Lions Gate Entertainment (LGF) Jon Feltheimer on Q1 2017 Results - Earnings Call Transcript

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Lions Gate Entertainment Corp. (NYSE:LGF)

Q1 2017 Earnings Call

August 04, 2016 5:00 pm ET

Executives

James M. Marsh - Senior Vice President-Investor Relations

Jon Feltheimer - Chief Executive Officer & Director

James W. Barge - Chief Financial Officer

Kevin Beggs - Chairman, Lionsgate Television, Lions Gate Entertainment Corp.

Brian Goldsmith - Co-Chief Operating Officer

Michael Raymond Burns - Vice Chairman

Analysts

Alexia S. Quadrani - JPMorgan Securities LLC

Stan X. Meyers - Piper Jaffray & Co. (Broker)

Amy Yong - Macquarie Capital (NYSE:USA), Inc.

Barton Crockett - FBR Capital Markets & Co.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc.

David Joyce - Evercore Group LLC

Todd Juenger - Sanford C. Bernstein & Co. LLC

John Janedis - Jefferies LLC

Steven Cahall - RBC Capital Markets LLC

Matthew J. Harrigan - Wunderlich Securities, Inc.

Eric Wold - B. Riley & Co. LLC

Evan Wingren - Pacific Crest Securities

Rich Greenfield - BTIG LLC

James Charles Goss - Barrington Research Associates, Inc.

Tuna Amobi - Standard & Poor's Investment Advisory Services LLC

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Lionsgate Fiscal 2017 First Quarter Earnings Call. At this time, all participant lines are in a listen-only mode. Later, we'll conduct a question and answer session and instructions will be given at that time. And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to James Marsh. Please go ahead.

James M. Marsh - Senior Vice President-Investor Relations

Great. Thanks, Ryan, and good afternoon to everyone. Thank you for joining us today for our fiscal 2017 first quarter conference call. We'll begin with opening remarks from our CEO, Jon Feltheimer, followed by remarks from our CFO, Jimmy Barge. We'll then open up the call to questions after those remarks. Joining us on the call today are Vice Chairman, Michael Burns, Motion Picture Group Co-Chair, Rob Friedman; Chairman of Lionsgate TV Group, Kevin Beggs; Steve Beeks, Co-COO and President of the Motion Picture Group; Brian Goldsmith, Co-COO; Rick Prell, our Accounting Officer; and Laura Kennedy, EVP of Corporate Development, as well as Patrick Wachsberger.

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

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

Jon Feltheimer - Chief Executive Officer & Director

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

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

Starz has built a solid content portfolio with growing hits like Power, Survivor's Remorse and Outlander. We can now capitalize on the success of the expertise of our Television Production division that's been responsible for some of the most significant network defining series in recent history, including Orange Is The New Black for Netflix, Mad Men for AMC and Casual for Hulu, all shows that have created enormous enterprise value for the owners of these networks.

We now have the opportunity to do this in collaboration with our new colleagues at Starz and hit product will result in more subscribers, stronger revenue and material upside for our shareholders. Equally important the combined company will have significantly improved predictability and stability of free cash flow which enables us to capture the upside from the increased content investment without increasing the risk profile. In fact, the significant cost and tax efficiencies for the combined company will achieve cash savings in excess of $200 million every year and that's before any revenue enhancement from the retention of rights, successful execution on content production and capturing the upside from our global distribution.

Together our companies also provide a platform that will generate more consumer touch points from our combined over-the-top services and other consumer facing businesses. All in, we believe this transaction positions us as a stronger, more diversified content-driven company that will prove to be extremely accretive for our shareholders. I'm also pleased to report that both companies are heading into this combination with tremendous momentum. CEO, Chris Albrecht and his team have achieved a huge ratings boost for Starz shows by creating a powerful Sunday night programming block and our own momentum is reflected in the continued outsized performance of our television business and one of our deepest and most exciting film slates ever.

Even in a highly competitive summer period for the industry, we currently have four films in the marketplace playing on more than 4,000 North American screens: Nerve, Now You See Me 2, Café Society with our partners at Amazon and Roadside Attractions' Indignation. All of them will be profitable and our slate is positioned to gather momentum through the rest of the year and set the stage for profitable growth in the years to come.

Those of you who attended Comic-Con last month saw firsthand the tremendous diversity we're bringing to our audiences, whether it is Blair Witch with a unique marketing launch that electrified the crowd; Saban's Power Rangers, which has the potential to become one of our next big franchises or Nerve, a lower cost targeted film that proved yet again our ability to connect with young audiences.

You'll see the same breadth and depth of content next month when we bring our strongest lineup ever to Toronto, including Deepwater Horizon, a film that we believe is one of the best we've ever produced; La La Land, which has earned the opening night slot at the Venice International Film Festival; and American Pastoral, based on the Pulitzer Prize winning book that has been hailed as one of the greatest American novels in the past quarter century.

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

You can also see the same focus on branded properties and great intellectual property in next year's slate. Just to highlight a few of the films currently in or preparing for production: Wonder, based on the remarkable New York Times Bestseller, with Academy Award winner Julia Roberts heading a cast that includes Owen Wilson and Jacob Tremblay; The Glass Castle, based on another bestselling book property and featuring another Academy Award winner, Brie Larson with Naomi Watts and Woody Harrelson; Chaos Walking, a young adult franchise that we've been working on for the past three years, now coming together quickly under the direction of Bourne Identity filmmaker Doug Liman and starring Star Wars: The Force Awakens' Daisy Ridley; Granite Mountain, true story of the heroic firefighters who saved an Arizona town from one of the deadliest wildfires in history, starring Josh Brolin, Jennifer Connelly, Jeff Bridges, Miles Teller and Taylor Kitsch; and How to Be a Latin Lover with Eugenio Derbez, star of Instructions Not Included, Salma Hayek and Rob Lowe; and after five years preparing the right vehicle for the return of Jigsaw, we think you'll like what we've done with the franchise when you see the next Saw in theaters on Halloween 2017.

Our television business keeps getting stronger and stronger and is heading for its fourth straight record-breaking year. We're coming off a quarter highlighted by new buyers for our brand-defining premium content, fresh hits and successful renewals of our returning series. We continue to license series to a growing array of platforms, including the high profile scripted series, Step Up, based on our hit film franchise for YouTube Red, and Pilgrim Media Group's competition reality series, The Runner, for Verizon's go90 platform. The Runner achieved tremendous levels of social engagement during its initial 30-day run, and we view go90 as the kind of platform that will create a great opportunity for shows targeted at millennial, mobile first audiences. We're in the middle of casting and pre-production for Dear White People, the adaptation of the critically acclaimed film that will be our second original series for Netflix and another show that underscores the synergies between our film and television businesses.

We currently have six Lionsgate film properties in development or already ordered as television series. We also continue to develop premium scripted programming for our traditional network partners with Showtime, ordering the Pilot White Famous, produced by Jamie Foxx and inspired by his early years in standup. Many of our new series are already being readied for launch. The timely political satire Graves, staring Academy Award nominee Nick Nolte and Sela Ward which debuts on EPIX October 16. The anthology series Manifesto for our partners at Discovery. The behind-the-scenes late-night comedy Nightcap for Pop and the drama series Teresa, based on Televisa's widely popular telenovela which is a perfect example of Starz approach to targeting underserved audiences and their own commitment to deliver premium TV and film properties to Hispanic consumers.

We also had another successful quarter securing renewals for our new and returning series. Greenleaf has emerged as a breakout success for Oprah Winfrey's OWN Network and has already picked up for a second season. The Golden Globe nominated dramedy Casual has become a top rate prestige series heading for its third season on Hulu. The Royals continues as the number one drama series on E and the ground-breaking Orange is the New Black continues to demonstrate its global appeal in your linear broadcast syndication.

During the quarter, we found new network partners for our fan favorite drama, Nashville. We believe that CMT and Hulu will provide a great long-term home for the series which returns for its fifth season this winter with new superstar show runners, Ed Zwick and Marshall Herskovitz. With over 50 billion impressions more than a 1 billion streaming churns and 430 million friends on the Facebook platform alone, Lionsgate content touches people all over the world from the record-breaking opening of Now You See Me 2 in China to the global appeal of shows like Orange is the New Black and Nashville.

Last quarter, we mentioned the formation of our Globalgate consortium of leading international producers, distributors, and co-financing partners to identify and secure priority access to intellectual property for production as local language films in territories around the world. This afternoon, I'd like to highlight our growing local language production initiative in China. We've already invested in two films and are on discussion to invest in at least four others. Lionsgate will distribute these films outside China. Importantly, these opportunities have evolved with local partners with whom we build long-term relationships in financing, licensing, marketing and distributing our content. We're also expanding its original television series production internationally.

And as Lionsgate UK diversifies into an important platform for our European operations, during the quarter, we invested in our second UK production company, Primal Media headed by reality producers Adam Wood with and Mat Steiner. The deal jumpstarts our nonfiction business in the largest TV markets outside the U.S.

Though the global environment for content-owners has never been stronger, it's also in the midst of profound change. As a disruptive company that is always benefited from change, we're always poised to exploit strategic opportunities in an evolving marketplace. This past quarter, we capitalized on one of our greatest opportunities. The deal to acquire Starz will accelerate the growth of both companies, deepening our portfolio of content, expanding our access to distribution, diversifying our pathways to the consumer and unlocking enormous opportunity for long-term value creation for our shareholders.

I will now turn things over to Jimmy to take you through some of the benefits of the deal before opening the call to your questions. Thank you.

James W. Barge - Chief Financial Officer

Thanks, Jon and good afternoon, everyone. I will briefly discuss our quarterly financial results, give you an update on our previous fiscal 2017 guidance as well as discuss some elements of the proposed Starz deal. We reported first quarter net revenues of $554 million which were up 35% from the prior year as both Motion Picture and TV posted year-over-year growth. Gross contribution at Motion Picture was negatively impacted by higher marketing costs associated with the wide releases in the current quarter relative to last year. Adjusted EBITDA for the quarter was $41 million and reported earnings per share came in at a $0.01 a share.

For fiscal 2017, we continued to estimate adjusted EBITDA in the range of $200 million to $300 million. With regard to the timing of fiscal 2017 adjusted EBITDA, as we said on our last earnings call, we see the third quarter and fourth quarter as the largest contributors. Lastly, we want to provide some color on the potential synergies related to the proposed Starz acquisition. As Jon mentioned, we are expecting over $200 million in annual cash savings and this is before revenue benefits that have not been quantified.

First, with respect to the operating cost savings across combined company, expect those to exceed $50 million on an annual run rate basis. Savings are expected to include the elimination of duplicative cost and redundancies. As part of that, we expect efficiencies to be gained from economies of scale in areas such as production, manufacturing and marketing spend. Secondly, we expect the incremental tax savings on average to exceed $150 million per year through fiscal 2021. These tax benefits are based on our existing international status, accumulated Lionsgate NOLs and the level of leverage contemplated in the transaction. We expect these incremental cash tax savings to begin immediately upon consummation of the merger. The net result will be a deal that is significantly accretive with cash flow that will drive shareholder value as we quickly delever.

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

James M. Marsh - Senior Vice President-Investor Relations

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

Question-and-Answer Session

Operator

Okay. Our first question will come from the line of Alexia Quadrani with JPMorgan. Please go ahead.

Alexia S. Quadrani - JPMorgan Securities LLC

Hi, thank you. My question is on the film side of your business. I guess has the strategy changed at all in your film business post sort of The Hunger Games series, are you more focused on singles and doubles, but nicely profitable films, or is the focus to actually sort of pursue sort of the next big franchise or may be a combination of both?

James W. Barge - Chief Financial Officer

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

Jon Feltheimer - Chief Executive Officer & Director

Hi, there, Alexia. We probably have as we look forward at our 2018 and 2019 slate, every year, we're sort of looking at three pictures I would say a year that we believe could potentially be franchise pictures. And we're very comparable with that. We actually think that we have the best group of intellectual property that can drive franchise creation than we've ever had before, so we're certainly not abandoning that, but I would say we're a little bit more focused on making sure we get at least one or two quadrants excited about every single movie as opposed to trying to get four quadrants sort of excited, so a little bit more focused, but have been clear, I would say three movies a year we think have potential to be sort of franchise quality.

Alexia S. Quadrani - JPMorgan Securities LLC

And even on those, say, those three movies per year, or just I mean, just to speak to your general strategy, the strategy is still to kind of pre-sell the international distribution rights and really cover your cost and really much more of a focus on profitability, is that fair?

Jon Feltheimer - Chief Executive Officer & Director

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

Alexia S. Quadrani - JPMorgan Securities LLC

All right. Thank you very much.

Jon Feltheimer - Chief Executive Officer & Director

Yeah.

Operator

Our next question comes from the line of Stan Meyers, Piper Jaffray. Please go ahead.

Jon Feltheimer - Chief Executive Officer & Director

Hey, Stan.

Stan X. Meyers - Piper Jaffray & Co. (Broker)

Thanks, guys. I have one for Jon or Rob and one for Jimmy. So, I wanted to discuss in more detail the rumor decision to reconfigure the final Divergent film into what appears to be a TV movie or a TV show. Maybe you can comment on how monetization of TV shows has changed these days and would this allow for similar profitability? And then for Jimmy, I wanted to come back a little bit to your guidance from last quarter, you obviously mentioned again, that Q3 and Q4 will be the largest contributors to the outperformance in Q1 here, is that more timing? What should we expect about Q2?

Jon Feltheimer - Chief Executive Officer & Director

Kevin.

Kevin Beggs - Chairman, Lionsgate Television, Lions Gate Entertainment Corp.

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

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

It's just an example of what we call the virtuous cycle right now of content bouncing back and forth from TV and film and vice versa. And the economic upside in a long-term series franchise is very substantial. It comes over time and it isn't an all-in pop, but it is really rewarding. And we found on the bigger hits that we've had it's been a nice contributor every year.

Stan X. Meyers - Piper Jaffray & Co. (Broker)

And for everyone's edification, Kevin, how many pictures do you have on this, how many interested buyers?

Kevin Beggs - Chairman, Lionsgate Television, Lions Gate Entertainment Corp.

Well, we have 12 or 13 buyers that want to hear, we are trying to squeeze into one week, so we will see where we get to.

Stan X. Meyers - Piper Jaffray & Co. (Broker)

Okay. And Jimmy?

James W. Barge - Chief Financial Officer

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

James M. Marsh - Senior Vice President-Investor Relations

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

Operator

That comes from the line of Amy Yong with Macquarie. Please go ahead.

Amy Yong - Macquarie Capital (USA), Inc.

Thanks. Two questions; first, can you comment on some of the financial projections in the S-4, I guess this year it assumes the midpoint of the adjusted EBITDA guidance, but what's actually going into the outer year projections, can you just give us some comments around, or color around the movie slate? And then I guess on the Starz side, what does that mean in terms of the MVPD relationships and any potential renewals as well as the savings from output agreements?

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

Jon Feltheimer - Chief Executive Officer & Director

Well, obviously, not only is there an ownership position, but both the CEOs of Liberty Global and Discovery, Mike Fries and David Zaslav, two of the absolute finest executives in media, are on our board. And I can tell you that in both cases, including our board meeting yesterday where we specifically talked about content for the Liberty Global platform, where we talked about our series that we're producing for Discovery, I would say, these are constant conversations. I think those relationships will be very, very valuable.

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

James W. Barge - Chief Financial Officer

Yeah. Sure. Look, Amy with regards to the S-4, obviously this doesn't reflect guidance or anything, but I'm happy to try to give you a little bit of color on those numbers just looking out a bit. So, certainly, on the Lionsgate numbers, the increases really going into 2019 that you see there are reflective of our continuing growth in our TV business, as well as our improving film slate. In addition to that, additive is our ancillary businesses and our investments as well. From the Starz side, I'm not going to comment on anything relative to the MVPDs, but growth moving out into 2018 and beyond reflects improving revenues as well as moderating cost as the Disney product amortizes off and originals reach steady state.

Amy Yong - Macquarie Capital (USA), Inc.

Got it. Thank you.

James M. Marsh - Senior Vice President-Investor Relations

Thanks, Amy. Ryan, next question please?

Operator

And that comes from Barton Crockett with FBR Capital Markets. Please go ahead.

Barton Crockett - FBR Capital Markets & Co.

Okay, great. Thanks for taking the question here. I wanted to ask a little bit more about the tax benefit of $150 million. It seems like that's a mix of applying Lionsgate's NOLs to Starz's earnings stream and then also some of the benefits of lower, kind of, tax jurisdictions internationally and some of the inter-company transfers there. But on the NOLs, I was wondering if you could tell us, how long do you think it is before those are used up? And would kind of the ongoing savings by the time those are used up still be supportive of that $150 million average that you are talking to?

James W. Barge - Chief Financial Officer

Sure, Barton, yes, look you noted a lot of the things that are very positive here. First with regards to the $150 million-plus of annual run rate savings, we've indicated that that will go through fiscal 2021, and let me just underscore that that's based on our existing status as a Canadian multinational, and is also based off the leverage in the announced merger. So things that are effectively in place, not at risk. I would also add that with regards to even going out beyond that, the over half of this $150 million-plus annual run rate savings, I think over half of that will extend well past 2021. So, we are well positioned with regards to that and expect those benefits to continue for a long time.

Barton Crockett - FBR Capital Markets & Co.

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

James W. Barge - Chief Financial Officer

Look, obviously, there's the component of that that includes accumulated NOLs, okay, those that were accumulated as of the yearend March 31, 2016 as well as those that will continue to accumulate in the near-term. And those will carry forward and then we have savings that we're layering in with regards to the leverage that will continue on and on.

Barton Crockett - FBR Capital Markets & Co.

Okay. All right, that's helpful. And then on the idea of this great growth in the TV production, you guys were I think looking to do about $1 billion or so this year on maybe kind of steadyish margin in the TV segment. Could you update us on how much visibility you have on that? How much confidence we have based on the pipeline that you see? And then how much visibility do you have in your ability to continue to show some growth or hang on to the growth next year?

Jon Feltheimer - Chief Executive Officer & Director

Yeah, the answer – it's Jon, we actually have a lot of visibility going out fairly far. I would point out your margins usually in a year as great as this year, actually your margins do get depressed a little bit; I think you can expect them to go up next year, fiscal 2018 a little. But I think once you start having as many successful series as we do, I think you've got a lot of visibility. Let's not forget what we report in our television business. I think sometimes people forget about some of the other businesses we've got and particularly the Debmar-Mercury syndication business, there is Wendy Williams, there is Family Feud, Celebrity Name Game, these are sort of annuities that we keep growing year after year after year. So, between that, the Pilgrim which is big factory for nonfiction, our growing internal nonfiction, which include a big network show Kicking & Screaming, I think we've got a lot of shots at bat, frankly. I think you can pretty much count on pretty consistent revenue and ultimately margin growth.

Barton Crockett - FBR Capital Markets & Co.

Okay. All right, thank you very much.

Operator

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

Benjamin Mogil - Stifel, Nicolaus & Co., Inc.

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

Jon Feltheimer - Chief Executive Officer & Director

I'll let Kevin answer that.

Kevin Beggs - Chairman, Lionsgate Television, Lions Gate Entertainment Corp.

I mean, we go into every show, every new series offering a whole suite of marketing assistance, if you will. From our own millions and millions of Facebook followers of our movie franchises, our own entire marketing department, the cast, the relationship, you know the studio is really the grease beneath the wheels, moving all these things forward and exploiting, and we have to go recover international revenue around the world which all these days feeds into the mothership of the domestic.

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

Jon Feltheimer - Chief Executive Officer & Director

Yeah, and I should add, a very good question. The fact is that I think some people have looked at the Starz transaction a little bit like, okay, there is going to be a platform over there on Beverly Hills and there's going to be a content company over in Santa Monica. And I think, the first thing that's happening here is we're actually moving Starz into our building. And the whole point is that the culture here is a culture that everyone working together. Kevin's talking, he's got six projects right now that are virtually going or are in pre-production in terms of film properties that are going to the television. But there's way more behind that. And the point is that this company that gets put together between Starz and Lionsgate is going to be an integrated content company, and we take advantage of all the resources of our company. I don't know anybody else who does this.

If you look at the conglomerates, if you look at sort of what their premium channel is compared to their studio, et cetera, I think, they're virtually two distinct businesses. We don't see it that way. We are going to combine these businesses in an effective way. We're going to put the cultures together in an effective way. And as I said, we are not turning this into two different companies. This is going to be an integrated global content company.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc.

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

James W. Barge - Chief Financial Officer

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

Benjamin Mogil - Stifel, Nicolaus & Co., Inc.

Okay. That's great. Thank you very much.

Operator

Our next question comes from the line of David Joyce with Evercore. Please go ahead.

David Joyce - Evercore Group LLC

Thank you. Two questions. First, in thinking about how your TV production business is evolving, you haven't lapped the year yet with Pilgrim. I'm just wondering how the mix shift – how should we think about the mix shift of the scripted and unscripted programming should be flowing in terms of lower cost, and therefore, lower revenue per episode or per hour versus where you have been and if there is any seasonality in that?

And then, secondly, related to the pending Starz deal, given you'll have more pro forma free cash flow, will there be any change in the type of financing arrangements for film productions, i.e., would you be using film specific production spending less that would be impacting free cash flow? Thank you.

James W. Barge - Chief Financial Officer

You know, just with regards to your question, with regards to capital and film production, I don't expect that we will change that going forward. We like the pricing on that. We like the product, and we think it works very well with our business, so I'd expect that to continue forward.

Jon Feltheimer - Chief Executive Officer & Director

Again what Patrick Wachsberger, our co-chairman of film business has put together with these extraordinary output deals is our ability to bank these deals very effectively and pay them off very quickly, so no, there really would be no reason to change that. And Kevin, in terms of the mix from TV production?

Kevin Beggs - Chairman, Lionsgate Television, Lions Gate Entertainment Corp.

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

Our non-scripted business is really two components you mentioned Pilgrim, they have a fantastic business, it's a really smart investment, and they really have a steady-state operation running multiple, multiple series primarily in the cable non-scripted business, although they are also going to get into scripted and theatrical film development with our team. And then our own non-scripted business which is growing nicely and that's much newer to the world. That's really about two-years-old in earnest, it's been around for a long time doing one of two shows, but Jon mentioned a big network show coming in January on Fox, Kicking and Screaming, that's a really, really big production, big-budget one at one of our big shots. We invested in a UK company called Primal two fantastic show runners in the UK who primarily create formats.

And so that is growing nicely as well. Our goal ultimately would be to have revenues in scripted and non-scripted inclusive of Pilgrim at an equal level. Right now scripted is far greater on the revenue side based on the expense of scripted shows, but we'd like to diversify that portfolio nicely and we're on a nice trajectory to do so.

David Joyce - Evercore Group LLC

All right. Thank you.

Jon Feltheimer - Chief Executive Officer & Director

Thank you. Next question, Ryan.

Operator

Comes from the line of David Miller (36:45) with Loop Capital Markets. Please go ahead.

Unknown Speaker

Yeah. Hey, guys, Jimmy, another question on the S4, in your free cash flow assumptions for the combined firm, you have in fiscal 2018, you've got $591 million in free cash flow versus $379 million in free cash flow in fiscal 2017, so that's about a 55% clip higher in free cash flow fiscal 2018 versus fiscal 2017, just wondering if you can comment on some of the puts and takes there? Any kind of color you can give, particularly as it applies to some of the more important components like film amortization and working capital? And then I have a follow-up. Thanks.

James W. Barge - Chief Financial Officer

Well, look the most significant factor driving that growth among other things is one you got stable increasing cash flows on the Starz side of the transaction, as well as our increasing free cash flow as well. So and significantly to that is remember that the $150 million of tax synergies start immediately, so that day one after consummation of the transaction, likewise the $50 million plus of operating cost synergies will be ramping up pretty quickly and that drives cash as well. So that's really the driving force behind the free cash flow. And thanks for noting the significant increase of that because it is highly accretive.

Unknown Speaker

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

Jon Feltheimer - Chief Executive Officer & Director

Yeah, I don't want to speak for the whole partnership. I think that was fairly obvious that the programming is fairly film-heavy, and I would expect it to be that way for the next three years or so. I think, there's no question that Chris and his team are doing a great job, getting the original programming, there's no question that there's going to be more investment in that, you know, working together it's not only more investment in that from a license fee perspective, but definitely more concentration on rights retention because I think that's really important we built a amazing worldwide distribution business. We have a lot of third-parties come to us obviously in the Regency, Miramax, number of companies and therefore we believe that between their portfolio and our portfolio that we can create additional margin out of that content. So, rights retention is going to be really important.

I would add just one other thing that – the thing that I think Chris and his team are doing really well right now is, while the programming is certainly wide, if you look at the ratings on some of these Saturday night shows, but they are actually making sure that it's focused as well and I think that's part of what we do as a company as well. So I think there's tremendous synergy and thinking about who the modern audience is and how they watch television, so from a brand perspective I think we have a great fit, great alignment.

James M. Marsh - Senior Vice President-Investor Relations

Great. Thanks, David. (40:18) Next question, Ryan.

Operator

That comes from the line of Todd Juenger with Sanford Bernstein. Please go ahead.

Todd Juenger - Sanford C. Bernstein & Co. LLC

Hi. Thanks for taking the question. Actually I will just throw out two questions and let you decide who wants to field them in what order. First one, just kind of picking up on Jon's comments about the harmonization between Starz and Lionsgate as independent companies becoming one. I'd really love to drill that down a little further and think about the development process.

On a scale of both companies or entities keeping completely independent creative development processes for Starz and then for Lionsgate, and then perhaps just finding each other where you happened to intersect versus the other end of the scale of sort of ramming it all together into just one single development process, how do you – where on the scale do you think are you currently thinking that you are going to draw the line there to sort of maximize both the combination of companies, but also maximize your ability to find other partners and do things outside, that's question number one?

And the second one is much quicker just – sorry, if I didn't see this in the S4, Jimmy, is there anything you can say about the cost of getting the deal done, the deal cost, restructuring cost, integration costs, or any of those one timers that would be very helpful? Thank you.

Jon Feltheimer - Chief Executive Officer & Director

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

For us, we have it through our film development side, we have it through our film acquisition side, we have it in television through our scripted area, we have it through our non-fiction area, and we have it through Debmar-Mercury. On their side as well they are getting it through a lot of different places and so I think that's an area that we're going to have to really think through how to keep that diversity of incoming channels, incoming content, and organize it efficiently.

But again, as I said before integrating these companies as closely as we're going to having Chris five yards away for me, he and I and his lieutenant COO, Jeff Hirsch, these conversations we're going to be speaking 10 times a day to figure that out, but I can promise you that given the two companies together they are going to be even more ideas coming through our channels than we've ever had.

James W. Barge - Chief Financial Officer

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

James M. Marsh - Senior Vice President-Investor Relations

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

Operator

That comes from the line of John Janedis with Jefferies. Please go ahead.

John Janedis - Jefferies LLC

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

Kevin Beggs - Chairman, Lionsgate Television, Lions Gate Entertainment Corp.

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

John Janedis - Jefferies LLC

Okay, got it. And maybe separately, I'm sorry if I missed this, but can you talk more about how the China production deal will work? I guess, what rights do you retain and what did you say about the plan to distribute? I may have missed that, sorry.

Jon Feltheimer - Chief Executive Officer & Director

Sure, I'll have Brian Goldsmith answer that question.

Brian Goldsmith - Co-Chief Operating Officer

Hi, there. It really varies on a project by project basis, but generally speaking outside of Greater China, Lionsgate would distribute these movies internationally, so it's actually ex-China, so think in the U.S. as well as throughout our global distribution footprint, but each deal is sort of a unique – is a unique process, so distribution rights may vary on deal by deal basis.

John Janedis - Jefferies LLC

Thank you.

James M. Marsh - Senior Vice President-Investor Relations

Okay. Thanks. Ryan, next question please.

Operator

That comes from the line of Steven Cahall with Royal Bank of Canada. Please go ahead.

Steven Cahall - RBC Capital Markets LLC

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

Jon Feltheimer - Chief Executive Officer & Director

Yeah, we had nice uplift with regards to our growth rate outside of Pilgrim, with regards to revenue, and I think you will see the same throughout the full year. So not breaking it out specifically, but we're expecting very strong revenue growth for the year and expect then 2017 is going to be a low double-digit margin. And then going into 2018, we would be approaching or exceeding $1 billion in revenues as we said before.

Steven Cahall - RBC Capital Markets LLC

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

Jon Feltheimer - Chief Executive Officer & Director

Yeah, certainly, on Motion Picture look, it's going to vary quarter to quarter just based on the timing of P&A and product releases. So I think you ought to look at our historical run rates and see us getting back to those margins as your better indicator and not necessarily focus on any particular quarter. Though I would add, obviously as I noted earlier to one of the other responses, as we go into the second quarter with seven releases you're going to expect revenues up in Motion Picture, you know, nicely or being affected or benefiting from that. And as I mentioned we'll have the P&A to support that. So that would negatively impact the margin, but it all works out over the long-term, we feel very good about our margins and growth there in our film business.

James M. Marsh - Senior Vice President-Investor Relations

Thanks, Steven. Next question please.

Operator

Comes from the line of Matthew Harrigan with Wunderlich Securities. Please go ahead.

Matthew J. Harrigan - Wunderlich Securities, Inc.

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

Jon Feltheimer - Chief Executive Officer & Director

Thanks. Look, we're leaning in heavily in the short form area, but primarily we view some of this great digital content as an opportunity to migrate filmmakers, television talents that are not necessarily on our day-to-day radar into our traditional vertical. As an example, we had a long-term deal and had it for a couple of years now with Freddie Wong and RocketJump, which is kind of a film collective run by Freddie and his partners who are YouTube superstars. We green lit a movie called Dirty 30 with Grace Helbig and the Hart Sisters who are big time YouTubers. Greg Kalegian (49:27) has a digital label within his company called 1620, and we've made an overall deal with Grace, but all of those have happily migrated into long running series that's really going to have a much bigger return. These are really we think development opportunities that turn into real long-term perpetual businesses which is really where we live in the TV and the film space.

Matthew J. Harrigan - Wunderlich Securities, Inc.

Thank you.

Operator

Our next question comes from the line of Eric Wold with B. Riley. Please go ahead.

Eric Wold - B. Riley & Co. LLC

Thank you. A follow-up question on one of the ones earlier kind of talking about the ancillary investments, I know you've discussed in the past plans to monetize those, where you think the value is not reflected in the stock price. I guess two parts to that, one, would everything you consider on the table or would you think about some as being carved out and really not an option to be monetized? And then two, is that something that was more important in terms of thinking about Lionsgate as a standalone company or when you combined with Starz, is that viewed as really an opportunity now to delever post-deal?

Jon Feltheimer - Chief Executive Officer & Director

Well, I'll answer the first part of that, which is to say, I think any investment that's a minority investment ultimately and is not significantly strategic is something that we feel – at whatever point we feel it's not going to become strategic, it's an opportunity to monetize. The question is sometimes we will hold onto something in order to take advantage of whatever other benefit it has along the way as well as to wait for the point in time where it's got the best valuation we think that we might be able to get. And so there are couple of those, I'm not going to specify which they are, but in general if it's not going to become a strategic – a true strategic piece of business for us, we are ready to monetize.

James W. Barge - Chief Financial Officer

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

Eric Wold - B. Riley & Co. LLC

Great, thanks.

James W. Barge - Chief Financial Officer

Thank you.

Operator

Next question comes from the line of Evan Wingren with Pacific Crest Securities. Please go ahead.

Evan Wingren - Pacific Crest Securities

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

Jon Feltheimer - Chief Executive Officer & Director

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

We see their over-the-top offering is, if you will, the general entertainment over-the-top offering and we see the targeted over-the-top channels that we have as being sort of the satellites around that. They will bunch (52:59) together, I've looked at presentations that Jeff Hirsch and his team have put together already and I tell you it's very, very compelling, as a matter of fact I wouldn't be surprised if there's other outside parties including fairly significant ones, I'm aware of some conversations of putting other third-party products through that package. So, we think that's one of the fantastic opportunities that we have, not looked at it in terms of monetization, but that's going to happen and I'm very excited about it.

Evan Wingren - Pacific Crest Securities

Okay. And then just one follow-up on TV production. In terms of the tightness of supply, are you seeing just the overall scarcity of show – availability of shows impact your ability to drive price in terms of when you are selling those shows to any of your buyers?

Jon Feltheimer - Chief Executive Officer & Director

I'm going to answer for Kevin on this, I think he is modest. But I think he said earlier, he's got on the Divergent potential series he's got 12 buyers. And if you got one buyer it's pretty hard to drive price, if you got 12, I think it's a lot easier. We are going out with products, Kevin and his team go out with product, they don't go out with it until it's ready, they don't go out until it's packaged. And I think that as Kevin has said, sometimes he's got so many meetings he wants me to provide a helicopter for him. So, I think for great premium content and for a company that's created brand defining shows, I think we'll continue to get excellent pricing.

James M. Marsh - Senior Vice President-Investor Relations

Great. Thanks, Evan. Next question please, Ryan.

Operator

Okay. That comes from the line of Richard Greenfield with BTIG. Please go ahead.

Rich Greenfield - BTIG LLC

Hi, thanks for taking the question. So, when you look at Starz, I think we look at it very much as kind of a pay-TV channel that's always lived in an à la carte world and isn't exposed to the significant over earnings challenges faced by basic cable networks as the legacy bundle phrase, but there's a real investor concern that this is kind of the beginning of a multiyear cable network rollup my Lionsgate. When you read the proxy on Starz it's clear that Malone only wanted sell to Lionsgate, and so the fear becomes challenged assets like Discovery get jammed into Lionsgate or other cable networks like AMC Networks, curious kind of how you look at strategically the future of Lionsgate and what people should read or not read into the Starz acquisition?

Jon Feltheimer - Chief Executive Officer & Director

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

I think it is interesting, my friend Les Moonves has said it really well lately and I think you picked it up, which is the kind of acquisition he's focused on are anything that can enhance his content platform, and I think obviously one of the smartest people ever in the business, the fact that he's saying is that basically CBS isn't really a broadcaster, it's a content factory and that's really what we are looking at, being a global content factory particularly with premium content, and I think you'll see particularly after we've now got the benefit of the Starz platform, I think you would see any transaction that we are more focused on content than anything else. I would also say that most importantly, you're not seeing us running out to the marketplace, the most important thing you're going to see this company and myself doing for the next couple of years is integrating this, making this thing run like a top and really taking advantage of making this an incredibly accretive transaction for our shareholders.

Michael Raymond Burns - Vice Chairman

Hey, fellas, it's Michael, I just want to add one thing, Rich. This is an asset – I mean, John Malone thought these two assets would fit nicely together, he's been saying that for a long time, but make no mistake, we wanted the Starz deal.

Rich Greenfield - BTIG LLC

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

Michael Raymond Burns - Vice Chairman

I think Jon made the point. We're not going to buy anything unless we think it fits beautifully.

Rich Greenfield - BTIG LLC

Thank you.

Operator

Our next question comes from the line of Jim Goss with Barrington Research. Please go ahead.

James Charles Goss - Barrington Research Associates, Inc.

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

Kevin Beggs - Chairman, Lionsgate Television, Lions Gate Entertainment Corp.

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

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

Jon Feltheimer - Chief Executive Officer & Director

Yeah, I would add that when you look at it, I think as I say, Chris and his team are doing a great job now, but at the end of the day Starz really hasn't had its brand defining shows. So I mean, I think you can answer your own question, clearly having a show like Mad Men which parenthetically, and we love the guys, Josh and Charlie and all of them at AMC, but for year-after-year they would tell us that they were losing money on Mad Men when of course their enterprise value would go up $1 billion a year. So I think it's pretty obvious that having that kind of brand defining show would be great. I think people though do forget it, at Starz there's so much additional content going through, then there's branded channels like the Western channel which is one of the best watched channel on anybody's platform on the Encore side, and so they have huge amount of libraries, huge amount of movies and just some really great series already on the air as well as a number of others that are coming up and being considered that I've read and that are really terrific and premium. But, of course, again having that big monster hit on any platform is a game changer.

James M. Marsh - Senior Vice President-Investor Relations

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

Operator

We have one final question.

James M. Marsh - Senior Vice President-Investor Relations

Let's do that.

Operator

And that comes from the line of Tuna Amobi. Please go ahead – pardon me, it's with S&P Global Markets. Please go ahead.

Tuna Amobi - Standard & Poor's Investment Advisory Services LLC

Hi. Thank you very much. So with regard to the Starz deal, I'm trying to figure out what questions to ask that hasn't been asked already. This is first for Jimmy, how will this deal affect the segment reporting if at all. I mean, how much breakout can we expect going forward?

And separately, also related to that, I know that you alluded to that in your comments on deleveraging, flexibility, et cetera. I'm wondering if there's any shift in terms of capital allocation? I know that John Malone has his own philosophy concerning these things and I'm wondering if you feel that you are aligned or need to be aligned with his thinking and how would you expect that to evolve. So those are the first set of questions. I have a follow-up. Thanks.

James W. Barge - Chief Financial Officer

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

James M. Marsh - Senior Vice President-Investor Relations

And your follow-up there, Tuna.

Tuna Amobi - Standard & Poor's Investment Advisory Services LLC

No, I also asked about segment reporting, any changes to expect? And I have another follow-up.

James W. Barge - Chief Financial Officer

Yeah. We've not concluded with respect to ultimately what our segmental reporting would look like, but obviously you'd expect the networks to be a separate segment. We'll figure out exactly how the rest of that falls in with the overall Lionsgate family (1:03:00).

Tuna Amobi - Standard & Poor's Investment Advisory Services LLC

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

Jon Feltheimer - Chief Executive Officer & Director

Yeah. Again, with the currency, when you're both in the production acquisition as well as television business. The currency changes will take it and give back to you. So from the production point of view anything we produce there is essentially a gain, especially produce cheaper stuff that we have been producing a number of series there. I would add as well have been few things, a number of series there. I would add as well what Zygi Kamasa and his team have done very, very well is not just rely on the U.S. product, but they've been in the acquisition for production business there. And again, I think we won't be affected very much from that perspective. So I think, no, the key (1:04:25) nothing to do with currency or devaluation, but it has to do with a vibrant business, the biggest leading market in the world and one of the best executives we have in our company.

Tuna Amobi - Standard & Poor's Investment Advisory Services LLC

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

Jon Feltheimer - Chief Executive Officer & Director

No. We don't really have any exposure. There's been – as I say, we're buying and selling and we are not really looking at a significant amount of exposure.

Tuna Amobi - Standard & Poor's Investment Advisory Services LLC

Okay. Thank you.

Jon Feltheimer - Chief Executive Officer & Director

Thank you everybody. We look forward to our next call.

Operator

Okay. Ladies and gentlemen, that does conclude today's conference. As I mentioned earlier, today's conference was recorded. It's also going to be available for a replay starting tomorrow, August 5, 2016 at 1:00 p.m. Pacific, going for one week until August 12, 2016 at Midnight Pacific. You may access that replay system by dialing 1800-475-6701 and entering the access code 398706. International callers may dial into the United States using 320-365-3844. Those numbers again are 1800-475-6701, International 320-365-3844. The access code is 398706.

That does conclude today's conference. Thank you for your participation. You may now disconnect.

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