Starz Entertainment Corp (STRZ) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Lionsgate FY17 first quarter earnings call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I'd now like to turn the conference over to James Marsh, please go ahead.

Great, thanks Ryan, and good afternoon to everyone. Thank you for joining us today for our FY17 first quarter conference call. We'll begin with opening remarks from our CEO, Jon Feltheimer, followed by remarks from our CFO, Jimmy Barge. We'll then open up the call to questions after those remarks. Joining us today on the call are Vice Chairman Michael Burns, Motion Picture Group co-chair Rob Friedman, Chairman of Lionsgate TV Group Kevin Beggs, Steve Beeks, our co-COO and President of Motion Picture Group, Brian Goldsmith, co-COO, Rick Prell, our Chief Accounting Officer and Laura Kennedy, EVP of Corporate Development as well as Patrick Wachsberger.

The matters discussed on this call include forward-looking statements including those regarding the performance of our future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward looking statements, as result of various factors, including the Risk Factors set forth in Lionsgate's 10-Q filed with the SEC on August 4. The Company undertakes no obligation to publicly release the results of any revisions to these forward looking statements that may be made to reflect any future events or circumstances. With that, I'll turn it over to Jon. Jon.

Thank you James, and thank you all for joining us this afternoon. During the quarter, we took significant steps to scale our content portfolio and expand it's access to world-class distribution. Upon closing, our acquisition of Starz will be the largest and most transformative transaction in our history. We've been looking at Lionsgate's and Starz' respective operations, pipelines and platforms, exploring all the things can we do together and I can tell you that we are even more excited about the deal today, when we first announced it.

We think the rationale is very compelling. This transaction provides a unique opportunity to dramatically scale our original, premium television production, which we believe is a critical success factor for any content-driven company. The combined company will invest nearly $1 billion a year in new television series alone and nearly $1.8 billion in new content annually, including our investment in Motion Pictures. And together our two companies will be spending approximately $700 million a year marketing this content on a global basis.

Starz has built a solid content portfolio, with going hits Ike Power, Survivors Remorse and Outlander. We can now capitalize on this success with the expertise of our television production division that's been responsible for some of the most significant network defining series in recent history, including Orange is the New Black for Netflix, Mad Men for AMC and Casual for Hulu. All shows have created enormous enterprise value for the owners of these networks. We now have the opportunity to do this in collaboration with our new colleagues at Starz, and hit products will result in more subscribers, stronger revenues and material upside for our shareholders.

Equally important, the combined company will have significantly improved predictability and stability of free cash flow, which enables us to capture the upside from the increased content investment without increasing the risk profile. In fact, the significant cost and tax efficiencies for the combined company will achieve cash savings in excess of $200 million every year and that's before any revenue enhancement from the retention of rights, successful execution on content production and capturing the upside from our global distribution. Together, our companies also provide a platform that will generate more consumer touch points from our combined over-the-top services and other consumer facing businesses. All in, we believe this transaction positions us as a stronger, more diversified, content driven company that will prove to be extremely accretive for our shareholders.

I'm also pleased to report that both companies are heading into this combination tremendous momentum. CEO Chris Albrecht and his team have achieved a huge ratings boost for Starz shows by creating a powerful Sunday night programming block and our own momentum is reflected in the continued outsize performance of our television business and one of our deepest and most exciting film slates ever. Even in a highly competitive summer period for the industry, we currently have four films in the marketplace playing on more than 4000 North American screens. Nerve, Now You See Me 2, Cafe Society with our partners at Amazon, and Roadside Attraction's Indignation. All of them will be profitable, and our slate is positioned to gather momentum through the rest of the year and set the stage for profitable growth in the years to come.

Those of you who attended Comic-Con last month saw firsthand the tremendous diversity we're bringing to our audiences. Whether it's Blair Witch, with a unique marketing launch that electrified the crowd, Saban's Power Rangers, which has the potential to become one of our next big franchises, or Nerve, a lower cost targeted film that proved yet again our ability to connect with young audiences. You'll see the same breadth and depth of content next month, when we bring our strongest lineup ever to Toronto, including Deepwater Horizon, a film that we believe is one of the best we've ever produced, La-La Land, which has earned the opening-night slot at the Venice International film Festival, and American Pastoral, based on the Pulitzer prize-winning book that's been hailed as one of the greatest American novels of the past quarter-century.

Wherever you look on our slate, the first thing you will see a is a lot of depth in areas of proved strength. The return of Tyler Perry in A Madea Halloween, Mel Gibson's Hacksaw Ridge shaping up to be a contender for year end awards. Patriots Day, a film about the hunt for the Boston Marathon bombers with our partners at CBS films; The Shack, adapted from the global faith-based bestseller; the next film in our John Wick action franchise, and as I mentioned a moment ago, Saban's Power Rangers, based on one of the world's most popular and recognizable entertainment brands which closes out our fiscal year.

You can also see the same focus on branded properties and great intellectual property in next year's slate. Just to highlight a few of the films currently in or preparing for production, Wonder, based on the remarkable New York Times bestseller with Academy award winner Julia Roberts heading the cast that includes Owen Wilson and Jacob Tremblay. The Glass Castle, based on another best-selling book property and featuring another Academy Award winner, Brie Larson with Naomi Watts and Woody Harrelson.

Chaos Walking, a adult franchise that we've been working on for the past three years, now coming together quickly under the direction of Bourne Identity filmmaker Doug Liman and starring Star Wars the Force Awakens' Daisy Ridley. Granite Mountain, a true story of the heroic firefighters who saved an Arizona town from one of the deadliest wildfires in history, starring Josh Brolin, Jennifer Connelly, Jeff Bridges, Miles Teller and Taylor Kitsch. And How to Be a Latin Lover with Eugenio Derbez, star of Instructions Not Included, Salma Hayek and Rob Lowe. And after five years preparing for right vehicle for the return of Jigsaw, we think you will like what we've done with the franchise when you see the next Saw in theaters on Halloween 2017.

Our television business keeps getting stronger and stronger and it's heading for fourth straight record-breaking year. We are coming off a corner highlighted by new buyers for our brand defining premium content, fresh hits and successful renewals of our returning series. We continue to license series to a growing array of platforms, including the high-profile scripted series, Step Up, based on our hit film franchise for YouTube Red and Pilgrim Media Group's competition reality series The Runner for Verizon's Go90 platform. The Runner achieved tremendous levels of social engagement during its initial 30 day run and we view Go90 as the kind of platform that will create a great opportunity for shows targeted at millennial, mobile first audiences.

We're in middle of casting and pre- for Dear White People, the adaptation of the critically acclaimed film that will be our second original series for Netflix and another show that underscores the synergies between our film and television businesses. We currently have six Lionsgate film properties in development or already ordered as television series. We also continue to develop premium scripted programming for our traditional network partners, with Showtime ordering the pilot White Famous, produced by Jamie Foxx and inspired by his early years in standup.

Many of our new series are already being readied for launch. The timely political satire, Graves, starting Academy Award nominee Nick Nolte and Sela Ward, which debuts on Epix October 16. The anthology series Manifesto, for our partners at Discovery. The behind the scenes late-night comedy Nightcap for Pop and the drama series Teresa, based on Televisa's widely popular telenovela, which is a perfect sample of Starz approach to targeting underserved audiences and our own commitment to deliver premium TV and film properties to Hispanic consumers.

We also had another successful quarter securing renewals for our new and returning series. Greenleaf has emerged as a breakout success for Oprah Winfrey's OWN network and has already been picked up for a second season. The Golden Globe nominated dramedy Casual had become a top-rated prestige series heading for its third season on Hulu. The Royals continues as the number one drama series on E, and the groundbreaking Orange is the New Black continues to demonstrate its global appeal in linear broadcast syndication. During the quarter we found new network partners for our fan favorite drama, Nashville. We believe that CMT and Hulu will provide a great long-term home for the series, which returns for its fifth season this winter with new superstar show runners Ed Zwick and Marshall Herskovitz.

With over 50 billion impressions, more than one billion streaming turns and 430 million friends on the Facebook platform alone, Lionsgate content touches people all of the world, from the record-breaking opening of Now You See Me 2 in China, to the global appeal of shows like Orange is the New Black and Nashville. Last quarter, we mentioned the formation of our GlobalGate consortium of leading International producers, distributors and co-financing partners to identify and secure priority access to intellectual property for production as local language films in territories around the world.

This afternoon Id like to highlight our going local language production initiative in China. We've already invested in two films and are in discussion to invest in at least four others. Lionsgate will distribute these films outside China. Importantly, these opportunities have evolved with local partners, with whom we've built long-term relationships in financing, licensing, marketing and distributing our content.

We're also expanding its original television series production internationally, as Lionsgate UK diversifies into an important platform for our European operations. During the quarter we invested in our second UK production company, Primal Media, headed by reality producers Adam Wood with and Mat Steiner. The deal jumpstarts our nonfiction business in the largest TV market outside the US.

Though the global environment for content owners has never been stronger, it is also in the midst of profound change. As a disruptive Company that it has always benefited from change, we always poised to exploit strategic opportunities and an evolving marketplace. This past quarter we capitalized on one of our greatest opportunities. The deal to acquire Starz will accelerate the growth of both companies, deepening our portfolio content, expanding our access to distribution, diversifying our pathways to the consumer and unlocking enormous opportunity for long-term value creation for our shareholders. I'll now turn things over to Jimmy to take you through some of the benefits of the deal before opening the call to your questions. Thank you.

Thanks, Jon and good afternoon, everyone. I will briefly discuss our quarterly financial results, give you an update on our previous FY17 guidance, as well as discuss some elements of the proposed Starz deal.

We reported first quarter net revenues of $554 million which were up 35% from the prior year as both Motion Picture and TV posted year-over-year growth. Gross contribution at Motion Picture was negatively impacted by higher marketing costs associated with the wide releases in the current quarter relative to last year. Adjusted EBITDA for the quarter was $41 million and reported earnings per share came in at $0.01 a share. For FY17, we continued to estimate adjusted EBITDA in the range of $200 million to $300 million. With regard to the timing of FY17 adjusted EBITDA, as we said on our last earnings call, we see the third and fourth quarters as largest contributors.

Lastly, we want to provide some color on the potential synergies related to the proposed Starz acquisition. As Jon mentioned we are expecting over $200 million in annual cash savings and this is before revenue benefits that have not been quantified. First, with respect to the operating cost savings across a combined Company, expect those to exceed $50 million on an annual run rate basis. Savings are expected to include the elimination of duplicative costs and redundancies. As part of that, we expect efficiencies to be gained from economies of scale in areas such as production, manufacturing and marketing spend.

Secondly, we expect the incremental tax savings on average to exceed $150 million per year through FY21. These tax benefits are based on our existing International status, accumulated Lionsgate NOLs and the level of leverage contemplated in the transaction. We expect these incremental cash tax savings to begin immediately upon consummation of the merger. The net result will be a deal that is significantly accretive with cash flow that will drive shareholder value as we quickly de-lever. Now I'd like to turn the call over to James for Q&A.

Great, thanks very much. Ryan, can we open it up to questions please?

(Operator Instructions)

Alexia Quadrani, JPMorgan.

Hi, thank you. My question is on the film side of your business. How's the strategy changed at all in your film business post The Hunger Games series? Are you more focused on the singles and doubles but nicely profitable films, or is the focus strategy to pursue the next big franchise, or maybe a combination of both?

Hi, Alexia.

The strategy is definitely to go back to what we've been very comfortable with in the past. We are going to have more films for a wider audience, basically we like to think event films for every audience available. So there will be a lot of different products, some bigger, some medium-size movies like Nerve that are very targeted and focused for a young audience, where we can make them very efficiently and score well. And that use then use that IP throughout the country for expanding all of our opportunities.

I'd add, Alexia, we probably have, as we look forward at our 2018 and 2019 slate, every year, we're looking at three pictures, I would say, a year that we believe could potentially be franchise pictures. And we are very comfortable with that. We actually think that we have the best the group of intellectual property that can drive franchise creation than we've ever had before.

So we're certainly not abandoning that but I would say, we're little bit more focused on making sure we get at least one or two quadrants excited about every single movie, as opposed to trying to get four quadrants sort of excited. So a little but more focused, but then to be clear, I would say three movies a year we think have potential to be franchise quality.

And even on those that say there's three movies per year are just maybe, just to speak to your general strategy, the strategy is still to pre-sell the (inaudible) distribution rights and really protect your cover, your cost and really much more of a focus on profitability. Is that fair?

There's no question, our model hasn't changed. We are still the largest supplier of big commercial third-party product for the rest of the world. So in most of the territories other than China where we distribute the same way as everybody else does and the UK where we have a first-class distribution organization, we are still getting a very large percentage, somewhere between 65%, 70%, sometimes more percent of each budget going in with these minimum guarantees that we are paid the minute we deliver the picture. So I would obviously say that a franchise potential picture, we're probably going to take a little bit more risk, but it is not the kind of risk you typically think of from the major studios.

Thank you very much.

Stan Meyers, Piper Jaffray.

Thanks.

I have one for Jon or Rob and one for Jimmy. So I wanted to discuss in more detail the rumor of decision to reconfigure the final Divergent film into what appears to be a TV movie or a TV show. Maybe could comment on how monetization of TV shows has changed these days, and would this allow for similar profitability?

Then for Jimmy, I wanted to come back a little bit to your guidance from last quarter. You obviously mentioned again that Q3 and Q4 will be the largest contributors. Outperformance in Q1 here; is that more timing? What should we expect about Q2?

Kevin--

It's Kevin Beggs, I'll start on the Ascendant question. There's tremendous fandom around the Divergent franchise, but the performance of the last segment of the theatrical didn't really create a situation where Rob and Patrick and their team felt they could commit the production resources necessary to really make the production they needed. That's when we happily were invited into the conversation with Eric Five and the writer and director, and for many hours got excited about the possibilities of what this show series could look like, resolving the novel in a season across 10 to 13 episodes and then expanding from there for multiple seasons. And creatively it's really fantastic.

We'll be out as early as next week presenting networks with that opportunity. It both resolves the characters from the book franchise and creates new ones, and it really just points to the kind of discussions we're having every day with our theatrical colleagues, which have resulted in a lot of great development and series sales including Step Up, the Dirty Dancing adaptation at ABC, Lord of War, which is developing at Hulu, The Rook, which is a theatrical film property, Dork Diaries and others that are in the market.

It's just an example of what we call the virtuous cycle right now, concert bouncing back and forth from TV and film and vice versa. The economic upside on the long-term series franchise is very substantial. It comes over time and is an all-in-one pop, but it is really rewarding and we found on the bigger hits that we've had, it is been a contributer every year.

For everyone's edification, Kevin, how many pictures to have on this, how many interested buyers?

We have over 13 buyers that want to hear it; we're trying to squeeze that into one week. So we will see where we get to.

Jimmy?

Yes, Stan, to help you with cadence of adjusted EBITDA throughout the year, as you noted and as I mentioned in my opening remarks, the fiscal year results are backend loaded so that speaks for Q3 and Q4. With regards to the first quarter, as you have seen, we've come in very nicely versus expectations and part of that was related to timing. But also as with regards to the second quarter, we have seven releases in the quarter so you should expect increased levels of DNA spend.

Thanks, Stan. Ryan, can we have the next question please?

Amy Young, of Macquarie.

Thanks. Two questions.

First, can you comment on some of the financial projections in the S4. This year it assumes the midpoint of the adjusted EBITDA guidance. But what's actually going into the outer year projections, can you just give us some comments around or color around the movies slate. And then on the Starz side, what does that mean in terms of the MVPD relationships and any potential renewals, as well as the savings from output agreements?

And my second question is around the relationship that you have with Liberty Global and Discovery. How has that evolved over time? It seems like Liberty Global gives you a great way to jumpstart your International distribution and Pilgrim TV fits very nicely in with Discovery. So if you could just comment around that particular relationship, that would be great.

Obviously, not only is there an ownership position, but both CEOs of Liberty Global and Discovery, Mike Friesen and David Sasloff, two of the absolute finest executives in media are on our Board. And I can tell you that in both cases, including our board meeting yesterday, where we specifically talked about content for Liberty Global platform, where we talked talk about our series that we're producing for Discovery, I would say these are our constant conversations.

I think those relationships will be very, very valuable, Liberty Global, whether we are talking about content for their over-the-top offering, whether we're talking we are talking about expansion of our over-the-top platform that now ultimately merged over-the-top platform with the Starz, we think that global possibilities there are immense. And Discovery is a huge programming factory and we think that we can have a tremendous amount of content. We're already doing, by the way, their home entertainment, we set up a documentary business together. So obviously we think those relationships are incredibly valuable. You couldn't have two more collaborative people than Mike and David, and so we're really pleased them on the board, pleased to have them as investors and to continue those conversations Jimmy, you take the first part.

Sure. Look, Amy, with regards to the S4, obviously this doesn't reflect guidance or anything but I'm happy to try to give you a little bit of color on those numbers just looking out a bit. Certainly on the Lion's Gate numbers, the increases really going into 2019 that you see there, are reflective of our continuing growth and our TV business, as well as our improving film slate. In addition to that, additive is our ancillary businesses and our investments, as well.

From the Starz side, I'm not going to comment on anything relative to the MVPDs, but growth moving out into 2018 and beyond reflects improving revenues, as well as moderating cost as the Disney product amortizes off and originals reached steady-state.

Got it, thank you.

Thanks, Amy. Ryan, next question please.

Barton Crockett, FBR Capital Markets.

Thanks for taking the question here. I wanted to ask a little bit more about the tax benefit of $150 million. It seems like that's a mix of applying Lionsgate's NOLs to Starz' earnings stream. And then also some of the benefits of lower tax jurisdictions internationally. And some of the inter-company transfers there.

But on the NOLs, I was wondering if you could tell us how long do you think it is before those are used up? Would the ongoing savings by the time those used up still be supportive of that $150 million average that you're talking to.

Sure, Barton, yes, you noted a lot of the things that are very positive here. With regards to the $150 million plus of annual run rate savings, we've indicated that that will go through FY21. And let me just underscore that that's based on our existing status as a Canadian multinational and is also based off the leverage in the announced merger. So things that are effectively in place not at risk.

I would also add that, with regards to even going out beyond that, over half of this $150 million plus annual run rate savings, I think over half of that will extend well past 2021. We are well-positioned with regards to that and expect those benefits to continue for a long time.

Okay, so did the benefits through 2021 still include the NOLs and so the half of that that extends would be the portion that is really not from the NOLs, which aren't in perpetuity, but are just [to be] here for a few years?

Obviously there's the components of that includes accumulated NOLs, those were accumulated as of the year end, March 31, 2016, as well as those that will continue to accumulate in the near-term and those will carry forward. And than we have savings that we're layering in regards to the leverage that will continue on and on.

Okay. All right. That's helpful.

Then on the idea of this great growth in the TV production, you were looking to do about $1 billion or so this year and maybe a steady margin in the TV segment. Could you update us on how much visibility you have in that, how much confidence you have based on the pipeline that you see? And then how much visibility do have in your ability to continue to show some growth or hang onto the growth next year?

Yes, the answer, Jon, we actually have a lot of visibility going out fairly far. I would point out, your margins usually in a year as great as this year, your margins do get depressed a little bit, I think you can expect them to go up next year FY18 a little. But I think once you start having as many successful series as we do, I think you've got a lot of visibility. And let's not forget what we report in our television business.

I think sometimes people forget about some of the other businesses we've got, particularly the Debmar-Mercury syndication business is Wendy Williams. This is Family Feud, Celebrity Name Game, these are annuities that we keep growing year after year after year. So between that, The Pilgrim, big factor for nonfiction, our growing internal nonfiction, which include the big network show Kicking and Screaming. I think we've got a lot of shots at bat, frankly. I think you can pretty much count on pretty consistent revenue and ultimately, margin growth.

Okay. All right, thank you very much.

Ben Mogil, Stifel.

Hi, good afternoon, thanks for taken my question. So Barton got my question on tax, so I will ask a different one. On AMC's call today, they were talking a lot about the competitive environment with regards to TV, and brand and brand of channel matters a lot. That's obviously what Starz has been pushing, as well. When you look at your as a supplier of TV shows, obviously it's the network's responsibility to do the marketing, et cetera. But in order to make sure shows continue to get renewed and continue to have traction, any thought on spending directly on shows marketing yourself, just to give them a better life start, if you will.

I will let Kevin answer that.

We go into every show, every new series offering a whole suite of marketing assistance, from our own millions and millions of Facebook followers of our movie franchises, our own entire marketing department, the cash, that relationship, the studio is really the grease beneath wheels moving all these things forward and exploiting. And we have to go recover International revenue around the world, which all these days feeds into the mothership of the domestic.

So we look at everything and the first season we're always investing and over-investing because you've got get one big season under your belt before a show really gets traction. And when you think about shows like Madmen that were quiet sleepers and then they exploded, you know why a network like AMC and we are committed to sticking with something even if it is modestly successful in the first couple of years. But generally the network is really at the forefront of the domestic marketing effort. But these days it's truly a team effort both financially and in resources.

I should add, very good question. The fact is that I think some people have looked at the Starz transaction a little bit like okay, there's going to be a platform over there on Beverly Hills, and there's going to be a content company over in Santa Monica. And I think the first thing that's happening here is we're actually moving Starz into our building. The whole point is that the culture here is a culture that everyone's working together, Kevin talking, he's got six projects are now that are virtually going or in preproduction in terms of a film properties that are going to television, but there's way more behind that.

And that the point is that this Company that gets put together between Starz and Lionsgate is going to be an integrated content company. We take advantage of all the resources of our Company. I don't know anybody else who does this. If you look at the conglomerates, if you look at what their premium channel is compared to their studio, et cetera, I think they're virtually two distinct businesses. We don't see it that way, we are going to combine these businesses in an effective way, we are going to put their cultures together in an effective way, and as I say, we are not turning this into two different companies. This has got to be an integrated global content Company.

Okay that's great thank you very much both Kevin and Jon for that. Jim, one for you. I know guidance unchanged; obviously you've got a lot of moving parts left for the year in terms of tightening that up. I know one thing you talked about was some potential asset sales that would tighten that range up. Any update you can give us?

Yes, we continue to be active in that space. And like I said the previous quarter, still feel very much in the next 12 to 24 months that we are going to take several of those assets that are effectively hidden assets, we don't think that are fully valued or included in the value of our share price, and we are going to monetize those. We're either going to monetize those or move those to be positive contributors to adjusted EBITDA.

Okay. That's great, thank you very much.

David Joyce, Evercore.

Thank you. Two questions.

First, in thinking about how your TV production business is evolving, you haven't lapped a year yet with Pilgrim. Just wondering how should we think about the mix shift of the scripted and unscripted programming should be flowing in terms of lower cost and therefore lower revenue per episode or per hour versus where you have been? And if there is any seasonality in that. And then secondly, related to the pending Starz deal, given you will have or pro forma free cash flow, will there be any change in the type of financing arrangements for Film Production? I.e. would you be using film specific production, spending less that would be impacting free cash flow? Thank you.

Just with regards to your question, with regards to capital and Film Production, I don't expect that we will change that going forward. We like the pricing on that, we like the product and we think it works very well with our business. So I expect that to forward.

Again, what Patrick Wachsberger, our co-Chairman of film business has put together with these extraordinary output fields is our ability to bank these deals very effectively and pay them off very quickly. So there really would be no reason to change that.

And Kevin, in terms of the mix?

Sure. On the mix, the television production mix, there's really, our scripted business continues to grow exponentially every year. There's a bunch of buyers in the market right now, new ones coming to the table every few months. We've had big success this year with Greenleaf and OWN, which was doing some scripted programming, but not at budget level. And it's been a breakout hit for them and happily, it's in the Discovery family, so it is win-win for everybody. But there's new platforms all the time. So scripted we continue to see two or three new series a year.

Our non-scripted business is really two components. You mentioned Pilgrim, they have a fantastic business, it's a really smart investment. And they really have a steady-state operation running multiple, multiple series primarily in the cable non-scripted business, although they are also going to get into scripted and theatrical film development with our team.

And then our own non-scripted business, which is growing nicely and that's much newer to the world. That's really about two-years-old in earnest. It's been around for a long time just doing one of two shows. But, Jon mentioned, a big network show coming in January on Fox, Kicking and Screaming. That's a really, really big production, big-budget, one of our big shots.

We invested in the UK Company called Primal, two fantastic show runners in the UK who primarily create formats, and so that is growing nicely as well. Our goal ultimately would be to have revenues in scripted and non-scripted inclusive of Pilgrim at an equal level. Right now, scripted is far greater on the revenue side base on the expense of scripted shows, but we'd like to diversify that portfolio nicely, and we're on a nice trajectory to do so.

All right, thank you.

Thank you. Next question, Ryan.

David Miller, Loop Capital Markets.

Hello.

Jimmy, another question on the S4. In your free cash flow assumptions for the combined firm you have in FY018, you've got $591 million in free cash flow $379 million in free cash flow in FY17, so that's about a 55% clip higher in free cash flow FY18 versus FY17. Just wondering if you can comment on some of the puts and takes there? Any color you can give, particularly as applies to some of the more important components like film amortization and working capital, and then I have a follow-up. Thanks.

The most significant factor driving that growth, among other things is one, you've got stable increasing cash flows on the Starz side of the transaction, as well as our increase in free cash flow as well. And significantly to that is, remember, that the $150 million of tax synergies start immediately. So that's day one after consummation of the transaction.

Likewise, the $50 million plus of operating cost synergies will be ramping up pretty quickly, and that drives cash as well. So that's really the driving force behind the free cash flow, and thanks for noting the significant increase of that, because it is highly accretive.

Okay.

Excellent and then Jon, once you have Starz fully integrated into your model you have everything up and running in everything is running like a well oiled machine, what do you see as the core branding difference between the two pay-TV constructs that you obviously have an interest in, those being Starz and Epix. It feels to me like Starz is going to be more TV episodic and Epix is going to be more film and sports and the boxing and the concerts and stuff like that, but any color you're willing to provide at this time would be helpful.

Thanks.

I don't want to speak for the whole partnership. I think though, it's fairly obvious that the programming is fairly film heavy and I would expect it to be that way for the next three years or so.

I think there's no question that Chris and his team are doing a great job getting the original programming going. There's no question that there's going to be more investment in that, and working together it's not only more investment in that from a licensing perspective, but definitely more concentration on rights retention. Because I think it is really important: we built an amazing worldwide distribution business. We have a lot of third-parties come to us obviously, New Regency Miramax, a number of companies.

And therefore we believe that between their portfolios and our portfolio that we can create additional margin out of that content. So rights retention is going to be really important, and I would add one other thing, the thing that I think Chris and his team are doing really well right now is while the programming is certainly wide, you look at the ratings of some of these Sunday night shows, but they are actually making sure that it's focused as well. And I think that's part of what we do as a company as well, so I think there's tremendous synergy and thinking about who the modern audience is and how they watch television. So from a brand perspective I think we have a great alignment.

Great, thanks David. Next question, Ryan.

Todd Juenger, Sanford Bernstein.

Things for taking the question.

Actually I'll just throw out two questions and let you decide who wants to fill them in what order. First one, picking up on John's comments about the harmonization between Starz and Lionsgate as independent companies becoming one, I'd really love to drill that down a little further and think about the development process. On a scale of both companies or entities keeping completely independent creative development processes for Starz and then for Lionsgate, and then perhaps just finding each other where you happened to intersect, versus the other end of the scale, of ramming it all together into just one single development process. Where on the scale are you currently thinking that you're going to draw the line there to maximize both the combination of companies, but also maximize your ability to find other partners and do things outside, that's question number one.

The second one is much quicker: just, sorry I did not see the in the S4. Jimmy if there is anything you can say about the cost of getting the deal done; the deal costs, restructurings costs and integration costs, any of those one timers, that would be very helpful, thank you.

I'm going to answer the first one and tell you that's a very good question and I'm not really prepared to answer it yet. I think there's some really smart people on both sides. I think what I would point out is that we as a company, and I think Starz as well, have ideas coming to us in terms of content development through a lot of different channels. For us we have it through our film development side, we have it through our film acquisition side, we have it in television through our scripted area, we have it through our nonfiction area and we have it through Debmar-Mercury.

On their side as well, they're getting it through a lot of different places. And so I think that's an area that we are going to have to really think through. How to keep that diversity of incoming channels, incoming content and organize it efficiently. But again as I said before, integrating these companies as closely as we're going to, having Chris five yards away from me, he and I and Lieutenant COO, Jeff Hersh, these conversations, we are going to be speaking 10 times a day to figure that out. But I can promise you that given the two companies together, there are going to be even more ideas coming through our channels then we never had.

Todd, with regards to the overall deal cost, you will find that it is in the S4 under sources and uses of cash. And I would just add that generally speaking, the way that will flow through is you'll will have one time deal cost associated with the merger that will be expensed as incurred. Some of that was actually incurred and expensed in this quarter and the rest of that would be expensed between now and generally the period of closing. With regards to the refinancing of existing debt, that will generally be expensed at a time related to debt extinguishment, which you've seen before and are accustomed to, and then any fees associated with raising of new financing will generally be capitalized and spread over time.

Great, thanks, Todd. Next question please, Ryan.

Jon Janedis, Jefferies.

Thank you.

I wanted to ask a related question regarding the profitability in the TV segment, meaning, it seems like the ratio of TV content you deliver to SVOD versus linear TV is going to grow. And so given the much higher profitability of renewal on an SVOD platform, compared to linear TV in general, should the SVOD product have a higher margin over time? And does that have the potential to skew segment margins higher than the historical range you discussed?

Well look, it's Kevin speaking.

All of the SVOD players, each of them have very different models. Some are in the cost-plus model, some are in the limited rights model. So it is actually two broad of a generalization to just differentiate between SVOD and cable broadcast. Every property we bring to the market is different, some have a high, high international opportunity for return and if you were to give away long-term upside on something you might regret it later when the show could have taken off and really continue to be in the lifecycle for 20,30,40 years. So each one is one is a case-by-case basis and we look at them that way. We make tough decisions when we have multiple offers, and then we decide where we want to go.

Okay, got it. And let me start by saying, I'm sorry if I missed this, but can you talk more about how the channel production deal will work? What rights do you retain and what did you say about the plans to distribute that? I may have missed that, sorry.

Sure, I will have Brian Goldsmith answer that question.

It really varies on a project by project basis. But generally speaking, outside of greater China, Lionsgate would distribute movies internationally. So actually ex-China. So think in the US, as well as throughout global distribution footprint. But each deal is a unique process. So distribution rights may very on a deal by deal basis.

Thank you.

Ryan, next question please.

Steven Cahall, Royal Bank of Canada.

Thank you, just two questions, maybe the first on the television side. I was wondering if could give us the organic growth rate that Pilgrim did in the quarter and also on the domestic production revenue that you did outside of Pilgrim. Looks to me like you had a pretty decent run rate there and I think will be ramping as we go through the rest of year. So I was wondering if you could confirm that?

We had nice uplift with regards to our growth rate outside of Pilgrim with regards to revenue, and I think you will see the same throughout the full year. So not breaking it out specifically. But we're expecting very strong revenue growth for the year and expect FY17 we're going to be in a low double-digit margin. And in going into 2018, we would be approaching or exceeding a billion dollars of revenues, as we said before.

And then maybe just a follow-up on the margin side, very strong quarter in both revenue and EBITDA at the motion picture side. But it looks like, if I'm doing the math right, that margin has compressed quite a bit. So what do we think of as maybe run rate or exit margin as we're coming through the year. And is anything you would call out in the quarter that contributed to margin being where it was maybe compared to the quarter last year?

Thank you.

Yes, certainly on motion picture it is going to vary quarter to quarter just based on the timing of P&A and product releases. So I think you want to look at our historical run rates and see us getting back to those margins is your better indicator. And not necessarily focused on any particular quarter, though I would add, obviously, as I noted earlier to one of other responses, as we go into the second quarter with seven releases, you're going to expect revenues up in motion picture nicely, or being effected or benefiting from that, and as I mentioned, we will have the P&A to support that.

So that would negatively impact the margin. But it all works out over the long-term. We feel very good about our margins and growth there inour film business.

Thanks, Steven. Next question please.

Matthew Harrigan, Wunderlich Securities.

Thank you. At NAB and some advanced TV conferences, there's been an immense focus on short form video for advertising and really getting the specifics of a younger demographic, and then you look at the CISCO VNI numbers and really hyperbolic growth curves there. You've got a lot of capabilities in that direction already with your digital investments, but seems like there's an even broader opportunity now with the advent of the deal. Thank you.

We are leaning heavily in the short form area, but primarily we view some of this great digital content as an opportunity to migrate filmmakers, television talent that are not necessarily on our day-to-day radar into our traditional vertical. But, as an example, we had a long-term deal and had it for a couple years now with Freddy Wong and Rocket Jump, which is a film collective run by Freddy and this partners who are YouTube superstars. We green-lit a movie called Dirty 30 with Grace Helbig and the Hart sisters who are big time Youtubers.

Craig Collegian has a digital label within his company called 1620, and we've made an overall deal with Grace, but all of those have happily migrated into long running series that really could have a much bigger return. These are really, we think, development opportunities that turn into real long-term perpetual businesses which is really where we live in the TV and the film space.

Thank you.

Eric Wold, B. Riley.

Thank you.

Follow-up question on one of the ones earlier talking about the ancillary investments. I know you discussed in the past plans to monetize those where you think the value is not reflected in the stock price. Two parts to that: one, would everything be considered on the table or would you think about some as being carved out really not an option to be monetized. And then two, is that something that was more important as Lionsgate as a standalone Company, or when you combine with Starz? Is that viewed as really an opportunity now to deliver post-deal?

I will answer the first part of that, which is to say, I think any investment that's a minority investment ultimately and is not significantly strategic is something that we feel, at whatever point we feel, it is not going to become strategic. It is an opportunity to monetize.

The question is, sometimes will hold onto something in order to take advantage of whatever other benefits it had along the way, as well as wait for the point in time where it's got the best valuation we think that we might be able to get. And so there's a couple of those; I'm not going to specify which they are. But in general if it is not going to become a true strategic piece of business for us, we are ready to monetize.

I will just add to that Eric, that all of this provides us with a lot of flexibility to delever, okay? And that could allow us to delever much higher than the 1.5 times in next 12 to 18 months post acquisition that we've noted, it just really depends on how we play that out. But it is great to have that flexibility.

Great, thanks.

Evan Wingren, the Pacific Crest Securities.

Thanks. I'm just wondering how you view Starz current over-the-top offering and how you see it evolving under Lionsgate management, and if your ability to drive incremental revenue through that offering that maybe isn't factored into your current projections?

Yes, great question. We have not factored anything incremental in other than to say there's pretty much no doubt that we will combine those efforts. They are doing -- I can't speak to their numbers, but I can tell you, you would surprised when you hear how big they are, they are doing extremely well. I can tell you the sign-ups after the launch of Power and the Sunday night programming block was extraordinary. The velocity was just absolutely immediate.

We see their over-the-top offering and, if you will, the general entertainment over-the-top offering. And we see the targeted over-the-top channels that we have as being a satellite around that. They will be packaged together. I've looked at presentations that Jeff Hersh and his team have put together already and I tell you it is very, very compelling.

As a matter of fact, I wouldn't be surprised if there's other outside parties including fairly significant ones, I'm aware of some conversations of putting other products and [third products] through that package. So we think that's one of the fantastic opportunities that we have, not looked at in terms of monetization. But that's going to happen and I'm a very excited about it.

Then just one follow-up on TV production.

In terms of the tightness of supply, are you seeing the overall scarcity of shows -- availability of shows impact your ability to derive price in terms of when you are selling those shows to any of your buyers?

I'm going to answer for Kevin on this, he's modest, but I think he said earlier he's got on the Divergent potential series, he's got 12 buyers.

If you've got one buyer it's pretty hard to drive prices; if you've got 12 I think it's a lot easier. We are going out with product, Kevin and his team go out with product. They don't go out until it's ready, they don't go out until it's packaged and I think that, as Kevin had said, sometimes he's got so many meetings he wants me to provide a helicopter for him. I think for great premium content and for a Company that's created brand-defining shows, I think we will continue to get excellent pricing.

Thanks, Kevin. Next question please, Ryan.

Richard Greenfield, BTIG.

Hi, thanks for taking the question.

When you look at Starz, I think we look at it very much as a paid TV channel that's always lived in an ala carte world, and it isn't exposed to the significant over-earning challenges faced by basic cable networks as the legacy bundle phrase. But there's a real investor concern that this is the beginning of a multi-year cable network roll-up by Lionsgate.

When you read the proxy on Starz, it's clear that Malone only wanted to sell to Lionsgate. And so the fear becomes challenged assets like Discovery get jammed into Lionsgate or other cable networks like AMC networks. Curious how you look at strategically the future of Lionsgate and what people should read or not read into the Starz acquisition?

I think really we have made this clear, appreciate the question, Rich. We are focused on content. We're focused on filling our pipeline with premium content, content that can expand to ancillary markets, location-based entertainment and game and franchise extensions and that's really our focus.

I think it is interesting, my friend Les Mundus said it really well and I think you picked it up, which is the kind of acquisitions he's focused on are anything that can enhance his content platform. And I think, obviously one of the smartest people ever in the business, the fact that he's saying is that basically CBS isn't really a broadcast earner, it is a content factory.

And that's really what we are looking at. Being a global content factory, particularly with premium content. And I think you will see particularly after we've now got the benefit of the Starz platform. I think you would see any transaction, that we're more focused on content than anything else.

I would also say the most importantly, you are not seeing us running out to the marketplace. The most important thing you're going to see this Company and myself doing for the next couple of years is integrating this, making this -- making this thing run like a top, and really taking advantage of making this an incredibly accretive transaction for our shareholders.

It's Michael, I had one thing Rich. This is an asset, John Malone thought these two assets would fit nicely together, he's been saying that for a long time, but make no mistake, we wanted the Starz deal.

I understand that you wanted the Starz deal. I'm saying the question was whether there's other assets they could push in, and I think it's very clear from your answer that you don't want to enter the basic cable universe. You want to build in content. And I was just wanted you to clarity that, because I think there's been a lot of confusion about the future of Lionsgate and I think that was very helpful.

And I think Jon made the point, we are not going to buy anything unless we think it fits beautifully.

Thank you.

Jim Goss, Barrington Research.

Thanks. First, I'm wondering how important you think it would be to have a defining series like a Madmen or Orange is the New Black for Starz for branding purposes or to raise its status? Or do you think the original series progress it's making right now is adequate? On a related basis, how do you prioritize content between this owned subsidiary and third-party options if you did come up with something perceived to be a great idea and others might have an interest in paying you for it?

It's Kevin, let me answer the second and Jon will address the first. We talk a lot about this as an independent supplier. We are in business with 40 different networks and platforms. And for us it comes down to the right show for the right platform at the right time. When that alchemy happens and it is a Madmen or Orange is the New Black or WEEP or a Casual, it's great day for us, it is great day for our clients and value is created and it lasts for years and years and years.

We look at the paying premium landscape as great opportunities create network defining shows, but we will always focus on where it will work best. So we've been calling on Starz for 12 years now, in the original space. We have done two series with them. We pitch them regularly and we have several things in the pipeline there. And we expect to continue to do so. But certain things that'll work for them won't be right for other networks and vice versa. So really, what's best for the show and which will make it a long-lasting asset is what our focus is on the studio side.

I would add that when you look at it I think, as I say, Chris and his team are doing a great job now of that, but at the end of the day Starz really hasn't had its brand defining shows, so I think you can answer your own question clearly. Having a show like Madmen, which, parenthetically,, and we love the guys, Josh and Charlie and all them at AMC, but for year after year they would tell us that they were losing money on Madmen, when of course, their enterprise value would go up $1 billion a year. So I think it is pretty obvious that having that kind of brand-defining show would be great.

The people though do forget that at Starz there's so much additional content going through them. There's branded channels like the Western channel, which is one of the best watched channel on anybody's platform on the Encore side. And so they have huge amount of library, huge amount of movies, and some really great series already on the air, as well as a number of others that are coming up and being considered that I've read and that are really terrific and premium. But of course, again, having that big monster hit on any platform is a game changer.

Thanks Jim. How many more questions do we have in the queue there, Ryan?

We have one final question.

Let's do that.

Tuna Amobi. S&P Global Market.

Hi, thank you very much.

With regard to the Starz deal, I'm trying to figure out what question to ask that hasn't been asked already. (multiple speakers) This is first for Jimmy, how will this deal effect the segment report and if at all? How much breakout do we expect going forward? And secondly, also related to that, I know that you alluded to that in your comments on deleveraging, flexibility, et cetera. I'm wondering if there's any shift in terms of capital allocation? I know that Jon Malone had his own philosophy concerning these things and I'm wondering if you feel that you are aligned or need to be aligned with his thinking, and how you expect that to evolve. So those are the first set of questions and I have a follow-up.

Thanks.

Sure, with regard to where we are in terms of capital allocation, as we commented many times, we are focused on de-levering. We have significant free cash flow that has a lot of visibility, it adds to the diversification of our overall business, it accelerates both growth and diversification, that falls across all of out metrics and particularly falls nicely and heavily across improving free cash flow. That will be used to significantly de-lever the inbound or the opening leverage of this transaction so I think everybody is fine with regards to capital allocation.

And your follow-up there, Tuna?

I also asked on segmental reporting? Any changes in that respect? And I have another follow-up.

We've not concluded with respect to ultimately what our segmental reporting would look like, but obviously you'd expect the networks to be a separate segment. We will figure out exactly how the rest of that falls in with the overall Lionsgate family of segments.

And separately for Jon, I wonder if you could remind us of your UK exposure at this point? I thought it was quite interesting that you are stepping up your investment in UK at this point in time with all the concerns with Brexit, et cetera. I'm wondering if one should interpret that to mean that this is a non-factor for you? Or if are there any mitigating circumstances that lead you to be more positive with regard to your UK plan that one might expect, given all the uncertainty?

With currency, when you are both in the production acquisition as well as (inaudible) the currency changes both taketh and give back to you. So from a production point of view, anything we produce there is essentially produce a cheaper subject (inaudible) for series there. I would add as well, what [Vicki Kamas] and his team has done very, very well it is not just rely on US product, but they've been in acquisition for production business there and again, I think we won't have (inaudible) very much from that perspective so I think (Inaudible)nothing to do with [current de-valuation], but it has to do with the vibrant business, the vibrant business, the big seating market in the world, and one of executives we have around.

Are you able to quantify that exposure at this point? For the UK?

We don't really have any exposure. As I say, we're buying and selling and (Inaudible). Okay, Tuna, thank you. Thank you everybody, we look forward to our next call.

Ladies and gentlemen, that does conclude today's conference. As I mentioned earlier, today's conference was recorded. It is also going to be available for replay starting tomorrow, August 5, 2016 at 1.00 PM Pacific going for one week until August 12, 2016 at midnight Pacific. You may access that replay system by dialing 1-800-475-6701 and entering the access code 398 706. International callers may dial in to the United States using 320-365-3844. Those numbers again are 1(800)-475-6701, international 320-365-3844. The access code is 398 706. That does conclude today's conference, thank you for your participation. You may now disconnect.