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,

Jeff Hirsch - Chief Operating Officer, Starz

Brian Goldsmith - Chief Operating Officer,

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, ; 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 forward- looking 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 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 , 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 , , 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 , 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 and adapted our 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 , 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 X1 platform.

With the continued success of Pantelion's later , 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 to .

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 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 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 .

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 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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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 a- la-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.

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James Marsh Great, thanks Aravinda. Jimmy will take the first question on content other comparisons in 2019 over 2018 and then the growth rate forward. And then, Chris could take the affiliate fee question on Starz.

Jimmy Barge Aravinda, look, one thing we don't do is provide specific guidance in 2019 on a specific sub segment. But the Content & Other segment is obviously very profitable for us. We had a lot of sales last year so it produced a tough comp but in a longer term that continues to be strength of LIBOR and one of the advantages of owning worldwide rights be able to exploit those.

Chris Albrecht With regard to the Starz MVPD business, look we look forward to be a powerful and stable revenue generator. We don't comment on specific deals, but as most people know there are yearly increases, whether they are a-la carte deals or whether they are non-consignment deals. I would expect that trend to continue. I don't know what the other services are getting, but we are obviously working on creating the best win-win partnership that we can with these long-term partners, but the OTT business is clearly the business that we see there being real growth potential in, and the economics are good for us there and we are very bullish as we expand our global reach.

Operator Next we go to Alan Gould with Loop Capital. Please go ahead.

Alan Gould Thank you. I have got a few questions. First for, Joe. Joe could you tell us what major changes you are making at the studio and how long it should take until we see the impact of your films? Second one on Starz, I thought you didn't have Altice for two months this past quarter, maybe I am wrong on that. I was surprised to see that sequentially the Starz Network revenue was almost flat with the prior quarter. Obviously, we have a higher ARPU? And then third question for Jimmy, your investment in content was about a $1.5 billion, are you going to stay at that level or are we going to be closer to like the $1.8 billion level this year?

Joe Drake Alright, Alan, this is Joe. We just completed a management change in the Motion Picture group on the creative side, the film generation side. We are organizing that around a much more focused strategy and movies that we are self generating, more movies that we self generate here. The company has been a little too reliant on the acquisitions marketplace. Going forward we want to have more control over the films that we make, a more reliable supply built around talent relationships that are experts in specific segments with an idea of retaining more rights and supporting not just the Motion Picture business, but driving value into the TV business, location based and all the other platforms in the company.

In terms of fiscal 2019 was largely baked but we are doing a lot of work to make sure that it's set properly and run efficiently. The first films that will really come out of things that we remade here will start in fiscal 2020 predominantly.

James Marsh Alan, the other question for Chris was about ARPU going up even though Altice wasn't in for the full quarter? Is that your question?

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Alan Gould Yes. I mean with Altice out for two or three months, is that accurate?

Chris Albrecht Yes. Altice was out for two of the three months Alan, and factoring that in Starz revenue still grew 3% if you had included a full quarter, we would have been up 5%.

Alan Gould Okay.

Jimmy Barge And Alan to your question regarding the level of content spend. Yes, we definitely will be increasing the amount of content spent going into fiscal 2019. I think your estimate of $1.8 billion sounds reasonable.

Alan Gould Yes, okay. Thank you very much.

Operator Next question will come from Barton Crockett with FBR & Company. Please go ahead.

Barton Crockett Yes, from B. Riley. Thanks for taking the question. The firm name is B. Riley FBR. I wanted to ask, a couple of things. One is to understand on the outlook for Starz this being a year of investment, where there is not really OIBDA growth, is there revenue growth this year? Is that investment against the growing top line? Is that a fair way to think about it?

James Marsh Yes. Jon said, that in our prepared remarks.

Barton Crockett Okay. And in terms of maybe for Michael, just stepping back, I know we've had this acceleration in the…a little bit of a change and probably an acceleration in the consolidation wave around content media with Comcast and CBS/ thing heating up, I'm just wondering if there's any kind of evolution in your view of Lionsgate’s ability to operate at scale in this changing environment.

Jon Feltheimer Barton, let's start with the fact that all of these deals certainly speak to the value of content and frankly ever since we got Starz and we've integrated these business and look at how much content we're touching in our worldwide distribution platform, it's fair to say we love our assets and think we are incredibly well positioned for all kinds of partnerships, various kinds of M&A. We've got a great balance sheet. We are a great partner as you start seeing who we're partnering with. We announced one of those partnerships today. You could see that we are a desirable partner for a lot of companies. I'm not really sure which way any of these deals are going to go, but I can tell you that, for 18-19 years, disruption has been our friend. We've been able to be nimble and move quickly and again with a great balance sheet, with a great broad infrastructure covering every part of content creation, we are in fantastic shape in this environment.

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Michael Burns I would just like to add one thing, if I could. Barton, scale does matter and also the strategic alliances and obviously evidenced by the roll out of Starz with Amazon, that's an incredibly important strategic alliance.

James Marsh All right, thanks Barton.

Barton Crockett Okay, all right.

Operator Thank you. And next we go to David Joyce at Evercore. Please go ahead.

David Joyce Thank you. I got two questions, one for Kevin, one for Joe. For Kevin, I was just wondering if there's any new trend evolving in terms of your TV episode deliveries. I know there's some that you're selling to Starz but if there are others going to platforms like Netflix. Are you still able to retain global rights or are you selling them typically at costs plus a margin and just if you can talk about any the volume changes there? Then for Joe, in terms of the film slate, with you owning and more of the rights, producing more films, should we think about maybe a slight deceleration in the number of new releases each year or obviously offset by you owning the long-term rights as opposed to 2019? Thank you.

Kevin Beggs It’s Kevin speaking on the first point. It’s really a portfolio approach. We have shows all over with many, many different networks obviously most of the streamers have a cost-plus model. And have moved to that and that is about them retaining worldwide rights for a fairly long period of time. We have two high-profile series at Netflix in the scripted side in Orange Is The New Black and and a number of unscripted shows there and Step Up High Water at YouTube and we've had a lot of business at Hulu and other places. We are going to have much more that's in the rights retention model of license fees and/or co-productions. Obviously, all the stuff that we are doing together with Chris and Carmi [ph] and his team and Starz is owned and retained and monetized for many years to come. For us it's about diversifying that portfolio and picking the right shows for the right platform with the best economic outcome.

Joe Drake Alright, on the film slate side, no, we expect to have similar volume. It'll just be a different mix slightly more focused in areas where we think we can really own a space and win where we can build long-term relationships with talents that are aligned with us that are best of breed in any one space. And it should allow us to capture more upside and drive more value across the platform.

David Joyce Good. Thank you very much.

Operator And we go now to Vasily Karasyov with Cannonball Research. Please go ahead.

Vasily Karasyov

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Thank you. I wanted to ask where we will see the impact on the P&L from Starzplay UK, and Germany. First of all, do you need to recognize any incremental programming cost now that you are making programming available beyond the normal scale? And also, will you be reporting it in the same segment? A quick question about free cash flow next year. If you could just give us puts and takes what would affect let's say EBITDA to free cash flow conversion in 2019, that we could ballpark where we'll come out? Thank you.

Jimmy Barge Certainly, from a P&L perspective you should see the impact in the Starz Network segment, Media Networks in total. That will play out, we're not going to break that out separately but it is factored into to our thoughts relative to guidance. With regards to free cash flow, we had a very strong year this year. We expect to continue to generate significant cash flow in the future not going to break out a specific number, but clearly we do have investment in original content and rollout of international plan at Starz. That will affect the cash flow, but we still expect very strong balance sheet and continued strong cash flow.

Vasily Karasyov A quick follow-up. Should the programming costs go up at Starz because of the launch of the new services in Europe?

Jon Feltheimer No, not really.

Vasily Karasyov Not really?

Jon Feltheimer As we’ve sort of looked at the terrific success of Starzplay Arabia, we certainly have noted that the combination of strong library product and customized product for the region, it certainly worked. We’re fortunate, we’re launching in the UK and Germany right now. We have about five production companies in the UK and we’re fortunate that we have the ability to create content there that will work really well there, but we will then sell it off in the rest of the world. That’s probably the pattern that we’ll use some customized products in various territories. As you know, we’ve got this Global Gate partnership with 12 different international partners. They are sourcing local content everywhere, but we will source that unique local content in a very efficient Lionsgate way. We’ve got all of that factored into our budgets.

Vasily Karasyov Thank you, have a good day.

Operator And our next question is from Jim Goss at Barrington Research. Please go ahead.

Jim Goss Thanks. A couple of them. First, with the discussion you’ve had about the various types of films you’re trying to make, you’ve tended to veer toward, more smaller films anyway, but I’m wondering if given that the Warner Brothers and Disney’s especially are focusing on films with blockbuster potential, do you think there is a specific heightened value to filling in that gap on the other end? And what does that imply in terms of your film costs, ROI implications, and also the value in negotiations with HBO and Epix at the other end once you have that slate together?

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Joe Drake What I would say is that from a mix perspective, we’re going to still look for needle movers where they make sense. Jon spoke a little bit about Kingkiller Chronicle. We have our Lionsgate version of franchises, but we’re certainly not reliant on those big movies to be successful. And in fact, if the box office has shown anything the last couple of years there’s movies across the spectrum.

Take a movie like Wonder where you can drive enormous value and build a big franchise at a price. We’re focused on things that create urgency genres, that create urgency at the actual box offices where their audiences that are very enthusiastic about going to theaters, both genres and audiences and our slate will be built around that and in terms of the size of the budgets, the investment shouldn’t change significantly from what it traditionally has, it will just be a different mix of products.

Jon Feltheimer Yes. And to your second question, I can tell you that there’s huge enthusiasm in the marketplace for that first pay and second pay window. We’re strategizing right now all of our film content and obviously our priority overall is Starz and making sure we have a robust lineup, but I can tell you the demand from outside both streamers and traditional pay networks is extremely high for first-class film content of which obviously we provide.

Operator And our final question will come from Todd Juenger with Sanford Bernstein. Please go ahead.

Todd Juenger Wow, the final question. Well, I’ll do my best, two if I may. One on churn whoever wants it? I noticed in Jon’s opening remarks he said lowest churn for Starz ever in a long time and low churn at Starz, did that comment refer to the overall Starz business? Or was it for the traditional business as opposed to the OTT business? What is the difference in churn between the traditional business and the OTT business, if there is one? In terms of churn and are you willing to say roughly what is a churn?

Chris Albrecht What is churn…what is the churn? Todd, this is Chris. We’ve received the lowest rate of churn in the last two months on our OTT business, this is the one that we were referring to. It’s not our churn number to give on the MVPD business, it’s their number and you can ask them for a lot more accurate information than we have.

Todd Juenger Okay, got it, good, glad I asked, thank you Chris. And my second one and maybe the final one, probably for Jimmy or Michael. It was a couple years ago when you guys had talked about there were 15 initiatives you identified of either money losing lines of businesses or JVs that were off balance sheet where you thought you could get value. We sort of lost focus of that or it was Starz, maybe your priorities changed. I just wondered are those opportunities still…so where are we? Have you achieved any of that? To extent the answer is maybe no, is that still an opportunity in front of you?

Jimmy Barge Certainly it’s an opportunity and you are referring to the non-core assets, which have significant value…continue to have significant value. And certainly, we have executed on that in a large way in context of Epix, $400 million basically in a very tax efficient manner. That was part of our

Lions Gate Entertainment Corp. Thursday, May 24, 2018, 5:00 PM Eastern 13 original pay down of debt and as part of de-leveraging story as you know. But all the remaining assets including assets like Atom tickets, et cetera, continue to build in value and we continue to evaluate those and maintain all the flexibilities that we need.

Jon Feltheimer Yes. I would say though your last point is we are not afraid to try new things, when they don’t work we cut them off. Again, that’s part of us being entrepreneurial and being nimble, but I would tell you that we are super focused right now on our three legs of the stool, which is our film business, our television business, and our Starz business. And most importantly making sure those three businesses work together really efficiently, really productively turning already high margin business into higher margin business particularly in the direct to consumers’ place. Thank you for your last question.

CONCLUSION

James Marsh Noah, I’m going to wrap up with my closing statement here. Just please refer to the press releases and events tab under the Investor Relations section of the company’s website investors.lionsgate.com for a discussion of certain non-GAAP forward-looking measures discussed in this call. With that can you provide the dial replay numbers there, Noah?

Operator Certainly. Ladies and gentlemen, this conference will be available for replay after 6 PM. today through midnight on Thursday May 31st. You may access the AT&T executive replay system at any time by dialing 1800-475-6701 and entering the access code 446831. International participants dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844, access code 446831. That does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.

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