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Lionsgate Entertainment Corp (NYSE:LGF)

Q4 2014 Results Earnings Conference Call

May 30, 2014 09:00 AM ET

Executives

Peter Wilkes - SVP of IR and Executive Communications

Jon Feltheimer - Chief Executive Officer

Rob Friedman - Motion Picture Group Co-Chair

Steve Beeks - Co-COO and President of the Motion Picture Group

Jimmy Barge - Chief Financial Officer

Analysts

Alan Gould - Evercore

Ben Mogil - Stifel

David Miller - Topeka Capital Markets

Stan Meyers - Piper Jaffray

Alexia Quadrani - JP Morgan

Matthew Harrigan - Wunderlich

Tuna Amobi - S&P Capital

Eric Wold - B. Riley

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Lionsgate Fiscal 2014 Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Peter Wilkes. Please go ahead.

Peter Wilkes

Good morning. Thank you for joining us for our Q4 and full-year analyst call. We'll begin with opening remarks from our CEO, Jon Feltheimer. Following his remarks, we'll open the call for your questions. Joining us on the call today are our Vice Chairman, Michael Burns; Motion Picture Group Co-Chair, Rob Friedman and Patrick Wachsberger; Chairman of the Lionsgate Television Group, Kevin Beggs; Steve Beeks, Co-COO and President of the Motion Picture Group; Brian Goldsmith, Co-COO; Jimmy Barge, our CFO; and Rick Prell, our Chief Accounting Officer.

The matters discussed on this call include forward-looking statements, including those regarding performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results for the future could differ materially and adversely from those described in the forward-looking statements as a result of various factors, including the risk factors set forth in Lionsgate's 10-K filed with the SEC on May 29. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. Jon?

Jon Feltheimer

Thanks Peter. Good morning and thank you all for joining us. Yesterday, we reported record adjusted EBITDA and earnings per share for the second year in a row as we continued to achieve significant contributions from all of our businesses. Before I discuss our recent progress in launching new franchises and extending our existing brands, I'd like to touch on the diversity of our portfolio.

This quarter, a number of our television series continued to progress towards their syndication and other second-cycle windows keeping us on track for the revenue and margin growth within our television business that we've recently discussed.

Nashville was renewed for a third season on ABC. Orange is The New Black was renewed for a third season on Netflix, even before the second season premiered; and Deadbeat, the sleeper hit of the LA screenings was picked up for a second season on Hulu shortly after its first season launch.

It is interesting to note that Orange is The New Black and Deadbeat have followed different paths to their early success. Orange is a series in the Netflix model of premium content with a big ensemble cast at a budget of several million dollars an episode. Deadbeat is a series of surprisingly robust international sales belies much lower online network license fee. In both cases, by continuing to operate as one of the premier content providers for new digital platforms, we are able to innovate financial models that capitalize our new or accelerated windows and make these shows significantly profitable.

Mad Men, Weeds, and Nashville three shows that are not made for digital platforms will still generate approximately $150 million in ultimate revenue from SVOD windows that didn’t even exist five years ago. And whether our shows launch on broadcast networks cable or online, emerging windows enable us to piece together multiple new revenue sources much earlier in our shows’ life cycles, creating higher margins and accelerated profitability on a present value basis compared to the traditional approach of deficiting series for five or six years, and waiting for the syndication payoff.

This year, we are returning nearly 90% of our shows currently on the air, but we are certainly not resting on our laurels. We're adding to our portfolio with one of the strongest development slates in our history, and we continue to average better than one show picked up to series for every three network projects in development.

Manhattan, a period piece about danger, deception, and sacrifice set in the clandestine world of Los Alamos during the race to build the atomic bomb is a directed series order that debuts on WGN America on July 27. Judging by what I saw when I visited the set a couple of weeks ago, it’s poised to become another compelling Lionsgate drama in the tradition of Mad Men and Orange is the New Black.

We are also very enthusiastic about the first series from our Southshore television partnership with Televisa, Chasing Life, which debuts on ABC Family on June 10. A young woman’s inspiring story based on a hugely successful limited series, Chasing Life has already been picked up for an additional seven episodes even before the first 13 episodes have aired. Currently shooting in London, The Royals, is the black comedy about a dysfunctional monarchy that is E’s first entry into scripted dramas.

On the series order for the space travel thriller Ascension for the SyFy channel, an animated pilot order from Adult Swim for Harold & Kumar, and a new pilot order from HBO rounds added development slate that gives us new shows for six buyers with whom we have never previously done business.

With a consistency of our renewals, returning shows already headed towards syndication availability and our ability to place new shows, we remain confident that our television business is heading towards $100 million in annual profitability in a few years. This past quarter also underscored our continued ability to create new film franchises as well as to expand existing ones. As we launch Divergent, began production on Gods of Egypt, announced our partnership on Power Rangers, and rolled out the home entertainment campaign of Catching Fire.

Our Divergent franchise is off to a great start with the first film grossing $150 million domestically and approaching $275 million worldwide opening on a par with the first X-Men film and the first film in the Fast and the Furious franchise. Book sales have skyrocketed from 3 million last May to over 20 million copies today putting the Divergent book series on a steeper growth trajectory than The Hunger Games. The second film in this series, Insurgent, began filming in Georgia last week. We’ve added Academy Award winner Octavia Spencer to the cast, and we believe that Shailene Woodley’s performance in Fox’s upcoming The Fault in Our Stars will continue to enhance her global stature. These factors all validated our decision to extend Divergent to a fourth film creating a major new franchise as films will be made for substantially less than the cost of the typical studio tent pole, and which will contribute very significant incremental profitability through fiscal 2018.

In the quarter, we also announced our partnership with Saban Brands to launch a series of live action films based on the immensely popular and enormously successful Power Rangers brand. What’s noteworthy in this competitive environment is that we were able to attract an outside party, who believes that our production marketing and distribution prowess creates an ideal platform for launching this very special property. No project speaks both to the vitality and the discipline of our franchise model more than Gods of Egypt, currently filming in Australia for release on February 12, 2016.

The budget of $140 million encompasses an epic re-imagining of mythical ancient Egypt with tremendous visual scope while tax incentives for filming in Australia and robust licensing to our international distribution partners around the world have left us with the U.S. GAAP of less than $10 million, even less than the average film on our slate.

And no discussion of our franchises would be complete without an update on The Hunger Games. Jennifer Lawrence and the rest of the cast joined us in Cannes as we dazzled international distributors with the sneak peek footage of Mockingjay. The non-stop action, incredible battle scenes, and epic visual scope that Director Francis Lawrence has brought to the iconic characters in Mockingjay give us every reasons to believe that we will continue to grow the franchise’s global appeal.

As you will recall, Catching Fire's international box office grew 60% from the first Hunger Games film even as it became the tenth highest grossing domestic release of all time, and we're confident that the odds for continuing to expand the franchise remain in our favor.

We've recently taken several significant steps designed not only to extend The Hunger Games brand at the global box office, but into new businesses as well. I'm pleased to report that we have partnered with Kabam, one of the leading companies in the free-to-play games space to create a new mobile role playing strategy game that creates an immersive experience for Hunger Games fans around the world.

Similarly, Thinkwell one of the leading designers of theme park attractions and other location-based entertainment around the world, including the making of Harry Potter in London, is spearheading an initiative to explore line extensions for The Hunger Games and all of our other brands. As a first step, they’ve already designed a state-of-the-art Hunger Games traveling museum, involving costumes, props, and other elements of The Hunger Games world that will begin touring the U.S. next summer.

The Hunger Games wasn’t the only Lionsgate franchise concurring Cannes a few weeks ago. Sly Stallone and his cast of Expendables, including new comers Mel Gibson, Harrison Ford, Antonio Banderas, Wesley Snipes, and USC Champion Ronda Rousey, literally stormed the Croisette in battle tanks, providing a taste of the fireworks to come on the film’s release, August 15. Buzz is already building for our Expendables spinoff that will extend the series to female action stars, and I think you’ll be surprised at the level of casting.

Following the tremendous breakout success of the first Now You See Me film at the global box office, we began developing a sequel and are producing Now You See Me 2 on three continents to continue to broaden the property’s worldwide appeal with Jesse Eisenberg, Mark Ruffalo, Woody Harrelson, and Isla Fisher all returning.

In fact, 12 of our 25 wide releases are franchises or potential franchises as we continue to build a portfolio of brands with formidable breadth and scope. These include upcoming releases like the action comedy Mortdecai, starring Johnny Depp, Gwyneth Paltrow, and Ewan McGregor, as well as high profile properties in development such as The Last Witch Hunter starring Vin Diesel, a film adaptation of bestselling author Kimberley McCreight’s upcoming Sci-Fi Trilogy, The Outliers, and the action comedy American Ultra starring Jesse Eisenberg and Kristen Stewart.

In addition to our traditional film and TV slates, we're committed to exploring innovative new types of long-form content and exciting new directions in storytelling that brings us closer to our next generation consumers.

Last month, we announced a partnership with Freddie Wong and the team at RocketJump, creators of the iconic web series Video Game High School. They've launched a broad range of properties on YouTube and the RocketJump platform that have attracted nearly 1 billion views and 7 million subscribers. And RocketJump is a kind of kindred entrepreneurial spirit with whom we want to be in business to expand the breadth and diversity of the content we bring to our audiences.

As I mentioned a moment ago, video games represent a natural extension of our content business. We just hired Peter Levin, the co-founder and former CEO of Nerdist, a veteran of CAA and Disney and one of the leading entrepreneurs in the games space to head up our interactive digital initiatives and lead our entry into the video game arena.

Peter has been tasked with incubating new properties and investing in existing games and other digital media vehicles as well as leveraging Lionsgate's franchises and other branded properties into the gaming space.

In closing, we are pleased that the overall trajectory of our business, depth of our content pipelines, and diversity of our portfolio gives us sufficient visibility to extend our guidance for another three years.

We expect that our strong operating momentum coupled with continued enhancement of our capital structure will result in continued strengthening of our financial results for the three year period through fiscal 2017. In that period, we anticipate generating between $1.2 billion and $1.3 billion of adjusted EBITDA. In addition to reinvesting in our content portfolio, we remain committed to returning value to our shareholders through accretive transactions, ongoing stock buybacks, and the continuation of our dividend policy.

As you know, we have a buyback authorization from our Board of Directors of $300 million. We have repurchased $90 million of stock in the past quarter, and we continue to believe that at current levels, our stock is at very good value and an excellent use of our cash.

We also paid another quarterly dividend of $0.05 a share today, and going forward it’s our intention to increase that dividend on a yearly basis. The environment for content creation is more favorable than ever. Our platform continues to become broader and more diversified and our ability to generate repeatable income from our film franchises, television properties, and library continues to grow giving us even greater confidence that we can continue to accelerate the pace at which we create value for our shareholders. I’d now like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Alan Gould from Evercore. Please go ahead.

Alan Gould - Evercore

Thank you. In your guidance, I assume, you are assuming -- are you assuming Divergent shows a similar pattern to the Twilight series where there was a big increase in the box office, the second film from the first film? That was a nice description on the TV side. Can you give us some timing of when the big syndications will be hitting?

Jon Feltheimer

On Divergent, we have modeled the first film about $275 million worldwide, Alan. We’ve modeled the second one around $350 million, $350 million -- probably expect $350 million to $400 million worldwide, and frankly we expect growth after that, although I think we’ve modeled it pretty conservatively in terms of what it’s going to contribute through ‘18.

In terms of television, I’m not going to give you the specific dates for syndication, but obviously we are looking at Nurse Jackie, Orange is the New Black, Anger Management, House of Payne, a couple of the other shows moving into syndication within that period. I can tell you sort of, as I look from today through ’17, probably looking at margins going from around 7% to probably doubling around 14% in revenue, increasing about 50% in that period of time.

We’re also looking at -- when I look down the road to ’17, we’re also looking at shows like Wendy Williams, which at the beginning was not significantly profitable as we go down the road, the success of that show by potentially Celebrity Name Game, starring Craig Ferguson. Some of these other shows that look like annual strong contributors should get much significantly better as we go down the road.

Alan Gould - Evercore

Jon, if I could just follow-up on two specific shows then, Nashville just got picked up for its third season, I believe. Could you typically be syndicating that in the fourth or fifth year? And if I am correct, Orange is The New Black that you licensed to Netflix, and the rights come back to you after, I am not sure, typically four or five years, do you then have the right to resell those rights?

Jon Feltheimer

You know, the way television works right now is there are so many new windows that you might be able to pick up, but you would call syndication as early as first or second year. Some of the networks are making shows available earlier in the window, particularly to SVOD platforms because they feel that it actually provides kind of a marketing ability to the viewer as a catch-up ability. So again, it's hard to put a specific timeframe on it, but certainly Orange and Nashville are coming up relatively soon in terms of potential of what you would call second window revenues.

Alan Gould - Evercore

Okay. Thank you very much.

Operator

Your next question comes from the line of Ben Mogil from Stifel. Please go ahead.

Ben Mogil - Stifel

Hi guys. Good morning and thanks for taking my question. So first question, sort of in terms of the guidance that you're looking for, when you look at 17 [Technical Difficulty].

Operator

Ben Mogil, your line is open. Please go ahead.

Jon Feltheimer

Ben we lost you.

Ben Mogil - Stifel

Okay. Sure. Sorry. Can you hear me okay now?

Jon Feltheimer

We can.

Ben Mogil - Stifel

Great, thanks. So in terms of the guidance, when you look at the ‘17 [Technical Difficulty] a new Hunger Games being up [Technical Difficulty] and if you want to break it down between TV and film, that's fine. And then also, when you look at the slate, should we be thinking about it as very similar to fiscal ‘14 with Divergent and say a film Now You Can See Me but no blockbuster on The Hunger Games level?

Jimmy Barge

Ben I'm sorry, sorry lost you again about a third of the way.

Ben Mogil - Stifel

So let me try this. Is this better?

Jimmy Barge

Well it’s better to start any way.

Ben Mogil - Stifel

Let me start okay. So in terms of the guidance that you're looking for in the three-year guidance, when you look at ’17, post sort of the new Hunger Games, what kind of revenue range are you looking for that year? And in terms of the slate, is this sort of one of those years where it looks a lot like fiscal '14 ex-Hunger Games, so a Divergent and say something along the lines of Now You Can See Me but no kind of big, big blockbusters. Is that the right way to think about '17?

Jimmy Barge

I think the right way to think about ’17, we certainly, it’s pretty far out but we’ve had populated ‘17 with our film titles, and a fair amount of our TV titles. Obviously, some of those titles will change, but I think the right way to look at ‘17 is that the similar blend of contributions from our various business units as we’ve had this year last year and the next couple of years, but I would say TV will have a somewhat larger percentage contribution.

Jon Feltheimer

And Ben, we’re not giving particular color on any given year, but obviously with our guidance, we do not see a cliff. As matter of fact, we like our visibility throughout the playing period and expect the three years to be somewhat backloaded.

Ben Mogil - Stifel

Okay. And coming up with your guidance when you look at EPIX in the contributions there that flow up to your adjusted EBITDA calculation, are you expecting a lot of growth from EPIX, and obviously it is the great turnaround, it’s now got much better carriage, do you sort of see a material ramp from the $90 million or so of EBITDA the business was doing on a consolidated basis going forward?

Jon Feltheimer

I think we have really not modeled as much growth frankly nearly as much growth in EPIX as I think we’re going to have.

Ben Mogil - Stifel

That’s great. Thank you very much.

Operator

And next we go to line of David Miller of Topeka Capital Markets. Please go ahead.

David Miller - Topeka Capital Markets

….questions. Jon, just correct me if I am wrong, so with the television production profile that you outlined in your prepared remarks, by this time next year you’ll have 39 shows on 28 networks, is that about right?

Jon Feltheimer

Well, I can’t assume everything is going to work and frankly, obviously we don’t model that everything is going to work. But obviously we’ve got a very robust business right now and I particularly like about as I said it most of the things that we have do not require a large deficit going in. And obviously we think from an ROI perspective, we've got a really good model, but again, I can't say that every single thing is going to work and obviously I don’t model that everything is going to work.

David Miller - Topeka Capital Markets

Okay, fair enough. And then following upon Alan's question on the syndication issue. Should we assume that television syndication, be it either international or domestic is going to be fairly smooth over that three year timeframe or might -- the reason I ask is because my sense that fiscal ‘15 will be exceptionally strong for television syndication, but I'm trying to kind of profile ‘16 and ‘17, should we assume kind of a front loaded effect on television syndication or do you think it will be fairly smooth over the three years?

Jon Feltheimer

No, I would say and speaking to Jimmy's point. We're looking overall at the company probably at overall revenue of sort of in the $3.25 billion range in ‘17 and some of that is driven as I said earlier by perhaps larger contribution from television. So, I would say this syndication is more back loaded towards ‘16 and ‘17.

David Miller - Topeka Capital Markets

Okay. And then just the final question, just wanted to get you guys take on the EPIX launch on the Time Warner Cable system, I believe that launched on March 18 as memory serves. So it's been a couple of months, just any kind of color you guys have on just the response with overall subscribership over these past couple of months? Thanks very much.

Jon Feltheimer

Okay. Yes, I think the launch has been really, really strong on Time Warner Cable, I think again, people are starting to recognize the value of that EPIX is bringing in the flexibility that the way they can package EPIX has brought. We had a 90-day introductory period, pre-period turned out to have great usage by the Time Warner Cable consumers and frankly EPIX has become one of Time Warner Cable’s most watched networks.

So, we think this is going to be great. We think it is going to generate significant incremental ARPU for Time Warner Cable; definitely this has been a win-win.

David Miller - Topeka Capital Markets

Okay, wonderful. Thank you very much.

Operator

And next we go to line of James Marsh of Piper Jaffray. Please go ahead.

Stan Meyers - Piper Jaffray

Good morning, this is Stan in for James. I guess first question is on Divergent. The film opened on March 21 late for 11 days in a quarter. I assume most of the film related costs have been sort of front loaded in the quarter. What is your sort of rough estimate of Divergent profits that you will recognize in fiscal ‘15, sort of percentage wise?

Jimmy Barge

Yes, sure Stan. Yes, as a matter of fact, the P&A expense is obviously, largely and almost exclusively fell in the quarter. So that’s been expensed. We move forward with the profitability in the ‘15. We are not going to side the profitability on any specific franchise or film, but feel good about where we're positioned with the entire franchise and the film in particular moving into ‘15.

Stan Meyers - Piper Jaffray

Okay. And then on TV side, you obviously guys had nicely benefited from growing number of outlets demanding from the original content. However, do you guys see in the industry shifts to bring the TV production sort of in-house to capture more of the upside of their platform. I know AMC has been out there highlighting their AMC Studio produced shows, just sort of what kind of trends are you seeing there?

Jon Feltheimer

I’m not sure, I got the front part of that question. Can you repeat that?

Stan Meyers - Piper Jaffray

I was just saying that you guys have benefited from growing number of outlets demanding new original content from you guys and buying your shows, but we've recently seen some studios, or some I guess parties producing TV shows in-house, AMC Studios for example, producing their own shows, have you seen any of those trends taking place on TV side?

Jon Feltheimer

Yes. Look we certainly, this trend has been going on for, I don’t know 10 years I mean networks online competitors certainly trying to own more rights. We don’t ever produce for higher if you will we own virtually all of our IP, we produce all of it in-house, we retain generally all of the distribution rights. And I think frankly that most of the networks you can see in this particular quarter, we are announcing six new projects with six new buyers. I think that most networks recognize our ability to create great IP and we have found an ability to come up with an economic formula with everybody from Hulu to ABC that is economically beneficial to both sides.

So I am not concerned about that trend, we continue to be a very, very strong content provider for all networks.

Stan Meyers - Piper Jaffray

Okay, thank you. And then just one last one on EBITDA margins. Obviously those have improved nicely over the past few years, do you see margins reaching maybe potentially as high as 20% as more and more of your revenue comes from TV additional sales and library?

Jon Feltheimer

I would say again we focus a little bit more on margins than revenue. I’ve mentioned to the previous question we do see revenue continuing to increase our model shows, that’s around $3.25 billion. In ‘17 our margins went up from about 12% to 14%, we expect them to go a little bit higher next year and we're going to continue to push them up I think your numbers in this period of time, I think your numbers are little aggressive.

Stan Meyers - Piper Jaffray

Okay. All right. Thanks.

Operator

And next we go to line of Alexia Quadrani of JP Morgan. Please go ahead.

Alexia Quadrani - JP Morgan

Just looking at your extended guidance, could you give us some sense sort of how much conservative or how much sort of what you’re thinking is really for the new franchises such as Gods of Egypt. Are you assuming it’ll be another breakout hit or you (inaudible) pretty conservative assumptions?

Jon Feltheimer

I would say that anytime we give a guidance; right now we gave three year guidance couple of years ago, we're tracking nicely towards that guidance or exceeding that guidance. So we always tend to believe that we're giving you the best look at where we see our numbers coming in. So I would say it’s neither conservative nor aggressive, I would say we've given you what we think is our base case, with certainly nothing extraordinary happening in that period.

Alexia Quadrani - JP Morgan

And just a follow-up on the home entertainment revenues that were a little bit later than you had expected in the quarter. Can you give us a sense I guess of if you guys sense there’s any softness there what caused it and do you think that you've already seen that's the benefit from the Catching Fire in home entertainment in the past quarter or if you kind of benefit in the June quarter as well?

Steve Beeks

Alexia it’s Steve Beeks. I would say in the quarter as well as in the fiscal year the drop in home entertainment revenue is really just a matter of timing as well as the slate. In fiscal '13, we had 19 wide releases versus 13, in fiscal '14 to obviously there is difference there, and the rest of it’s a matter of timing and obviously in home entertainment we also have some SVOD revenue which tends to be lumpy depending on when we’re syndicating a show or it can a library sale.

So, we haven’t really seen any softness in home entertainment overall, as a matter of fact when you look at the first five months of the calendar year. Overall, home entertainment consumer spend is actually flat versus last year, which is not only great news, the better news is, we’re seeing a lot of growth in digital primarily ESTs being driven by the ownership model supported by models like such as UV as well as new entrance such as Comcast which we mentioned before.

So, I think we’re seeing not only margin percentage increase, we’re seeing overall operating margin dollars at the studio level actually growing. So we’re fairly bullish in home entertainment overall. And even more granular example of that is strength of digitals effect that you look at Catching Fire compared to The Hunger Games and so year and half later our actual operating margin dollars, or Catching Fire will be approximately 90% of that of The Hunger Games a year and half later and that’s demonstrating, but the growth in digital is really I think the exciting thing happening in home entertainment.

Jon Feltheimer

Alexia, just to give you a little more color to add what Steve is saying. Remember the prior year packaged media there was tough comp against Breaking Dawn 2 and Hunger Games. And as Steve mentioned the continuing rollout of the larger fiscal ‘13 slate continued certainly did benefit of the prior year revenues an occasion point in that in packaged media there were six releases in packaged media a year ago quarter versus four this quarter.

Alexia Quadrani - JP Morgan

Okay. Thank you.

Jon Feltheimer

Despite that we were still up year-over-year.

Alexia Quadrani - JP Morgan

Okay. Thank you very much.

Operator

And next we go to line of Matthew Harrigan of Wunderlich. Please go head.

Matthew Harrigan - Wunderlich

Two things, first in the Chaos Walking is that still in development or is that more or less it have been shelled, I mean it just have a plethora of projects it seems. And then also I think there is a report in the Hollywood Reporter that you are also working with Johnny Depp on the Houdini kind of America's first superhero adaptation that kind of sounded interesting. I don't know whether you could comment on that or not? Thank you.

Rob Friedman

It’s Rob Friedman, Chaos Walking is still active development property for us. We're very excited about it. We are still working to put it together with both Director and Star, there is three books as you know in the series. Houdini is a property that we are very, very excited about it. We have had conversations with Johnny and we're moving forward on that property as well.

Matthew Harrigan - Wunderlich

Thank you.

Jon Feltheimer

Next question?

Operator

Your next question comes from the line of Tuna Amobi from S&P Capital. Please go ahead.

Tuna Amobi - S&P Capital

Hi, thank you so much. I guess my first question is on free cash flow, I know that you guys don’t focus in terms of guidance, but I was -- just kind of looking back the last couple of years, it seems like the conversion level have been pretty high north of 70% to 80% free-cash conversion of adjusted EBITDA.

So the context of your new guidance I'm wondering if you think that these kind of levels are kind of sustainable? I have a follow-up question.

Jimmy Barge

Sure Tuna. Obviously while we don't provide guidance on that we're very focused on probably free cash flow. So what I would tell you is that we expect to continue converting a significant portion of our adjusted free cash flow or adjusted EBITDA to free cash flow. In addition, I would note that we’ve reduced our cash interest to an annual run rate of just under $40 million and cash taxes should continue to be $15 million to $20 million a year as we extend our NOLs into fiscal ‘17. So we feel very good about our free cash flow conversion.

Tuna Amobi - S&P Capital

Okay, that’s helpful. Certainly just a bigger picture question perhaps for Jon. So as you think about your TV business and you are trying to grow without, obviously some of our peers are piggybacking on YouTube channels to kind of incubate some new franchises marketing what not. So I am just kind of wondering given the audience that you serve, it sounds to me like that kind of strategy might be somewhat an amenable for you guys, as you grow your TV. So I am wondering if you have any interest in perhaps leveraging YouTube either organically or even through acquisitions of an MCN and how you kind of view that strategy in the context of your television business.

Jon Feltheimer

Yes, we have seen a couple of deals lately, I mean again all of our projections are going forward without MA and M&A activity and all baked into them. We’ve looked at couple of those MCN deals. To me the numbers look really, really high. We have certainly done the Freddie Wong deal, we’ve got our partnership in Defy. We have got -- frankly we don’t talk a lot about it because again until any of these ventures start printing profits and money, it’s not (inaudible) alone, our YouTube channel has 2 million subscribers right now. And what everybody has got a YouTube channel right now or even a YouTube show is really trying to figure out that what the right way to monetize that.

And so we are focusing on two or three things that we think extend our intellectual property, extend our leadership in for example in that case the fitness and wellness area and we are going to continue to concentrate on that and we’re looking at sort of the online channel not necessarily with YouTube but that online channel area as potentially an interesting way to monetize our content in well and we are talking to actually a number of really interesting partners in that space.

Tuna Amobi - S&P Capital

Okay, thank you.

Operator

And your final question today comes from the line of Eric Wold from B. Riley. Please go ahead.

Eric Wold - B. Riley

Actually I will make it easy, my questions have been answered. Appreciate it.

Jon Feltheimer

Alright thanks so much. Thank you everybody we will look forward to our next call.

Peter Wilkes

And also just please refer to reports, presentations under the corporate section of the company’s website at www.lionsgate.com for a discussion of certain non-GAAP forward-looking measures discussed on this call. Thanks again.

Operator

Ladies and gentlemen, this conference will be available for replay after 8:00 a.m. Pacific Time today through June 6th. You may access the AT&T TeleConference Replay System at any time by dialing 1 (800) 475-6701 and entering the access code 326366. International participants, dial (320) 365-3844. Those numbers once again are 1 (800) 475-6701 or (320) 365-3844 with the access code 326366. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.

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