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Edited Transcript of KEW.A.TO earnings conference call or presentation 14-Aug-19 1:00pm GMT

Q2 2019 Kew Media Group Inc Earnings Call

TORONTO Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Kew Media Group Inc earnings conference call or presentation Wednesday, August 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ankit Hira

Kew Media Group Inc. - IR Head

* Geoffrey Richard Webb

Kew Media Group Inc. - CFO

* Steven Lewis Silver

Kew Media Group Inc. - Founder, CEO & Director

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Conference Call Participants

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* Bentley Cross

TD Securities Equity Research - Associate

* David John McFadgen

Cormark Securities Inc., Research Division - Director of Institutional Equity Research

* Matthew James Lee

Canaccord Genuity Corp., Research Division - Associate Analyst of Telecom and Media

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Presentation

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Operator [1]

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Greetings. Welcome to the Kew Media's Second Quarter Fiscal 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ankit Hira, Investor Relations at Kew Media. Thank you, sir. Please go ahead.

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Ankit Hira, Kew Media Group Inc. - IR Head [2]

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Good morning, and thank you for joining Kew's Second Quarter 2019 Earnings Conference Call. On the call today, we have Steven Silver, Founder and Chief Executive Officer of Kew; and Geoff Webb, our Chief Financial Officer.

Before we begin, allow me to provide the disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements about current and future plans, expectations and intentions, results, levels of activities, performance, goals or achievements or any other future events or developments. This information is based on management's reasonable assumptions and beliefs in light of information currently available to us and listeners are cautioned not to place undue reliance on such information.

Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. We refer you to our second quarter filings, including the management's discussion and analysis as well as the company's annual information form dated April 1, 2019, for a summary of the significant assumptions, underlying forward-looking statements and certain risk and factors that could affect our future performance and ability to deliver on these statements. We undertake no obligation to update or revise any forward-looking statements made on this call.

The second quarter earnings release, the related financial statements and the management's discussion and analysis are available on SEDAR as well as on the Investor Relations portion of Kew Media's website at investors.kewmedia.com.

Finally, all figures discussed on this conference call are in Canadian dollars unless otherwise noted.

With that, I will turn the call over to Steven Silver.

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Steven Lewis Silver, Kew Media Group Inc. - Founder, CEO & Director [3]

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Thanks, Ankit. Good morning, everybody, and thank you for taking the time to join Kew Media Group's Second Quarter Earnings Call. It's a pleasure to have the opportunity to update you about Kew and talk about its performance for the quarter.

We are very pleased with the results from the second quarter of 2019 and also the momentum in each of our businesses heading into the second half of the year. Our second quarter results were in line with our expectations as we achieved revenue of $69.1 million, an increase of 38.8% over the prior year period, and gross profit of $21.3 million, an increase of 59% over the same period last year.

The group saw a meaningful increase in revenues and gross profits. Some of our increased performance was offset by higher levels of G&A, general and administrative expenses in the quarter. The G&A expenses were fully budgeted for and also in line with our expectations.

They're predominantly related to the Essential acquisition last year as well as costs related to additional talent acquisition and the centralization of our infrastructure, as we improve efficiency inside our support functions moving forward.

Our sales momentum remains strong, and we've made excellent progress with our full year product pipeline so far. We remain focused on enhancing our quality of revenues and driving greater margins and profitability across the group. Based on our visibility for the full year, we continue to expect another year of growth. We once again reaffirm our prior year full 2019 outlook of adjusted EBITDA organic growth in the range of mid- to high single-digits over the pro forma 2018 adjusted EBITDA of $31.9 million, which, as a reminder, included an annualization of a full year of Essential's earnings.

I'll now spend a few minutes discussing our business and highlighting some of the key drivers of our performance in Q2 and beyond?

Let's start off with some good news. As the television awards season starts to heat up, Kew titles are receiving much-deserved recognition. Companies in the Kew Group were recently nominated for 9 Emmy Awards. Kew Media Distribution, which I will refer to as KMD from now on, had a title called Leaving Neverland, this is the film about Michael Jackson's abuse allegations. The firm received 5 nominations, including Outstanding Documentary or Nonfiction Special and Outstanding Direction.

Jigsaw Productions received 3 nominations, 1 for The Inventor: Out for Blood in Silicon Valley, the film about Elizabeth Holmes and the Theranos scandal. Also, Divide and Conquer: The Story of Roger Ailes which was distributed by KMD, and also, the Alex Gibney-directed, No Stone Unturned for Outstanding Investigative Documentary. Also -- a film also being distributed by KMD.

Finally, the KMD-distributed film Believer for HBO Documentary Films was nominated in the Outstanding Arts and Culture Documentary category. As a note, the Emmys will take place on September 22.

Meanwhile, Leaving Neverland, won a the Television Critics Association award for Outstanding Achievement in News and Information, and Jigsaw's Netflix show, Salt Fat Acid Heat, was nominated for Outstanding Achievement in Reality. Leaving Neverland continues to be an extraordinary commercial success as well as a critical one. We recently announced that KMD has sold Leaving Neverland to every single territory in the world excluding China.

There continues to be unprecedented interest in this provocative and important piece. It's become HBO's most-watched documentary of all-time with over 9.2 million viewers and counting.

Summer is always a busy season for production companies and this year is no exception. There is a huge amount of production happening across the group, including many internal productions between Kew Production companies and our 2 Distribution platforms. We previously announced Essential Media's The Impossible Live with A&E in the U.S., which will be distributed by KMD. This incredible 10-hour series will showcase the most complicated and dangerous stunts ever attempted, including a world record high-wire walk over an active volcano. Sienna Films is in preproduction on their premium drama series, The Trickster, for CBC. The series is also to be distributed by KMD.

The Trickster is a dark, humorous, coming-of-age stories. It's a mash-up of dysfunctional family drama and a supernatural thriller.

Production is also underway on 2 shows for Our House Media and KMD. They are titled, My Paranormal Nightmare and Mutant Weather, which KMD recently sold to Discovery for Africa and the Middle East. Architect Films is having an exceptional summer with 6 shows in production at the same time with third-party buyers, including The Big Bake, Chocolate Masters, Fire Masters 2 for the Food Network Canada, Hot Market for HGTV and Handmade Hotels and Best Cake Wins for Blue Ant.

We're also very excited about the collaboration between TCB Media Rights and the newest company on the Kew Group, Two Rivers Media. Two Rivers was recently commissioned by BBC Two to produce the docu-series, Frankie Boyle's Scotland. TCB will be distributing the title internationally. This is Two Rivers' second major commission in under 7 months, the first one being Children of the Devolution for BBC One. And just to remind everyone, Kew invested in Two Rivers in January of 2019 alongside the merchant bank Noble Grossart of Scotland as well as U.K.'s Channel 4.

We're also seeing some great sales activity from previously announced collaboration titles. For example, Frantic Films and KMD's High Maintenance, a premium factual series that takes a fascinating look at the maintenance and repair teams responsible for keeping some of the world's most impressive superstructures safe. We sold that show to Blue Ant, and it will air on their Smithsonian Channel in 2020. The KMD and Collins Avenue show, My Crazy Birth Stories, is airing on a prime-time slot in TLC's Thursday night line-up, and it's been garnering strong sales, including the 7 Network in Australia and Discovery U.S.A. and Latin America.

KMD also sold Media Headquarters show, The Brigade, to Discovery Middle East and Bristow Global Media's Paranormal 911 to Discovery Germany amongst other platforms. As illustrated by this enormous range of titles, the Kew companies are taking advantage of our diversified and growing platform. The platform continues to enable the production and commercialization of content at an accelerated pace, which in turn helps strength -- Kew strengthen its competitive position in the marketplace.

In addition to all the new Production and Distribution activity in the quarter, Kew has enjoyed the success of some returning favorites. These include Collins Avenue's hit show Dance Moms, which is currently airing its 8th season on Lifetime and Frantic Films award winning, the Baroness von Sketch, which has been renewed for its 5th season on CBC and will start Production this fall. KMD-distributed Frankie Drake Mysteries has been renewed for a third season by the CBC. It's worth noting that the first 2 seasons have already sold to 113 territories worldwide. KMD will be launching sales for this new season at MIPCOM in Cannes in October.

Our group of companies has also enjoyed some recent high-profile success in the features world. I'll mention here, KMD's title, Marianne & Leonard: Words of Love, Nick Broomfield's documentary about the love affair between singer Leonard Cohen and his muse Marianne. It opened theatrically in North America and the U.K. to rave reviews and has done great box office numbers.

Sienna's Sweetness in the Belly starring Dakota Fanning will premiere at the Toronto International Film Festival and the Alex Gibney-directed Citizen K, an intimate yet sweeping look at post-Soviet Russia from the perspective of the enigmatic Mikhail Khodorkovsky will premiere at the Venice Film Festival and will also play at the Toronto International Film Festival following.

Both festivals are among the most important in the world and are considered strong launching pads for international and awards attention.

Our group of companies also continue to exploit new innovative business lines. Recently, Our House Media announced the Jenna Lyons project. This is an exciting hybrid-branded content project with Warner Media. The unscripted series will follow Jenna, the former J.Crew President, as she builds a new lifestyle brand. Both the brand and the show will be built in tandem with Warner Media taking a significant stake in the commerce platform. The show will debut in 2020 on TNT, TBS as well as streaming on HBO Max, Warner Media's recently announced streaming platform.

TCB known as the factual entertainment specialist has also been expanding its remit to include high-end documentaries with its acquisition of the Feature, the $50 million art swindle for BBC Two. And its commission of the miniseries How I Created a Cult. Both titles will be launched at MIPCOM 2019 as part of a robust content slate from TCB.

In addition to this kind of -- this new kind of programming, TCB continued to show very strong sales activity with its core business, including bulk deals for 60 hours of content with key French and German broadcasters, such as Canal Plus and ProSieben. Popular titles sold include World's Greatest Palaces, Mythical Beasts and Wartime Crime and many others.

With many of these titles, we're starting to see the uplift from a relatively large increase in product acquisition spend across our Distribution segment over the prior quarters. With strong momentum going into the fall season and the MIPCOM market in October, which is a key content market in our space and anticipate the continued return of our investment through the remainder of FY '19.

I'd now like to turn the call over to Geoff to review our financial results and outlook with you in greater detail. Geoff?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [4]

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Thank you, Steve. Q2's 2019 revenue of $69.1 million was comprised of $46 million from Production and $23.1 million from Distribution. Gross profit of $21.3 million included $11.7 million from Production and $9.6 million from Distribution. Gross profit margin was 30.8% with segmented gross profit margin of 25.4% for Production and 41.6% for Distribution. Overall, margins met management's expectations for the quarter.

Inside the Production segment, gross profit margins were slightly higher due to the introduction this year of Essential. Inside the Distribution segment, margin percentages met management's expectations and were lower than in previous periods due to product mix and revenue recognition timing issues. At a segment level, Production revenues were $46 million, an increase of 23%. Gross profit was $11.7 million, an increase of 46.3% and the gross profit margin percentage was 25.4% compared to 21.4% in 2018.

G&A increased by 28.6% to $6.3 million. All of these increases were predominantly due to the inclusion of Essential in the quarter. Adjusted EBITDA increased by $2 million to $4.3 million.

Titles that were produced across the segment include Essential's Texas Flip 'N Move seasons 12 and 13 for DIY Network in the U.S., Body Hack Season 3 for Network TEN in Australia; Collins Avenue's Dance Moms Season 8 for A&E in the U.S.; Frantic Films' Baroness von Sketch Season 4 for CBC; Architects' Fire Masters for Corus in Canada; and Jigsaw Productions' The Family for Netflix.

On the Distribution side, revenues were $23.1 million, an increase of 86.3% on FY '18. Gross profit was $9.6 million, an increase of 77.8% and the gross margin percentage was 41.6%, which was 43.5% in 2018. G&A increased marginally by $470,000 to $4.8 million.

Adjusted EBITDA increased by 284% to $4.9 million. The segment's revenues benefited from the delivery in the quarter of some high revenue, but lower margin titles. The types of titles in this product mix are positive to the revenue line. And whilst gross profit also increased there was a decrease in the percentage margins.

Additionally, we have budgeted for higher G&A in the segment this year, given the level of growth that is expected. Titles that were distributed across the segment include Line of Duty Season 5, Bletchley Circle: San Francisco, My Crazy Birth Stories, The Spy Who Fell To Earth, Egypt's Unexplained Files and Massive Engineering Mistakes. Adjusted EBITDA for the quarter after noncontrolling interest was $7.8 million. A full breakdown of the adjusted EBITDA calculation is available in our Q2 MD&A.

We achieved net income of $0.2 million for the quarter, which equated to negative $0.03 per share for the shareholders of the Group. But adjusted net income after tax and excluding noncontrolling interest was $7.2 million or $0.53 per share.

Turning to a brief review of our results for the first half of 2019, we saw strong revenue growth of 35.2% driven by a 28.6% increase in Production and 49.8% in Distribution. Total gross profit was $35.3 million, an increase of 34.7% and the gross margin percentage was 29.1%. Adjusted EBITDA in the first half increased to $7.6 million in the first half of 2019, while adjusted EBITDA margin of 9.5% was in line with our expectations.

We experienced net loss of $7.7 million for the first half of 2019 or $0.66 per share, but on an adjusted net income after tax and excluding noncontrolling interest basis, we had $6 million of net profit or $0.44 per share.

Before I move on to discuss the balance sheet, let me make some overall comments on our performance in Q2 relative to other quarters. For some time, Peter, Steven and I have communicated to our shareholders in the marketplace that in our time of this type of business, we are subject to significant fluctuations in quarterly performance. There are several reasons for this, including seasonality, the product mix of the revenue recognition in any period and the timing of revenue recognition based upon product delivery.

In Q2 of this year, our seasonal results saw revenue of $69.1 million and adjusted EBITDA of $7.76 million. These seasonal results saw higher revenue, but lower margin revenues being recognized in the period. In particular, in the Distribution division, we did not have as many high-margin library or wholly owned titles, where revenue was recognized in the period.

Our results in the second quarter were in line with our expectations. As our long-term investors are aware, Kew will continue to have significant quarterly fluctuations, one way or the other. From our perspective, it is important to remain focused on the full year result, which normalizes out seasonal fluctuations and short-term differences in product mix and revenue recognition.

We also have a heavily diversified portfolio of companies. So we are not dependent on the performance of any one company or indeed one title or even a group of titles. So the key issue is to normalize all these factors across the full year. And to reiterate, we remain confident in hitting our full year result this year, based on the current visibility we have through to the end of the year.

One other reminder I'd like to provide is that we incorporated the new accounting standard, IFRS 16, beginning with our Q1 results. We have disclosed the effects of the new standard as cleanly and completely as possible on a year-over-year basis, and I will walk you through the key highlights.

From Q1 FY '19, the financial statements have adopted IFRS 16. Under that statement, we have chosen not to restate the FY '18 comparatives. Therefore, in the MD&A, there is a somewhat of a mismatch in the adjusted EBITDA calculation, where FY '19 is under the new standard and FY '18 is under the previous standards.

We have, therefore, provided the cash amount expended on our leases in each quarter, so comparisons can be made between the periods. To be clear, the guidance we have provided and the organic growth assumptions have been calculated under the previous standards, which treated lease expenditures as part of our G&A expense.

We are currently reviewing how best to disclose and analyze these numbers going forward. However, shareholders and other interested parties will be able to calculate under the previous standards, the adjusted EBITDA as at 30 June 2019, which will show that we are ahead of the comparative in 2018.

In Q2, we are also showing some increases in G&A expenses. The largest constituent of the increase is due to the inclusion of Essential, but there are also increases in our Distribution and Corporate segments. It is important to note that Kew is still a relatively young company and the G&A over the past few quarters has been increasing due to the investments to support our current and future growth. To that extent, all of these increases were budgeted and were accounted for in our full year guidance.

Moving to the balance sheet, as of June 30, 2019, we had cash and cash equivalents of $26.2 million, with approximately $11.9 million in loan availability. Our net debt was $99.7 million. Our adjusted net debt was $85.8 million. This figure takes into account material foreign exchange movements since the beginning of the year and amounts expended by our treasury on interim Production financing.

The adjusted net debt of $85.8 million to pro forma 2018 adjusted EBITDA of $31.9 million is 2.7:1. We continue to anticipate that this ratio will reduce further into 2019 with an overall longer target of 2.1 or below as we remain committed to maintaining a strong balance sheet to provide the financial flexibility to pursue accretive acquisitions in the future.

Following our annualized disclosures in Q4 of last period related to free cash flow, for the first time, we have generated free cash flow under any calculation in this period, and we anticipate some positive free cash flow developments throughout the remainder of the year.

Free cash flow before movements in working capital and before movements in film and television rights was $4.64 million compared to point -- compared to $1 million last year. Free cash flow after movements in working capital but before investments in film and television rights was negative $2.2 million compared to negative $4.6 million last year.

After movements in both working capital and investments in film and television rights, free cash flow was $0.9 million compared to negative $8.7 million last year. At the segment level, Production free cash flow, before movements in working capital and investments in film and television rights, was $3.1 million.

Free cash flow after movements in working capital but before movements in investments in film and television rights was negative $2 million. After movements in both working capital and investments in film and television rights, free cash flow was positive $0.8 million. Distribution free cash flow before movements in working capital and movements in investments in film and television rights was $4.5 million. Free cash flow after movements in working capital but before investments -- movements in investments in film and television rights was negative $1.1 million, but after movements in both of these items, free cash flow was negative $1.3 million.

Turning to our full year 2019 outlook, we continue to expect a range of mid- to high single-digit growth on our full year 2018 pro forma adjusted EBITDA of $31.9 million. As a reminder, our results in any given quarter or year can be affected by seasonality and/or specific product delivery timing. Typically Production occurs over the summer and starts delivering in the fall and early winter months. As reflected in our 2018 performance, our 2019 results are expected to be heavily weighted in the fourth quarter.

And with that, we are happy to open the line for questions. Operator, will you please open up the lines?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of David McFadgen with Cormark Securities.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [2]

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A couple of questions. Do you have an idea of what you think the total spend is going to be on content this year? Just wondering. And then secondly, in order to hit that leverage target of 2.1, is that a target you expect to achieve at the end of fiscal '20 this year -- fiscal 2019? And if so do you expect to generate free cash flow in order to get you to that level?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [3]

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Yes. David, in relation to your first question, which was where do we spend -- where do we expect our acquisition spend to be. Obviously, the area that we're most focused in on, in that overall segment, is the Distribution segment. In Production, that normally is obviously of no risk and it comes in with post the third-party financing. So on the Distribution side, we expect it to be similar to last year. It obviously is very difficult to say exactly, where it is going to land, but I think last year was just under $50 million. We don't provide guidance on that, but we have been saying that we expect something similar in FY '19.

In relation to the second question, as you know, David, we don't provide precise guidance in relation to either free cash flow or net debt. And I think your question was, do we expect to get that 2:1 by the end of the year. We won't provide that guidance because it's just too difficult to come up with a number. What we've been saying that 2:1 is a level that -- to speaking to balance to outperform the term.

So even if it were to transpire that we didn't hit that goal by the end of the year, we still -- reach that goal relatively reasonable period of time.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [4]

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Okay. And I don't know, if you guys can, but maybe even just qualitatively, give a kind of relative performance of the various companies like which ones are really doing well this year if you could?

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Steven Lewis Silver, Kew Media Group Inc. - Founder, CEO & Director [5]

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So -- David, we as -- I think, it's come up before, we don't segment out each of the Production companies. It's in the nature of Production that a company might have 1 strong quarter or 2 and then a weaker quarter or 2 following that and one of the benefits of Kew's portfolio approach is that across the group that tends to smooth out the performance across the platform. So we don't think it's helpful to sort of point to one company over another. I can say to you that the Production group is performing very well, and we're very pleased with how it's shaped up. That's not to say every company in the group is having a good year, but we are really pleased with all the teams across the group. And of course, as you can tell Distribution is certainly banging away. So yes, I think that's as much as we're going to say on that.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [6]

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Okay. I'll try one more. So in the past, revenue's been past the forecast and, Geoff, you commented that probably gross margin is a better number to look at. I know you've given some EBITDA guidance but do you have a range as to where you think gross margin might shakeout for 2019?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [7]

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Yes. David, again, we haven't provided that guidance. And we continue to be reluctant to do so because we feel that it really is the adjusted EBITDA number, which is the best performance measure that we've currently got. I think what we've been trying to -- what we've been trying to drive at is that last year certainly benefited from a lot of high-percentage margin, library titles being sold or titles that we own outright. This year we're going to have, we expect to have some more higher revenue, but lower percentage gross margin product in there and you're seeing that coming through in the Q2 results. But I think, when we're providing guidance on the increase that we expect in the adjusted EBITDA, it is possible to kind of work that back when you take account of expected G&A to get to the gross margin, but we're not providing any guidance on that as yet.

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Operator [8]

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Our next question is from the line of Matthew Lee with Canaccord.

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Matthew James Lee, Canaccord Genuity Corp., Research Division - Associate Analyst of Telecom and Media [9]

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Just on the IFRS impact, is the annual impact still expected to be around $4 million for the year?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [10]

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Yes.

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Matthew James Lee, Canaccord Genuity Corp., Research Division - Associate Analyst of Telecom and Media [11]

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Okay. Great. And then on the exceptional cost, can you maybe dig into what goes into that $1.3 million for the quarter?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [12]

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Yes. It's mainly one-off costs that we're experiencing that will not reoccur. And it includes things like, for example, professional fees that are incurred in things like tax planning. And other similar one-off expenses that we need to incur given how young we are. But the key issue with them for us is that over the longer term, we don't expect these to reoccur. They really relate to us getting everything in line, given the young nature of the company.

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Matthew James Lee, Canaccord Genuity Corp., Research Division - Associate Analyst of Telecom and Media [13]

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All right. And then just on the Distribution front, gross margins were 42%, up from 27% in Q1. Can you talk about that delta? You said, maybe more Distribution of content you own, but can you maybe talk about whether that 40%-range margin is sustainable over the near term?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [14]

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So -- yes, Matthew, this is the one thing that's -- it's difficult to comment specifically because the general comment is this, is that we've got such a wide variety of revenue products coming down the line, and they have such a wide variety of different percentage gross margins that -- it's difficult to answer your question without going into a hell of a lot of detail which is not appropriate. Just to say that -- yes, I think, you can read into it that the margins were a little higher this year than -- sorry, this quarter than they would be in a typical quarter. And I think you'd want to assume that over the longer term that would -- that gross margin percentage would fall a little.

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Matthew James Lee, Canaccord Genuity Corp., Research Division - Associate Analyst of Telecom and Media [15]

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Okay. So if I look at your first half gross margins combined, that's probably more of a indicator of how a regular quarter should look.

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [16]

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Yes. If you have a look at last year, obviously, the gross margin percentage was a lot higher than perhaps the average for this year. But yes, I think as a general comment what you just said is true.

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Operator [17]

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(Operator Instructions) Our next question is from the line of Bentley Cross with TD Securities.

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Bentley Cross, TD Securities Equity Research - Associate [18]

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First, just following on with the last line of questioning. When you think about Distribution margins, not from quarter-to-quarter, but just kind of big picture, maybe for Steve. Is the product mix changing such that we will see more library or less library going forward? Or is the bouncing around from this year versus last just a function of again one-offs and not really indicative of any sort of trend?

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Steven Lewis Silver, Kew Media Group Inc. - Founder, CEO & Director [19]

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I don't think the -- no, and -- I don't think tracking the margin as an indicator of trends particularly on a quarter-by-quarter basis is useful at all. I think year-on-year, it can be to an extent, but even then, just sort of big picture, I think what we're seeing contextually is that there's a shift going on from almost an old world to a new world and old world dominated by linear and cable networks. And a new world driven by these where they're described by Internet television, a world of top-tier global streamers and an emerging number of second-tier streamers with regional focuses or some kind of niche drama focus and a niche genre focus. And I think as we shift from the old world to the new world I think companies like Kew are going to stay agile and nimble as they hang on to the demand that continues from those legacy buyers and as we lean into and pivot toward the new universe of buyers.

We feel like we're very well placed to do so. I think operationally, what does that mean for Kew? It means that the benefit of having a joined Production and Distribution platform where the different parts of the company are working in sync makes us very well positioned and competitively situated to exploit that shifting landscape. If you go back to our perspective when we launched Kew a couple of years ago, you can see -- you will see that what I've just described was a thesis, which really underwrote Kew, and we see that thesis being proven out right now in our context.

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Bentley Cross, TD Securities Equity Research - Associate [20]

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I understand all that, Steve. What I'm mostly trying to get is, lately we've seen a lot of headlines, obviously, there is new shows that these guys are commissioning. But at the same time, there is some big library deals. Lately, Seinfeld has gotten some headlines, The Office. Just wondering kind of how are you seeing that mix of all in that they are getting new products, that's maybe grabbing some headlines and devoting some resources to that. But then also some library titles and just wondering if that's changed at all over the last 6, 12, 18 months.

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [21]

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We're not seeing any massive shifts in the -- in what's being sold. We're seeing shifts in who is buying. And so the short answer is that the -- if you look at the sort of segmentation between revenue and Distribution, even in -- across not only Kew, but it's comps you're still seeing a similar mix certainly, in Kew. Our library is continuing to perform and in a similar kind of ratio to Production's performance. We are not seeing any shifts at the moment in that -- in the ratio between library sales and new orders. That might tilt in the future, but we don't anticipate that changing this year.

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Bentley Cross, TD Securities Equity Research - Associate [22]

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And just moving on, thanks for the segmentation on Distribution versus Production. Just wondering, if you're willing to give any guidance on how you think this year's guidance will shake out by division.

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [23]

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Again, we're not providing -- we're not specifically providing that, Bentley. And the reason for that is it's just too difficult to predict. What we can say is, we've got so much going on: number one, in each of the individuals separately; and then number two, as Steven highlighted in his comments, we're starting to get that cross-pollination as between Distribution and Production working together. And you're seeing that in the product that Steven went through in terms of where our Production unit is working with our Distribution unit. Just how that's going to shake out in terms of which -- where the revenues and the gross margins and by expansion of the profits is going to settle across Production and Distribution, it's difficult to predict. And I guess what we're trying to highlight is, we're not a one-trick pony. We don't have just 1 or 2 shows we rely on. We've now got 14 production companies across the group. They have a very diversified amount of product. We've got 2 distribution companies that are distributing that product and also distributing product on a third party. And it's that great amount of individual product, which gives us the confidence to say we expect a strong full year. But as to where that will end up in Production or Distribution, difficult to say.

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Bentley Cross, TD Securities Equity Research - Associate [24]

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I figured as much but I figured I may as well give it a try. Last one for me. Just the loan from the director that has surfaced. Just wondering, how that came to be because I don't think you guys had any sort of liquidity issues. Obviously, it's nice to see the support and I'd take an interest-free loan any day of the week, but just wondering, why that came to be.

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [25]

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Yes. No, so I think we put that in -- and I'm not quite sure of the precise comment that's being made. But it's in relation to a particular fund that we're putting in place. And it just made sense for us to have bridging finance from an external party, rather than from our internal resources and one of our directors came to the party in that regard.

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Operator [26]

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Our next question is from the line of (inaudible) with GMP Securities.

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Unidentified Analyst, [27]

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So I want to go back to the synergies that you guys are seeing from the integrated platform from having Production and Distribution together. How have these synergies been achieved? And is there room to grow? And the other side, what percentage of the Production is completed through the Distribution platform at Kew?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [28]

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Yes. So in terms of the way that it is growing -- is that the main thrust of the question, the kind of evolution, if you like, as to how that's being playing out?

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Unidentified Analyst, [29]

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Yes. And if you guys have a target percentage or what you guys are -- is it fully evolved yet? Or is there still room to grow?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [30]

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Okay. So -- firstly, to say that obviously, we were at a standing start, back in -- when we started the company back in 2017. And while some of our production companies, new-add distribution companies, there was hardly any work that was being done across those companies. So it took each of the individual business units and also the Distribution unit to get to know each other before they started swapping ideas and by extension, commercializing the opportunities that were available to them when you've got joined up Production and Distribution. So the first year was a bit of a -- let's talk about things. The second year, going through to the end of next -- of last year, you saw a number of shows that's -- whether it was a collaboration. One of the larger ones was in plain sight. But in BGM, you also had a show called [The Hospitals]. And that kind of -- as the Production companies and the Distribution companies got to know the benefits of working together, rather than to treat each other separately that has accelerated over the last 6 months and into this year. So I haven't got the numbers specifically at hand, but just as a qualitative guideline, if it was nothing or very limited in the first year, and if it was kind of 7% of revenues last year, it's probably running at an annualized rate of around 15% this year. And then your question is, do we expect that to grow? And I think the answer to that is, yes.

It's certainly -- as everyone is working with each other and as the success is growing, to give you one example on that. On the BGM side, we started out with 1 paranormal show being green-lit by our Distribution unit. And then that's now led to 3 paranormal shows being green-lit by the Distribution unit. And we're into a second season on 2 of those shows. So -- I think what you're going to get is you're going to get a natural increase in that as shows get renewed. And then as new shows gets -- get green-lit by Distribution it's going to accelerate further. So as a general target, one would think that we're going to head out towards 25% or over the longer term, perhaps even north of that.

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Unidentified Analyst, [31]

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Okay. That's very helpful. Jumping over to the revenue side. Is Kew done shutting its low-margin revenue business? Or is there more expected to come?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [32]

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Yes. We're agnostic, totally and utterly agnostic. If something makes sense for us to produce at a low margin then we will do so. So -- at its extreme if someone walked in the door and said, we'd like you to do this $100-million production but you're going to make $5 million, but that was profitable to the Group, then we would have no problems in undertaking that kind of project. However, I think, what you're referring to is that, as a general comment, what we're seeking to do is, anything that is low-margin and not making a great amount of profit for the Group, and that's the kind of business that we are trying to avoid. And the phrase that we're using is, we're trying to drive the quality of the gross profit that we've got. So focusing on the gross profit because if we are -- if we have a fixed overhead, which generally we do, then really what it is, is driving our gross profit into that line with positive cash flow, and that's what we're seeking to do.

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Unidentified Analyst, [33]

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Okay. Perfect. And then last question for me. So Q2 EBITDA the margins were a strong beat in terms of consensus. So how we think about this in terms of the reaffirmed guidance? Does some of this EBITDA delta come out of Q3, Q4 if there's no changes to guidance because the latter half of the year is usually the significantly stronger quarters?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [34]

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I think I'll be more inclined to say that, that in terms of timing, one should think that Q1 was weak. And I do think we provided some color around the fact that there were some shows that we were hoping we're going to be delivered in Q1 and they missed that and they spilled over into Q2. I'd be more on that side rather than saying there's any expected differences across Q2 and Q3. And when we say that at half year is online with what our expectations are that would provide the guidance to say -- we're still on forecast -- on internal forecast in terms of the splits that we expect.

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Operator [35]

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(Operator Instructions) Our next question is a follow-up from the line of Matthew Lee with Canaccord.

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Matthew James Lee, Canaccord Genuity Corp., Research Division - Associate Analyst of Telecom and Media [36]

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Just one more for me. Given the shifts in the industry, can you maybe give us a refresher as to your M&A strategy? And maybe what sort of assets you are looking at right now?

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Steven Lewis Silver, Kew Media Group Inc. - Founder, CEO & Director [37]

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Yes. As you can imagine, it's not a lot we can say about that, Matthew. I think if you look, there is some evidence in what we've done thus far. So in January, we announced the joint venture with industry veteran Alan Clements who created his new company, Two Rivers Media. We co-invested in that with Channel 4's growth fund and Noble Grossart, a merchant bank out of Scotland. And the -- and -- not for nothing, but that's already proven itself out with the company having got significant commissions right out the gate and also a first collaboration between a show it's producing and that Kew is distributing through TCB, it won distribution on.

So we're always on the hunt for acquisitions or M&A activity, whether it's -- whether there are companies that join the group by buying the whole company or a JV like the one we did with Two Rivers. All of those kinds of acquisitions on the table. I'll say this, is that each of them are highly strategic. They are designed to fill gaps in Kew's platform or increase the diversification in our asset mix, and it remains an active focus for us.

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Operator [38]

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Thank you. We've now reached the end of our question-and-answer session. I'd like to turn the floor back to Steven Silver for closing comments.

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Steven Lewis Silver, Kew Media Group Inc. - Founder, CEO & Director [39]

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Thank you and thanks, everybody. As you can tell, we're excited by the momentum in our business and remain committed to growing Kew, its platform by producing and distributing our content to a growing range of eager buyers around the world. With the ongoing proliferation of streaming platforms scheduled to be introduced, content subscribers in the back half of this year, like us, are preparing ourselves to service this increasing demand and this increasing magnitude of appetite for content.

We're really experiencing strong demand for our content as we head into the seasonally stronger third and fourth quarters, as we've mentioned. We're encouraged by second quarter results. They are in line with our expectations. And once again, we're on track to achieve our outlook for the full year. I just want to thank everyone for joining the call today and your ongoing interest in Kew Media Group. We look forward to speaking to you again next quarter. In the meantime, as always, don't hesitate to reach out with any additional questions.

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Operator [40]

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This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.