Jul 14, 2010
Executives
John Cassaday - President and CEO Tom Peddie - EVP & CFO Doug Murphy - EVP & President, Corus Television Hal Blackadar - EVP & President, Radio
Analysts
Adam Shine - National Bank Financial Paul Steep - Scotia Capital Bob Bek - CIBC Scott Cuthbertson - TD Newcrest David McFadgen - Cormark Securities Colin Moore - Credit Suisse
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Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Corus Entertainment Third Quarter Analyst Conference Call.
During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer-session.
(Operator Instructions). As a reminder, this conference is being recorded, Wednesday July14th, 2010.
It is now my pleasure to turn the conference over to Mr. John Cassaday, President and Chief Executive Officer.
Please go ahead, sir.
John Cassaday
Thank you, operator. Welcome to Corus Entertainment’s fiscal 2010 third quarter report and analyst conference call.
First of all, 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 www.corusent.com in the Investor Relations section. We'll now run through the standard cautionary statement.
This discussion contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1955.
Some of these statements may involve risks and uncertainties. Actual results may be materially different from those contained in such forward-looking statements.
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 filing with the U.S. Securities and Exchange Commission.
I'd like to introduce you to the Corus Entertainment team joining me on the call. Executive Vice President and Chief Financial Officer, Tom Peddie, Doug Murphy, Executive Vice President and President of our Television division, and Hal Blackadar, Executive Vice President and President of our Radio division.
So, if you turn to slide three and four, we are very pleased with our outstanding results for Q3. Turning to slide three and four of the PowerPoint presentation, we finished the quarter with consolidated revenues of $218.4 million, up 12% compared to last year while our consolidated segment profit was $73.8 million, up 20% from a year ago.
These exceptional operating profits are a result of strong top line growth while controlling our costs. Net income for the quarter was $31.4 million or $0.39 per share, compared to a net loss of $145 million or $1.81 per share last year.
Net income for the prior year includes a $172.5 million after-tax, broadcast, license and goodwill impairment charge. Removing the impact of this item results in an adjusted third quarter basic earnings per share of $0.34 in the prior year.
Turning to slide five. We are pleased to report that our Television division had another terrific quarter, segment profit up 17%, and revenues of $147 million up 13% versus last year.
Television revenues were driven by double-digit growth in both advertising and subscriber revenues. Total specialty advertising was up 14% versus a year ago and subscriber revenues grew 13% compared to last year.
Other revenues increased this quarter by 21%, and this included growth from distribution and merchandising revenues in our content business. Our Kid segment had a great quarter with overall revenues up 14%, and ad revenues growing 19% due to impressive ratings and successfully monetizing our co-view audience.
PPM data shows consistently strong rating games for Teletoon and YTV with YTV's average minute audience for Kid's 2 to 11, up 39% and Kid's 6 to 11, up 45% versus a year ago. Co-view continues to be a strong growth platform for us with programs like iCarly, Survive This, and 10 Things I Hate About You, contributing to average minute audience ratings for adult 18 to 49 and women 18 to 49 that are more than double that of prior year.
Toys, food and entertainment remained the top advertising categories and we're seeing growth in wireless and personal care categories as well. Our merchandising revenues were up 19% versus a year ago, driven by the success of the Bakugan brand as well as the Backyardigans and Babar.
Subscriber revenues achieved single-digit increases and the portfolio benefited from the addition of the Nickelodeon service. Our specialty in pay group also performed extremely well.
Revenues were up 13% from a year ago, both subscriber and specialty ad revenues achieved double-digit growth with subscriber revenue up 16% and specialty ad revenues growing by 10%. This quarter Movie Central subscribers increase 2% from the same period last year.
Increased subscriber revenue also reflects strong growth in Cosmo Television as well as a positive response to our two new offerings, Sundance Channel and W Movies. Turning to our women's portfolio, advertising revenue performance was very strong with double-digit growth versus prior year.
Key gains were in retail home entertainment, food products, auto and auto supplies. The recent addition of W Movies to the portfolio has generated strong acceptance in the marketplace, with ad revenue for the service contributing to 20% of the overall growth in the portfolio.
AMA ratings for the women's services resulted in growth across the segment with particularly strong increases for VIVA and CosmoTV which saw a doubling of its audience versus last year. Moving to slide six, Radio also had a very strong quarter.
Total revenue finished up 9% over the prior year. Strong cost controls drove segment profit up by 36% and on a regional basis all three regions, the West Ontario and Quebec saw year-over-year revenue growth with Ontario and Quebec experiencing strong growth, both outperforming the overall market according to TRAM.
The key categories that fueled our growth in Radio were foreign and domestic auto which were both up over 30% from a year ago. The biggest contributor in the retail category was home repairs and hardware which was up 26%.
According to TRAM, local direct revenues have grown to 9% compared to 8% for the market overall. Markets with exceptional results for local direct revenue include Vancouver, Kitchener, Toronto, Montreal and Quebec City which all saw growth of between 20% and 27%.
On a regional basis Q3 revenue continued to be robust throughout Ontario, finishing 19% ahead of last year. Toronto, London and Kitchener clusters outperformed the market as measured by TRAM.
Toronto solidified its PPM gains on 102.1 The Edge, Q107 and Vinyl FM and the regional stations continued to show positive growth largely by focusing on direct local retail and targeted account development. Quebec Radio also delivered strong revenue growth, up 10% versus the prior year.
Both Quebec City and Montreal’s French stations showed significant gains achieving double digit revenue growth. And for the first time in several quarters our Western Stations also saw a modest return to growth versus a year ago.
Both Vancouver and Winnipeg exceeded market growth in Q3 according to TRAM and our clusters in Calgary and Edmonton showed improved performance. Western markets are starting to see dramatic increases in domestic and foreign automotive advertising with domestic auto spending in Vancouver up 83% in the third quarter compared to last year, another positive indicator of a return to growth in the west.
Targeted advertising drives in Vancouver, Edmonton and Calgary aimed at developing new business categories have added over $1 million in new revenue for Q3 in each market. With top line growth and a focus on cost controls, our Radio division has seen a significant improvement in segment profit margins delivering margins of 31% in the third quarter, up from 25% last year.
In closing, we'd like to provide you with some comments on the outlook for the balance of the year. Turning to slide 7, our revenue outlook for the last quarter for televisions overall specialty ad revenues is currently projected to grow in low double digits, primarily due to the monetization of our co-view audience for YTV, continued growth for Teletoon and the continued strength of our women oriented channels.
Subscriber revenue was also expected to growth with this in mid single digits with increases in our Movie Central subscribers, the end of the free preview period on CosmoTV and the momentum of our two new services, W Movies and Sundance Channel. Some of this growth will be offset by a decline in revenue from production and distribution and merchandising revenues off a very strong Q4 a year ago.
Radio continues to pace well into the fourth quarter. We are projecting continued ad revenue growth in the high single digits led by Ontario.
Toronto continues to drive substantial Q4 growth as well as other key markets in Ontario which was pacing ahead of last year. Pacing in Quebec continues to be strong with Quebec City and Montreal French stations driving the regions year-over-year growth.
The return of ad growth in the West is also encouraging and we expect to see that trend continue. With our ad sales pacing ahead in the fourth quarter and ongoing signs of economic recovery, we are on track to achieve our earnings guidance for the fiscal year.
On May 10th we announced a new senior management team with the appointment of Doug Murphy as President of the Television Division and Hal Blackadar as President of Radio. We also announced that we would be conducting a review of the organization to access workflow and ensure an efficient structure.
This summer all of our Toronto locations have been consolidated into Corus Quay which represents a great opportunity for us to take full advantage of the buildings leading edge, technological infrastructure and align our decision making process and organizational structure with our new technology. While we anticipate continued top-line growth this will ensure we remain both innovative and vigilant on our cost structure for long term growth and success.
We hope that you have found our comments helpful in providing an overview of our Q3 results and our outlook for Q4 and we would now be pleased to take any questions that you may have.
Operator
Thank you ladies and gentlemen. (Operator Instructions).
Our first question comes from the line of Adam Shine from National Bank Financial. Please proceed with your question.
Adam Shine - National Bank Financial
Hi, there. So good solid Q3 results certainly, a few little I guess housekeeping just to begin with.
You are talking about free cash flow guidance likely coming in a bit better than previously expected because of the decision to capitalize or pursue capital leases. Can you give us a sense as to where you see CapEx coming in in 2010; I think the previous number was about a $100 million and $20 million next year.
Tom Peddie
Adam, it's Tom. Those numbers are still consistent.
The 2011 number might be a little higher than that but the $100 million that we have forecast for this year is still the number we are using.
Adam Shine - National Bank Financial
Okay. Because I have got you at around -- maybe correct me if I am missing something, I think you are at $52 million year-to-date.
So, obviously looking for a very big delta heading into the Q4, correct?
Tom Peddie
What's not included in that $52 million is some of the capital leases that we referred to, so I think that number is less than $10 million at this particular point in time but will be higher for the year. So, with the combination of the capital leases and the actual cash out the door on expenditures will still be in the $100 million range.
Adam Shine - National Bank Financial
Okay, thank you for that. When we look at corporate costs, the number came in a little bit lower than I have been anticipating and I think your guidance last Q2 was maybe somewhere in the sort of I think it was $21 million and $22 million range.
Is that still a reasonable range for corporate cost for the year?
Tom Peddie
At the end of Q2, we said that our target was $25 million to $26 million compared to our run rate in 2008 which was around $23 million; last year it was about $18 million. So, at the end of Q3, we are now at $19.5 million, so if our run rate in Q4 is at the same level as Q3 we would be at $27 million and not the $25 million to $26 million we forecast last quarter.
Part of the increase is as we said we moved to Corus Quay, we have taken on additional space here. The cost of that additional space is probably $3 million to $3.5 million extra per year, so the impact per quarter is about $900,000.
So we will be picking that up in Q4, extra $900,000. And the other thing that is happening in the corporate number is that we are delivering better financial results than budgeted which is driving our incentive based performance plan, so that's driving the number up.
So, our current estimate for the year would be $27 million to $28 million as opposed to the $25 million, $26 million we talked about in Q2.
Adam Shine - National Bank Financial
Perfect. You know what I -- thank you for correcting me because I was looking at my depreciation numbers as compared to my corporate cost numbers.
Tom Peddie
Okay, and I then just comment a bit on that is that because we are little, I suppose a little slower into moving into Corus Quay and our depreciation is [Technical Difficulty].
Adam Shine - National Bank Financial
Hello. Tom?
Operator
Ladies and gentlemen, please stand by. The conference will resume momentarily.
Ladies and gentlemen, we've been rejoined by line of Mr. John Cassaday.
Mr. Cassaday, please proceed with your presentation.
John Cassaday
Sorry about that, folks, Tom was going out a little long there, so we cut him off.
Tom Peddie
Adam, it's Tom. Hopefully you got the balance of my question or comment with respect to depreciation is it is running a little lower because we're not really accounting it until June 1st our move into Corus Quay.
Operator
Our next question comes from the line of Paul Steep from Scotia Capital.
Paul Steep - Scotia Capital
So we will give this a quick try here. On radio, covered a lot of ground there earlier John, I thought I heard you say wireless and personal care, but I'm not sure whether that was for radio or TV, I guess the real question --
John Cassaday
I may that comment with respect to television.
Paul Steep - Scotia Capital
So the question was more of the sustainability, the recovery. I know you have flagged auto in there a couple of times.
What are you sort of seeing in terms of your response from advertisers as we now lap some pretty dismal quarters last year?
John Cassaday
Are you talking about radio in particular?
Paul Steep - Scotia Capital
Yes, radio in particular, just sort of how sustainable do we think that radio recovery looks like at this point, it looks great --
John Cassaday
It looks pretty solid for a couple of reasons. First of all, I'll give you some indication of Q1 pacing, which is very strong.
Q1 is pacing about -- well, it’s pacing high single digits and that pacing is consistent across the country, so that includes Western Canada, so we are starting to see a real benefit of Western Canada coming around which is very, very encouraging.
Paul Steep - Scotia Capital
Okay, that helps, I assume you mean Q4, right?
John Cassaday
No. I'm talking about Q1 fiscal '011.
Q4, we made reference in the commentary that Q4 is pacing ahead mid to high single digits as well. So looking two quarters ahead, we're pacing very strong on Radio.
Paul Steep - Scotia Capital
That helps a lot. Okay.
Then if we shift gears quickly to Kids and we look there, what's really the driver, like you flagged both co-view but you also flagged presumably Nick and sort of the rating recovery on that side? Anyway, I know it's hard to tell as to which one seems to be driving more of that sort of power through in those numbers.
John Cassaday
Well, YTV for sure. YTV is the big dog here and that's clearly what is doing most of it.
Also Teletoon is doing extremely well. We're getting the benefit of two things.
We're getting strong overall Kid ratings, number one. And number two, particularly on YTV, we're getting the benefit of our co-view audiences and we're being able to monetize those but we've seen Toys come back for us in a nice way.
We've seen Entertainment come back for us in a nice way in Q3. We've seen strong performance from retail.
So there's generally a good category profile on our Kid's business and good growth in ratings and revenue on our core brands. And no question Nick's come and done a nice job but it's still a relatively small brand in terms of overall ad revenue.
Tim Peddie
Scott, here I'd also add that we had a lot of deliveries in the third quarter on the production and distribution side of the business in Nelvana deliveries and had a strong quarter on the merchandise revenue front.
Paul Steep - Scotia Capital
Actually that led me right to where I was going to go last and then I'll let somebody else have a shot here which was on the content side, obviously you're flagging the comments about lapping a really tough Q4 comp. Can you talk a little about Q4, how we should think about that and more importantly, what the pipeline looks like to 2011 on the merchandising side is more what I'm thinking about there, in terms of Bakugan and some of the other hits?
John Cassaday
Okay. Well, I'll let Doug talk a little bit about the outlook on the merch side but I would like to make sure that everybody did hear me when I did say that we will be lapping a pretty tough quarter on the merch side.
So last year in Q4, we had a couple of important events. One was the new licensing agreement for Beyblade and secondly, it was a new agreement on Babar and both of those contributed revenue in Q4 which is not going to be repeated this year.
Hopefully, will be big winners for us as the merchandising sales start to come in. So, on the ad side however, I expect that we'll do very well in Q4 versus year ago.
Doug, do you want to talk a little bit about the outlook on merch sales for our key properties?
Doug Murphy
Sure John. Paul, next year we have three big drivers we're focusing on.
Of course we're positive with Bakugan's continued strength. Our third season is launched in North America now and second season is launching internationally and we're very pleased with that business.
It's doing very well. In terms of brand new properties coming to retail, Beyblade of course, is now on the air in North America.
We'll be launching a broadcast internationally over the summer and we have a kind of day and date global merchandise launch for the fourth quarter calendar in all markets. So, that's a very favorable setup for growth in the coming year.
And lastly, our Babar business, we're focusing first and foremost on the French market launch. That's going to be broadcast consumer products, home video kind of simultaneously in the spring of '11 and so we're feeling very good about how that business is shaping up.
It will be a meaningful contributor, clearly not though on the level of Bakugan.
Operator
Our next question comes from the line of Bob Bek from CIBC. Please proceed with your question.
Bob Bek - CIBC
Just wanted to start with a couple of accounting questions if I could. Tom, the duplicate rent situation, I guess you got that in other category.
Can you remind us where that's going to be in Q4 now that you're in? Are you fully in or some of that carries into Q4 and will it be on the same sort of line below EBITDA?
Tim Peddie
Yes, what I've said in my opening comments here is that we're reflecting our new rent in our EBITDA number now for Q4 being in that Corus Quay but as you said we do have some duplicate rent which I think would be about $1 million that will be reflected in the other line in Q4.
Bob Bek - CIBC
And just I guess on the royalty change on Radio. Just could you talk us through the treatment on that?
I guess as a retroactive it will be in Q4. So will that be in EBITDA, the retroactive payments, is that correct?
And the pro forma number, sorry, the number that you've given in the release on I guess $2 million to $3 million in extra payments going forward, is that pro forma of the Quebec Radio sale or not?
Tim Peddie
No. Quebec is included in that particular number.
And we'll treat this similar to how we've treated an adjustment in rate in the past. So what will happen is that the retroactive portion for '08 and '09 would be reflected below the line but the amount for 2010 will be included in the EBITDA.
So it will hit our EBITDA number in Q4 to the tune of I'll say about $2 million and then as we said the run rate going forward, we're saying two to three. We're having a difficult time doing the calculation and as you say, that assumes at this particular point in time that we still continue to have Quebec.
Bob Bek - CIBC
Just a question on Radio, I guess for us, for John or for Hal, but you had Radio; you've had rate compression in Alberta with the new stations there. You're starting to see some signs of strength in those marketplaces.
Do you think that with some improving demand you'd see some potential to see some of that rate improve at this point or is that just a little too hopeful, given how many your stations are in the markets?
Hal Blackadar
Yes, it's Hal, Bob. We are starting to see an improvement, particularly in Vancouver and in Calgary.
In Calgary in particular we're pacing considerably ahead of the same time last year. We're also seeing good local revenue uptick in Vancouver market, the market that has had the most recent number of licenses added to it, some of which have even yet to come on air is Edmonton and so we're a bit behind there but otherwise in the West, we're starting to see positive sign in front of our growth curve there.
Bob Bek - CIBC
Okay, so you could see both ends of that, right? You can see the improving economic demand, but then also perhaps some rate improvement as well?
John Cassaday
The rates are starting to come up but the challenge there with the new additions is that it does take some time for rate increases to go through. But there certainly is an increased demand.
Bob Bek - CIBC
And I guess just lastly on the television side, in your presentation you talked about advertising growth being offset by the decline in other revenues. You just talked through that John.
I know that you didn't use the phrase partially offset or somewhat offset. So we can take that at face value then, the sort of the merch pickup from Q4 last year, that's declining and then the ad pickup you're going to have this Q4, could probably offset each other?
John Cassaday
You're a good listener.
Bob Bek - CIBC
Well, I'll leave it there for others.
Operator
Our next question comes from the line of Scott Cuthbertson from TD Newcrest. Please proceed with your question.
Scott Cuthbertson - TD Newcrest
Just wanted to turn the conversation over to costs a little bit. Just wondered, you've been investing in your content on the television side.
It's a little bit sort of, a little bit lower change in the rate of reinvestment in Q3 than it was year-to-date but I was just wondering if you can give us some color about what that looks like going into Q4 and into next year. Just specifically I wondered if the television cost trends are going to be more like the sort of the 10% increase we saw this quarter or more like what's it been year-to-date going into Q4?
Tom Peddie
Scott, it’s Tom. I think that one of the things you should really look at on our business is on a 12 month basis as opposed to specifically quarter-to-quarter because as you know we can have some things that kind of fall into the quarter or just fall outside the quarter.
Managing our programming costs I think is one of our biggest challenges because as you know our conditions and licenses are tied to our revenue growth. And so it's tough for us and so we're still in high single digits from a cost point of view.
So I think that that's really what you should probably be using in your models.
Scott Cuthbertson - TD Newcrest
Okay, and that includes going into 2011 as well, Tom?
Tom Peddie
Correct. Now I think one of the other things too that kind of masks or skews that increase a bit is the addition of some new channels.
Last year in Q3 we would not have had a Sundance and W Movies as an example.
Scott Cuthbertson - TD Newcrest
For sure. Okay.
And looking at the cost in Radio, they're pretty flat in the quarter. Have you seen a real change in the pacing there?
John Cassaday
No. With the exception of the addition of incremental copyright payment we've got our costs under control.
On Radio and Television as Tom mentioned, the TV issue that we've highlighted in the past is just program costs due to two factors, investments in new networks, HBO, Sundance, W Movies and also the incremental costs associated with success which is the incremental Canadian program expenditures that we're required to make on the basis of the improvement in our bottom line.
Scott Cuthbertson - TD Newcrest
Sure. And just a housekeeping question for Tom.
Fully diluted earnings per share from operations, you get $0.44?
Tom Peddie
Fully diluted, it's on the -- we didn't adjust it.
Scott Cuthbertson - TD Newcrest
You didn't, okay.
Tom Peddie
No. I'll just have to look.
I'll get back to you.
Scott Cuthbertson - TD Newcrest
Okay. And the last thing I just wanted to add or ask was on Corus Connect.
It sounds like an interesting innovation. Just wondered if you can give us a little bit of color on the initiative and help us with any cost or implications that may arise from that.
John Cassaday
Well, I just would say that this was just for the benefit of those of you who aren't aware of it, it's essentially an efficiency tool to help our customers interact with us on a more cost effective basis. It was an innovative idea that was brought to us by one of our sales managers in Toronto.
We funded the development of it and she led the implementation of it. It’s been extremely well received and it’s just really I guess part and parcel of our response to our top to tops with the customers which is their plea to help us take cost out of the business, particularly out of the back room, so we can make sure that everything appears on the screen or on the air.
So thank you for your compliment and thank you to Renee Roth who conceived the idea here, our sales manager in Toronto, and we are getting an excellent response. And I think over time it will become standard for the industry and help us eliminate the cost associated with exchanging invoices and checks.
Scott Cuthbertson - TD Newcrest
I guess, but in the -- for modeling purposes I guess it sounds like you have great initiative but probably not that material in terms of --
John Cassaday
It is not material from a cost point of view at all.
Operator
The next question comes from the line of David McFadgen from Cormark Securities. Please proceed with your question.
David McFadgen - Cormark Securities
Couple of questions, Tom, what's the accounting impact from going with capital leases instead of just regular CapEx. Can you just remind us what that difference is?
Tom Peddie
Well, what will happen is that it will increase our interest expense line going forward, so you will see the financing costs go through there.
David McFadgen - Cormark Securities
Okay. And is that why the interest expense was a lot higher in the quarter?
Tom Peddie
Well, no, because the interest expense was higher in the quarter for a number of reasons. We did our refinancing, we took out and as a result we took swaps out.
We took, we did it all and we also have higher rates because we are borrowing at 7.25% as opposed to the low rate. As we said in our shareholders report, our effective rate was about 5.1, I think compared to about 4.1, 4.2 last year, so you have that cost.
We have additional costs in there with respect to the commitments for the higher lines of credit that we have. The impact of the capital leases in the quarter really wasn't material, it will -- as I look out into the future the number might be a $1 million a year but we will also have increased depreciation from the assets that we had acquired till, for example, we did $20 million worth of capital leases we would have the depreciation on the value of those particular assets.
David McFadgen - Cormark Securities
And when I look at the quarter, the interest expense was I think $14.5 million, for me it was a lot higher than what I was looking for, what would have been a normal rate to use going forward excluding this capital lease addition?
Tom Peddie
Well, I think that as you start to look out you are probably trying to do your model for 2011. So, if you look at it and you felt that we had $500 million worth of debt at 7.25%, so that's about $36 million.
And then if we had another $200 million at 5%, there would be another $10 million in interest. And then you would have the commitment fees that we would be obtaining for access to lines of credit which could be about $3 million and then you have the imputed interest that's calculated on long-term program rights which you see is generally about $5 million or $6 million a year, that's a non-cash item.
And so, you could get a number when you start doing that into the $60 million range without much difficulty. But as I am saying not all of it is cash related.
David McFadgen - Cormark Securities
Okay. And then just a question on Movie Central, the subs year-over-year, the growth slowed, is that kind of a new range going forward or is there an anomaly in the quarter.
Any comment on that?
Tom Peddie
Well, there was a couple of things that happened in the quarter; one of our customers had a fairly significant price increase. We think that might have been a factor.
Also as we increase the penetration of digital to this generation of adopters, they may be proving to be a little slower or a little less interested in premium movie services than the early adopters. But having said that we're certainly not conceding that the growth is going to slow.
We think there is tremendous potential to capitalize on explosive digital growth, and we're putting in place programs to ensure that we are able to sustain the growth in the 5% range as we have historically. We also have a plethora of new programming coming out that we think is going to be very well received, and one of the things that’s kind of broken through for us a little bit by surprise is True Blood, which is taking off and is exceeding the level of satisfaction in audience attention that Sopranos had previously and we thought might never be matched again.
So, we still feel that we are in really good shape here. We had 2% subscriber growth, but we had pretty significant growth in terms of our revenue per subscribers.
So the story on Movie Central remains very positive as far as we're concerned.
David McFadgen - Cormark Securities
And then I noticed in the MD&A, you talk about significant regulatory hurdles for the Corus Quebec Radio transaction, has the outlook changed regarding the regulatory hurdles for that transaction since you announced it?
Tom Peddie
No, not at all. What we recognized is that there is a multiple license ownership policy in place, and the company that acquired or has made an application to acquire our assets would like exceptions made to that policy.
So, there will be a discussion of that at the hearing. We believe that an exception to the policy is warranted given the competitive environment in Quebec.
We've made that case to the CRTC as has the acquiring company and now we will see where the chips fall on that one, but it is our expectation that at some point in fiscal '11 that transaction will close.
David McFadgen - Cormark Securities
Okay, and then just lastly, when you look out to 2011 with the CapEx dropping down to the -- let’s call it $25 million to $30 million range, free cash flow will go up a lot are you -- what's the probability of a higher dividend?
Tom Peddie
Well, as we’ve said historically, David, we believe that dividends are an important part of our story. We typically talk strategically about dividend growth being in line with earnings growth, but that's a decision that will ultimately be made by the Board of Directors.
Historically, we've looked at that at the January Board Meeting. And in the event that there is a dividend increase, it may well coincide with historical timing.
Operator
Our next question comes from the line of Colin Moore from Credit Suisse.
Colin Moore - Credit Suisse
My questions are related to Television, I believe at the last quarter you talk about how you might be repositioning some of your programming on the women's channels to try to bring in more men. I was wondering if is that’s still a working progress, or has that happened and started to add to the traction and robust growth that you saw this quarter?
John Cassaday
It's a work in progress, but there are actual programs that are having an impact on that now. And just for the benefit of those who are wondering what Colin is talking about we had a very strong complement of programs that were focused on personal improvement and what we found in PPM is that programs skewed to women that also had some appeal to their male partners were having a significant impact on ratings.
So, clearly we needed to adopt our programming to that new reality and there will be a series of new shows that we think will be strongly appealing to women but perhaps a little more gender-neutral than we've had in the past. Doug, I don't know if you want to point any specific example.
Doug Murphy
Yes, I can do that. Thanks John.
We're describing it as what we called social viewing, what appeals to for the female audience but also to family members who are maybe viewing with her in the four to eight time zone, that's you know oftentimes could be daughters or sons, it could be husbands or boyfriends during date night or Friday night movies. Some of the success we've had right now is our biggest hit is called Love It or List It.
We've also had some success with Come Dine with Me. So, those are the two new shows that have come in and really helped us improve our business in this last quarter.
John Cassaday
And I think as a result of that and just focus on our part, we've seen a nice return to growth on the W business and we are optimistic that we will continue to be able to grow that business into the future. As you saw today our women add numbers were pretty outstanding in the quarter.
Colin Moore - Credit Suisse
Great, thanks for the color. And just a follow-up to Scott's question on the expenses.
My angle is actually just from the general and administrative expenses. The growth rate was a bit higher that I expected this quarter and I think in the report you had mentioned it wasn’t employee-related but just a collection of cost.
Was there one or two items that specifically led to that growth this quarter or was it just the group that you mentioned?
John Cassaday
Well, we're just looking around the table. We can't think of anything that's your --
Tom Peddie
Are you referring, Colin, to a particular division or just the corporation from a consolidated point of view?
Colin Moore - Credit Suisse
Pardon me; it's the G&A cost within Television? And if I back it out I think it may have been double-digit growth this quarter?
John Cassaday
Yes, we did have stronger growth in the quarter and I think it was additional marketing costs to drive ratings. We had some CRTC Part II fees this year that we didn't have last year.
We, I think, quantified that particular amount in the segment results in the bottom of the page ten of the shareholders' report. And as John said in his opening comments, one of the things that we clearly will be able to do here in the move to Corus Quay is to realign some of our particular costs.
So, controlling our G&A cost is a top priority for us.
Operator
(Operator Instructions)
Tom Peddie
Operator, just while we are waiting to see if there are any other callers, Scott, it's Tom, I might just comeback to your question with respect to diluted earnings per share. You were pretty quiet accurate, I just looked and, fully diluted, if we took out those adjusting items in Q3 this year would be $0.43.
I think you referred to $0.44.
Operator
And the next question comes from the line of Tim Casey from BMO Capital Markets. Please proceed with your question.
Tim Casey - BMO Capital Markets
Thanks. Question for John, now that your into the new facility, I'm wondering how we should think about the efficiencies that you hope to drive out of there.
Is this something that will just be incremental and hopefully be reflected in margins over time or will it be more of a time defined event where there will be some restructuring and maybe some associated charges with that. How should we look at the potential for efficiencies given your spent $100 million on a new facility?
John Cassaday
First thing is that you should expect us to be striving to get a return on our invested capital as we would any other investment that we make, so you can be confident that, that will take place. Secondly, both scenarios that you suggested are part of our program going forward.
You will see on an on-going basis a continued focus on margin improvement as we realize that efficiencies that are possible and inherent in this new building. And then as I suggested in my opening remarks, there will be an impact from restructuring.
We announced an organizational redesign at the top of the company just a few weeks ago, consolidating our Management Committee from thirteen to six. We'll be making additional announcements in the very near future about what the level three and four implications are of that and the result and impact on our costs, but suffice to say that we've taken the opportunity over the past several weeks to explore all of our costs in detail and ensure that we have the organizational structure and cost structure in place to allow us to compete effectively in fiscal '11 and beyond.
We will take the opportunity and I'll just remind everyone now given Tim's question that we'll take the opportunity at our Investor Day which will be held on September 29th to further elaborate on what our new organizational structure looks like and the impact on our costs at that time.
Operator
We have a follow-up question from the line of Adam Shine from National Bank Financial. Please proceed with your question.
Adam Shine - National Bank Financial
Thanks a lot. In terms of, I think it might with Bob, his question regarding further duplicate rental costs, you noted $1 million in Q4, is there going to be any spillover into early 2011 or you're done with those?
Tom Peddie
I think we'll effectively be done with them, Adam. As I said in my comments, the incremental cost on an annual basis as said to us is about 3.5 million [ph].
We also do have some surplus space here. We have a plot [ph] that we are not occupying and we'll treat that cost on below the line.
So, it will still impact our net income but we're in process of mitigating that rental [ph] cost.
Adam Shine - National Bank Financial
I'm sorry you faded out at the end there, you're in the process of…
Tom Peddie
We're in the process of mitigating that cost; in other words we're looking to find a tenant for the seventh floor.
Adam Shine - National Bank Financial
Of course. And if I go back to what you were saying before you got cut off, or the line went dead, in terms of depreciation, you know the timing of the move into Corus Quay obviously allowed for depreciation to be even lower than anticipated in Q3.
So, going into Q4, are we looking at a significant delta that might surprise or are we just looking at another $1 million or so, just to close out the year.
Tom Peddie
I know that's $1 million or $2 million and I think that if you were using your run rate for 2011, a number of around $30 million would probably be roped in.
Adam Shine - National Bank Financial
$30 million for 2011 depreciation?
Tom Peddie
Yes.
Adam Shine - National Bank Financial
Okay, I thank you for that. And then lastly just in the context of pay TV, you know obviously the expectation was that you were going hit about a million subscribers for Movie Central to close out the year.
Still I suspect some degree of incremental growth to be had at least sequentially heading into Q4 with the return of Entourage, Hung and maybe a few other series. Anything you can say in terms of the growth expectation, maybe below $1 million but certainly above $970,000?
John Cassaday
Yeah, that's a good encapsulation. We set a –what some thought was a wildly audacious goal but we certainly thought $1 million was within our grasp.
But it’s possible but unlikely based on where we're at right now that we will get there. I do expect that we will get there very soon into fiscal '11 and as soon as we saw the numbers come in for Q3 we sat down and said, what can we do to accelerate adoption of this by new digital households and try to make the number for this year.
Our partners, our BDU partners have embraced that and Doug and Andrew Eddy have been out drumming up support for some exiting programs to get us off to a quick and early and fast start in the summer that will help our numbers in Q1 of fiscal '11.
Adam Shine - National Bank Financial
And just to clarify, just to wrap up, if I go back and reflect on what was said earlier, Tom you’re sort of guiding not withstanding the generation of free cash next year, which was certainly much stronger than this year and the ability to reduce debt accordingly, you’re still talking about interest costs somewhere in a $55 million plus range and then you just alluded to the depreciation costs being I think a lot higher than previously anticipated around the $30 million mark. That's correct for 2011?
Tom Peddie
I guess it's probably a two part. I'd look at the depreciation as probably $28 million to $30 million.
I guided you towards $30 million I guess. It gives me a bit of a cushion when I gave that particular number.
And as I say with respect to the interest cost, I talked about those numbers and clearly if we're able to generate the free cash flow that we think we can generate and if the interest rates stay the way they are, the interest on our floating rate debt would certainly be less than the $10 million number that I threw out. So I threw out a number of about $36 million on the $500 million and then I used $10 million.
So that's $46 million. And as I say, I've got $10 million with the capital lease costs on that $47 million and then I've got some commitment fees, say $3 million.
Then I'm at $50 million. And then I talked about some other potential items that would be non-cash.
Operator
Mr. Cassaday, there are no further questions at this time.
Please continue with your presentation or closing remarks.
John Cassaday
That concludes our presentation for today. Thank you for your interest in our company and thanks to our employees for a great Q3.
And we look forward to seeing you through the summer and certainly at our investor day on the 29th of September. Bye for now.
Operator
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
Have a great day everyone.