Lions Gate Entertainment Corp. Fiscal 2018 Fourth Quarter ...

[Pages:14]Lions Gate Entertainment Corp.

Fiscal 2018 Fourth Quarter Year End Earnings Call

Thursday, May 24, 2018, 5:00 PM Eastern

CORPORATE PARTICIPANTS Jon Feltheimer - Chief Executive Officer Jimmy Barge - Chief Financial Officer Michael Burns - Vice Chairman Chris Albrecht - President, Chief Executive Officer, Starz Jeff Hirsch - Chief Operating Officer, Starz Brian Goldsmith - Chief Operating Officer, Lionsgate Joe Drake - Chairman, Motion Picture Group Kevin Beggs - Chairman, Television Group Laura Kennedy - Chief Operating Officer, TV Group Rick Prell - Chief Accounting Officer James Marsh - Senior Vice President, Head of Investor Relations

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PRESENTATION

Operator Ladies and gentlemen, thank you for standing by. Welcome to the Lionsgate Fiscal 2018 Fourth Quarter Year End Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If you should require assistance on today's call, please press star then zero. And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Senior Vice President and Head of Investor Relations, James Marsh. Please go ahead.

James Marsh Thanks, Noah. Good afternoon, everyone. Thanks for joining us today for the Lionsgate's fiscal 2018 fourth quarter call and year-end earnings conference call. We'll begin with opening remarks from our CEO, Jon Feltheimer; followed by remarks from our CFO, Jimmy Barge. After their remarks, we'll open the call up for questions.

Also, joining us on the call today are Vice Chairman, Michael Burns, Starz' President and CEO, Chris Albrecht, Starz' Chief Operating Officer, Jeff Hirsch, Lionsgate's Chief Operating Officer, Brian Goldsmith, Chairman of the Motion Picture Group, Joe Drake, Chairman of Television Group, Kevin Beggs, Chief Operating Officer of the TV Group, Laura Kennedy, and Chief Accounting Officer, Rick Prell.

The matters discussed on this call today 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 our forward-looking statements as a result of various factors, including the risk factors set out in our annual report and Form 10-K filed with the SEC on May 24. The company undertakes no obligation to publicly release the result with these revisions to these forwardlooking statements that may be made to reflect any future events or circumstances.

With that, I'll turn it over to Jon. Jon...

Jon Feltheimer Thank you, James, and thank you all for joining us today. Many of you've already read the exciting news that this morning we launched our Starz offering on Amazon Prime in the United Kingdom and Germany.

This is another major step in rolling out Starz as a global consumer brand. I'll talk more about this international rollout in a moment. But first, I'd like to briefly recap a strong quarter and a successful year in which we exceeded our internal and consensus financial expectations.

We achieved this performance with significant contributions across our film, television and Starz platforms, enabling us to grow adjusted OIBDA by 11% to a record $604 million last year. We also continued to generate the robust free cash flow we anticipated. Let me take you through the highlights of the year that contributed to our strong performance.

At Starz, we signed new deals with Verizon, Amazon, Altice and Sprint. They reflect the compelling value proposition we offer to linear and digital platforms alike. We achieved record ratings from returning series Power and Outlander and renewed key properties like American

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Gods and Girlfriend Experience. Earlier this month, we launched new series, Vida, Sweetbitter and Howard's End, driving over the top subscriber ads to their highest level since last October. And year-over-year, we've more than doubled Starz over the top subscribers.

With our new programming connecting with its core demos, we reduced subscriber churn to its lowest level ever, as data from our direct to consumer business continues to enhance our ability to target our audiences. In spite of disruption in the traditional MVPD universe, success of our Starz over the top offerings allowed us to grow overall media network segment revenue by 5% last year. And we anticipate growth again this year.

Turning to our film group; we increased our calendar year domestic box office by 30% in a highly competitive environment with hits from all areas of our slate, Wonder, a targeted film that we transformed into $300 million worldwide box office success, Ryan Reynolds and Sam Jackson's The Hitman's Bodyguard, Pantelion's breakout film, How To Be a Latin Lover and together with our partners at Amazon Studios, The Big Sick, one of the biggest indie hits of the year.

We are off to fast start again this year with a faith based I Can Only Imagine; The Commuter from our friends at StudioCanal and Pantelion and MGM's comedy hit Overboard. In fact, Overboard is on its way to becoming Pantelion's highest-grossing film ever, reaffirming our ability to deliver hit content to the Latinx community. And overall, thanks to a targeted diverse slate, and an efficient business model, we achieved ultimate profitability on over 90% of our fiscal 2018 theatrical releases.

We are looking forward to another great slate this year. With a feel-good comedy Uncle Drew, Sundance sensation Blindspotting, The Spy Who Dumped Me starring Mila Kunis and Kate McKinnon, A Simple Favor with Blake Lively and Anna Kendrick, Robin Hood starring Taron Egerton and Jamie Foxx and the Seth Rogen/Charlize Theron comedy, Flarsky.

Fiscal 2018 was also a year in which we prepared to launch new franchises like Chaos Walking and The Kingkiller Chronicles, expanded the universe of existing brands like John Wick and adapted our Step Up film series into a hit television show that has just been renewed for the second season on YouTube.

Last week, at the Cannes Film Festival, our presentation of Kingkiller led by director Sam Raimi was a hit with international buyers as we move forward with a major event film, a premium origin series and mobile console and board games with three different partners all under the creative leadership of Lin-Manuel Miranda.

In television, we not only readied a number of signature properties for our network partners, but most importantly assembled our first Lionsgate produced lineup of premium programming for Starz.

The Rook, our co-production with Liberty Global, began shooting in London earlier this month with a terrific cast and the John Wick Spin-off The Continental is slated to begin production early next year. It was also a year in which we continued to form new relationships with top streaming platforms while expanding our existing partnerships, with six scripted and unscripted series for Netflix, a growing supply of premium shows for YouTube and our first original series for Facebook watch.

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And it was a year in which our interactive games, location-based entertainment and Lionsgate over-the-top initiatives continued to gain momentum. Just yesterday, our fast-growing Pantaya, Spanish-language streaming movie service launched on the Comcast X1 platform.

With the continued success of Pantelion's later films, including the recent hit Overboard, the debut of Starz original series like Vida and the rollout of Pantaya, we continue to build our leadership in the very important Latinx vertical.

In addition to what we achieved in our individual businesses, we had a very successful year integrating Lionsgate and Starz bringing our employees together, achieving greater than expected financial and operating synergies, working collaboratively to extract maximum value from Starz original series on the distribution front, while partnering creatively to add exciting new properties to the Starz pipeline.

And as I mentioned at the start of my remarks, earlier today we launched Starzplay branded channels in the UK and Germany on the Amazon platform bringing Amazon Prime subscribers over 1,000 hours of premium Starz original series, Lionsgate shows like The Royals, Casual and Boss and blockbuster film franchises from Saw to The Hunger Games.

The Amazon relationship is an important part of our plan to create significant market share worldwide by rolling out the Starz brand in 15 territories over the next three years. All of this activity comes on top of a successful Starz launch in Canada and the continued growth of our Starzplay venture in the Middle East and North Africa. In Canada, where we recently announced our partnership with Bell Media, Starz programming is already available to consumers with full over-the-top and linear rollout slated for early next year.

And in the Middle East and North Africa, our Starzplay Arabia Venture became a market leader poised to cross the one million subscriber mark. Our strong growth momentum also continues on the domestic front starting with renewal of our domestic distribution deal with Amazon creating win-win incentives designed to accelerate subscriber growth on one of our most important over-the-top platforms. And today, we're pleased to report that Starz will launch on YouTube TV next month bringing our full array of programming to consumers via their smartphones, tablets, PCs and connected TVs.

We follow that with another major digital platform launch on Hulu in October and we expect meaningful subscriber increases from all of these new deals. These steps are just the beginning as our programming investment continues to bear fruit, and as we roll out additional distribution partnerships domestically and internationally. We are locked and loaded for accelerated global expansion and overall subscriber growth in fiscal `19.

I'd like to note that none of these initiatives would have been possible without our unique value proposition. A massive content library, rich slate of original Lionsgate films and television series and a robust lineup of Starz programming to populate our expanding portfolio of branded channels around the world.

In closing, we believe that the dynamics of today's industry environment play to all of our strengths, our expertise in creating targeted content for passionate affinity audiences, our agility in adapting to changes in our business, our ability to attract talent through a holistic Lionsgate approach that leverages opportunities across all of our platforms, and our focus on finding the right partners to help us continue growing our global business.

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Now I'd like to turn things over to Jimmy.

Jimmy Barge Thanks Jon, and good afternoon. I will briefly discuss our quarterly financial results and update you on our outlook as well as provide an update on our balance sheet.

We reported solid results for the quarter and the full year. For the full year, adjusted OIBDA increased 11% over the prior year on pro forma combined basis despite an expected 4% decline in revenue, driven largely by a smaller film slate.

Fiscal fourth-quarter adjusted OIBDA was $136 million while revenue was $1.04 billion, down 16% and 17% respectively, driven largely by difficult comparisons in the Motion Picture segment relative to the prior year December release of La La Land.

Reported fully diluted earnings per share were $0.41 a share this quarter, while fully diluted adjusted earnings per share came in at $0.25 a share.

Now let me briefly discuss performance at the underlying segments, compare the prior year on pro forma combined basis. You can follow along in the updated trending schedules that we've posted to our website. Media Networks segment quarterly revenues declined 1% versus prior year to $366 million, while segment profits declined 8% year-over-year to $115 million.

The Media Networks revenue and segment profit decline related to difficult comparisons at the Content & Other sub-segments level, where as you will recall, we licensed a significant amount of Starz original library in the prior year quarter. In fact, Starz Networks actually accelerated revenue growth in the quarter to 3% despite the temporary disruption of service on Altice. Excluding the impact of Altice, revenues would have been up 5%.

Similarly, Starz Networks profit declined 4% but would have been up excluding the impact of Altice. Starz ended the quarter with 23.5 million subs down 500,000 from the last quarter.

Our Motion Picture segment, revenue declined 35% in the quarter, driven by difficult comparisons related largely to carryover effect of "La La Land". Segment profit slipped 44%. Recall last year, the fiscal fourth quarter also included material contributors like "Deepwater Horizon" and "John Wick Chapter 2".

In television production, segment revenues of $253 million were up 4% in the quarter. TV segment profits came in at $23 million. The improved results were driven by the timing of both scripted and unscripted new episodes. Full-year TV segment profits were up 6%.

Now looking ahead, we continue to feel comfortable with our updated guidance from last quarter for a three-year adjusted AOIBDA CAGR of mid-to-high single digits.

Now turning to our balance sheet, during the quarter we took a number of steps to restructure our balance sheet including up sizing our Revolver and Term Loan B, repricing our Revolver in Term Loan A and hedging our exposure to higher interest rates. We re-priced our Revolver in Term Loan A to LIBOR plus 175 saving 25 basis points. We also extended the tenor on both to five and seven years respectively.

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In addition, earlier this month we limited our interest rate risk by hedging a $1 billion of notional value of seven year LIBOR at just over 2.9%. We will also explore repricing our Term Loan B upon the expiration of the soft call in June.

During the year, we generated $330 million of free cash flow which along with the proceeds from the sale of Epix was used to reduce net debt by $650 million. Net leverage at the end of the year came in at 3.4x, which is down nearly a full turn from 4.3 at the beginning of the year. And we continue to be below our initial target of 3.5 to 4x. Also, with an increased revolver we have $1.5 billion of unused capacity and concluded the quarter with $378 million of cash on the balance sheet. Overall, we ended the year with a significantly stronger balance sheet, reduced interest rate exposure and enhanced flexibility.

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

James Marsh Thanks Jimmy. Noah, we can open it up for Q&A now, please.

QUESTION AND ANSWER

Operator Ladies and gentlemen, if you wish to ask a question, please press star then one at this time. Once again, if you have a question, please press star then one. Our first question will come from Matthew Thornton with SunTrust. Please go ahead.

Matthew Thornton Hey, good afternoon, guys. Thanks for taking the question. Maybe two if I could. First off, Jimmy, you talked about comfort in that three year OIBDA outlook. Are you still comfortable with kind of the shape of that and previously you guys have talked a little bit about fiscal 2019 being kind of flat and then obviously you are seeing the growth manifest in fiscal 2020. Just checking if you are still comfortable with that? And then maybe over to Chris on the Starz subs, any color you can offer there just in terms of OTT, you know, sequential movement versus MVPD channel. And any quantification you can give us and just what the impacts from Altice were would be helpful. Thanks guys.

Jimmy Barge Sure, Matt. Look as we previously mentioned we expect fiscal 2019 will be a year of investment in Starz and realignment at our Motion Picture group. We are not likely to see growth in adjusted OIBDA. Obviously, we just concluded fiscal 2018, still early in the year, and of course, there were a number of factors that could impact fiscal 2019 results either up or down. In terms of the cadence, for fiscal 2019 quarterly cadence we expect it to be a bit back end loaded like last year. With the fiscal first quarter being smaller seasonal quarter and we expect the quarters largely build sequentially throughout the year.

Chris Albrecht Starz subs, a bit of a tough couple quarters in our MVPD space, but we are poised for growth in the Starz subs in fiscal 2019.

As Jon mentioned, we've locked some new distribution deals in. We've extended our Amazon deal, when you put that together with what we think it is going to be our best lineup for quarters to come on our original programming this couldn't come at a better time. We feel very good

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about the YouTube, Hulu launches and other deals that we are working on that we are going to announce in the near future.

With regard to the MVPD business, we think that will stabilize as we cycle through the U-Verse shut down. We were impacted by the repackaging of the Time Warner systems under the Charter deal and we haven't seen what will be positive impact as the Altice deal starts to ramp up. We are looking for a good story on subs with Starz in fiscal 2019.

James Marsh Great. Thanks Matt. Noah.

Operator Thank you and next we will go to Stephen Cahall with RBC Capital Markets. Please go ahead.

Stephen Cahall Thank you. Maybe first just a follow up on the Starz sub question Chris. Just wondering if you could give us the timing of the Altice deal, I think you end up on more subs than Altice than you are on before. If you could just confirm that. I was wondering, if you would give us an indication as whether you think STARZ subs will be up year-over-year in the first quarter which would be back over that $24 million watermark? Secondly, maybe one for you Jimmy, you deleveraged [ph] a lot last year and you just talked about some of the refinancing. Can you give us any indication as to maybe what the free cash flow tailwind and the interest line might look like in fiscal 2019? Thank you.

Chris Albrecht With regard to Altice, I can't give you too many specifics, but I can say overall that the deal is a win-win. Obviously, there were some short-term impact, but we look to grow subs in that deal in the coming quarters. OTT, as I said before we are poised as Jon said domestically poised for meaningful growth. We look to grow our Starz subs overall in fiscal 2019.

Jimmy Barge Yes, Stephen on the average interest rate going into the year is 4.5%. They should help you model that, and of course, we are 60% fixed now. They should give you some feel for that on a modeling perspective.

James Marsh Thank you. Next question please, Noah.

Operator Next we will go to Amy Yong with Macquarie. Please go ahead.

Amy Yong Thanks. Two questions as well following up on Starz and leverage. Just on Starz, I think you commented that 2019 will grow again, maybe if you could talk through kind of a mix of linear versus OTT. And do you think that digital and international efforts are enough to offset the linear pay TV decline that we've been seeing? And maybe if you could give us some color on the economics of digital versus international and how that might impact OIBDA going forward that would be helpful? And then Jimmy you are obviously de-leveraging really quickly, just thoughts on priorities of cash, the stock is really under pressure any thoughts around a buyback or accelerating that. Thank you.

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Chris Albrecht Amy with regard to Starz, look we grew revenue in the Starz subscription business which is really our focus. As you know, a lot of these deals are flat deals. Revenue is not necessarily impacted up or down with specific sub numbers. As I said, some unique situation disruptions in our MVPD partnerships will subside and we will see that stabilized which gives us room to improve our overall numbers with the meaningful growth of the OTT business. And that's an ala-carte business, those are good subs, each sub we get paid for, in the international space it is an a la carte business as well. We look for similar splits as we go forward and expand globally. And as Jon said it's just the beginning of that international expansion.

James Marsh Amy can you repeat the second question?

Amy Yong Yes. My question was on deleveraging, obviously you are deleveraging really quickly and hitting your target, maybe Jimmy if you could update us on your thoughts on priorities for cash, the stock is fairly under pressure, any thoughts on a buyback or accelerating that?

Jimmy Barge Well, certainly, we generated a significant free cash flow this year and certainly expect to continue to generate free cash flow in fiscal 2019 even with our investment in international rollout and original content. We always are balancing a number of potential uses for our free cash flow with the sole focus really to drive long-term shareholder value. That certainly includes cash for M&A opportunities, buybacks as you referenced, as well as, returning cash to shareholders through a dividend. While we did not repurchase any shares in the current quarter, we do have a $185 million of share buyback authorization in a really strong balance sheet, other than that I am not going to comment specifically about our plans.

Michael Burns Jimmy I just want to add one thing, Amy we are obviously, in the fall, expecting the conclusion to the dissenters (liability), obviously we have to be prudent until that outcome happens.

Jimmy Barge Great, thanks Amy.

Operator Thank you. Next we will go to Aravinda Galappatthige with Canaccord Genuity. Please go ahead.

Aravinda Galappatthige Thanks for taking my questions. Two for me as well. First of all, on the Content & Other segment within the Media Networks, obviously that bounces around a lot on a quarterly basis. Just wanted to get a sense of how you see that trajectory going into 2019 and beyond? And then in terms of a reliable margin that we can rely on for that, it's 33% for the year. How should we think of a baseline there? And then secondly a bigger picture question with respect to Starz, obviously a lot of incremental programming going into the platform, longer term is it reasonable to expect sort of stronger affiliate fees on a per sub basis? Obviously there is still a big delta which is the other premium networks, however not to say that it should close the gap, but over time is there a meaningful upside there as you look to get a return on those investments? Thanks.

Lions Gate Entertainment Corp. Thursday, May 24, 2018, 5:00 PM Eastern

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