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Lionsgate Entertainment Corp. (NYSE:LGF)

Q3 2013 Earnings Call

February 12, 2013 9:00 am ET

Executives

Jon Feltheimer – Chief Executive Officer

Jim Keegan – Chief Financial Officer

Michael Burns – Vice Chairman

Rob Friedman – Co-Chair, Motion Picture Group

Steve Beeks – Co-Chief Operating Officer, President Motion Picture Group

Kevin Beggs – President, Television Group

Peter Wilkes – Investor Relations

Analysts

Alan Gould – Evercore Partners

James Marsh – Piper Jaffray

David Miller – B. Riley Caris

Ben Mogil – Stifel Nicolaus

Doug Creutz – Cowen & Co.

Caroline Anastasi – JP Morgan

Jim Goss – Barrington Research

Matthew Harrington – Wunderlich Securities

David Bank – RBC Capital Markets

Tuna Amobi – Standard & Poor

Operator

Good morning ladies and gentlemen and welcome to the Lionsgate Fiscal 2013 Third Quarter Earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during today’s call, please press star then zero. As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, SVP Investor Relations, Peter Wilkes. Please go ahead.

Peter Wilkes

Good morning. Thank you for joining us for our Q3 analyst call. Jon Feltheimer, our CEO will have opening remarks. Following his remarks, we’ll open the call to Q&A. Joining him on the call are Michael Burns, our Vice Chairman; Rob Friedman, co-Chair of our Motion Picture Group; Steve Beeks, co-COO and President of our Motion Picture Group; Kevin Beggs, President of our TV Group; Jim Keegan, our CFO; and Rick Prell, our Chief Accounting Officer.

The matters discussed on this call include forward-looking statements, including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the risk factors set forth in Lionsgate’s annual report on Form 10-K filed with the SEC on May 30, 2012. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.

Jon?

Jon Feltheimer

Good morning and thank you all for joining us. We had another strong quarter operationally and financially and all of our businesses are meeting or exceeding expectations. I’d like to focus my remarks today on four areas: continued expansion of our existing franchises and creation of new ones; momentum in our feature film business; our progress in building out our international business; and the ongoing diversification of our television business. I’d also like to briefly recap the integration synergies we’ve achieved in the year since our acquisition of Summit.

The Hunger Games franchise continues to build momentum. Catching Fire was featured on the cover of Entertainment Weekly’s 2013 Preview Issue and has been hailed by numerous media outlets as the most highly anticipated film of the year. We’re already lining major promotional partners in cosmetics, fast food, consumer electronics and technology as we expand the franchise’s reach, and we’ll be rolling out a series of announcements in the coming months.

Divergent begins production in Chicago in April with a great cast rapidly taking shape. Directed by Neil Burger, the film stars Shailene Woodley of the Descendants, and Academy Award-winner Kate Winslet, with more announcements to follow. Book sales of the Divergent franchise are approaching the 3 million mark and continue to compare favorably to The Hunger Games and Twilight franchises at a similar point in their trajectory. Divergent is slated for release on March 21, 2014 in the slot where we launched The Hunger Games.

The rest of our slate is starting off the year where it left of 2012, a year in which we grossed over $2.5 billion at the worldwide box office and became the first non-traditional major studio to break a billion dollars at the domestic box office in a single calendar year.

Warm Bodies opened strongly two weekends ago as we counter-programmed effectively against the Super Bowl, and the film is another indication of our expertise and leadership in the young adult space. Texas Chainsaw 3D also performed well last month, following in the footsteps of Sinister, The Possession and Cabin in the Woods as our fourth straight successful horror release, another genre in which we’ve established our leadership.

Despite our track record, not every film will be a hit. The underperformance of The Last Stand is a reminder of the benefits of a portfolio approach that smoothes out the inherent volatility of our business.

Our upcoming films reflect our usual mix of tent poles, strong brands with worldwide commercial potential and critically exciting films. Even with the inclusion of our next Hunger Games film, the U.S. GAAP for the average film on our slate, defined as production capital at risk after international presales and estimates and before marketing spend, is approximately $13 million, not much more than our historical average.

In addition to our tent poles, we have high expectations for the second film in our Red franchise, starring Bruce Willis, Mary Louise Parker, Catherine Zeta-Jones, John Malkovich and Helen Mirren. Now You See Me, a film with another great ensemble cast starring Jesse Eisenberg, Mark Ruffalo, Morgan Freeman, Woody Harrelson and Michael Caine, and comedian Kevin Hart’s Let Me Explain, the first film from our CodeBlack urban venture. In the back half of the fiscal year, we have several of our highest profile films – Ender’s Game, Tyler Perry’s Medea’s Christmas, Divergent, and of course Catching Fire.

Our momentum is equally strong internationally. We’ve established output deals for our films covering 80% of the world’s movie-going population outside of China and India. We’ve also expanded our partnership with IDC, a company in which we have a 50% investment, to encompass both Lionsgate and Summit content in Latin America, which has become a major market for us.

The IDC partnership is a good example of creating significant growth and incremental revenue for our film business without taking commensurate risk. It enables us to achieve most of the benefits of self-distribution through uncrossed deals with local partners in each Latin American territory, generating solid returns through a combination of minimum guarantees and overages, all without significantly increasing our overhead. IDC generated $125 million at the Latin American box office for Twilight: Breaking Dawn 2, a record for any company outside the traditional majors, and it scored another big Latin America hit with The Impossible. The Impossible performed well domestically but the real story is at the international box office, where it will gross over $150 million.

With leading digital and traditional distributors like IDC, Netflix and Televisa, we’re generating revenue and profit in Latin America that is several orders of magnitude greater than just a few years ago, and we’re well positioned for future growth in the region. We expect to generate more than double the profit on Catching Fire in Latin America compared to the first Hunger Games.

We’re expanding our digital partnerships not only in Latin America but around the world, capitalizing on the recent emergence of platforms such as Netflix, Amazon, iTunes and Xbox that are helping to drive international growth and creating significant competition for our product where little or none previously existed.

On the television side, Anger Management and Nashville returned to the air last month, and our upcoming television pipeline is shaping up well. Anger Management has already shot 27 of the 100 episodes ordered by FX, and it debuted to solid ratings last month as it kicked off its second season. In addition, the show has been sold in 70% of the country, including the Fox station group for fall 2014 syndication.

The next show for which we plan to use our 10 plus 90 model is The George Lopez Show, and we’ve just announced that Matt Williams, the creator and executive producer of Roseanne and the co-creator and executive producer of Home Improvement will be the showrunner. Matt’s addition to the team completes a process we began in July that shifted into high gear when we signed Matt and his Wind Dancer production company to an overall first look deal last month, and we believe that we now have another great package to begin shopping to the networks. We’ve also interviewed several leading showrunners for the next series we expect to add to our 10 plus 90 pipeline, an odd couple pairing of stars Martin Lawrence and Kelsey Grammer.

Nashville returned to the air last month and ABC cited the series as one of the major contributors to its success so far this season. The show is performing well, even head-to-head with CSI, ranking as the number two freshman series on TV among adults 18 to 34, and it’s one of the two most DVR’ed shows on the air. Nashville’s soundtrack recently reached number three on the country charts and digital tracks from the show have sold nearly 1.5 million downloads to date, increasing our confidence that this show can generate successful concert tours and merchandising as well.

We’ve already completed most of the first 13 episodes of Jenji Kohan’s Orange is the New Black, and Netflix is very pleased with what they’ve seen so far. All 13 episodes will be available simultaneously to subscribers in the summer just as Netflix is doing with House of Cards. And as the Don Draper fans among you are already aware, Mad Men returns to AMC for season six on April 7.

I mentioned on a recent call that The Wendy Williams Show has turned a corner for us, and since then it’s ratings have not only continued to improve but have increased dramatically in a number of markets in the past couple of months. In fact, Wendy hit an all-time high with a 1.5 household rating two weeks ago and currently ranks among the top four talk shows in national demos. It’s continued ratings gains are significant, signaling that this show is becoming a long-term Lionsgate annuity.

Wendy is also expanding her brand, launching a production company in partnership with Debmar-Mercury to develop and produce reality, game and talk shows for the cable and broadcast networks. The new venture got off to a fast start last week with NBC Universal’s cable network Oxygen, which signed the company to an overall development deal.

In a recent research note, one of our analysts said with a smile that Lionsgate was an overnight sensation that took 12 years to build. Well, it has been a disciplined and steady 12-year build, but the process was certainly accelerated by last year’s acquisition of Summit. I’d like to provide a quick recap of the integration synergies we’re seeing a year after that deal which are translating into a combination of incremental margin, cost savings, and reduced cost of capital. These benefits are attributable to: higher settlement rates with our theatrical exhibition partners; a new pick, pack and ship deal with Fox, and a new replication deal with Cinram for our home entertainment content; a worldwide network of new output agreements; consolidation of our media buying with a soon-to-be-announced new agency deal; and a significant improvement in our capital structure with a new revolving credit facility and early payment of the Summit term loan.

The incremental margin generated by these synergies is greater than we anticipated. Coupled with the continued strong performance of our business, these synergies give us ever greater comfort with our three-year guidance of $900 million in EBITDA. We also believe that the 125 million in free cash flow we generated this quarter is indicative of our ability to continue de-levering our balance sheet going forward.

Our job is far from complete. Our goal to maintain our growth momentum and extend our financial trajectory beyond the three-year guidance we’ve already provided you. We intend to achieve this by continuing to capitalize on opportunities afforded by our critical mass, maintaining our international growth momentum, and continuing to grow our content businesses as we significantly de-lever our balance sheet.

Now I’d like to open the call to your questions.

Question and Answer Session

Operator

[Operator instructions]

I will now go to the line of Alan Gould, Evercore Partners. Please go ahead.

Alan Gould – Evercore Partners

Thank you. I’ve got three questions, please. First – Jon, can you tell us how much international profits you recognized from Twilight: Breaking Dawn 2 in the quarter, and how much is still to come? The film grossed over 500 million internationally during the quarter, yet your international revenue was only 90 million.

My second question is I’m sure your 900 million three-year EBITDA target did not anticipate 24 million of debt extinguishment costs. How should we be looking at EBITDA or adjusted EBITDA for that $900 million target?

And third on the free cash flow, your film costs are still running negative. I know you’re released 21 films this year and 14 next. I would assume at some point your amortization of 21 films will be more than your cost for the future 14 films. When should we see that film cost turn positive, and how much should working capital be negative in this March quarter with the video release of Twilight at the end of the quarter?

Jon Feltheimer

Is that all you’ve got, Alan?

Alan Gould – Evercore Partners

That’s it. Sorry, Jon.

Jon Feltheimer

All right. I’m going to let—well, I’ll let Jim go on your first and third question, but why don’t I start in terms of the adjustments. Obviously you’re starting to look at a pretty big gap between unadjusted and adjusted. I think it’s $57 million already. When we originally did our three-year guidance, there were two things we really didn’t know or couldn’t count on. One, obviously, was the stock price move, and as you note, that’s making a pretty big adjustment on mostly non-cash adjustment. The other thing was we weren’t aware of the charges for early repayment of debt.

So obviously if the stock price keeps moving in this direction, that gap is going to grow even larger. I would tend to say right now, given the adjustments are basically non-cash adjustments, probably I would say—everyone will focus on both metrics, but I would say probably adjusted EBITDA is becoming the most indicative metric of our operating performance.

Jim, would you answer the other questions?

Jim Keegan

Sure. To go revenue above and beyond the quarter on Breaking Dawn 2, internationally in the 130 range and contribution significant, I’ll say, 50, 60 million-plus to come.

Alan Gould – Evercore Partners

Will that hit this March quarter?

Jim Keegan

From the international, a portion of it will. About 30 million of revenue will hit in the quarter. That’s about, I’d say, 50% of that flowing through as a contribution--. Okay, Q4 margin will be 30 million on that, so the revenue (inaudible). You also asked--

Alan Gould – Evercore Partners

Free cash flow?

Jim Keegan

We’re anticipating for the year as you roll through, and that kind of goes along with all our guidance, we had indicated it would be—we’re obviously at 157 year-to-date now. With all the ins and outs, we had indicated we’d be paying down debt in the $200 million range. We’ve paid that down now about 145 million, so the two numbers kind of go hand in glove. So I would anticipate Q4 in that range, paying down—you know, so I can get to the $200 million mark, I’ll let you do the math, but that’s anticipated where we will end up.

Alan Gould – Evercore Partners

Okay. Thank you very much.

Operator

I will now go to the line of James Marsh, Piper Jaffray. Please go ahead.

James Marsh – Piper Jaffray

Great, thank you. Two quick questions here – first, you discussed some of the parallels between Hunger Games and Divergent – both young adult books, bestsellers, futuristic dystopia, et cetera. Could you talk a little bit about the major differences between the two, and just also related to that, could you just talk about how it is so far to work with Veronica Roth relative to, say, Stephenie Meyer, Suzanne Collins? And then I’ve got a follow-up.

Jon Feltheimer

Rob?

Rob Friedman

Well first, Veronica Roth – I mean, we have great relationships with all of our authors. They obviously are different personalities but inevitably we have great relationships. We pay a lot of attention to them and to the fan base that they’ve created, so that’s always an important component in working our filmmakers and our authors.

Divergent is different. I mean, the books are different, the society is different. One is about a society that’s striving for survival and its revolution entanglements; and another really is about a way society is surviving with distinct personalities and how those personalities interweave with each other.

James Marsh – Piper Jaffray

Okay, that’s helpful. Thank you. And then as you start to generate this substantial free cash flow and it starts to move through the cash flow statement, can you just talk broadly about how you see your optimal financial leverage going forward and if there are any plans to return capital to shareholders?

Michael Burns

Hi James, it’s Michael. I’ll tell you that we don’t have at the moment any plans for dividends, although it’s obviously always an option. Our focus right now is going to be to continue to de-lever. We are going to—we have a couple different choices. We could refinance our existing high yield later on in the year with another high yield because interest rates have come down so dramatically, so we could get fixed capital at what we think is a very attractive rate; or we could do what we’ve been currently planning, which is to pay down, to call our bonds likely in November, the 105.25 with a LIBOR-based facility. The question for us is that obviously LIBOR floats up and down – do we want to fix that or do we want to use that facility, and we’ll make that decision as we get closer to that date.

James Marsh – Piper Jaffray

Great. Thanks very much.

Operator

I will now go to the line of David Miller, B. Riley Caris. Please go ahead.

David Miller – B. Riley Caris

Yeah, hey guys. Congratulations on the stellar results. First of all, question for Rob. You guys were obviously pretty aggressive in just sort of pre-selling form rights to the first Hunger Games. The Catching Fire film is obviously a more expensive film. I think you’re filming a number of scenes on water – if memory serves, you just wrapped production in Hawaii. So it’s a higher negative cost, but I kind of have in my models conceptually that you guys are pre-selling this one a lot more aggressively. And so when you get to that final number of what your overall negative cost exposure is, can you put any sort of raw figure around that number? Jon, I know you mentioned that your average is around 13 million, that gap; but should we assume that the Catching Fire raw negative cost number after all foreign pre-selling is done is 30 million, 20 million, 10 million, 50 million? If you guys could put a number around that, that would be great; and then I just have a follow-up. Thank you.

Rob Friedman

Well, I can tell you that the number is virtually identical to the first Hunger Games. Remember, our output deals are percentage of budget, so as the budget grows, so too does the contribution. I will say to you that we license; we don’t sell, and I think that answers your question about the gap. We’re very excited about the movie. It is wrapped principal. We’re going to do a couple of reshoots, but otherwise it’s looking great and we have some really exciting (inaudible) materials that you guys will see in the coming months.

David Miller – B. Riley Caris

Okay, great. And then for either Jon or Steve, if you’re on the call, I would assume that the new Cinram deal that you guys are talking about was not in place when Twilight: Breaking Dawn Part 1 was released on home video – I think that was March of last year – although it did take place after the closure of the Summit deal. So with the new Cinram deal in place, how should we think about the margin bump per DVD as you guys gear up for Twilight: Breaking Dawn Part 2 on home video? Thank you.

Steve Beeks

Thanks, David – yeah, I’m here. You are correct. The new Cimram replication deal takes place in the middle of the year, so even Breaking Dawn 2, which comes out on DVD early March will be manufactured under the current deal, which is a Summit deal with Sony and distributed through its existing deal with Universal. That deal will play out to its normal expiration date, and then the savings that we will realize through the deal with Fox and with Cinram will take place—actually, the Fox deal has already taken place. It was a retroactive deal.

The great thing about that, I think, both Cinram and Fox recognized the value of our additional volume as well as how much shipping together in the same box reduces their cost. So we were able to renegotiate those deals to generate what will end up being significant savings in the tens of millions of dollars per year going forward.

David Miller – B. Riley Caris

Okay, wonderful. Thank you.

Operator

I will now go to the line of Ben Mogil, Stifel Nicolaus. Please go ahead.

Ben Mogil – Stifel Nicolaus

Hi, good morning and thanks for taking my question. So Steve, one for you while you’re on the DVD topic. We look at Hunger Games DVD in the second quarter and it was disproportionately physical weighted. We look at the third quarter – it was disproportionately digital weighted. Are you seeing customers, sort of the initial customer opt for physical but then over time the later customer, if you will, opt for digital? I’m kind of curious on the mix shift between the two quarters for the same title.

Steve Beeks

Well, one of the great things about what’s happening in the business, not only as we’ve said before has packaged media stabilized, and if you look at overall sell-through transactions, they’re almost identical when you include EST and digital; but the great thing about what’s happening at VOD and digital, those two categories are growing tremendously, especially with something like The Hunger Games. The amount of digital revenue, including Internet-delivered as well as VOD, has even surprised us with how much that is, and we’re actually having to raise our ultimates in both of those categories, which is really heartening. I think we’re actually seeing strength in the overall business, particularly in digital, and when you look at our Q4 revenue, not only was The Hunger Games revenue in digital really surprisingly robust but we had a tremendous quarter in library. We’re seeing the digital is really embracing library, so you look at our library numbers which are way up, and I think we had $135 million in library and a lot of that coming from digital, which is really the first time that we’ve seen digital becoming a library medium.

Ben Mogil – Stifel Nicolaus

I guess I meant sort of specific to the way the consumer is buying for new releases. In the second quarter of ’13, did you have VOD for Hunger Games or was it just DVD?

Steve Beeks

It was both.

Ben Mogil – Stifel Nicolaus

It was both? So are you seeing the later consumer who is not as gung-ho on the title but says three weeks later, I want to see it, be more digitally focused? The mix shift was kind of interesting to me.

Steve Beeks

Well I think what we are seeing, Ben, is that it has longer legs. The digital and VOD revenue has longer legs. We’re seeing it doesn’t really diminish in accordance with the same curve that we’re seeing in packaged media. Packaged media has a huge impact in the first couple of weeks and definitely first couple of months, and even though we see a little bit of that in VOD and digital, it has much longer legs particularly as we’re seeing new retailers come in and grow, like Xbox, Amazon, Voodoo is growing tremendously. So I think we’re just seeing it have lot longer legs and much greater strength in the follow-on quarters.

Ben Mogil – Stifel Nicolaus

Okay, that’s great. Thanks. And then the next question just on the TV production side, do you sort of expect to end the year up or flat? And remind us – I know that Mad Men for the broadcast window for AMC is a 2014 fiscal event. Is the Netflix delivery for season – I guess this is season five – is it going to be a 4Q event?

Jim Keegan

There is a lot of timing on this – this is Jim Keegan. I do anticipate the TV production revenue and MR, there’s going to be a big spike in Q4. A lot of deliveries are occurring, so it’s going to be up significantly. But you’re right – remember last year we did have seasons one through four of Mad Men delivering in July, so that created a lot of library revenue last year.

And the other part of your question was season--?

Ben Mogil – Stifel Nicolaus

So is season five Netflix delivery going to be in the fourth quarter of ’13?

Jim Keegan

The answer is yes.

Ben Mogil – Stifel Nicolaus

And that’s the first one on the new deal with the higher rates, because it has not yet repeated on AMC – is that correct?

Kevin Beggs

That’s on the normal deal. That’s just a normal holdback. (Inaudible) precedes or follows the current season.

Jon Feltheimer

Yeah Ben, it just comes really on a payment schedule. It really isn’t thought of with Netflix as a first run or second run. It’s just on sort of a delivery and payment schedule basis.

Ben Mogil – Stifel Nicolaus

Okay. I thought that the license fees for season one through four with Netflix were lower than seasons five through seven will be. Is that correct?

Jim Keegan

No, it’s not.

Ben Mogil – Stifel Nicolaus

No? Okay. So I get it – season five will be in the fourth quarter. I think that’s it for me. Thanks, guys.

Operator

I will now go to the line of Doug Creutz with Cowen. Please go ahead.

Doug Creutz – Cowen & Co.

Yeah, thanks. Just a question on your investment in film and TV programming from the cash flow statement. You’re at a little over 700 million for the year, which is about what you spent for the entire year last year. I know you’ve got more films this year. I’m just wondering if you could kind of give an indication of where you think this year will shake out, and then what kind of step-down we might see in fiscal ’14. Thanks.

Rob Friedman

I guess for the year, obviously you’re right – we’re at about 776 million for the nine months. I’ll give you a breakdown – so about 242 million for TV, 534 million motion pictures. You’re going to end the year somewhere—TV 320-ish range, and motion pictures 580 to 590 all-in, so around 900 million all-in. And I’m not really comfortable projecting next year’s investment.

Doug Creutz – Cowen & Co.

Is it fair to say it should step down, though?

Rob Friedman

I guess I’d like to withhold comment as we’re still working on our plan. I mean, you’re right – we did release 20 pictures this year.

Doug Creutz – Cowen & Co.

Okay. All right, thank you.

Operator

I will now go to the line of Alexia Quadrani with JP Morgan. Please go ahead.

Caroline Anastasi – JP Morgan

Hi, thank you. This is Caroline Anastasi for Alexia. Just a couple of questions. First, the losses at TV Guide seemed a bit worse this quarter. Can you just tell us what’s going on there and update us on your strategic plan for the network going forward? And then secondly, can you update us on how Nashville is doing versus your original expectations and give us a sense of the economics there and maybe at what point it should become profitable?

Jon Feltheimer

Kevin, I’ll let you take Nashville first.

Kevin Beggs

Nashville is performing very solidly for ABC this fall. It’s become one of their breakout successes in a fall that’s generally been a little down for all the networks; but specifically in the 18 to 34 demo, it’s particularly strong, especially with women, so they are very happy. It’s the number two most DVR’ed shows on TV right now. It’s routinely coming in just behind CSI on Wednesday nights and making in-roads against Idol, so they’re very happy with it and that means we’re very happy with it. It also has worked and been sold pretty effectively around the world.

In terms of the long-term economics, network shows are a little more risk intensive than cable, so we’re going to be losing a little money in the interim. But we think when you get to a second season, you have a very good chance of getting to three and four and that’s really when the network shows pay-off in a big way. All the conversations we’ve had with ABC have been about the future and about what happens next season, so we’re cautiously optimistic about getting there; but the show itself has become both a critical success and a real strong 18 to 34 ratings story for ABC, so we’re quite pleased.

Jon Feltheimer

So on TV Guide, we have had a couple of quarters of program write-offs, kind of one-time write-offs that have definitely hit the bottom line. I think there are some very good things going on at the channel. We do have some management changes that we’re in the process of right now, new branding, four new pilots that we’re doing for the network. We have just concluded a new affiliate arrangement with one of our MSOs with higher sub-fees. We continue down the path of cleaning up the real estate in terms of the scroll. We’re going to be—by the end of this year, we’ll probably be 80% full screen. But the ratings have certainly been challenged over the last year and we’re in the process of working on it.

As well, we’re talking to a number of strategic partners, as we’ve indicated to the Street. Not prepared to talk about them yet, but we are in the middle of some interesting conversations. But specifically with the network, we feel we’re on the right path to making it better and making the real estate better, and I hope that you’ll see that projected in better earnings going forward.

Caroline Anastasi – JP Morgan

Okay, great. Thank you.

Operator

I’ll now go to the line of Jim Goss, Barrington Research. Please go ahead.

Jim Goss – Barrington Research

Thanks. I was wondering if you could address the seasonality of your product flow. It would seem to me that it should be less than for many of the traditional studios due to your focus on using March and November, so I was wondering if you could look at it both in terms of the film flow and also the international aspect, and perhaps even the home entertainment; and whether the home entertainment might be influenced a lot by the UltraViolet initiative, given that it would seem to tie into the demographic you appeal to quite a bit.

Rob Friedman

This is Rob. The flow of our product really is release date-driven. As far as we’re concerned, the second most important decision we make after we green-light a movie is its release date. We do tend to stay out of the heart of summer or the heart of the Christmas season. It tends to be giant tent pole territory for the major studios, but normally our flow is spread throughout the year other than that.

As it relates to the home entertainment flow, obviously we look for opportunity based on our release dates, our theatrical release dates; and internationally always comes into play. We release a lot of our bigger titles day and date, but the international marketplace is playing very similar to the domestic marketplace as it relates to seasonality these days.

And Steve, UltraViolet--?

Steve Beeks

Yeah, so Jim, I would say our films perform particularly well in digital, especially when you look at the amount of revenue we’re generating from a film like Hunger Games and obviously the Twilight Saga – surprising to us. I’m not sure that UV necessarily is particularly different than the overall marketplace, but we’ve seen tremendous growth in UV in general. We’re pretty excited about UV, believe it’s on a great trajectory. You’ve seen that we’ve got over 10 million accounts open. I believe 5 million of those accounts opened in the fourth quarter alone. We’re looking at the amount of revenue we’re generating through a retailer such as Wal-Mart, which is obviously a UV supporter, and during the coming year we’re expecting even greater growth in the digital marketplace driven by UV as additional retailers announce their support.

You’ve probably noticed that CES, the studios announced a partnership with the CEA much similar to what we did with DVD back in the late 90’s, which is what we used to really drive and promote the DVD business. So we’re pretty excited about the prospects for UV. I think this is going to be the year you see UV really become a marketplace.

Jim Goss – Barrington Research

Are you seeing your mix be any different from other studios, though, because of the demographic issues?

Steve Beeks

Not driven by digital. I think we have a particular focus on digital in general. If you look at the alternative windowing strategies that we have employed, the day and date with theatrical, I think we’ve been one of the pioneers there. I think we were one of the first studios to support UV just because of our focus on digital. I do think that it’s a side benefit of our genre focus, whether it’s action or horror or obviously the young adult. These films tend to appeal to the kind of younger, digitally avid marketplace, and I think that’s been to our benefit.

Jim Goss – Barrington Research

Okay, last question – in terms of 3D and IMAX premium type strategy, are there any comments you’d want to make and direction you intend with those areas?

Rob Friedman

Well, we like the consumer are very excited by both of those formats. We do them selectively. You’ll see both Ender’s Game and Hunger Games coming out IMAX this year, and I Frankenstein will come out in 3D. But we’re selective. We do it where we think it’s appropriate for the creative as well as for the consumer enjoyment.

Jim Goss – Barrington Research

Okay, thanks.

Operator

I will now go to the line of Matthew Harrington, Wunderlich Securities. Please go ahead

Matthew Harrington – Wunderlich Securities

Thank you. I guess another UV question tangential, and Steve was up on the stage. When you think about marketing beyond the CE bundle initiatives – Sony and other guys you’ve put out there – given that this is such a ubiquitous proposition, would you do things like look at databases, loyalty programs at theaters when people go into see Catching Fire and maybe even try to sell into that directly at the original point of sale in the theater? I mean, you’ve done great on the conversion ratios It looks like the library with Summit layered in has ever more critical mass; but particularly with things like UV, it almost feels like there’s a chance to almost reinvent the sales proposition to a certain extent.

Rob Friedman

Well, I think that you’re going to see a revolution out there, given that you look at what’s happening to—well, I would look at the positive side of what’s happening in music. Music is growing primarily because of digital, and I think that’s where we’re going to grow. I think UV is going to provide that.

Particular promotions, whether or not we’re going to—you know, we’re looking at everything. We’re looking at loyalty programs, we’re looking at attachment. When you have the consumer data, it’s a lot easier to attach, to up-sell, to promote additional films, and we’re having those conversations with retailers right now as we speak. Whatever the exact format takes, I’m not sure; but I think it gives us a tremendous amount of opportunity to do a lot of things.

Matthew Harrington – Wunderlich Securities

And would that apply to the exhibitors as well?

Rob Friedman

I think everything is in the conversation. We’re not having those conversations right now, but we’ve had tangential conversations around that. Nothing concrete just yet.

Matthew Harrington – Wunderlich Securities

Great, thank you.

Operator

I will now go to the line of David Bank, RBC Capital Markets. Please go ahead.

David Bank – RBC Capital Markets

Thanks. So interesting update on the potential for the Martin Lawrence-Kelsey Grammer thing. There’s been some chatter around maybe George Lopez. I guess my question is the 10-90 thing gives really the Holy Grail of visibility in earnings and syndication and stuff for content. Why is it that you guys seem to have an edge on 10-90? It’s such an obviously great model, right, so is competition heating up, and how do you maintain your edge there?

Kevin Beggs

There are a number of places that are talking about doing it, but one of our edges is really Debmar-Mercury and what (inaudible) do specifically in the sale side. They came up with this model, they pioneered it, so we’re first movers. As first movers, we’re also getting the most interesting talent. We’ve got some great people in the pipeline. We’ve turned down some other impressive packages, but we just kind of hone in on this; and really those guys can bring that added value in secondary markets, we can contribute the international side.

And because it is a different model, the buyers are very focused on track record. Charlie Sheen in Anger Management, performing successful this summer on FX, opened a lot of doors and a lot of inquiries coming from broadcast and cable are coming in about what’s next. So it’s kind of a disciplined and creative model, a business and disciplined creative model that people are excited about. We want to move quickly and keep our edge, which is why we have these two in the pipeline that you mentioned – Martin and Kelsey, as well as George Lopez, who is working with Matt Williams.

David Bank – RBC Capital Markets

I’m sorry, can I ask one follow-up as well? If you were done answering that one – I’m not sure.

Kevin Beggs

Yeah, I’m done.

David Bank – RBC Capital Markets

Okay. Can I just ask a follow-up, too, on your outlook strategically for Epix as well, if you could just kind of give your general thoughts of what you see doing with your stake in it, with the entity over the next kind of couple year time frame. Do you think it just continues to operate as private JV, and what’s your view?

Jon Feltheimer

Well, we’re very pleased with Epix. I think we continue to have very interesting conversations with both non-traditional digital players as well as traditional MSOs. We like the optionality that Epix has afforded us, and again, we are profitable. We are able to do things, I think, that people who license their product to third party paid television providers aren’t able to do, and I’m really confident as we go down the road, like any other channel, that we’ll make changes that make this a very attractive product for all of the MSOs. So we like the trajectory of Epix.

David Bank – RBC Capital Markets

Okay, thank you very much.

Operator

We have time for one more question. I’ll go to the line of Tuna Amobi, Standard & Poor. Please go ahead.

Tuna Amobi – Standard & Poor

Hey, thank you so much. I’ve got three questions, if you don’t mind. Jon, thanks for those comments on the franchise creation and expansion – it was very helpful. I was wondering, in the context of the ‘14 to ‘15 films normalized output per year, if you see opportunities potentially to explore into other genres beyond your clothes knitting, or are you just going to stick to what you do best in the horror and young adult, et cetera? So that would be helpful.

And secondly on the Summit synergies that you alluded to, you rattled off a list of outperforming areas – settlement output, agency deals, et cetera. I’m just wondering now that you’re coming off the one-year anniversary of that deal, seems to be a good time to kind of look back and see if there were any potential areas that have not lived up to your expectations in terms of that deal.

And then lastly for, I guess either Michael or Jim, can you provide some color on how much liquidity that you need to run your business on a steady-state basis, and related to that, I know Michael took dividends off the table. I’m wondering the focus of de-levering, if I look at your adjusted EBITDA, it seems to me at the rate you’re going, you’re going to be having even more ample headroom for other uses. So I’m wondering if buybacks could be a potential use, and any comment as well on your share count. I see that’s been kind of volatile, something that had to do perhaps with some options coming into money. So if you could provide some guidance on that, that would be helpful. Sorry for the list of questions.

Michael Burns

It’s Michael. Let me take the last one first. The fully diluted share count has gone up because what happens is at a certain point, when your converts—we have two converts outstanding, one 66 million and the other 45. When they go so deeply in the money, it’s obviously prudent to add that to your future share count from a fully diluted standpoint.

On the second point, should we choose to de-lever completely, we should have that option in the next, call it 30 months, so we could effectively pay down all of our debt, which would include our credit facility. Now, obviously that is an $800 million facility that we use as a working capital account in many ways – that’s that LIBOR plus 2.5%. So I would say that there is probably some degree of leverage that will drive equity returns, but we will be on the conservative basis is my guess about how much leverage we have. It will certainly, as Jon said in his remarks, we will dramatically de-lever over the next few years.

Jon Feltheimer

To go back to a couple of your other questions, actually I’m very pleased with all aspects of the integration of our two companies. Obviously some recent results from the films that are in the pipeline – obviously Breaking Dawn 2 in terms of particularly the international performance, and I’m expecting—the DVD is coming out in a little less than a month, and I’m expecting actually very good performance there as well. The Impossible, Perks of Being a Wallflower – these movies have actually performed very well, and they’re also indicative of a piece of our business that people don’t concentrate on, but The Impossible and Perks are going to be very profitable pictures for us.

That leads me a little into the ’14 – ’15 slate. We are certainly looking at a Lionsgate – meaning Lionsgate/Summit – releasing slate of, call it around 14, 15 pictures, as Rob just said before. But I would also point out that we are in a couple of other businesses through Roadside Attraction – things like Arbitrage and Margin Call, which we are ramping up that business. We’ve got, I think, five or six movies in the pipeline already. These are primarily movies that will be released by Roadside but where we benefit from most of the economics. And we also have Pantaleon, our partnership with Televisa.

So we have a very robust slate. We certainly believe that there is no movie that we can’t do, but we like the fact that we’re focused on young adult, focused on horror, focused on branded action, focused on urban. We’re very excited about this new relationship we have with Kevin Hart and with CodeBlack. We think Kevin is in a totally different way sort of our next—potentially next Tyler Perry, very excited about that.

So again, it’s a robust slate, but from sort of the main pipeline we ended up with 20 films due to the integration. I think we feel that we don’t need to do that many films.

I might also add again that these synergies, as I noted in my remarks, are significantly larger than we expected. Obviously we had to negotiate a number of those terms and so we didn’t really know exactly how those negotiations would turn out, but I would say to give the Street a sense of it, we are looking at—assuming the size of business that we are projecting, we are looking at gross synergies of over $100 million, of which will benefit to us after our participation over $50 million a year.

So it’s really pretty significant, and again, extremely pleased with the Summit transaction, extremely pleased with the management that we’ve inherited and integrated. And overall, again, I think we’re in really, really good shape going into ’14 and ’15.

Tuna Amobi – Standard & Poor

Okay, great. Well said. Thank you.

Operator

Speakers, please go ahead with your closing remarks.

Peter Wilkes

Thank you all for joining us, and maybe the operator could just give you the replay information. Thanks again.

Operator

Ladies and gentlemen, this conference will be available for replay after 8:00 am Pacific Standard Time today through midnight February 19, 2013. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 279710. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, with the access code of 279710.

That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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