Lionsgate Studios Corp. (LGFA) Earnings Call Transcript & Summary

Good afternoon. My name is Carmelli. And I'll be your conference operator today. At this time, I would like to welcome everyone to the management discussion of Coronavirus Impact Conference Call. [Operator Instructions] Please note that today's call is being recorded. Thank you. Mr. Cahall, you may begin your conference.

So thanks, everyone, for joining us today on another weird and wild day in the equity market. And I want to really thank Lionsgate for joining us to speak today. I think from a lot of corporates' perspective, it's been this really unpredictable time. And sometimes the easy thing to do for all of us is maybe to sort of sit back and wait and let it play through and then figure it out later. And so my big things go out to Lionsgate for just trying to get in front of what's going on in this business and to give us some of their time today to talk us through what they're going through as a company and help us understand the implications both on their business and the stock a little bit better. So James, Jimmy and as a last addition surprise, Michael, thanks for joining us. For those on the line, we've got James Marsh from Investor Relations; Jimmy Barge, the CFO; and Michael Burns, the Vice Chairman of Lionsgate. So again, thank you all for joining us today.

Maybe just to get into things, I'd like you to start off with just like the 30,000-foot view of the business, how you're responding to the coronavirus right now? And maybe anything else you want to say. And sorry, just before I do that, I forgot to remind. If you have any questions and you're listening on the line, you can send them to myself or my colleague, Kristy Warmus. Just send those on e-mail during the call and we'll compile them and do some Q&A at the end. So sorry to interrupt myself there, but maybe you could just start off, folks, with letting us know how you're thinking about protecting your employees, managing some of this business disruption, and then we'll dive into some more detailed questions.

Well, thanks, Steven. Yes, glad to be on the call. Thanks for hosting. And surely -- for sure, our thoughts, prayers and everything is with our employees, our partners, our customers, that everybody remains safe. And clearly, that's our top priority. Jon -- Jon Feltheimer and Michael, have commissioned a task force here internally to deal with these matters, which we've been aggressively working with and been ahead of the curve and with regards to safety for, again, the entire community of employees, customers and partners. At the same time, evaluating the risk and as well as the opportunities, right? And making contingency plans, I mean, is it things evolve quickly as we all know. And so we're -- we feel confident with the things that we've put in place and what our plans are. Things will change, but we know we'll -- we're in a position to make -- to change with those events. I think, really, the top side that I would just frame for you is that remember that 80% of our business effectively is mostly in the home and particularly -- significantly domestic. So media networks, for example, is 70% of our adjusted OIBDA, and it's mostly in home and domestic. Where TV, for example, is mostly in home, but you could have some production disruptions, certainly will have. And it's more domestic than not, but certainly an international aspect to that business as well. And then you have 20% of the adjusted OIBDA, which is in Motion Picture Group. And of course, there's some theatrical exposure there. That's the one that comes first and foremost to one's mind and that's appropriately so. But I'll remind you there's significant home -- in-home viewership through all the ancillary revenue streams. And remind you that we take a pretty significantly derisk approach with our film business. I'm sure we'll talk more about that in a minute. But that kind of frames it when you step back and think about the fact that 80% of our business really is in home consumption, largely domestic. And that's a good way to look at it.

Great. Well, then maybe we'll just dive into Motion Picture. So maybe start with some of the films that you were on the cusp of releasing in the near-term and how you're thinking about what to do next. And we saw a little unexpected move by Universal just last night and going to an in-home window. So how are you thinking about the theatrical approach right now?

Sure. Well, look, fortunately, I would remind you that on our last call that we're pretty much back-end loaded with regards to this year's slate. But we do have films that are in the market now and that are upcoming. But again, the slate is more back-end loaded to the fourth quarter. In any given year, we are doing approximately a dozen wide releases. As you know, we follow a pretty derisked model here where we've pre-licensed international rights. So really, our exposure is predominantly the domestic impact, if you will. And then, of course, we're bringing in and we've already brought in production and financing partners and film, of course, in very tax-friendly locations. So it's a derisk approach, but we do have a film that opened this past weekend, opened nicely. We did close to $10 million, and I still believe it was 99% Rotten Tomatoes rating, A cinema score, and really we're happy with that film. It might have done more for sure, without some of the headwinds, but we've done $10 million [ there ]. And yes, we'll continue to look to monetize that throughout other windows as we progress. So looking ahead, we have 3 films over the next 3 months. So Antebellum, Run and Spiral. And beyond that, we really don't have a film until really late July. So our average box office expectations on these next 3 films generally before anything relative to the marketplace, there's relatively reasonable expectations of $35 million to $40 million of U.S. box. So the point there is, in addition to our derisked model, we're not overly reliant on any of these films. And we'll continue to evaluate those as we go through the -- get closer to release dates. I will also remind you that with respect to any theatrical release that hasn't been released yet and just in general, right? There's a pretty significant amount of P&A spend, which you could also push if you were to move the release date. So again, that's a bit of a natural hedge, if you will, if you're going to be removing or pushing release dates.

That's really helpful, especially on the natural [Indiscernible] domestically. Maybe just a follow-up where you sublicense. Is there any material financial impact that you expect on the international licensing side?

Generally, no. Obviously, our -- in the case where we're prelicensing, our distribution partners are taking the P&A and the distribution risk in those territories. So we've been paid a kind of a committed percentage of the production cost. And obviously, we retain overages. And quite often, we do earn overages. So we could be impacted there. And of course, we're working closely with all of our international distribution partners on the timing of releases and everything else to make the best of it for everyone, but that's certainly something that we prelicensed.

Great. And then how do you think about the potential of in-home entertainment at this point. So again, we saw Universal make a pretty dramatic shift yesterday. I'm kind of curious whether this premium VOD window is just going to be a temporary solution or could stick around a little longer? So whether it's -- so I guess, number one, are you contractually limited in any way and what you do in the window with some of your films for the near- and medium-term? And then how do you think about that premium home window that's concurrent to theatrical releases for the time being?

Well, sure. Look, I'm not going to get into the contractual obligations. These are clearly unprecedented times. So look, we've got great relationships with our theatrical distribution partners, and we're working very closely with them. Like I said, I still believe we had a really good weekend. We'll evaluate that going forward. There may be some opportunities and alternatives there to leverage some of our P&A investment. I think we're more likely to be leaning towards simply shifting release dates moving forward and making sure that we don't end up with P&A spend that we that we don't get the maximum benefit for. So again, I know Universal, namely and others, have been looking at different windowing. It's certainly an alternative. It's perhaps something that is always good to have alternatives. But again, at the moment, we're working closely with our distribution partners. Very happy with that. Obviously, we're going to all work through this together and then return to a much stronger and back to a strong theatrical window in the future.

It's Michael. And Jimmy talked about the percentage of home entertainment that we have, people watching in their homes. Just a couple of data points for you guys. Typically, if you look at week 4, 5, 6 of a EST or a video release, you'd see 20% to 25% down week-to-week. We have knives out in the marketplace. And in week 5, we actually saw a double-digit increase in sales. And that's sort of very interesting to see, obviously, more people are staying home. Obviously, also, as Jimmy talked about, the percentage of our business coming from Starz and Media Networks itself, we are seeing on the customer adds on just the app for the past week in a Saturday to Monday, versus the previous weekend, that was up -- these are direct people going to starz.com and downloading the app, and these are customer adds as well as new customer win backs and win backs up 63% from the previous week. So we are the beneficiary of a lot of people staying in home, and we're seeing that in very core businesses of ours.

Great. Thank you, Michael. Very helpful. Maybe switching gears a little bit as we think about some of the cost side about this. So I imagine that you've had a lot of preproduction and principal photography that's being impacted from what I can tell, reading the trade is pretty much everything in production around the world is shut down for the medium term. So how do we think about the cost of what you're going through right now? Is this stuff that, one, is it meaningful from a dollars perspective? Do you capitalize this in production? Or in the future, might we just see you and your peers taking some of this as write-downs? And same in motion picture as we think about Media Networks, how do we think about these costs when things like the power spinoffs get delayed a little bit?

Sure. But look, I think the way to think about it is, right? You've got generally 3 broad steps in production process, right? Preproduction, principal photography and post production. So generally, as we move forward in the pre and post environment, they're generally not affected in this current environment. But certainly, principal photography is the one that's more challenging, I mean, given the proximity on shoots, et cetera. So we have a handful of films that are in this stage of development and a dozen or so TV shows similarly in that stage. So we'll evaluate and move forward with those as appropriate and under each circumstance, but I would expect there would be some costs there that would be onetime in nature. My guess is those will be captured generally by people and disclosed and adjusted out or understood for what they are. And I believe those costs will certainly be manageable. I think regarding -- as you ask on the Starz side of things that our fiscal '21, most of our shows through February are already done shooting. So we're pretty much covered for fiscal '21. We've had some delays in the power spends, but we can slide around dates and keep the power universe moving. So we feel like we're pretty well-positioned. And I think certainly some onetime costs incurred as we do the right thing to either push release dates or otherwise have hiatus or some delays in production.

I was just going to add one more thing because we're -- this is a good time to have a 17,000-plus library titles available to us and to sell to others. We expect the first half of our -- sometime in the first half of our fiscal year coming up that our licensing and transactional business from our library will increase because of the viewing, the home viewing and many platforms at that time starting to feel pressure from the lack of new content as their production slowed down. So again, it's nice to be able to fill that void not only for ourselves, but for many others.

So if we think about putting all of that together in the short term, we can have some production delays. Maybe some slips and timing of film releases, maybe some shutdown costs, but then also some benefits on the home entertainment side or the Starz net ad side. How would you all suggest that we, in the equity market, think about trying to price all of this in or put this into our models? Is this a meaningful amount of chaos? Is this just a little bit of noise? Kind of help us frame it all together.

Jimmy, let me say one thing here. Obviously, you guys can follow the news. And if we push out film releases, and we haven't spent the P&A money on those, you guys can back that -- back into that -- back that savings, at least in the short term, back into your numbers. And obviously, if you're spending, if you're on a hiatus for 2, 3, 4 weeks, then you're pushing out the production costs of those television shows. So we're not going to do the modeling for you, but I would say that to over the next few days, you'll get a sense for what we're going to do with some of the upcoming releases and whether we're going to stick to the original plan or push those out, which I'm assuming like the rest of the world will happen here.

I think, Steven, just to add to that a little bit, that generally speaking, obviously, any shift in production schedules or particularly film releases, taking that for a moment. You would expect some reduction in revenues during that period of time. But really, it will be positive. You'd expect it to set aside any onetime cost, right? Which you would normalize out, you'd expect it to be positive because, again, you've got -- you're not going to be expensing the P&A. You're not going to start film amortization. And as you know, in those theatrical release periods, you're generally not recouping the P&A in that window. And it's generally a negative impact. So again, the short-term impact's likely to be positive, having shouldered some onetime cost upfront. And then that short-term positive, really becomes timing and turns around in the future as you're back on your natural cycle. So I think it's very manageable in that context. Again, and we will not be forcing something into a market that's not ready. We can control the timing in that context, again, absent some onetime cost. And then we'll move forward from there. But near term, it's actually positive likely on both segment profit, EBITDA as well as free cash flow.

Okay. So maybe then just 2 more related items. I mean, one, is there anything in business disruption insurance that might cover you for any of these onetime costs? And then Jimmy leverage has been a big question for folks over the last year or so. I don't think you have any maturities coming up, but the term loans are something that you've kept to focus on. How do you think about the balance sheet, both near- and medium-term as you go through this disruption? It sounds like it could be more positive than negative, but I just want to make sure I'm not missing anything there and just how you're thinking about weathering the balance sheet?

Sure. I'm very confident on the balance sheet and our flexibility. But first, let me just kind of quickly address their insurance question as yes. We do have insurance coverage. I mean everybody's coverage will vary differently. These are unprecedented times, but we would clearly expect some of the onetime cost and interruption, business interruption and production interruption to be covered by insurance. In terms of the overall leverage, again, I'll remind you that about $2.6 billion of net debt. At the last quarter, about 5.9x leveraged adjusted OIBDA. But excluding the international investment that we're making, right? It was 4.6x levered. And as we said, we're going to continue to pay down debt. We see that with positive cash flow, fully investing in all our core businesses, including that international investment. So we expect to really continue to delever and reduce the amount of debt outstanding. The ultimate leverage calculation itself is a factor of your trailing 12 months adjusted EBITDA, obviously. But we have substantial cash flow, and we'll continue to pay down debt. I would also point out to you that we have significant backlog, as you've seen in our trending schedules. It's over $1 billion as of end of last quarter. That is contractual guarantees, effectively hard contracts for future revenues and cash flows. So of that over $1 billion, you can think about 2/3 of that approximately coming in, in terms of revenues and cash between now and the end of our fiscal '21.

And could you just remind us of anything you have on the covenant side? And as you're in ongoing discussions, I imagine all of the time with your lenders, if this changing situation, has it all changed the nature of how your lenders are speaking to you? Or if there's anything that would concern a covenant event?

Sure. As you know, as we've spoken to you before, we have plenty of room under our covenants. We -- it's a substantially significantly different calculation, right? All of the -- in addition to other nuances and variances, one of the more significant ones is, is that the covenant calculations exclude the international startup losses and investment that we're making, which is an approximate run rate of about $150 million a year, as we've said before. So that's totally excluded, and that provides us with substantial room with regards to our covenants. So I feel good about where we stand there, and we're always stress testing those, but feel good about that.

Great. Okay. And then just maybe related to that, I mean, do you feel comfortable with the way that your liquidity sits in this environment? And if you decided for a myriad of reasons that you needed to tap additional liquidity, is there any sense that, that is any less available to you today than it maybe was some months ago, more because the other side has changed or maybe has eased up?

Look, as you know, we've got $1.5 billion unused, generally unused revolver, okay, available to us. We use it periodically throughout the quarter for various working capital purposes, et cetera. But -- and that line, to your earlier point, the line of credit in our Term Loan A's are first, if you will. Maturity date in any of our debt stack is not until the end of our fiscal '23. So we got a long runway there. So we think there's significant liquidity available to us, I do think it's absolutely available to us if we fall relative to the other side of the equation. If you go back to the '08, '09 financial crisis, there for companies in compliance with their covenants, they were able to draw during those periods of time. I would expect to be able to fully draw on a revolver. And I would remind you that, of course, the financial community is in a much stronger position than it was in '08 because obviously, there's been a lot of rules and regulations in place that has resulted in a much stronger position. So I feel confident that we can draw on our revolver if and when we need to.

Okay. So then the stock has been under a lot of pressure. You're down -- you're in half kind of since the beginning of the year. So what aspect of the business, based on -- I'm sure, a myriad of investor calls that you've had, do you think the market is really misperceiving? What risk do you think that people see in the business that you just think aren't really there?

Well, look, I think it's always hard to tell you what the market is thinking. But I think all of this has accelerated so significantly, and the volatility has been so significant that the market has not had a chance to evaluate necessarily company by company. And I think given our profile, we've been misunderstood in the context of, again, 80% of our segment profit and cash flows generally stand to benefit, if you will, from in-home consumption and the shifts and some of those shifts we're seeing, as Michael alluded to earlier. So I think that's been missed. I think we've [ put ] it down more like theatrical distributors rather than hold like in-home consumption, such as the Netflix. So we're significantly closer to that in-home consumption just based on the numbers I gave you. And also, I think people missed the fact that even in the theatrical window, right? In addition to being significantly derisked, it's very significant that you've got a major amount of P&A spend that you just literally hold back and you hold your releases for a period of time until the theatrical window restores itself. And I'm confident that will happen. Don't know about the timing. But again, we've got great flexibility. So I think a lot of that's been missed. And again, understandably so because the markets are moving quick and in great volume. I think there'll be a time where people come back and evaluate the opportunities for putting money to work in the right spots, and I hope we're one of those stocks.

I was going to say, Steven, echoing and putting a little emphasis on this. I think that much of The Street has really missed how diversified we are today. From our television business to an enormous library with pretty terrific cash flows. The backlog that Jimmy just talked about and Starz and the Media Networks, it is a very diversified company now, much different than it was a few years ago.

Yes, yes. Certainly. Okay. Well, with that, let's take a couple of questions that have been e-mailed in from the live listeners. Maybe you want to start with, with production soft, what do you perceive this is going to be meaningful for working capital and film production loans?

Well, I think on the working capital -- let's first take film production loans. I think your production loans are going to extend out until delivery. So you'll have a modest amount of deferring -- or modest amount of carrying cost, right? Those are generally LIBOR-plus type loans. LIBOR is down, and there's generally a markup on those that they're very close to what our revolver rates would be, which is LIBOR plus [ 1.75% ]. So it's not a lot of additional carrying costs associated with that.

And then just on working capital, kind of how do you expect that to trend in this environment? And a related question we received is that some of your free cash flow has benefited from the work that you've done to monetize receivables. I think you instituted that program last year. Would you expect any disruption to that receivable program you've put in place? And maybe if you just want to more broadly address how you're thinking about working capital for now?

Sure. Relative to the receivable monetization program, no. I wouldn't expect any changes there. We worked this program through 7 or 8 financial institutions, which we think will continue to be there, and we'll expand that in the future. And if you -- again, you look back to the '08, '09 financial crisis, this market has been around for a while, and you only saw 1 institution effectively step away from that market during that time. And that was an international bank that was pulling completely out of the U.S. So we think that's very strong. It continues. And as we said, this is a sustainable reduction of our working capital needs, and there's even more possibility to further reduce working capital. So that's very positive. I would also add, relative to any exposure to the theatrical distributors that our receivables at this point in time, less than $10 million. And it will increase some with the right -- with the receipts coming in from, I still believe, but still a very manageable amount. So not a lot of exposure there. In terms of productions, I mean, interestingly, it's beneficial. Other -- the monies that you would save in production are likely to be much more significant than any incremental carrying cost during the holding period. So that should be positive to working capital.

That's very helpful. And I got a question, and I think I know the answer, but I'll ask it anyway. Someone's asked if you do anticipate any additional financing needs, and you talked about the $1.5 billion in your unsecured revolvers. I think the answer is no, but maybe we'll just put a fine point on it. Do you anticipate any additional financing needs at this point?

Not at all.

Okay. And then that's very clear. I think our final question, which is a little bit more into the business of the company, which might be a nice satisfying change of direction. I think you had a press release or one of your companies or partners did recently about Starz and Dplay expanding in the MENA region. So any comment that you want to make on that new partnership? And I know that's an area where you've traditionally had some strength with STARZPLAY Arabia. So maybe a brief update there.

Sure. Look, we love our business in MENA, STARZPLAY Arabia. We're #1 or #2 in that marketplace, depending upon how you define the territory. And a strong management team. About a 1/3 ownership position in that company is not currently consolidated, but we obviously are very active and have a path to control. So we like that business, and it continues to grow nicely for us. So I think is a harbinger of other great things to come. And our STARZPLAY International, where you know we've launched in almost 50 countries now. And we're very excited about that opportunity. We think we're early into the marketplace. In those other countries, we think our MENA and our experience in STARZPLAY Arabia has been very helpful in executing that strategy, and we think there's more good things to come.

Okay. We've had one more come in, since we've still got you on the line. Just wondering if you could make any commentary around Comcast? So since you agreed the sort of orderly transition from the fixed rate model to the a la carte model and with power concluding, is there any update you could give on how that transition is going?

I think that it would be more of a question for Comcast, but I will tell you that I think everybody in Philadelphia feels that, that a la carte transition is going very smoothly, and we are adding a lot of a la carte customers.

Okay. Well, that's great. Well, look, I want to thank you all for your time today. I know this is a really busy time for both everybody listening on as well as you all as well. I thought this was a very candid discussion in terms of how your business has maybe been a little misunderstood lately. So thank you, again, for providing that additional detail.

Great. Thanks, Steven. Much appreciated. Take care.

Thanks, Steven. Thanks for your help.

Thank you.

Bye.

This concludes today's conference call, you may now disconnect.