDUs and expect to have some meaningful revenue from that in the back half of this fiscal year.
Michael Elkins - TD Securities Equity Research
That's great. And just one more question on Netflix.
I know in Canada that it has the rights to some of the older episodes of some of the Nick content that you also broadcast, I think, specifically SpongeBob and Fairly OddParents. Just wondering whether that was Viacom or yourselves is it -- that owns the rights and sold those shows in Netflix and whether there's been any kind of noticeable decline in viewership since those shows are available on Netflix.
Douglas D. Murphy
Yes, that -- our rights for Nickelodeon don't include every and all on-demand rights. So those Netflix older seasons and their older seasons of Nickelodeon properties were licensed to Netflix by Nickelodeon International, which is based in New York.
As regards to your ratings question, we take the same view as does our friends in New York at Viacom. The presence of Netflix has not negatively impacted ratings whatsoever.
In fact, we're seeing some impressive growth in Kids ratings with the new seasons of Nickelodeon content as our friends in New York. And so we expect to continue to see some nice buoyancy in ratings delivery on Kids K2-11 with no negative impact from Netflix.
Operator
Our next question comes from the line of Paul Steep with Scotia Capital.
Paul Steep - Scotiabank Global Banking and Markets, Research Division
Just actually on that last point. If we go back to Q3 a year ago, Doug, in the Kids ad market, as I recall, Nickelodeon was that when those ratings started to turn?
Are you lapping an easy comp to sell again starting in Q3 or is that into Q4? I know the first part of last year was a bit of a challenge.
Douglas D. Murphy
I can't remember specifically, Paul, when the softness was in Nick. It was certainly some time last year.
We started to see the ratings turn with our Nick content in Canada with all of our services vis-a-vis the competition here in Canada on audience delivery in the August, September period, and it's continued since then.
Paul Steep - Scotiabank Global Banking and Markets, Research Division
Okay. And then just on the broader YTV and Treehouse services, how has sort of the ratings trend held up there?
Douglas D. Murphy
They're great. Treehouse is up high -- it's up 15% to 20% in ratings delivery.
YTV Kids is up high single-digit ratings delivery. The noteworthy item on YTV, which we called out during our Investors Day in the fall, is our co-view audience delivery in prime time is up north of 35%, and we sustained that level of growth.
And you'll recall that the value of the co-view inventory is a premium-type sale because it reaches parents and kids. And the recall of advertisements aired during those special times when parents and kids been together watching television, is 2 to 3x higher.
So the audience -- we've always said to you all that eyeballs lead revenues, and we're very excited about the opportunities we have in co-view in that regard.
John M. Cassaday
Just to add one comment, Paul. We talked about the specific softness in the entertainment category, and we saw the Cineplex numbers.
So obviously, there's been some impact on just the general movie audiences and movies coming out, but -- and we do rely on the advertising of these movies to drive that particular space. But we are not simply accepting this decline.
We have done proprietary research, and we are targeting the entertainment companies specifically with compelling research justification to continue to focus their spending on the kid audience and the co-view audience that we deliver so well. And while we're disappointed in our current results with that particular category, we're confident that we can get that turned around.
Douglas D. Murphy
I'll build on that, John. Thank you.
The other thing, we've spoken in the past about our investment in customer research and insights and we've identified the entertainment category as a very appealing category to take advantage of those. And we've done a couple of studies recently, one on theatrical that addresses how movie going decisions are made between couples and the other one in the realities of the DVD business.
And we've been bringing these insights to our entertainment company partners, and with the 2 examples in the last 8 weeks, in fact, that have delivered impressive results by anybody's standards. So just to John's comment, we got stuck in this quarter due to simply a slate timing issue in terms of advertisements against kids and family films.
That will obviously right itself in future quarters, but you add on top of that the realities of us driving a site-driven sale around our networks, and I think we have a very promising future not just in this fiscal but going forward in this category.
Paul Steep - Scotiabank Global Banking and Markets, Research Division
Okay. And actually just to wrap up on the TV side of things, if we could talk about like Movie Central Go, how the response has been there, maybe whether you have just anecdotal data around downloads or sort of audience interaction to date since you've been in the market a little longer?
Douglas D. Murphy
Anecdotally, it's been a huge addition to the value proposition of Pay Television. We're hearing that from all the BDUs that have launched various -- the Shaw Go in particular, but anybody that's doing sort of a TV Everywhere application against premium, they're demonstrating impressive incremental usage beyond what was happening prior to the launch of the said platform.
So I think one of the things that I think we're all going be focusing on, I know we are focusing on, I suspect you'll be, too, is going forward, how many of these subs that we've added stick after the offer period expires. And our thesis, which we're beginning to see come to bear at the moment is that this new value proposition enhancement with the TV Everywhere kind of application is going to mean we're going to have a much smaller churn out rate from offer campaigns than we have had in the past.
And that's promising because that's EBITDA that sticks to the ribs once we get out of the offer period. So I would net out my comments by saying it's been a significant addition to the value proposition for our subscribers.
That plus HD Now, which is fully rolled out, makes our Pay Television proposition a very compelling one.
Paul Steep - Scotiabank Global Banking and Markets, Research Division
Okay. And just on that finally, free offer.
When would that sort of roll off? I thought it would be within this current quarter you'd start to see most of that roll, correct?
Douglas D. Murphy
It wasn't free. It was a 6 months 50% off offer.
Those are -- they're starting to roll off in and around this quarter, and we have new offers coming out. So they're layered on top of each other in a strategic manner so as to continue to get net overall growth, and the work we're doing right now is just on retention with the BDU partners.
Paul Steep - Scotiabank Global Banking and Markets, Research Division
Okay. Great.
Last one quickly is Radio pacings in Ontario. Chris, can you talk to like how Ontario feels at this point, and then maybe, I guess, the thought process with Fresh FM, how much of a sort of, I guess, break-in period would we expect sort of a quarter or 2 on that?
Chris Pandoff
Sure. Well, let me answer the second question first, and that's probably 2 quarters just because of the way the BBM sweeps, Paul.
So we've relaunched the Ontario Fresh kind of midway in a diary book in Hamilton and outside of the PPM numbers in Toronto, we won't see a full-blown book for the Hamilton market until the fall of 2013. So that's kind of first thing.
Second thing is in terms of Ontario pacing, if -- the downturn in Q2 was really all kind of concentrated in the month of February. If you look at the TRAM for the month, markets like London, down 18 -- or excuse me, Kitchener, down 18; London, down 11; and Toronto, down 11 in terms of Radio spend for the markets.
It's a big downdraft for that 1 month. In John's comments, he made mention of the difficulty with regard to visibility and more so in Ontario than in the West.
Declines in the West haven't been nearly the same in terms of market spend. So they're better markets, and we're also actually doing better from a rating standpoint in those markets.
John M. Cassaday
If I could just add, a couple of times I said that is expected in my opening remarks. So what wasn't expected is for Radio to be as soft as it was because when we last talked to you, we had 2 months of visibility and we were feeling really good.
And then as Chris said, in February, the whole market just tanked, and fortunately, it's certainly showing strong signs of recovery now. But the month of February was a real anomaly that took us completely by surprise.
Operator
Our next question comes from the line of Aravinda Galappatthige, Canaccord Genuity.
Aravinda Galappatthige - Canaccord Genuity, Research Division
A couple from me. First of all, just to get back to the subscriber revenues that you discussed earlier.
I just wanted to check the promotional discounts that you're offering for under -- for the Pay TV segment, do you think that had any meaningful impact on sub revenues as well or was that too minor?
Douglas D. Murphy
It had a modest impact, Aravinda. I don't think it's significant, but it certainly had a modest impact, yes.
Aravinda Galappatthige - Canaccord Genuity, Research Division
Okay. And then when you think about the sort of the back half of the year in terms of costs for TV, when you x out Nelvana because I know that, that creates some distortion, are we looking at sort of low single-digit inflation for operating costs in TV?
Is that a reasonable expectation?
Douglas D. Murphy
It's a reasonable expectation. We have -- we schedule our new shows based upon the strategy to maintain and grow our ratings momentum on our big networks.
So -- and those shows are both shows that we receive through our content output deals. For example, ABC Spark premieres has a summer premiere in June, and so there'd be a whole bunch of original programming launches on first and second seasons of returning shows, which will hit the books then.
And then we also have our required investments on Canadian commission content as a function of our COL, and that also will be -- being spread on W throughout the back half. So we will be investing in programming at a rate larger than what we've done in the first half of the year, but I think your estimate is a reasonable one.
Aravinda Galappatthige - Canaccord Genuity, Research Division
Okay. And then just on the library sales that you discussed to the BDUs, any comments you can make about the pricing mechanism there, the pricing dynamics there sort of compared to what typical second window sales would be for that kind of content?
I mean, is there a meaningful variance there?
Douglas D. Murphy
First of all, there was a very thoughtful and disciplined kind of piece of analytical workout to arrive at a valuation for the usage in question, and that was based on a global sort of synthesis of sales to a variety of different sort of over-the-top and broadband video delivering platforms. And then we used certain metrics for footprint to calculate the reasonable pricing for each BDU in question.
Aravinda Galappatthige - Canaccord Genuity, Research Division
Okay. So just to be clear, this is -- so this is not -- the library sales, are they nonexclusive at this stage?
Douglas D. Murphy
That's correct.
Operator
[Operator Instructions] Our next question comes from the line of David McFadgen with Cormark Securities.
David McFadgen - Cormark Securities Inc., Research Division
A couple of questions. Could you tell us what the TV margin would have been in the quarter excluding the merchandising, distribution and other business?
Douglas D. Murphy
We probably wouldn't share that information. It's -- we've always talked about the margin, David, being 35% to 40%.
That's what we target our activities to fulfill, and that's what we did.
David McFadgen - Cormark Securities Inc., Research Division
Okay. And so that -- so just to be clear, that margin, 35% to 40%, that's the merchandising distribution and other margin?
Douglas D. Murphy
No, that's the total TV division EBITDA target margin, yes.
David McFadgen - Cormark Securities Inc., Research Division
Okay, okay. So -- and then just -- you talked about ratings gains for the Kids properties, Viacom delivering decent ratings for its programming now.
Can you quantify the ratings gains you're getting from the Viacom programming in Canada?
Douglas D. Murphy
I wouldn't break that out specifically. I gave you some stats earlier.
We schedule -- we love all of our programming on all of our networks, obviously. In the Kids side, we layer in the Nickelodeon content with our Nelvana content, with our very important independently produced third-party Canadian animation content and otherwise.
So they all are a sort of template that we use to drive audience and sell ads to. I will, though, take this opportunity to talk a little bit about W, and John's comments touched upon it.
But it's important to reiterate that W is the #1 women's network in Canada. We are seeing very impressive audience delivery growth in prime, as well as ratings growth across the whole rest of schedule.
And this is providing continued opportunities for us to grow the revenue piece of the business all throughout the year but most certainly in the back half. We -- the women's vertical was up high single digits in Q2, will be double-digit growth for the rest of the year in the women's vertical, and that's a fantastic result that we're very proud of.
David McFadgen - Cormark Securities Inc., Research Division
And sorry just a matter of clarification. I think John said in his prepared remarks that something was up 44%.
I thought it was OWN ratings. Can you clarify?
John M. Cassaday
That's right, David. Oprah ratings.
David McFadgen - Cormark Securities Inc., Research Division
Oprah ratings, okay.
John M. Cassaday
Year-over-year.
David McFadgen - Cormark Securities Inc., Research Division
And then for Q3, I think, and once again just a clarification, I think you said that the merchandising, distribution and other revenue would be flat in Q3. Is that correct?
John M. Cassaday
That's what we spoke of, yes, David.
Operator
Our next question comes from the line of Haran Posner with RBC Capital Markets.
Haran Posner - RBC Capital Markets, LLC, Research Division
Just maybe with respect to specialty advertising. I guess when you were -- John, when you were talking on the Q1 conference call, you were looking for growth in specialty, low single digits.
And I know you alluded to February being a very tough month for Radio. I was just wondering what happened in specialty towards the end of the quarter?
John M. Cassaday
Yes, well, we did end up at minus 2, and it really was all related to our Kids space or segment, and virtually all of that was related to the entertainment space, which just was a real disappointment to us in the quarter. We had strong growth on many of our brands.
The women's brands in particular were particularly strong. So I guess the point that I'd like to make is that while it might be easy to conclude from the fact that ad revenue was down that there's the ad recovery is not underway, I don't think that's the case.
I mean, we use an expression around here, a problem well defined is a problem half solved. Then to define this specific problem, it was Kids, and then more specifically, the entertainment sector.
And then we talked about the specific action plans that we have in place. So we are seeing very good ad sales performance on a number of our brands, and Doug talked about the strong ratings performance on W.
You -- our senior sales executive would say that they've never seen a strong business prospect for W as we're seeing right now. So there's lots to be optimistic about on the ad sales side.
Regrettably, it just didn't hit our P&L because of the softness on the entertainment category within our Kids space in this particular quarter.
Douglas D. Murphy
And I'll just add to John's comments on the Kids side is that we've talked in the past, with Kids advertising, it is one of those you live by the sword, die by the sword thing. There are 3 categories that drive the vast majority of our revenues.
The bright spot underneath the -- setting aside for a moment the advertising and movies sort of downstroke in the quarter, the bright spot was we saw an exciting lift in our retail spending on our Kids networks more specifically around toy and the food categories. So 2 of the 3 weak categories are firming up.
We had hypothesized that the opening of Target stores would bring a bit of a bid to those kind of retail and Kids marketplace, and we're beginning -- we're hopeful that we're beginning to see some of that. There's 25 stores currently open now, with another 25 opening in the next couple of months, so we'll report back in the next quarter about how that, we think, is helping our business, but there are signs of promise there for sure.
Haran Posner - RBC Capital Markets, LLC, Research Division
And so when you look at the 3 categories together, is it fair to say -- or did you say that you expect Kids advertising to be up in the back half?
Douglas D. Murphy
Well, we've been always saying to you, we started as early as Investors Day, that we expected the Kids ad market to turn in the back half of the year, and at this juncture, we're still hopeful that, that will result.
Haran Posner - RBC Capital Markets, LLC, Research Division
Okay, that's helpful. And then one other question for me.
John, you gave some good color around the subscription or the affiliate deals that you've done with BDUs. And I guess my question there is you're obviously getting some pretty good penetration on some of the services like Nick and ABC Spark.
But you had also said that you're not expecting any big price increases and you're not expecting any significant decreases in the level of subscribers. I guess my question is just how does that feed into the dynamic around BDUs supposedly offering more flexibility to their customers.
So your agreements with them, how do they provide for that?
John M. Cassaday
Yes. Well, I think the first principle of our discussions with our distribution partners is that they're focused on controlling their cost of goods.
So I would say that while flexibility is important, the most important thing to them is their concern about cost and price increases. So we -- the way we approach our relationship with our customers is perhaps a little bit different than others, and we look at this on a key account basis, and we look at trying to ensure that we build the total pie.
So we're less focused on a rate for an individual brand than we are to make sure that we grow our business with Bell, that we grow our business with Shaw, that we grow our business with Telus. And we've also taken the view that we're going to steal an old ad claim, we're going to earn our money the old-fashioned way by working for it.
So we will push hard for increased penetration and then rely on our skills as programmers to build ratings so that we can translate that into ad growth. So if you look at Corus' history, we've always said that we've been modest about our subscriber growth potential.
We've always talked about it being in the low single-digit basis. And yet, we've had more lofty growth aspirations than that because we've always viewed our responsibilities to try to get maximum penetration for these services and then do a great job meeting the needs of our advertisers by targeting these brands well, getting great programming, scheduling it properly and maxing out on the ad side.
So none of our customers are in a mode where they want to unbundle as a dramatic part of their strategy. What they all want to do is create value for their customers by providing them with more on-demand product, more broadband product, TV Everywhere on-demand use of the set-top box widely, better customer interface.
That's what our customers talk to us about. That's what we're trying to deliver.
And we try to protect ourselves with rate cards that are grid-based to offset any impact in lost distribution. But quite frankly, that's not really what these discussions are all about.
It's all about controlling costs and adding value to what we offer to their customers and indirectly ours.
Haran Posner - RBC Capital Markets, LLC, Research Division
That's very helpful. And then maybe one last one for me.
I'll throw it to Tom. Just -- with respect to your free cash flow in the quarter, you've added back maybe $7.5 million for strategic investments.
So I'm just wondering what that relates to.
Thomas C. Peddie
We do make some investments in some various funds. And we have investments in KidsCo.
We have investments in a venture called Steamboat. So that's what those would be.
Operator
This concludes our question-and-answer session. I would now like to pass the conference back over to Mr.
John Cassaday.
John M. Cassaday
Once again, thank you, all, for joining us today. Hopefully, you all had a chance to ask any questions that were on your mind.
And as you know, we're always available for follow-up discussion, but we appreciate your continued support. Thanks.
Bye for now.
Operator
Ladies and gentlemen, this does conclude the conference for today. We thank you for your participation and ask that you please disconnect your lines.