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Edited Transcript of KEW.A.TO earnings conference call or presentation 15-May-19 1:00pm GMT

Q1 2019 Kew Media Group Inc Earnings Call

TORONTO May 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Kew Media Group Inc earnings conference call or presentation Wednesday, May 15, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ankit Hira

* 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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* Deepak Kaushal

GMP Securities L.P., Research Division - Director and Technology & Communications Analyst

* Matthew James Lee

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

* Siddhant Dilawari

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

* Vince Valentini

TD Securities Equity Research - Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the Kew Media First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host [Ankit Hira]. Thank you. You may begin.

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Ankit Hira, [2]

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Good morning. And thank you for joining Kew's first quarter 2019 earnings conference call. On the call today, we have Peter Sussman, Kew's Founder and Executive Chair; Steven Silver, Founder and Chief Executive Officer of Kew; and Geoff Webb, our Chief Financial Officer.

Before we begin, allow me to provide a 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 risk and uncertainties that could cause actual results to differ materially from those projected.

We refer you to our first 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 cause -- 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 in this call. The first 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 Q1 earnings call. Our first quarter results were in line with our expectation as we achieved a revenue of $52 million, an increase of 39% over the prior year period, and gross profit of $14 million and an increase of 27% over the same period last year.

While the group saw a meaningful increase in revenues and gross profits, our performance was offset by higher levels of general and administrative expenses, G&A in the quarter. The G&A expenses were fully budgeted and in line with our expectations. They were predominantly related to the Essential acquisition last year as well as costs related to talent acquisition, and centralized infrastructure to improve the efficiency of our support functions moving forward.

Our sales momentum is strong, and we've made excellent progress with our full year product pipeline. 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're pleased to reaffirm our prior full year 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 includes an annualization of a full year of Essential's earnings.

I'll now spend a few minutes to provide an update on our business and provide my perspective on the drivers of our performance heading into the balance of 2019 and beyond. Leaving Neverland became one of the industry's most prominent documentaries, attracting front page coverage and some of the highest ratings seen for a documentary in a number of territories. Kew Media Distribution, or KMD has now sold this hit title to over 190 countries worldwide. Some of the revenues for this title were recognized in Q1, but they will also continue into Q2 and throughout the year.

The highly awaited reboot of Dance Moms, one of the largest series in the group, went into full production this year, and will start delivering in Q2 with the forecasted first broadcast date in June. Several specials in relation to the series have been ordered, and ongoing revenues anticipated for this title during the rest of the year. Our company Jigsaw delivered The Inventor: Out for Blood in Silicon Valley, the much anticipated documentary on Elizabeth Holmes and the Theranos scandal for HBO in the U.S.

We continue to generate organic growth by exploiting the significant benefits of our integrated production and distribution platform. The platform enables us to deliver higher margin product to the market more quickly and more efficiently. We've already been enjoying successes from some of our collaboration titles. Some new KMD collaboration titles for this year include Frantic Films, High Maintenance, which launched the MIPTV in April; Our House Media's My Paranormal Nightmare and Mutant Weather; Essential Media's 6-part series, Griff off the Rails: Down Under; and Jigsaw Productions' Laurel Canyon for epics produced with Steven Spielberg's Amblin Television, the Kennedy Marshall Company and Warner Music Group.

Overall, there's a lot of production activity across our group as we head into the busy summer shooting schedule. In addition to the titles I've mentioned above, shows currently in production also include Media Headquarters' CBC documentary Life Of Rabbit; Sienna Film's feature film Happy Place; and Our House Media's Building Off The Grid Season Two for Discovery and Unboxed Season Two for [UP TV]. There are also several new major production titles which are close to closing that we expect to be able to announce shortly.

Our group of companies continue to amplify other business lines with Bristow Global Media expanding its kids and family slate with recent commissions of a music-focused show called Backyard Beats for TVO, as well as striking a development deal with the BBC for animated -- an animated project called Rikki Rockett. Media Headquarters continues to focus on formats licensing as hit studio competition format, Canada's smartest person to Spanish production company Global Media. Global Media will produce a 10-part series for broadcaster TVE. Spanish adaptation is currently in pre-production and slated to air later this year.

Meanwhile, coming out of a very strong MIPTV, TCB Media Rights made a full title deal with (inaudible) World totaling 32 hours of premium content, including some of the company's bestselling titles. These include plain [reclaimers], (inaudible) Mythical Beasts and [Private Lives]. TCB completed another big sales deal with Science Channel in the U.S. for titles including Underground Worlds Abandoned Engineering Season 4 and Massive Engineering Mistake Season 2.

Inside Kew Media Distribution, or KMD, we continue to see strong international sales activity. And the KMD group is currently at the Cannes Film Festival with several new titles, including a rock and roll documentary, The Quiet One, which offers a unique behind-the-scenes look at the highs and lows of the life and career of Bill Wyman, former founding member of the Rolling Stones; and Cleanin' Up The Town: Remembering Ghostbusters, which charts the making of Ghostbusters and features Dan Aykroyd, Harold Ramis, Ernie Hudson, Sigourney Weaver and Ivan Reitman.

(inaudible) BAFTA award winning title, Line of Duty on BBC One continues to break ratings records with the recent finale, securing the biggest overnight audience of the whole series with 9.1 million peaking at 9.6 million viewers as it drew to a close. Created Jed Mercurio's Police Drama scored the biggest overnight audience of 2019 so far, and the biggest overnight drama figures since Mercurio's other hit title, The Bodyguard last year. The Line of Duty finale also delivered the seventh biggest drama overnight audience of the past 5 years.

A robust [slate] of products came out of a relatively large increase in product acquisition spend across our distribution segment. The decision to increase our investment in new product is designed to drive more accretive margins onto KMD and TCB's distribution platforms. We've been able to achieve a significant increase in both cases, with accretive levels of increase to the segments -- to both those segments as a result.

In summary, we are excited about positive momentum and tremendous growth trajectory, remain focused on enhancing the quality of our revenue to achieve strong margin, profitability growth and free cash flow, thereby delivering value to all of our shareholders.

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

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

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Thank you Steven. Q1 2019's revenue of $52 million was comprised of $33.5 million from production and $18.5 million from distribution. Gross profit of $14.1 million included $9 million from production and $5 million from distribution. Gross profit margin was 26.9%. We've segmented gross profit margin of 26.9% for production and 27% 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, but they were lower than in previous periods due to product mix and revenue recognition timing issues. At a segment level, production revenues were $33.5 million, an increase of 36.7%. Gross profit was $9 million, an increase of 38.5%. And the gross margin percentage was 26.9%. G&A increased by 38.7% to $7.2 million, and this was predominantly due to the introduction of Essential. All of these increases were -- sorry, adjusted EBITDA increased by $0.2 million to $1 million.

The titles that were produced across the segment included Texas Flip and Move seasons 12 and 13; Death Row Story Season 4 for CNN; Dance Moms 8 for A&E; Dirty Money 2 for Netflix; Stats of Life Season 2, Backyard Builds Season 2; Fire Masters for Corus; and The Brigade for Outdoor Network.

On the distribution side revenues were $18.5 million, an increase of 20.9%. Gross profit however was $5 million, a decrease of 20.1%, and the gross margin percentage was 27% versus in 2018, a gross margin percentage of 41.2%. G&A increased by 32.4% to $4.5 million, adjusted EBITDA decreased by $2.4 million to $0.5 million. The segments revenues benefited from the delivery in the quarter of some high-revenue, low-margin titles. The types of titles in this product mix are positive to the revenue line, but the decrease in the percentage margins low as the comparative gross profit.

Consequently, whilst revenues increased, gross profit decreased compared to Q1 last year, which had a product mix with comparatively higher margin titles. Additionally, we have budgeted for higher G&A in the segment this year, given the level of growth expected. The titles that were distributed across the segment included Slasher Season 3, Paranormal 911, Republic of Doyle, Leaving Neverland, Egypt's Unexplained Files and Abandoned Engineering.

Adjusted EBITDA for the quarter after non-controlling interest was negative $0.1 million. A full breakdown of the adjusted EBITDA calculation is available in our Q1 MD&A. We incurred a net loss of $7.9 million for the quarter or negative $0.64 per share, and an adjusted net loss after tax and excluding non-controlling interest of $3.2 million, or negative $0.24 per diluted shares.

Before I move on to discuss the balance sheet, let me make some overall comments on our performance in Q1 relative to other quarters. For sometime, Peter, Steven and I have communicated to our shareholders and the marketplace that in our 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 Q4 last year, shareholders will remember that we had $82 million of revenue and $15.3 million of adjusted EBITDA.

These seasonal results were due to strong results in both the production and distribution segments, and they included a number of low revenue, higher margin titles across both divisions, and in particular, library sales. In Q1 of this year, our seasonal results saw a revenue of $52 million and adjusted EBITDA of negative $146,000. These seasonal results saw higher revenue, but lower margin revenues being recognized in the period, in particular in the distribution division, which did not have as many high margin library or wholly-owned titles where revenue was recognized in the period.

Nevertheless, our results in the first 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 any one particular company performing.

So the key issue is to normalize all these factors which were essentially timing differences across a 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.

At this juncture let me comment on the introduction in our financial statements this period of the new accounting standard IFRS 16, which is related to a company's leases. We have disclosed the effects of the new standard as cleanly and completely as possible, and I will walk you through a brief summary. The Q1 FY '19 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 mismatch in the adjusted EBITDA calculation where FY '19 is under the new standard and FY '18 is under the old standard. We have therefore provided the cash amount expended on our leases in Q1 of FY '19 so comparisons can be made between periods.

To be clear, the guidance we have provided and the organic growth assumptions that have been calculated, have all been done under the old standard, which treated lease expenditure as part of our G&A. We are currently reviewing how best to disclose and analyze these numbers going forward.

In Q1, we are also showing some increases in general and administrative 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 accounted for in our full year guidance.

Moving to the balance sheet, as of March 31, 2019, we had cash and cash equivalents of $23.6 million, with approximately $3.6 million in loan availability, and our net debt was $103.5 million. Our adjusted net debt was $84.3 million, and this figure takes into account material foreign exchange movements since the beginning of the facility, and amounts expended by our treasury on interim production financing. The adjusted net debt of $84.7 million to pro forma 2018 adjusted EBITDA of $31.5 million is a ratio of 2.7:1. We continue to anticipate that this ratio will reduce further into 2019 with an overall 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 last period related to free cash flow, for the first time we have provided quarterly free cash flow numbers. We believe they are encouraging and they demonstrate the beginnings of improved free cash flow generation over the full year. Free cash flow before movements in working capital and before movements in film and television rights was $3 million compared to $1.1 million last year. Free cash flow after movements in working capital but before investments in film and television rights was positive $6.2 million compared to negative $2 million last year. After movements in both working capital and investments in film and television rights, free cash flow was negative $2 million compared to negative $2.2 million last year. Divisional free cash flow numbers can be seen in the MD&A.

Turning to our full year 2019 outlook, we continue to expect a range of mid to high single digit growth on full year 2018 pro forma adjusted EBITDA of $31.9 million calculated on the basis that I have noted above. 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're 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 from Vince Valentini from TD Securities.

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Vince Valentini, TD Securities Equity Research - Analyst [2]

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First in terms of the increase in G&A expenses and partially related to increasing talent, are there any numbers that you can put on that as you increase the size of your sales-force in anticipation of more product to sell and your expectations of greater sales in future periods?

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

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Yes, Vince, the majority of this has occurred in the distribution division. And you've seen that -- you can see that increase is a specific increase in distribution. And then that's in relation to us recruiting more sales and other talent. And then of course there has also been a mild increase in the centralized costs relating to the build out of that infrastructure.

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Vince Valentini, TD Securities Equity Research - Analyst [4]

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And you dovetail that into your confidence in the full year guidance remaining intact. Can you flesh out a bit exactly what gives you confidence or how much of it is contracted business versus just discussions you're having with buyers? Or is it just you know the pipeline of how much content you have this year versus last year and you assume it will sell? Can you can put those into those buckets for me if possible?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [5]

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Yes, it's a mixture of both, Vince. What I would normally say is this there's normally 3 buckets. One is the level of contractual sales that you know you've got and are going to be recognized in this financial year. The second bucket is the amount of titles that you know are going to be delivered and so therefore you don't have to worry about the product coming in, you've just got to sell the programming. And then the third bucket is where you haven't got the programming in yet and you're trying to forecast it both being acquired and then being sold. And we have said that our visibility is good and I think you can read into that, that that means that we have certainly a good level of visibility on the contractive side.

It should not surprise anyone that we have perhaps a more than good level of visibility in terms of the product that we know is arriving and that is purely a consequence of the increase in our spend from last year. And to be frank, there's not many things that are in that bucket of we have to find new product to be delivered this year and then also sold.

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Vince Valentini, TD Securities Equity Research - Analyst [6]

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Okay. That's good color, Geoff. And one last sort of a bigger picture question. I know you must be frustrated as a lot of your shareholders probably are, but you've had 2 years in a row now in 2017-2018 where you've -- you said you were going to do something and you delivered it in terms of your financial results. You've also delivered on some of the growth by acquisition strategy articulated when the company was formed. And clearly, the share price is not reflecting any of those good things and your valuation seems to be well below what some of the larger players in the content industry trade at. Can you give us any sense of is there any frustration at the management level, as are we getting close to a point where strategic alternatives need to start to be considered? And that being do you have any idea what the sort of recent range of private market valuations is for companies that are not super-small, but are more in the category that you guys were at?

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Steven Lewis Silver, Kew Media Group Inc. - Founder, CEO & Director [7]

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So, Vince, this is, Steven. Well, we can't be -- we can't offer any -- an answer which has any specifics in it. If you're asking if we're frustrated, yes, we're frustrated. We formed Q 24 months ago and have hit our numbers now 2 years running. We keep messaging to the market that quarters in the first half of our year in particular are not reliable indicators of our full year performance. That applies whether we post an unusually strong Q1 or an usually weak one. If we post an usually strong Q1, it doesn't suggest that we're going to overshoot our guidance for the year. And if we post a weak Q1, it doesn't suggest we're in danger of missing our guidance for the year.

It's the nature of our business that stuff gets shot in the summer and delivered in the fall. We're in northern hemisphere sector and that's how this works. To track us quarterly is just not appropriate. So -- and if you just look back historically to '17 and '18 on a pro forma basis in 2017 I think we did about 56% of our EBITDA in H1 and beat our numbers. And in FY '18 we did around 20% of our EBITDA in H1 and still beat our numbers. So again we think for the educated investor we remain a value play, a solid growth strategy and I think both for Peter and I our immediate task is to keep delivering on what we promised, is to keep executing the strategic plan.

We had -- we've said to the market along the way that '17 and '18 would be spendy, they were. We've telegraphed to the market that we think we've reached an appropriate level of investment or for want of a better word CapEx and that we can deliver the requisite amount of growth now at -- by maintaining and not upsizing or increasing our investment in new product. And our focus for this year is on demonstrating and proving out the second arm of our thesis, which is to demonstrate that the company is a cash-generative enterprise. And that's our focus for this year.

So we consider -- from a strategic point of view we consider more avenues for future growth and as you know we're considered a preferred acquirer of other companies in our space. And I think we consider a range of options as we chart our way into the future. Private sector multiples are significantly higher. I don't think it's just in our industry. I think it's a well-known fact that transactional multiples inside this -- in the private sector are several turns higher than when the same assets are marked into the public market. So in the media sector the -- you'll see multiples ranging from 9x to 11x for a company of Kew's size, particularly given the fact that we have one of the largest built out distribution platforms in the world.

That is truly -- in our world it's a jewel in our crown. You just don't get big distribution platforms like Kew Media Distribution and TCB, you just don't see them coming to the market very often. So yes, I think that it's certainly frustrating that we're trading 3x or 4x below what those same assets would be worth on the -- in on the private side of our sector. But right now the plan is keep executing, keep proving out our thesis again in 2019, keep showing the kind of growth we've showed over the last 2 years. I think you're seeing some green shoots on the cash conversion front in Q1. We want to keep proving that after this year. If we can roll into Q4 hitting our numbers again and demonstrating strong cash, I think the market will be forced to recognize that we're not boxed in and we'll have ongoing agility to keep gapping the company up. Sort of a longwinded answer, but I thought your question warranted it.

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Vince Valentini, TD Securities Equity Research - Analyst [8]

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Oh, no, it's excellent color.

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Operator [9]

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Our next question here is from Deepak Kaushal from GMP Securities.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [10]

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I've got a couple questions. Maybe, Steven, just to follow up on Vince's last question and your comments, maybe you can remind us and investors of what capacity you have today and how much of that capacity you're using in terms of production, how many hours can you produce a year? How many titles or hours can you distribute? How many countries? And what percentage of your total capacity you're actually deploying to achieve your guidance this year?

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Steven Lewis Silver, Kew Media Group Inc. - Founder, CEO & Director [11]

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So, yes, I mean the answer to that -- the answer to that question is twofold and both of them are good pieces of news for us. Kew delivered over 2,200 hours of content last year. When we generated, in other words we commercialized 2,000 -- over 2,200 hours of content, brought it to market in some form or another. If you had asked Peter and I what we thought that number was before we calculated it, we would have guessed around 1,600 hours. That number surprised us. It is indicative of a company undergoing extraordinary growth and particularly for a company of our size.

So we were -- we were really gratified when we received that number. The other arm of that is that given that we seem to be punching a bit above our weight class is our platform still underutilized? And on the one hand it is in the sense that we think we can load up a ton of more product onto our production and sales platforms without necessarily seeing a proportionate amount of increasing overhead. Nonetheless, we are -- as Geoff mentioned, we did allow and budget for an increase in some G&A as we lean into the growth for this year. And that's not surprising. We are a new company with a very intense focus on growth. So we think that the platform store, however, when you look at it from a group point of view is underutilized and we expect to be able to load up a lot more inventory -- a lot more product on the production and the distribution side this year and next.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [12]

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Okay. And out of that 2,200 hours, how much of that was produced in-house? And what's your capacity to produce in-house? I don't know if you have those metrics handy.

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Steven Lewis Silver, Kew Media Group Inc. - Founder, CEO & Director [13]

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560 of the 2,200-odd hours was produced in-house.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [14]

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Okay. And in terms of your library, how many hours in the library -- I guess when we look at other segments of the media industry, typically there's valuation ranges on a per title basis. Do you guys think of your library value that way? And how should investors think about what's the asset value of what you've produced to date as a company?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [15]

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Yes. So I think the best way to answer that, Deepak, is to say we have a massive library, it actually includes 14,000 hours of programming. If I had to push and say how many of those hours of that 14,000 are being sold on a day-to-day basis, it's probably around half that. And then the other half is just sitting there waiting for the opportunity to be sold to someone when and if that title is actually -- there's a demand for that title and that can happen. A title can sit on the shelf for 10 years and then suddenly come back into life. So that's how many hours we have.

A library is a little bit distorted in that we have more nonfiction programming than some of that larger programming that are sort of larger competitors. We have -- probably have more drama products. We get our library valued for bank collateral purposes each year. The previous library valuation was around USD 75 million. But important to say that that's for bank collateral purposes. So it uses very aggressive discount factors in the range of kind of 14%. And we're currently getting that library revalued at the moment. And indications are that it will be up significantly from where it was last year, of course because of all the additional product that we've acquired over the last 12 months.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [16]

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Okay. Excellent, that's very helpful, Geoff. I do have a follow-up question. I won't delve into the minutiae of the quarter, I can ask those offline. But I did want to ask a bit about the balance sheet. $23.6 million in cash, I think I understand and the $3.6 million credit available, does that include the accordion feature on the credit facility? And because I just noticed that in the financials, I think you have an obligation of $23.9 million subsequent to quarter end. So I'm just trying to understand what's your kind of liquidity position right now and are you tapped out terms of investments for the year? Or is there more cash available for anything on the balance sheet?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [17]

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No, we haven't included the accordion in that number. So we haven't exercised that accordion. So that's still available to us. And again, without going into too much detail, we are thinking that we've got some other positive news in relation to liquidity coming out, so.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [18]

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Okay. And sorry, I'm just trying to find a number on the accordion. Is that USD 20 million...

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [19]

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USD 25 million.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [20]

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Okay. And are there any stipulations on spending that? Is that earmarked specifically for an acquisition? Or is it earmarked for working capital purposes or production financing, how can you use that?

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

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No, it's as long as we can draw it down and we can utilize it for any purpose under the line facility and that includes general working capital purposes. As you'd imagine that the -- we probably need to seek approval for any particularly large acquisition or an asset class that was outside of those limitations, but there's no general limitation on how we can spend that.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [22]

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Okay.

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Operator [23]

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Our next question is from Matthew Lee from Canaccord Genuity.

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Matthew James Lee, Canaccord Genuity Limited, Research Division - Associate Analyst of Telecom and Media [24]

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I just had a quick question. I think if I heard you correctly, you said you're not planning on investing more year-over-year in F '19 into content than you did in F '18. So if that's the case, can you give us some idea on how you think about the cash flow for the year?

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Steven Lewis Silver, Kew Media Group Inc. - Founder, CEO & Director [25]

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Yes. So, Matt, we haven't provided any free cash flow guidance and we -- at this stage, we don't intend doing so, we think we're a little young yet to put that kind of guidance into the market. We have made some qualitative comments in our press releases along the lines of we expect our free cash flow generation to improve this year. And we've also said that it's one of the -- it's one of our key objects this year and that is to prove to the market that not only are we profitable, we're also cash flow generative. So there's no numbers that we've put out there other than the qualitative comments to say that we do expect improvement this year.

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Matthew James Lee, Canaccord Genuity Limited, Research Division - Associate Analyst of Telecom and Media [26]

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Okay. That's fair. And just can you help us break down the impact of Quail this quarter on revenue and EBITDA? So help us get the organic number?

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Geoffrey Richard Webb, Kew Media Group Inc. - CFO [27]

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Yes. So again, Matt, it's not –- we've kind of got a golden rule and that is that we don't provide any guidance in relation to individual companies. And so obviously Hilton, Quail or Essential, whichever we want to call it, that is now baked into those production numbers. And so whilst it's contained in there, it makes them -- it makes up a minority position in relation to the overall production division. So of course it's going to have quarterly swings and roundabouts of its own. And so even if we did break it out, we don't think that would be helpful at all. And really what we think people should be focusing in on is that it's now within that group, it's now doing good things for the group. And it's part of the overall equation of us saying that we expect to hit our full year guidance this year.

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Operator [28]

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Our next question here is Sidd Dilawari from Cormark Securities.

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Siddhant Dilawari, Cormark Securities Inc., Research Division - Associate of Institutional Equity Research [29]

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I'm just filling in for David McFadgen. So just 2 quick [couple] of ones from me. So, Geoff, you alluded to revenue recognition timing issues, and higher revenue and lower margin delivery in the distribution segment. I was just wondering if you can maybe provide some color on how we should think about the gross margins in the segment for the rest of the year? Is the rest of the year going to be similar to what we saw in this quarter or similar to what we saw in Q4 '18?

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

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Yes. Yes, so I guess let's take it as extreme. Q4 was -- I would say is -- was a quarter where the margins were higher than we would -- what we expected that margin because we knew what product was coming down the line. But as a general comment, if you were estimating an average over a full year, then it was higher than what we'd expect on average. And then as we've -- as we've intimated in this release, this quarter was -- in terms of the gross margin percentage was lower than we would normally expect. So it is somewhere between those 2 extremes, probably more up towards the higher level, somewhere in the mid-30%s, perhaps north of that, getting up towards 40%, that's what we'd expect on a normal period. But I would just qualify that by saying what we're trying to get into everyone's minds is that it's very difficult for us to forecast what the gross profit margin percentage is going to be.

What is the most important element for us is what is the gross profit because it could be that a show comes in, it's got -- at its extreme, it's got $100 million of revenue, and it's got $2 million of EBITDA. Now of course that's going to distort the margin dramatically. But it's that gross margin -- the gross profit number that's most important to focus in on.

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Siddhant Dilawari, Cormark Securities Inc., Research Division - Associate of Institutional Equity Research [31]

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Okay. That's very helpful. Just one more for me. In the production segment, was the organic growth excluding Essential's acquisition?

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

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Yes, we haven't provided that number because if we do so, it exposes us to people working back to try and figure out what Essential actually did and that breaks one of our golden rules in terms of providing guidance by individual company. So, yes, at this stage, we're not providing that number.

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Siddhant Dilawari, Cormark Securities Inc., Research Division - Associate of Institutional Equity Research [33]

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Okay. All right. That's very helpful, guys.

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Operator [34]

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This concludes the question-and-answer session. I'd like to turn the floor back to Mr. Silver for any closing comments.

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Steven Lewis Silver, Kew Media Group Inc. - Founder, CEO & Director [35]

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Thanks, everybody. Just to summarize, we're tremendously excited about the progress in Kew. We have a mountain of content being produced both internally and by third-party producers and we are selling that content around the world through our 2 extraordinary distribution teams. Contextually, the demand for content and the ongoing proliferation of streamers coming to market continues to be a significant tailwind for our business. Our first quarter results were, as we've said, in line with our expectations, and we remain on track to achieve our outlook for the full year.

Thanks everybody for joining us today. And again, thank you from both Peter and I for your ongoing interest in Kew. We look forward to speaking with you again next quarter, and we remain as responsive as ever to any ongoing questions you might have. So please feel free to reach out to any of us with any additional questions. That brings our call to a close. Thank you.

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Operator [36]

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