Great. Just a quick note on important disclosures. disclosures appear as a handout available in the registration area and on the Morgan Stanley public website. With that, I'd like to welcome Michael Burns, Vice Chairman of Lionsgate, and Joe Drake, Chairman of the Motion Picture Group. Thank you both so much for joining us.
Thanks for having us.
Michael, maybe just to start us off with the obligatory question, what's left to do on the planned separation of the Starz and the studio assets? Are strategic discussions still part of that with partners, or do you foresee a potential outcome where you separate before that happens?
We remain on track. We've talked about a March filing. That'll be a private filing initially, and then it will be a public filing later on after that. We are on track for that. We've talked about and continue to believe that our September separation is currently on track. As far as strategic conversations, we are looking at a bunch of different alternatives. We don't need any money. We've de-leveraged ourselves, you know, self-help with some of the bond purchases that we've done recently, taking advantage of the interest rate environment and the fact that we priced those bonds originally in at the right time. I would, I feel pretty good about all of our businesses at the moment.
Joe's gonna specifically talk about the studio, but then I'll talk about Starz a little later on.
Great. Yeah. I guess with that, as we think about these assets on a standalone basis going forward, can you talk a bit about in the context of the broader theme of the media industry, rising industry focus on rationalizing content spend at a high level, how do we think about the positioning of Starz in that ecosystem? Maybe Joe, for you on the film side.
Starz is making money. If you put it in the streamer category, not a lot of players in that space making money. Jeff Hirsch and his team have done a great job on that, and it's a content machine. Their slate looks very good. They've got a bunch of shows that are working, very happy about that. I feel like there's gonna continue to be consolidation, but consolidation can take many forms. You're gonna see a lot of bundling. We just announced, for example, that Starz is now gonna be bundled with MGM Plus, and I think that's the first of many bundling situations that are gonna happen. It's pretty simple. The consumer wants a better price point.
Right.
You know, there's a tale of two cities out there right now, where a lot of people have money and a lot of people don't. It's tough out there for many people. The industry itself has always had an issue with churn. The hope, and I think that certainly the statistics prove out, that when you're doing the right type of bundling, you're gonna lower churn significantly, at the same time giving the consumer a better value proposition, which is a win-win.
Joe, for you on film.
For us on film, they are our pay television company. For all movies that we release theatrically that qualify, they end up as our pay television partner. We, in addition to that, periodically do sort of bespoke things. We sold them separately outside that paid deal, one of the Saw franchises a year ago. They're a valued partner of ours and will continue to be. Really predominantly just for that pay window.
Got it. Understood. I guess from a broader industry perspective in terms of what we're seeing as a theme that's been coming up on the focus around rationalizing spend. Some investors have voiced concerns about the sustainability of the studio library and production demand, if third parties kinda start to slow their spending. I guess how do we think about the positioning there from a navigating that from a motion picture standpoint?
Are you asking about, specifically streamers reducing spend?
That's right. For in terms of the demand on library content for the studio.
Well, look, I think you saw in the last quarter our library was at an all-time high. Although I think that you know, there is some reduction in spend at the streamer. When you think about where those streamers were 5, 6, 7 years ago, those budgets have gone up massively on a relative basis. As a content supplier, we are today really one of the largest supplier of wide release independent content in the world. As most studios are feeding their own global pipelines, we're a licenser everywhere else in the world. We occupy a pretty unique position. Are actually doing more business with streamers than ever before, because they need theatrical films and they need films that are very targeted specifically to their audience, and we're one of the biggest providers of those.
Although you see some pullback, we still see exceptional demand to fill with what we do.
I was gonna add one thing, an encouraging sign. It used to be a world where you have one streamer that would say, "All right, if I'm gonna play, I want worldwide rights." If you take a look at what we did recently with The Continental, which we were out of our television group, which is obviously a precursor of a limited series, 3 90-minute movies, we're making that for Starz. What happened is, we thought, "All right, well, there may be other opportunities." Jim Packer and his team ended up licensing that, two big deals. One is Peacock and the other is Amazon. You have a situation today where you have these big streaming players that are playing well together, and that's good for us.
Makes sense. I guess just in terms of Diversity of the revenue streams when it comes to buyers across your film and TV catalog, has that continued to evolve in a way where you feel like from a specific to title perspective, that there's a pretty wide range of outcomes and opportunities for monetization as your catalog grows?
For the Motion Picture Group, it certainly has in really meaningful ways that have ultimately driven higher values out of almost every window in the business. Looking at the international side of the business, because we self-distribute in the U.K., Latin America, and Canada, but we license everywhere else in the world and outside of the U.S. obviously. When you look at what's happening to values internationally, they've gone up by 15%-30% on a per-title basis. The makeup of who those end users are has really shifted. Michael talked about The Continental. We had a movie this last year called Shotgun Wedding. On the international front, we licensed to a number of our traditional theatrical distributors as well as a footprint to a streamer at significantly enhanced values.
Brought that back to the States to release it theatrically, and then ultimately looked at the value proposition, and it had a better home and better economics on streaming. What the proliferation of platforms and appetites has done for us is just given us way more opportunities and different ways to put these things together and ultimately increased value.
Understood.
I'm not going to quote DeSantis and say something about Florida where woke dies, but I will say something along the lines that great IP never dies. If you take a look at our top library titles, for example, Twilight. The Twilight movies are always in those titles year in and year out. What's happening, a new generation is now discovering Twilight. So you have the nostalgic moms that saw it and read the books way back when, and now their daughters or their sons or their family are now watching that together. What's happening also, when you take a look at what's in our library, we did those deals or Summit did those deals years ago where they licensed them internationally. Now, a lot of those rights are coming back to us.
Now not only do we have the domestic rights, we have the global rights to market those again, and I will tell you that the numbers that we're getting on those, that international right opportunity is extraordinary.
Great.
Old IP great IP never dies.
On that same vein, I think something that was benefiting you a little bit in terms of the scarcity value of that library content was that some of the larger players like Disney and Warner Bros. were retrenching and pulling back some of their libraries to their own exclusive platforms. As we kinda see some of those initiatives unwind and there being more appetite for licensing again in the ecosystem, how do you think about your positioning there in terms of the content?
We've always been the benevolent arms dealer. We spent some, between acquisitions and original productions, I think Peter Iacono told me we spent $20-some billion on content. I shudder to think how much that would cost to repeat that content today. It would probably be an astronomical number. We're not seeing, even with others now being in a position where they have to, you know, basically to service debt, license their content to potentially other players, it doesn't seem to be hurting us. I think again, it's a slice and dice in the windowing that our team takes advantage of every day.
Got it. Joe, I did wanna talk about the movie business.
Okay.
Some of the mid-sized films on your slate, like Plane and Jesus Revolution, have really performed quite well in the last few weeks and months. We're seeing some healthy signs of life at the box office. Is that kinda fair to say? As we kind of think about a return to the theatrical slate this year in more full form for you guys, how do we think about the content windows and how to capture monetization potential versus what you have done historically?
Sure. Look, for us, content windows are really a question of optionality and excuse me, we don't think of it as a one-size-fits-all model. What the good news is that there's a lot of intelligence in the marketplace today that we can use to create really sort of bespoke windowing models for each movie. I think a good example of that is the first three movies that we'll release this year, Plane, Jesus Revolution, and then John Wick, which is coming up in a couple of weeks. Plane is a movie that we released theatrically and then put to PVOD after a 20-day exclusive window for some very specific reasons. Jesus Revolution, and that movie's overperformed all the metrics we would've hoped.
Jesus Revolution is a movie that is in theaters today, will have a 45-day exclusive window and then go to EST and package for very specific reasons in terms of how that audience acts. John Wick, which is already a deeply established brand, and we can access our home entertainment revenues 1 million different ways. We're gonna give it the longest theatrical window because it has the most theatrical upside. For each one of those movies, we will capture the full value of the theatrical, or of the home entertainment marketplace without impacting theatrical. That's really important because our pay television rate cards are based on theatrical box office. We're constantly balancing those two things.
The real win here is that we're able to leverage that marketing spend, of the theatrical to impact, you know, that home entertainment market as well. We're getting a double bang for our buck out of that theatrical P&A.
I see.
It's been a real game changer for us.
You asked Joe about the theatrical business, but we never came up with a great name for the segment 2 business, but why don't you talk a minute about that?
We have People don't, you know, they think of the Motion Picture Group as these 12-14, 10-14 theatrical films a year. We have been, for the last 10 years, releasing 30-35 original films in addition to that theatrical marketplace, with very little P&A, sometimes little tiny million-dollar P&A spends, but for the most part, not P&A. That business has doubled over the last 3 years as competition has gone away and as we have focused on it. It's a major contributor that today, at least this year, pays all the overhead of the Motion Picture Group on its own. Consistently with really limited risk, that business generates over 30% slate margins every year.
We have these other areas of our business being in the space that we sit that are really, really profitable, low risk, high return, and allow us to take advantage of the changing market today.
Do you anticipate that the appetite for non-theatrically released or first-run theatrical released movies to continue to increase? I think that there's been some bigger players that have decided that direct-to-streaming movies might not necessarily be the way to go.
We're certainly not seeing that. What I would say to you is that competition for this space has really fallen away. As the other studios are kind of hunting for elephants, we're able to play in all these niches. There's still an enormous amount of shelf space with our international all rights business, our international theatrical business, our home entertainment business. We have so many touch points that we're really in the business of filling these slots that nobody else is paying attention to. What I would tell you is that we've been very intentional about growing that business, and we don't see... Based on the reduction in competitors and all of that global shelf space and growing appetite, you now have FAST channels happening. That's gonna be a new opportunity. AVOD drove new opportunity for us.
In the near term, no, I see is us having still room to grow.
Okay. We'll go back to that point that you made on Plane and the ability to kind of bring that film into an early VOD window. What kind of signals lead you to move-
Yeah
... so early into that direction, and how do you kind of look to replicate that level of success versus maximizing the theatrical aspect of it if you see a John Wick opportunity?
Sure. It's different for every film. In the case of Plane, we had a real strong sense of what sort of the theatrical, the breadth of the theatrical appetite was for that movie. There was also enough market intelligence that we could see that an action movie starring Gerard Butler that ultimately delivered on its trailer lived in the absolute sweet spot of that home entertainment, and frankly, the home entertainment PVOD buyer in particular. We made a decision to do that. We then were very specific about 20 days wasn't a magic number. Some people say 17, 20, 24. We picked 20 days because that was the window where our transactional partners, based on competition, could also get behind it the best.
We continued to release that film theatrically while it was in PVOD, and ultimately that movie hit its expected multiple based on opening weekend, so we think we got all of the box office out of it. Yet we did see that increase, significantly increased value in the home entertainment. The reason for that is ultimately what we're able to do is we're leveraging that marketing spend to now do two jobs for us, but it's the same.
Right
it's the same dollar value. There are signals out there that are specific to title. We didn't choose to do that on Jesus Revolution because of the way that consumer on that kind of title transacts. I would just say there's information out there that we can use to create really bespoke models.
Understood. I think Lionsgate in particular has really approached film financing from a unique perspective compared to some of the other major film studios. Can you maybe talk a little bit about how that structure has evolved over time, and whether or not you're maybe seeing an opportunity to change that in some instances where you might see the ability to capture greater upside from like a franchise performer, for example?
I'll take it. I think I think I get the question. Look, we'll always take advantage of the cheapest money that's out there. As Joe talked about, he'll license a lot of our bigger films. If a movie, even though if it's an expensive movie, certainly an expensive movie would be $100 million. He'll probably get licenses for that movie $60 million-$70 million. With the domestic risk against it, maybe more. I mean, Joe many times has actually covered the entire budget. Basically, our risk is our P&A on that particular picture. You know, we have a, right now, a credit facility, led by J.P. Morgan, and it's, I don't know, $1.25 billion and it's undrawn.
We'll use production loans that we'll go out there and we'll say, "All right, we won't use the facility. We'll take a production loan against that picture, and then on delivery, we'll collect the international licenses and time that fairly close to the release because we think it's more efficient from just from an interest rate standpoint." As I said, this business, if you have an expensive capital that you have to get, that's the reason. If you don't have a library and it's gonna cost you a lot of money to, you know, borrow 10%, 12%, 15%, you're dead on arrival. We're in a position right now, I know that Neil told me you can't say 17,000 titles anymore. Now we have 18,000 titles in our library.
The idea that if it's $850 million of very high margin business, certainly paying a tremendous amount of our overhead and then some. The idea that you can borrow against that at LIBOR + 2.5, which is still not expensive money, even in this giant rising interest rate environment. We're opportunistic. We have had film slates in the past. Sometimes it's a good idea, sometimes it's a bad idea. It depends on the fees that we get upfront. But my sense is that we'll continue to do that because we're pretty motivated to squeeze out every possible nickel that we can. In a world today where the data analytics have gotten so much better.
Joe talks about the consumer stuff, and he's sort of touching on it. We have a very good idea where our consumers are and exactly what we have to spend, and we don't spend what others spend to release movies. We're much more efficient, and that's where we're getting our margin.
Makes a lot of sense. I mean, as we think about the studio on a standalone basis going forward, how should we think about the corporate costs and, you know, the content production and the right capital structure?
Yeah. I think most of the corporate costs will end up on the studio. Remember, the studio is the library, the feature film business, the management company, the television business, and Starz is over here, with their own overhead. A lot of the overhead that you'll see when you separate the businesses, I would say the majority of it will end up on the studio side, but still a lot less than others.
How about corporate debt?
I think we've said publicly, look, we've got some bonds outstanding. I think it's likely that those bonds, we look at them as an asset, likely end up on the Starz side of the transaction. We're not gonna over-lever either company. You know, if we found the right type of financing.
Mm-hmm.
To make sure to do that, again, it's not a necessity, but if you got the right, what we consider to be smart money that, you know, which is, you know, getting their fair New England return, as my father said, but not more than that, then that's of interest to us.
Got it. Got it. That makes sense. I did also wanna ask about this movie, Operation Fortune, which seems like a kind of a, like, unique situation in terms of a film that needed a distributor. You took it on last minute in a pretty financially attractive way. Why is Lionsgate positioned to do these kinds of deals? Just in terms of the sizing of the contribution and in these cases, is it an upside source of, you know, earnings for you?
Sure, yeah. I mentioned competition earlier. You know, the competitors that operate in the space other than the other major studios have really fallen away. For the producer with one movie on, you know, with a briefcase with one movie in it that isn't a valued supplier to streamer, it's a little bit tougher days. We've become a great stop, if not one of the only stops, for certain opportunities. We've seen that in the case of Operation Fortune, a movie we've been tracking a long, long time.
Ultimately, we were able to pick up the movie on a zero-risk basis, didn't have to advance P&A, but provide a distribution slot and provide good distribution, and we'll ultimately return good money to that producer that gave us that movie. There isn't another company that could take that movie, contract it in eight days, put it in theaters one month later, deliver return for ourselves and deliver return to the producer risk-free. You also see that we have a movie that I think has the potential to really break out this year called The Blackening, that we saw in Toronto. Again, an example. We're the right distributor for it. I think we won it partially because of our distribution and marketing prowess.
There just isn't the same level of competition playing in what I'll call that mid-budget space. It's a really compelling space to be in today. Operation Fortune, Blackening, we just sit in a place where I think we have less competition and more to offer than most.
How should we think about the evolution of that film slate in terms of the mix of the mid-size versus the tentpoles? In terms of the potential financial returns of each of them?
Sure.
How do we think about kind of the financial profile of those two?
When you think about Lionsgate historically, just based on its pipeline, I think it would have. I've been here off and on for a long time, so I've been part of a bunch of it. I think you would look at this as a company would have one, maybe one and a half tentpoles in a 12-month period of time, or, you know, maybe a couple movies every 18 months. We've spent a lot of time focusing on making sure we had some big pillars in each year. We're now at the place where we'll have a minimum of 2 of these bigger franchises, a John Wick and a The Hunger Games or a Dirty Dancing and, you know, name the other franchise.
We're at the place where we should have 2 to 4 real pillar strong franchises in every release calendar. In addition, though, you can count on us to have 8 to 10, 8 to 10 what I'll call mid-budget films. I think that in terms of what the opportunity is today, you know, there's narrative like the mid-budget film isn't working anymore, and it could not be further from the truth. If there's one thing I could, if there was one thing I could help impart in terms of the reality of the marketplace today, is that the economics, the fundamental underlying economics of that mid-budget film are stronger than they've ever been. They're stronger than they were in 2019. And the reason for that is there's a bunch of reasons for that.
On a P&A basis, Michael mentioned it. Every studio has the opportunity to do this. With the information available to us, we are 15%-30% on a per-title basis more efficient in terms of the $ of P&A that we spend on a movie. That's to say that, for every $, we're spending 15%-30% less to get every $ of box office that we get, and that is the new normal for us. When you look at the revenue side of the picture, because we're a licensor in every territory in the world outside of the U.K., Latin America, and Canada, we've seen now over the last 12 films an increase in value on a per-title basis of between 15% and 30%.
You look at pay television rate cards, which are tied directly to box office levels. For every studio, those are up between 50% and more at every box office level. We've seen, because theatrical films are scarcer, we're seeing growth in our free television revenue. You add all that up, and you're looking at a really compelling model. Just to give you 2 last statistics. You look at Jesus Revolution and Plane as an example. When we greenlit those films, they will hit their box office expectations from the greenlights. At greenlight, those were 19% and 15% margin films at our base case. Hitting our base case today, those films will be 30% margin films and 35% margin films because of all the factors I talked about.
What you'll see from us is a mix of 2-4 tentpoles, 8-10 mid-range films, but on economics that are more compelling than they've ever been.
Yeah. Joe mentioned he's been here and then he left, and then we dragged him back in. It's like Pacino in The Godfather. The reason that John and I and others wanted Joe back is he's the best businessman in the film business, and he's also, his creatives follow him. You know, Nathan Kahane and Aaron Janus and the whole team down there. He also understands brand extension.
Mm-hmm.
you know, Joe was here when he originally went out and bought the original Hunger Games.
Mm-hmm.
Here we have another Hunger Games coming out in November, which is pretty exciting. A brand extension that his team came up with, and Joe has executed beautifully, if you could talk about Ballerina just for a second.
Oh, sure. You know, when I got back here about 5 years ago, we again wanted to have more of these reliable pillars in our slate, one of the things was, what are we doing with The Hunger Games? What are we doing with John Wick? When you look at John Wick, not to get too much into the creative, but for those of you who've seen those movies, you still have this unbelievable white space to explore. We know there are Continentals all over the place. We know there's assassins all over the place. We've met some of them. We meet new ones. It's just sort of an unlimited world, we wanted to put some organization around expanding that universe.
Michael talked about The Continental, which is a three-part show that we've licensed, that the TV group made and licensed, which is a big extension of that franchise. We, the first offshoot, we built a movie called Ballerina with Ana de Armas. Keanu joined that, it's a movie that we just finished shooting that's gonna be released here in the spring of calendar 2024. There'll be kind of like two Wick movies within a year of each other. This one is a true offshoot with a new character that comes out of that, the Ballerina world that we saw in the last franchise. We have a John Wick 5 in development with Keanu. We're looking at an additional franchise extension.
You have this, we can't say with who yet, but we've been talking about a triple A video game. You have this landscape now that we see as a great creative endeavor, but extraordinary sort of untapped business opportunity. When you look at the data, you look at what the consumer demand for that brand is, we've just scratched the surface. Now we're going about the business of how do we keep a cadence in every touch point that you can have, whether it's in television, whether it's in film, to really reach its maximum potential.
Again, getting back to the theme, great content never dies and it expands. Kevin Beggs and the television group, I think they've got 9 shows going into their 3rd season pickup. Kevin and our partnership with the BBC have a smash hit on CBS, we don't do a lot of network shows, called Ghosts. I would be shocked if there's not going to be some sort of, you know, spin-off of that show. Again, I'm not giving selective disclosure, but I just know the way that when something really works, there's an opportunity to expand that universe. Kevin and Sandra Stern are doing a great job in television doing that the same way that Joe and his team are doing it on the feature film side.
Great. Just to squeeze one last one in then, just on that topic of the relationship between Starz and the studio kind of staying intact even after the separation. As we think about the current in our segment relationships, how should we think about the right balance between supplying Starz with important content like the pay one up that you mentioned, versus the value that studio might be generating from maybe even a larger bidder coming in and maximizing the value that way through the studio side?
Well, I'm not gonna go into you can write about the eliminations, but obviously the reason that we're doing the separation is that we think that we're gonna have that by separating the companies, that you're gonna have a higher stock price. If we, if we don't, we should never be doing that. What I mean by a higher stock price is if you take the stock price today, once you do a separation, you add up what your value is, the Lionsgate shareholder on the Lionsgate side and on the Starz side, and if that number's not higher, I should be fired. I think that that is the concept. That relationship is arm's length, there are...
I'm not gonna end with a bunch of accounting, stuff about like eliminations, but you've written about it. There are some significant opportunities for us, financially by having, two separate companies.
Understood. Well, thank you so much for your time. Appreciate it.
Thank you.
Thank you.