Lionsgate Studios Corp (LION) 2024 Q4 法說會逐字稿

Good afternoon and welcome to the Lionsgate fourth quarter 2024 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Nilay Shah, Executive Vice President and Head of Investor Relations. Please go ahead.

Good afternoon. Thank you for joining us for the Lions Gate Studios Corp and Lions Gate Entertainment Corp fiscal 2024 fourth quarter conference call. We will begin with opening remarks from our CEO Jon Feltheimer, followed by remarks from Vice Chairman Michael Burns and remarks from CFO Jimmy Barge.

After their remarks, we will open the call for questions. Also joining us on the call today our COO Brian Goldsmith, Chairman of the TV group Kevin Beggs, Chairman of the Motion Picture Group Adam Fogelson, and President of Worldwide TV and Distribution, Jim Packer. And from Starz, we have President and CEO Jeffrey Hirsch, CFO Scott McDonnell, and President of Domestic Networks Alison Hoffman.

The matters discussed on the call also include forward-looking statements, including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results could differ materially and adversely from those described in the forward-looking statements as a result of various factors.

This includes the risk. Factors set forth in our public filings for Lions Gate Studios Corp and Lionsgate Entertainment Corp. The companies undertake no obligation to publicly release the result of any revision to these forward-looking statements that may be made to reflect any future events or circumstances. I'll now turn the call over to Jon.

Thank you, Nilay and good afternoon, everyone. Thank you for joining us. I'm speaking today as CEO of both the consolidated parent company Lions Gate Entertainment Corp and Lionsgate Studios as we now have two public companies trading in the market.

When Jimmy presents the consolidated financial results of the parent company in a few minutes, he will include the separate operating results of the Lions Gate Studio segments. Turning to my remarks, we had a great year.

We completed four major transactions, moved closer to a value defining separation of our studio and stars, exceeded our numbers, strengthened our content pipelines, and grew our library to record levels. We accomplished all of this in the face of two strikes and unprecedented industry disruption.

Let us look at the fiscal year highlights. Last week we launched Lions Gate Studios as a pure play publicly traded company positioned right in the sweet spot of the entertainment business, creating, owning and distributing great content. We believe that it has all of the ingredients to live up to its ticker symbol lion.

In December we closed the acquisition of E-1 and it is already deepening our library, strengthening our Canadian production initiatives, diversifying our television group and allowing us to efficiently scale Lions Gate alternative television into an unscripted powerhouse.

Our motion picture group reported its best segment profit in 10 years, driven by the latest installments of The Hunger Games, John Wick, and Safranchises. A robust multi-platform release business and a strong library performance.

Our ability to convert films to profitability in all parts of the business continued last weekend with a strong opening of the Strangers chapter one.

Our television group has rebounded from the strike with 7 series orders and renewals and 27 new shows sold into development in recent months. Earlier this week, we partnered with Amazon MGM Studios to announce the development of a Nurse Jackie sequel starring Edie Falco, an executive produced by Eddie and Bob Greenblatt, the first of several franchise properties we're bringing to the market this spring.

Our film and television library reported a record $339 million dollar revenue quarter, bringing trailing 12-month revenue to $886 million.

This performance was driven by strength across the board. Top properties from third party creators like the Conners and the Chosen, the [Sward] syndication of our hit comedy Ghosts on CBS, and evergreen titles from our deep library.

Stars continues to drive its successful transition to digital, ending the fiscal year with 64% of its revenue coming from streaming, with 70% anticipated by the end of the fiscal year.

It remains one of the only profitable pure play premium networks in the business and finally, we ended the fiscal year on a strong financial note, raising $350 million in gross proceeds from our Lions Gate Studios transaction and completing our bond exchange agreement to help prepare the studio and star's balance sheets for full separation.

Assuming we meet the financial targets to which we've previously guided, we expect to end the fiscal year with our studio leverage in the low threes. Look at our individual businesses coming out of the strike, our motion picture group has been putting together one of our strongest production slates in years, driven by a roster of world class talent. Graham Ken producing and Antoine Fuqua directing Michael, the Michael Jackson biopic.

Chad Stahelski directing Highlander while continuing to grow the John Wick franchise in both film and television. Blumhouse following up its partnership with Lions Gate on Imaginary with a multi-picture deal reimagining several of our horror classics. Hunger Games filmmaker Francis Lawrence following up Ballad of Songbirds and Snakes by directing the film adaptation of Stephen King's The Long Walk. Ruben Fleischer in Pre-production on Now You See Me 3.

Destin Daniel Cretin prepping the adaptation of the blockbuster manga property Naruto, and Margot Robbie and Lucky Chap Entertainment developing Monopoly.

Turning to television, we're witnessing the most profound industry disruption in recent memory shows being canceler or unrenewed, changes in buying patterns and buyer mix, the ad market abruptly transitioning from linear to digital, fewer network series pilots and the aftereffects of the strikes changing the calculus of our business in ways that are continuing to unfold.

Here's why we're a little less concerned about this disruption.

First, we're taking advantage of our diversification with growing contributions from E1, 3 Arts and our newly restructured unscripted business all helping us to weather pressure on any single part of the business. We are cultivating new buyers like MGM Plus, AMC Plus, Disney Plus, FX, and Amazon Prime alongside our long-standing relationships with platforms like. Apple TV Plus, Netflix, Hulu, Peacock, and the broadcasters.

We're innovating new business models that draw upon our ability to create noisy brand defining series like Seth Rogen's Half Hour comedy The Studio for Apple TV Plus, as well as cost effective international acquisitions and co-productions like Son of a Critch and Population 11, and we remain a prolific supplier of premium scripted series to stars.

With the reimagining of their hit series Spartacus, House of Ashe going into production this week in New Zealand, and the Sexy thrillers The Hunting Wives currently shooting in North Carolina for a fiscal '26 network debut, we believe that Lions Gate Television's history of working closely with stars provides our television group with a unique understanding of the platform's specific programming needs and an unparalleled ability to collaborate with them in crafting efficient business models.

This will continue to drive our relationship with stars after the separation. Turning to stars, we had a solid quarter with OTT subscribers holding steady, churned down, revenue up for the Third consecutive quarter, and continued profitability.

At a time when the streaming world has shifted its preferred metric from subscriber growth to profitability, I want to remind everyone that Stars has always been profitable. In fact, Stars has executed a successful transformation to digital while holding overall revenue steady and remaining profitable. This in the face of a more than 60% decline in linear revenue over the past Seven years.

On the programming front, Star's core group of premium series Ghost, Raising Kanan, Force, BMF, P-Valley, and Outlander are performing at levels comparable to any group of shows on any network. Family crime drama BMF had a strong premiere in the quarter that drove a 15% increase in viewership and achieved its strongest subscriber growth of the series.

Power Book II: Ghost will close out the fiscal first quarter on a strong note with its season 4 debut on June 7th. Franchise extensions like the prequel series Power Origins and Outlander: Blood of My Blood are in the pipeline for next year, and the network continues to ramp its offering of studio movies from its pay one and pay to output deals, helping to drive stars subscriber acquisitions and retention.

In closing last week's launch of Lionsgate Studios is more than just an opportunity to shine a light on the tremendous value of the content we're creating, owning, and delivering.

It's also an important step forward in fully separating our studio and stars by the end of the calendar year in order to simplify our structure, unlock opportunities to scale our respective businesses, and create incremental value for our shareholders.

Now I'd like to turn things over to Michael to discuss our next steps in separating the two companies. Michael.

Thank you, John. It's been a very busy 2024. As you noted, we recently announced the closing of a transaction which established Lions Gate Studios Corp, now trading on NASDAQ under the ticker symbol, LION as a pure play content company. We also closed the bond exchange which provides us with greater flexibility in managing our corporate debt.

These two transactions will help propel us towards a full separation of our studio and star's businesses which, as we've noted previously, we anticipate will occur before the end of the current calendar year.

Relatedly, management has been working with outside advisors in assessing the collapse of our A&B shares as well as the parameters for a premium in Favor of our shareholders in connection with the collapse.

Management believes that a vote to collapse the shares should be undertaken in combination with an eventual vote to fully separate the studio and star's businesses. Earlier this week, the board of directors authorized the formation of a special committee of the board to work with management to further consider the share collapse and otherwise work with management and the entire board towards a full separation. I would like to now turn things over to Jimmy.

Thanks Michael and Good afternoon, everyone. I will briefly discuss our fourth quarter in fiscal year 2024 financial results and provide an update on the balance sheet. In particular, as we have made significant strides toward execution of our strategic separation, I will provide additional color on our Lions Gate Studio and Stars businesses.

For the quarter, Q4 adjusted EBITDA was $140 million and total revenue was $1.1 billion. Consolidated revenues were up 2.9% and adjusted EBITDA was up 1.7% year over year due to the strength in television.

Reported fully diluted earnings per share was a loss of $0.22 per share and fully diluted adjusted earnings per share was $0.27 per share. Adjusted free cash flow for the quarter was a $3 million dollar use of cash.

For the full fiscal year 2024 you will notice we exceeded the high end of our fiscal '24 consolidated adjusted EBITDA outlook of $400 to $450 million even after excluding the $30 million benefit from Star's International territories.

Adjusted EBITDA of $518 million was up 45%. Total revenue of $4 billion was up 4%, and adjusted free cash flow was up fourfold to $230 million.

As you can see, we also exceeded the studio and stars domestic adjusted EBITDA figures shown in the roadshow deck associated with our recently completed equity raise.

We are reiterating our previously announced fiscal year 2025 adjusted EBITDA outlook for the studio business. Specifically, we continue to forecast fiscal year '25 adjusted to EBITDA for Lands Gate Studios to be $430 million.

Now let me briefly discuss the fiscal fourth quarter and full year performance of our studio and media networks businesses as well as the underlying segments compared to the previous year quarter.

First, I would like to talk about our studio business. Quarterly revenue of $880 million increased 6.8% year over year, while segment profit of $135 million was up nearly 10%. Studio adjusted EBITDA was $93 million up 34% year over year.

For the four-years studio revenue was approximately $3 billion roughly flat year over year, while studio adjusted EBITDA of $330 million is up 15%. Trailing 12 months library revenue at the studio was $886 million up slightly compared with fiscal year 2023 trailing 12 months library revenue.

Quarterly library revenue was $339 million representing the highest quarterly result in the company's history. Library strength in the period was driven by strength in both TV and motion picture breaking down the studio businesses. Let us start with motion pictures. Motion picture revenue for the quarter was $411 million while segment profit was $82 million.

Revenue and segment profit expectedly declined due to difficult comparisons for last year's theatrical launches of John Wick: 4, Jesus Revolution, and Plain.

For the year, motion picture revenue was up 25% to $1.7 billion while segment profit was up 16% to $319 million. Segment profit for fiscal year '24 was the highest in a decade, driven by franchise films such as The Hunger Games: The Ballad of Songbirds & Snakes, and Saw X, Strength and slate carryover, growth in multi-platform business, and strong library sales.

Moving to TV, quarterly television revenue was $469 million and segment profit of $53 million were both up over 50% year over year due to strong library sales and an increase in post-strike content deliveries.

For the year, television revenue of $1.3 billion expectedly declined due to the impact of the strikes while segment profit increased 10% to $147 million on performance of the continental.

Media Network's quarterly revenue was $362 million, and segment profit was $53 million. Revenue was up 7% from fiscal 2023 due to the exit from our international markets which we largely completed over the course of the fiscal 2024.

With the exit from the UK now complete, Stars is exclusively focused on the strength of its North American business. With that in mind, I will focus my comments today on Star's domestic financials as well as its North American subscriber trends.

Quarterly domestic revenue was down modestly year over year but was up sequentially as the impact of the June 2023 price increase continues to help Star's top line.

Star's domestic business has now grown revenues sequentially for three consecutive quarters. Quarterly domestic segment profit was down year over year due to higher content amortization resulting from the timing of original series premieres.

For the year, Star's domestic revenue was down 2.2% as continued strong OTT revenue growth was more than offset by linear revenue declines. Domestic segment profit was down 5.6% year over year due to the decline in revenue partially offset by lower content amortization.

Now let me discuss our subscriber trends in North America. We ended the quarter with 21.8 million subscribers, which represented a sequential decline of 480,000 subscribers, primarily due to the decline in linear subs.

Focusing specifically on OTT subscribers, Stars ended the quarter with 13.4 million North American subscribers, which is flat quarter over quarter and up 3.3% year over year. OTT subscribers now represent 61% of the sub-base and exiting fiscal year '25, we continue to expect OTT revenue to account for 70% of Star's revenue.

Now let us move on to the balance sheet. Given the number of moving parts that are in play as we approach full separation, I will provide some additional color to help you better understand what our landscape studios and stars businesses look like post separation.

We ended the quarter with net debt at the consolidated company of $2.2 billion Pro Forma for the Lions Gate Studio capital raise consolidated net debt was $1.9 billion.

Excluding the adjusted EBITDA from exited Lands Gate plus territories and inclusive of both the capital raise and the $60 million or projected run rate adjusted EBITDA from E1 consolidated trailing 12 months Pro Forma leverage was 3.6 times.

Looking forward to fiscal 2025, both Lions Gate Studios and Stars net debt upon closing of the equity raise was in line with our previous projections. Specifically, the studio's net debt on May 13th was approximately $1.4 billion leaving a corresponding level of net debt attributable to stars of $700 million.

This reflects going in leverage of less than 3.5 times using projected fiscal year 2025 adjusted EBITDA of $430 million and over $200 million for Lions Gate Studios and stars respectively. Along with the equity capital raise, we recently announced another important step toward full separation when we completed a bond exchange representing a majority of our $715 million of 5.5% bonds.

Specifically, $390 million of newly established exchange bonds will travel with the studio and at the time of full separation will adjust to an annual coupon of 6% with a one-year extension of maturity to 2030.

As we've previously noted, the remaining 325 million of the bonds will remain at stars with an existing by 5.5% coupon and 2029 maturity.

In this regard, I would also add that yesterday Fitch initiated ratings on the newly issued exchange bonds at B+.

With a stable outlook and superior recovery rating.

Additionally, Fitch similarly upgraded the rating on the remaining $325 million of bonds from B to B+ with a stable outlook and superior recovery rating.

We believe these parallel ratings are indicative of the thoughtful and balanced capital structure we're establishing at both businesses along with the operational success we're having as we approach full separation.

Finally, I want to provide some color on how to think about the shape of content spend and quarterly adjusted EBITDA in fiscal 2025. As such, we expect leverage at both Lions Gate Studios and stars to rise in the new term but ultimately leverage at both businesses should fall by the end of the fiscal year to levels closer to 3 times.

Now I'd like to turn the call over to Neele for Q&A.

Thanks, Jimmy. Operator, can you open the call up for Q&A?

We will now begin the question-and-answer session.

(Operator Instructions)

Steven Cahall with Wells Fargo. Please go ahead.

Thank you. So, John and Jeff, you have highlighted the profitability of stars. Maybe the market has not necessarily shifted from subs to profitability so much as to profitability while also wanting to see subscriber growth.

We've seen that in a lot of peers where there's punitive evaluations until we do see [net sub] growth. So, as you get to that 70% level of OTT, when do you think that subscribers can be positive on a net basis, on a go forward run rate basis and Jeff, do you have any expected shifts in how you're going to program the service, post separation to help achieve that aim and then Jimmy just wanted to dig into the studio EBITDA guidance a little bit.

Can you help us think about what's assumed in there in terms of library revenue and also how that breaks out between motion picture and TV segments.

Thank you.

Jeff, Thanks for the question. Yeah, look, I think the move away from, for us about driving consistent revenue growth and profitability really came on the heels of putting the first rate increase in the business this last year and look, we saw great success in that rate increase.

We've seen our peer group continue to raise their rates, which gives us a lot of headroom to continue to raise rate over the next couple of years. But when you put rate increases into the business, you have to be very disciplined about. After and achieving great subscriber growth in the short term that are not as what I'd call stable customers long term

Because you want to make sure that you capture as much of that rate without giving it away in the retailing the business long term and so I do think, based on what we've seen last quarter, we actually had net growth across both OTT and Linear. This was a little hangover quarter from that. We had one of our big partners change the way they do their onboarding process to move credit scoring to the front end to the back end.

They put a little pressure on there, but we still feel pretty good about the subscriber trajectory, long term for the business. In terms of programming the network, I think, we've always talked about programming for these two core demos and using content as a way to drive lifetime value and reduce churn.

I think we'll continue to focus on that. We like the way that the 10 poles are lined up for '25 and '26, and we think that will continue to help drive lifetime value for our subscriber base and ultimately profitability.

And Stephen, with respect to the guidance, look, the drivers are coming across both motion picture and TV, so I would expect both businesses to be growing from '24 to '25 and contributing to that growth. We feel good about that.

The motion picture slate in particular, great carryover coming from the '24 slate, a lot of mid-size releases. It's our bread and butter really providing carryover and then we're off to a great start in '25 as well with ministry, Unsung Heroes, strangers that just hit, and then we go to a solid release schedule in the summer and the fall.

Libraries obviously contributing to that as well, also across TV and a strong pipeline in TV, Rookie season 7, Ghosts and then across all of that is E1 integration, right, which is helping drive business in both motion picture and TV as we go to 25.

Thank you,

(Operator Instructions)

Barton Crockett with Rosenblatt. Please go ahead.

Hi, thanks for taking the question. Let me see, one of the things I was just wanting to understand a little bit better is, the EBITDA strength was any of that attributable to E1, because your guide had been for 400 to 450, excluding the international benefits and E1, and so I'm just wondering how much E1 there was in there, and then, just stepping back on this whole separation process, that you expect to finish by the end of the calendar, year.

You talked about, some board processes, but can you walk us through step by step what needs to happen between here and there for this to actually be completed? So, in terms of the quarter E1, the revenue contribution to E1 in the Q4 was about $100 million.

Segment profit was less than 10, and I would say the mix on the revenue side is about 80% [PB], 20% motion picture, and that's probably a good way to think about it going forward as well.

Michael, do you want to answer, the second.

Sure, happy to do it. We're taking a thoughtful, methodical approach to this operation, as I outlined in my opening remarks, the board authorized a special committee.

The special committee is discussing with a variety of experts what the ratio should be, the premium for the A's, and then once that's established, and obviously you're going to have a board for the studio and a board for the holding company and then a board for stars on full separation.

We're going to have a shareholder vote and both on this extraordinary transaction, both the A shareholders and the B shareholders will vote and obviously a lot of that is going to be about the ratio between the A's and the B's and what percentage of the studio they own. Remember that we were doing this by when we spend the 87% out on a tax-free basis to the shareholders.

Okay, that is helpful and then just one other thing on the bond transaction, could you provide a little bit more clarity? There's been some discussion about, the some of the bondholders end up with the studio, some stay with stars and some discussion about how that happened and whether everyone's completely happy, with where they sit on the bondholder side, is there anything you can say about that to kind of clarify what's happening there?

Yeah, we're not going to through how the sausage was made, but I would say very simply, I think the rating upgrade on the star's bond, and Jimmy laid it out pretty clearly, we think overall, of the bondholders have been benefited by this transaction, and, we're going to just move forward assuming everyone will realize that once they really do the math.

Okay, that's great.

(Operator Instructions)

David Joyce with Seaport Research Partners. Please go ahead.

Thank you. A couple questions. First on E1, what sort of seasonality should be expecting that to be contributing now, given that you just, let us know what it did in the March quarter, and also what are some, Michael, could you tighten up the time frames on when, we would expect, the voting to take place?

Thanks. I am happy to take that. --

Second one, but however you want to do it, John. Go ahead, Michael.

The second one, we've said that we expect the full separation by this calendar year, the end of this calendar year, which is obviously December 31st.

We are going through the processes that we have to do. There are, regulatory, shareholder votes, notices, all of that. So, we all believe that.

The sooner the better, but we're putting that outside target by the end of the year and have to follow all these different processes and remember also, there's a Canadian aspect to us and all of those I's and all those T's have to be crossed.

Yeah, and David, with regards to your question about E1 look I think the seasonality is pretty much very similar to our studio and our content business, right, in terms of just going to be based on deliveries and things like that.

Obviously, we're integrating a very strong library and we've just gotten started. So clearly, we've talked about a $60 million contribution in '25 run rate and so from E1 and if there is less than 10 in the first in this, fourth quarter we would expect that to be ramping up. So, we feel good, but that is going to be integrated completely into both motion picture and TV business going forward. So that's all encompassed in the new the guide we gave with respect to $430 million.

Thanks, and if I could extend the thoughts about the content in production, given that a lot of your buyers also have their own studios and they're ramping up production, how should we how should we think about any year over year comparisons for orders and deliveries, on the TV on the episodic side? Right.

I will let Kevin answer that question.

Sure, thank you. Well, look, year over year compared to a strike environment, as Jimmy touched on, it's already bouncing back in a significant way, and you know with the renewal of something, as big as the rookie, which is, a full season order along with other new shows going, I think it'll, be significant growth on the revenue line.

What we are finding in the market, the buyers are back. We after the strike ended the ensuing two months, we sold 2 or 3, maybe 4 projects into development in the intervening time, let's say from March to now we've sold another 23, so people are getting back to business and the pipelines are filling up.

There is pressure to be financially disciplined to start shooting shows at different price points. That sometimes take you to tax friendly locations or out of the country. I think you are going to see that more and more.

Obviously, it's in the feature business all the time, and we sell to everyone and can produce at multiple price points. So, I feel bullish. Obviously converting development into production is the key. We have a huge book of business together with Jeff and the SAS team, and we're excited about getting a cane renewal.

We started shooting Spartacus in New Zealand this week, the spinoff and hunting wives and shooting in Charlotte. Those are just three examples of things that we could not have done, 6 months ago in the strike environment, so feeling very good.

Thank you.

Thanks David. Alfred, could we get the next question, please?

(Operator Instructions)

Jason Bazanett with City. Please go ahead.

I just, thanks. I just had two quick questions. I think you said on the separation stars was going to have $700 million of debt and may be erroneously, I just always assumed that those 5.5. Coupon senior notes would just move over. But post this bond exchange, or there is only 325 of that left.

I just want to confirm there's still $700 million of debt that is going to be attributed to stars, is that right?

Yeah, Jason, that's correct. There is $700 million of net debt going in as of May 13th, right? We would expect that to be lever over the course of the year. Keep in mind full separation has not occurred yet. Okay, so the 715 of bonds effectively are attributable to stars at the moment, along with a small revolver draw along with, $50 million of cash, so to speak, so you're at 700 net debts.

All right, is that levers and as we get to full separation, it's not until full separation that the exchange bonds, which are still at 5.5% today and a 2029 maturity, it's not until full separation that they travel with the studio and then the 2025 which is relative to stars is going to be remaining with stars the way we've always said, but it's 2025 instead of the 715. We will backfill that with some term loan A obviously very financeable.

Stars has a very strong free cash flow. Let me remind you, $200 million plus of adjusted EBITDA. Okay, very little CapEx, no appreciable cash taxes at all. They will have carryover NOLs, okay, and 5.5% coupons with some term loans, not a lot of interest relative to the size of that business. So, they are in a very good position to deliver.

That is fantastic.

Thank you for the answer.

(Operator Instructions)

Alan Gould with Loop Capital. Please go ahead.

Thanks for taking the question.

Is the question. I have got a few. First of all, conceptually, this one is for Adam. The studio has had great margins since the pandemic, as you've had, haven't had a full slate, didn't have all the P&A expense, and library was a bigger percentage of the of the studio revenue and going forward, we have a full slate, should we expect the margins to stay here as opposed to being at the long-term rate, which is about half of what it's been in the last 4 years?

I mean, I'll let Jimmy expand on it a little bit if he needs or wants to, but I would just tell you that we're very confident that we're going to be able to maintain exceptional margins going forward.

The films that were mentioned before in Q1 of '25 have collected and blended, delivered a 40% return on invested capital.

We are running an incredibly efficient operation and even our smaller films that may not generate the sexiest headlines are delivering an incredible return for the company and that coupled with an exceptional lineup of franchises both existing within the studio and new ones that we're building give me incredible confidence in our ability to not only deliver growing returns, but to make those margins really solid.

Now when I just add the 19% margins you're seeing here rolling out of '24, I'd expect that to carry right on into '25, and Alan and his team are just masters at P&A efficiency.

Thanks, Jimmy. If I could follow up with one more, just trying to figure out what your investment and content should be at all stars in the studio business.

Next year, I think you spent about $1.1 billion at the studio and about 850 stars last year.

Yeah, those are the numbers for '24. I mean, look, it’s increasing. We're coming off the off the strike, obviously, and you saw we popped a pretty big free cash flow number in the quarter and finished the year very well.

And that's why in my marks, I talked about the cadence is more back end loaded, so you're going to have some carry over spin. Look, I'd expect, we, if you go back to earlier years, that was closer to a 2 billion combined company.

Spend and that goes, we'll be back at those levels maybe slightly more depending upon what the bounce is coming back, but most of that I would add is in the studio, right? TV as it scales up and a little less so, but also a motion picture, less so of a of a ramp in the star side.

Keep in mind we've effectively closed the international business. Canada's folded in with the North American focus, so you'll see savings there and less of a modest increase it starts.

Okay, thanks, Jimmy.

Thanks, Alan. Operator, could we get the next question, please?

(Operator Instructions)

Jim Goss with Barrington Research. Please go ahead.

All right, thank you. I was wondering if you feel that.

The move to become a pure play studio once again, despite the existing and continuing relationship with stars will influence either numbers of films, types of films, or any, anything else in terms of the monetization opportunities you might have. Does being a pure play make a difference in that regard.

Yeah, no, not at all and you'd be surprised at some of the movies that work really well for stars and probably not the ones you think of, and other ones that you would say are right down the middle or are not as good. \

At the end of the day, we're huge. Diversified entertainment company and whether it's television and Kevin addressed already this relationship we have, and we'll be producing, 6, I think, shows, franchise shows for stars, and these are shows that have a lot of spin-offs and sequels and prequels and so that relationship will remain the same, but Kevin has 30 other buyers between a scripted and unscripted business.

So, we have to be diversified in that respect and again, in terms of the movies, Adam has got to make a great movie that he and his team, believe in and with a great profile. Again, that's a really a great business for us and the margins will remain very strong.

Our international pre-sales were really the only ones who go to the market with big movies. The percentage of pre-sale that we're getting out of the international market is higher, not lower.

The return we're getting 90% of our smaller movies are highly profitable and so We're going to make a diversified slate that I think is going to work really well.

I wouldn't be surprised if we also made some lower budget movies specifically for stars, and we're talking about that and thinking about the calculus for how that works. And at the end of the day, we take all that product and all that huge investment, and it goes all into the library and the new stuff drives the old stuff as we've talked about before.

So, we've got, really a great ecosystem, whether we're the same company or whether we're two companies, I think you can expect those mutual benefits to continue.

Okay, thanks and my second question involved just that the library. Do you feel the process of building the library will primarily come from current production, or do you think you'll consider allocating funds to separately build out the film and TV library as you've occasionally done in recent years?

Hi, Jim, it's Jim. How are you? Yeah, I would say that, if you look at our trailing 12 months for this fiscal, it was a record for us.

Even the quarter was great and you're starting to see the real engines of all these years of buying libraries and what it actually means for us. In addition, we are really a premier third-party content distributor with the conners, with the Chosen, with Kill Bill and Jackie Brown's, we have Some of the best product in the marketplace comes to us for our distribution, acumen, and I'd say overall, I feel really good.

We have 30, 40 films that flow through, some multi-platform, some theatrical, 400 episodes of TV and every time you see something like, a Spartacus reboot, we have 4 seasons of library that go along with it. So, I feel very good about it, and, overall, I think it's going to continue.

And let me answer it a little differently. Whether it's a TV show or whether it's a movie.

When we do our analysis of green lighting that, we basically do a 10-year ultimate, and basically, we don't consider the value after 10 years, nor do we really consider the value of whether it's a prequel sequel and how much uplift it's going to give to the library, even though any prequel sequel will actually create a tremendous amount.

We need to live and die and make money on 10 years. Ultimate, and we need to get a return of 15% to 20% IRR on each and every one of those. The great news is we've been able to put together this incredible portfolio this year and looking into next year, our slate for motion pictures is incredible. We are able to do it, be profitable in the first 10-year cycle, and then build the library beyond it. So, again, we like how that is all playing out.

Okay, thanks much.

Thanks, Jim. Operator, could we take the last question, please?

(Operator Instructions)

Thomas Yeh with Morgan Stanley. Please go ahead.

Thanks so much. I wanted to follow up on the leverage point. You mentioned, Jimmy, that both the studio and Stars sees leverage rising in the near term before falling, I think closer to 3 X you said by the year end.

Should we think about that largely being driven by the cadence of EBITDA contribution over the course of the year? So, any help on how to think about studio lumpiness how that might be impacting that, cadence would be helpful and then I just wanted to get your stance also on just what you see as a comfortable range going past that for both of those assets.

Sure, look, it's both trading 12 months and free cash flow. We plan on both businesses being positive after fully funding their content needs, as we have been always on a consolidated basis. So, I see the net debt absolute balances going down and I also see trading 12 months improving. I think it's really the midterm.

A leverage before reducing to those three levels at the end of the year is probably more trailing 12 months than it is cash, but cash is a factor there and I think, you see stars, I see stars very much after, if you go into '26 and you look ahead below a 3 times leverage, and I see the studio, 3 times and moving below as well. So, really strong profiles for both.

Okay, understood back on stars, I mean, last quarter, Jeff, I think you mentioned leaning more into pay to as a content strategy as we think about how to get to that 20% margin you laid out, what needs to happen on the cost side? Should we expect there to be greater content efficiencies, or how should we think about content spending overall on the star side of things and whether or not, maybe on the non-content piece that there's no efficiencies to be had as well.

Yeah, thanks for the question. It, there's a couple of components on the cost side. One, if you look at our slate, we've got, some shows that are coming up that are later in their arcs that are obviously more expensive.

And so, we've announced, working closely with Kevin and team Power Origins, which is a new story which will reset that economics to that show with season one economics that coupled with the fact that we're no longer an international, we're focusing on domestic, brings some of the cost down because we don't have to cover the international cost anymore.

And so, as you look at turning over the slate over the next 2 to 3 years in terms of fresh content, new seasons and season 1 economics that are domestic, you can bring a lot of cost out of the business. I also think we will look at all of our other non-original costs as we go forward, whether it's library, an extension of a page 2 or an extension of page 1.

We'll look at that in the outer years as well, based on the data that we have just to make sure they're performing and that cost is actually, adding value to the business just putting cost on the books.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Neele Shaw for any closing remarks.

Hey everyone, please refer to the press releases and events tab under the investor relations section of each of our company's websites for a discussion of certain non-gap forward-looking measures discussed on this call.

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