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Lions Gate Entertainment (NYSE:LGF)

Q1 2013 Earnings Call

August 10, 2012 9:00 am ET

Executives

Peter D. Wilkes - Senior Vice President of Investor Relations and Executive Communications

Jon Feltheimer - Chief Executive Officer and Director

Kevin Beggs - President of Television Programming & Production

James Keegan - Chief Administrative Officer, Chief Financial Officer and Chief Accounting Officer

Steven Beeks - President

Michael R. Burns - Vice-Chairman

Patrick Wachsberger - Co-Chairs of Lionsgate's Motion Picture Group

Analysts

David W. Miller - Caris & Company, Inc., Research Division

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

Alan S. Gould - Evercore Partners Inc., Research Division

James M. Marsh - Piper Jaffray Companies, Research Division

David Bank - RBC Capital Markets, LLC, Research Division

Caroline C. Anastasi - JP Morgan Chase & Co, Research Division

Douglas Creutz - Cowen and Company, LLC, Research Division

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Tuna N. Amobi - S&P Equity Research

David Carl Joyce - ISI Group Inc., Research Division

Operator

Ladies and gentlemen, good morning. Thank you for standing by, and welcome to Lionsgate Fiscal 2013 First Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded.

Now I'd like to turn the conference over to our host, Senior Vice President of Investor Relations, Mr. Peter Wilkes. Please go ahead.

Peter D. Wilkes

Thank you for joining us on the call this morning. Jon Feltheimer, our CEO, will lead off with opening remarks. We'll then open the call to Q&A. Joining us for Q&A will be Michael Burns, our Vice Chairman; Patrick Wachsberger, co-Chair of our Motion Picture Group; Steve Beeks, co-COO and President of the Motion Picture Group; Kevin Beggs, President of Lionsgate's Television 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 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 risk factors as set forth in Lionsgate's 10-K filed with the SEC on May 30, 2012. The company undertakes no obligation to publicly release any revisions to the forward-looking statements that may be made to reflect any future events or circumstances.

Jon?

Jon Feltheimer

Thank you, Peter, and thank you, all, for joining us this morning.

Having completed the first quarter of the first full year of our operations as an integrated company, we are right where we expected to be for the year and our 3-year plan. More than 2/3 of the profitability of the first Hunger Games lies ahead of us, and this translates into a typically back-loaded year, where our profitability will grow every quarter, keeping us on track for our 3-year guidance of $900 million in EBITDA.

We released 5 films in the quarter, and all of them will be profitable. However, this quarter was atypical relative to what you can expect for the rest of the year due to the marketing costs associated with these 5 films, the $18 million in prerelease marketing costs for films slated for release later in the year, as well as some primarily noncash stock-based compensation.

In addition, you may have noted the noncash charge for paying down our Summit debt early, as well as the impact in the quarter of $16 million in marketing costs associated with the releases of Lionsgate U.K., which, as you will hear in a few minutes, is having a tremendous year. Although our costs were partially offset by the Hunger Games' profitability in the quarter, you will see a more meaningful contribution from the film beginning in the second quarter.

Turning to the quarter's operational highlights. The Hunger Games is nearing the end of its very successful theatrical run as the 12th highest grossing film of all time. Its growth into a transformative franchise continues. The trilogy's book sales have more than doubled this year, passing the $50 million mark, and our motion picture event of the year will become the biggest home entertainment rollout in our company's history next week.

We finalized the remaining release schedule for the franchise and will release a Hunger Games sequel every November for the next 3 years, beginning with the November 22, 2013, release of The Hunger Games: Catching Fire, which begins shooting next month. Coupled with this November's release of Twilight: Breaking Dawn 2, this gives us significant forward visibility from our film business. The rest of the branded and franchised properties that comprise a large portion of our film slate are in equally strong shape. We anticipate a strong opening next Friday for The Expendables 2, which is tracking well and gives every indication of following in the footsteps of the original.

Ender's Game has already completed principal photography, and we'll be looking at it next month before it enters postproduction to complete its visual effects. With Ender's Game and Catching Fire back to back, we will have a 6-week continuous run in IMAX theaters next November and December.

Red 2, the sequel to another Summit franchise, will begin production next month for a summer 2013 release. Catherine Zeta-Jones and Anthony Hopkins will join the cast of Bruce Willis, Helen Mirren, Jon Malkovich and Mary-Louise Parker returning from the original film that grossed more than $200 million at the worldwide box office. By testing the summer for the first time with Madea's Witness Protection, we found another great release period for Tyler Perry, whose brand continues to demonstrate its remarkable resilience. With nearly $65 million at the North American box office and counting, Witness Protection is Tyler's second-highest grossing film ever.

We've also been exploring ways to position our franchise and branded properties to drive the profitability of our entire slate. Our expanded pipeline, following our acquisition of Summit, has now enabled us to capitalize on one of the biggest growth opportunities in our industry, the international theatrical marketplace. A few months ago, we embarked on a strategy to take full advantage of our diversified portfolio of products by establishing output deals around the world that offer greater stability in an uncertain global economy, increase the long-term visibility from our film business and strengthen our partnerships with the leading distributors in the world.

Because of the strength of our product, we've made rapid progress in implementing this strategy. We just completed new output deals with Nordisk in Scandinavia, Village Roadshow in Australia and IDC in Latin America, and we will announce additional deals in Germany, Spain, Russia, Korea and Poland in the very near future. When we finish executing our plan, we'll be covering, on average, more than 50% of our film budgets even before receiving the benefits of our tax credits, all without sacrificing the overages from our back end in success. In fact, these deals have allowed us to improve our back ends in virtually every territory, mitigating our risks while enhancing our potential reward.

We've also continued to grow our Lionsgate U.K. business, and I'm pleased to report that we're having the best year ever. Through the first 4 months of the fiscal year, we've already surpassed our box office in the U.K. for any previous year. Our U.K. operations are on track to generate more than $100 million in box office this year, ranking among the top 5 film distributors in that territory.

The growth of our U.K. business will continue to be spurred by our pipeline of franchise movies, including the next 3 Hunger Games films. But it's interesting to note that more than half of Lionsgate U.K.'s box office performance this year will be attributable to third-party product. As a matter of fact, all of our overhead in the U.K. is covered by our success in distributing and co-financing third-party films. And this strategy is exemplified by Lionsgate U.K.'s resounding success this year with Magic Mike, which was bought well ahead of its North American release and the early acquisition of Salmon Fishing in The Yemen.

Our television business continues to fire on all cylinders as well. Anger Management debuted to the best ratings of any cable comedy series in history, and it continues to be one of the most watched shows on cable TV this summer. We expect strong ratings from next week's episode introducing Martin Sheen as a recurring character, and FX has already expressed their confidence in the show's ability to achieve a 90-episode pickup, which would make it another signature Lionsgate brand.

We also have high hopes for our new broadcast series, Nashville, which debuts on October 10 on ABC in the coveted Wednesday 10:00 time slot, and Jenji Kohan's Orange Is The New Black begins production next month and will premiere on Netflix next spring. As we've discussed, the next wave of TV projects, including a musical drama from American Idol creator Simon Fuller an adaptation based on Mystic River author Dennis Lehane's Gone Baby Gone and a deal with comedy star George Lopez to develop a new sitcom are all proceeding nicely.

We also announced yesterday that GSN, formerly known as the Game Show Network, has just picked up our new reality series, Family Trade, as part of our nonfiction programming initiative. Meanwhile, our current primetime cable series continue to perform well, earning another 22 Emmy nominations last month, including another best drama nod for Mad Men. Weeds is completing its eighth and final season, with strong ratings ending its run on a high.

We also continued to strengthen our library in the past year. Following on the heels of our distribution deal with Miramax, the acquisition of Summit and its library and renewal of our long-term distribution agreement with STUDIOCANAL, we just announced our new partnership in home entertainment with A&E Networks. The new A&E Networks deal includes thousands of library titles and great brands, including award-winning documentaries, original movies and hit TV franchises from the A&E, Lifetime and History channels, as well as programming from A&E's exclusive partnerships with major league baseball and Monty Python's Flying Circus. With completion of this deal, Lionsgate now handles more than 15,000 titles. The agreement also deepens our overall relationship with A&E Networks, with whom we're already doing business across multiple channels.

With 9% market share in our home entertainment business already this year, next week's launch of The Hunger Games not only marks the biggest home entertainment rollout in our history but gives us an opportunity to build our position on digital and traditional platforms alike. Hunger Games is the ideal vehicle to launch our UltraViolet initiative, and next week, we will offer The Hunger Games on DVD, Blu-ray, VOD and in partnership with Walmart and Flixster, in the UltraViolet format as well.

But our continued inroads in the digital marketplace aren't limited to our big franchises. By looking at the digital marketplace the same way we look at physical media in terms of placement, promotion and pricing, we have found new ways to monetize our entire feature film slate on digital platforms. For example, last week, we had 2 of the top 3 titles on Apple iTunes. Interestingly enough, not with The Hunger Games and Madea, but with LOL, which ranked #1 and Friends with Kids ranking #3.

While we continue to invest in our content business, we are also focused on significantly reducing our debt and interest expense. We've paid down $201 million of our $500 million Summit term loan in the 7 months since the acquisition, and we're ahead of schedule on our commitment to pay it down completely within 3 years. We also recently redeemed $23.5 million of our convertible notes. At the end of the fiscal year, we anticipate having at least $200 million less leverage in terms of corporate debt on our balance sheet. And we will continue to reduce not only our leverage but the cost of that leverage going forward.

As I noted at the start of the call, we remain on track for the year and for our 3-year plan. We anticipate significant and growing profitability beginning with the second quarter, although, as usual, the year will be back-loaded. With most of the profitability of our first Hunger Games movie still ahead of us, coupled with the other catalysts in our film and TV business that we've discussed, we anticipate that the benefits of our Summit acquisition, the strength of our young adult franchises and the continued evolution of our TV business will translate into significant and growing contributions next quarter and for the balance of the 3-year period.

I'd now like to open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today comes from the line of David Miller representing Caris & Company.

David W. Miller - Caris & Company, Inc., Research Division

Three questions. First of all, on the guidance of $900 million in EBITDA over 3 years, I recall that 90 days ago, I think I asked the question about whether or not that was adjusted or unadjusted. I'm pretty sure you guys said unadjusted. If you could just kind of reiterate that answer for maybe some of the other folks on the call today. I think there might be some confusion out there about whether that formal guidance is adjusted or unadjusted. I'm pretty sure you're going to say unadjusted, but if you could drive that home for the folks out there, that'd be great. And then, Felt, on Anger Management, how is this going to work with the other 90 episodes assuming that FX goes ahead with the 90-episode order, which, it looks like, that's the way things might fall. I know you have a couple episodes to go. Should we assume that, like, another 10-episode block is going to air kind of in January, February, and March and then the other 80 will air in fiscal '14? Or is it going to be sort of muddier than that? And then I have a follow-up.

Jon Feltheimer

I think you owe me one more question, David. In terms of EBITDA, yes, that's an unadjusted number. In terms of Anger Management, I don't want to speak for FX right now because I think they have a fair amount of flexibility. But I think you could assume a significantly larger amount of episodes airing over a period of time. I think Kevin Beggs is in the room. Kevin, I don't know if you want to add any color there.

Kevin Beggs

Sure. Well, our plan is to furnish them somewhere in the neighborhood of 40 episodes a year. How they then program them out will be completely up to them and air them. But our writers are working in anticipation that it goes forward and we start shooting in September to be able to furnish new episodes in a large, large block for them as early as January '13.

David W. Miller - Caris & Company, Inc., Research Division

Okay, great. And then just a quick follow-up. Felt, were you guys in the upfront this past June for TV Guide? And what were sort of the price and volume statistics, if you're willing to give that out on the call?

Jon Feltheimer

Sure. Yes, we definitely were in the upfront. And from both a revenue perspective and from a CPM perspective, we were up about 5% in revenue and about perhaps 3% in terms of CPM, pretty much really in line with other networks of our size. So we had a good upfront.

Operator

Our next question today comes from the line of Ben Mogil with Stifel, Nicolaus.

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

So I want to talk about P&A. It looks to us that the domestic P&A for titles released in the quarter was around $98 million, which seems pretty high given that Hunger Games would have been the quarter before. So can you maybe talk a bit about that, particularly given that there were pre-targeted releases and also, maybe talk about whether or not you actually increased The Hunger Games P&A after the strong opening weekend?

James Keegan

Sure, okay. We had $116 million of total P&A theatrical marketing cost in my Q1, $18 million of that did pertain to the next quarter. There was not very much marketing cost associated with Hunger Games in my Q1. Most of it had been expensed in my Q4. And I'm just saying – and there was -- and it was obviously 5 films that generated the $98 million in marketing costs for theatrical.

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

So that seems like a bit of a high number given that a couple of them were targeted by African American, a couple of them were pretty limited -- not limited but sort of very niche releases. Are you guys sort of thinking now that P&A environment is one where you've got to spend a little bit more you than historically had?

Jon Feltheimer

No, I wouldn't say that at all. Actually, if you take away the pre-expense, we had some somewhat atypical pre-expensing, specifically for Expendables. We wanted to hit the Olympics, which, if you've been watching them, you can see we did pretty extensively, although I think it was pretty effectively as well in terms of costs. But I think if you look at 5 releases, particularly Tyler Perry's was done, I think, on the last day of the quarter, if you do 5 releases and average $100 million, that's what, about $20 million minus that $18 million pre-expense. So I think that on a per-picture basis, we are definitely keeping our foot on the brakes in terms of costs, and I think that'll be pretty much through the year. Obviously, a bigger release like Expendables will have more P&A than perhaps a genre movie. But at the end of the day, I think we're still on track, the same way we've always been trying to get as targeted as we can be with our P&A spend. Ben, does that answer your question?

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

Okay, that's great. And then for like, I guess, for Jon, is the $200 million of deleveraging that you talked about, is that -- does that include the $23 million subsequent to the quarter or is that in addition?

James Keegan

That does not include that $23 million that was done subsequently, that is in addition to that.

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

Okay, that's great. And then lastly, do you guys have any kind of update on TV Guide, either on sort of the strategic review or on sort of -- obviously, it's had a tough couple quarters now. Any thoughts on sort of what's changed around that?

Jon Feltheimer

I think, Ben, we'd probably have a little bit more to say in the next quarter. We are working on some interesting strategy. We think, obviously, we had a good upfront. We've done, I think, a very good job in the distribution side. Perhaps have more to say about that as well next quarter. And on the programming strategy, again, I'm working on some things. I think perhaps in the next quarter we can talk about them.

Operator

And our next question comes from the line of Alan Gould with Evercore Partners.

Alan S. Gould - Evercore Partners Inc., Research Division

I've got a few questions, so let me take them one at a time. First, with respect to the Hunger Games, I had anticipated a little more profits this quarter. I know, Jon, you say 2/3 of the profits lie ahead. Will most of that occur in the September quarter? And Steve, can you tell us what your sell-in is for the title and what information you get from Amazon or others telling you about the consumer pre-buys?

Jon Feltheimer

I think on the first question, another way to look at it would be to say 50% or so of the entire profitability will lie in the next 3 quarters, if that's helpful. And I'm sorry, Steve, you...

Alan S. Gould - Evercore Partners Inc., Research Division

Is the bulk of that, Jon, going to be in the -- is more than half of that 66% going to be with the home video release in the September quarter?

Jon Feltheimer

I think that's fairly accurate.

Steven Beeks

Yes, Alan, I can give you some directional information. The pre-orders for The Hunger Games have been significant not only in Amazon, but a lot of the retailers are starting to take pre-orders now. And iTunes is obviously taking pre-orders, so it's moving up the charts. The sell-in, obviously, is going to be huge. I don't know if we're going to give you the exact numbers, but it's obviously the biggest release we've ever had. Products already started shipping. We anticipate that with the demand, the conversion rate is going to be on the high side for a film of this size.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. Let me move on to 2 more questions, one for Michael. Michael, can you tell us about the timing and annual savings you expect to get from the new credit facility? And with rates this low, does it make sense for you to lock in some of your deposition longer term, not the portion that'll be deleveraging but just whatever permanent debt you want to put in place? And lastly, for Jim, could you just tell us why the accounts receivable reserve for returns dropped by $13 million this quarter?

Michael R. Burns

Yes, Alan. What I'll say is that we're fairly deep in the process with our existing bank group to refinance and upsize the existing credit facility. And I'm happy to report that we've received bank commitments well in excess of our current facility. So as far as locking in long-term rates, that's a -- that'll be a LIBOR-based facility. When we do draw that down and to a significant enough number, I suppose we can certainly look to lock those with a forward contract. We've not done that typically in the past. We don't want to be in the business of sort of guessing which way interest rates go. But we are -- we do want to take advantage of this low-interest-rate environment that is for sure.

James Keegan

And then to answer your question, in our -- Breaking Dawn 1 was released in February, so my fourth quarter home entertainment revenues were -- had more receivables built into it. So we did not have as much revenue in my Q1 of this year from home entertainment, so we do an appropriate reserve based on outstanding AR, so it decreased.

Operator

Our next question today comes from the line of James Marsh with Piper Jaffray.

James M. Marsh - Piper Jaffray Companies, Research Division

Two quick questions here. One, Jim, I was hoping you could back up a little bit and discuss with everyone the Summit film purchase accounting adjustments. Could you just elaborate a little bit on what the drivers to those adjustments are? And then, just looking forward, should we assume that the pace and the size of these adjustments start to moderate? Just any insights you could give us there for forecasting this number. And then I have a follow-up.

James Keegan

Sure. Well, the drivers for the purchase accounting was primarily the Twilight series, Breaking Dawn 1. And so that's why last quarter when we announced, we said there was about $26 million with purchase accounting related to that. And so there'll be purchase accounting related to Breaking Dawn 2, and there'll be purchase accounting -- so what you'll see driving, as I'd indicated on the last call, that about maybe $90 million to $100 million of purchase accounting will be this year, impacting this year, and again, that impact is primarily from Breaking Dawn 2 and some rollover from Breaking Dawn 1.

Jon Feltheimer

And if this is helpful, I think you can assume that as you look at all of the purchase accounting going forward, you might assume that the number Jim talked about is approximately 2/3 of the total amount of it going forward. So in other words, about 1/3 of it for the 2 remaining years, total.

James M. Marsh - Piper Jaffray Companies, Research Division

Okay. All right. That's helpful. And then just a follow-up question on Epix. Obviously, there's a fairly public battle between DirecTV and Viacom over some broader carriage issues. And some of the trades were reporting that Epix carriage was a part of that discussion. In the end, it was resolved with what was described as an "option to carry the network." And it just doesn't seem like very typical terminology to me. So I guess as partners of Epix, I was wondering how we should read that language. What's your take on it?

Jon Feltheimer

I don't really want to talk specifically about that other than to say that Epix was a part of that conversation obviously. But in general, I would say, Epix stands alone. I think the financials from Epix and our contribution are becoming significant and consistent and that particularly, all of the people that are currently carrying it digitally and linearly are actually very pleased with the contribution, the results and the effectiveness of Epix. And so any discussion of Epix with a carrier, an MSO can stand on its own. And again, it's going forward, we're talking to everybody, and obviously, we would hope to be carried by DirecTV, but we have significant carriage conversations going on with everybody in both the linear and digital space.

James M. Marsh - Piper Jaffray Companies, Research Division

Okay. And just one last one quickly. On Hunger Games 2 and Ender's Game in IMAX, are those going to be international releases or just domestic releases or just digital only? Obviously, Hunger Games 2 is going to be using IMAX cameras that'll be film-based as well. But is Ender's just going to be a digital-only release? And do you know if it's going to be an international release? Because I know there's some distribution issues related to IMAX films, so if you could flesh that out a little bit, that'd be helpful, if you're aware of it.

Patrick Wachsberger

Okay. So you're talking about Ender's Game right now, correct?

James M. Marsh - Piper Jaffray Companies, Research Division

Yes.

Patrick Wachsberger

Okay. First of all, we don't control the international rights of Ender's Game. We're only involved in the domestic market. And in the domestic market, we definitely will be playing IMAX. And I cannot basically answer to you in terms of the international.

Operator

And we'll go to the line of David Bank, RBC Capital Markets.

David Bank - RBC Capital Markets, LLC, Research Division

A couple of questions. I guess, the first one is part of the extraordinary structural transformation of the company is that as you've laid out the release schedule, you kind of have visibility into one really enormous tentpole franchise annually. You sort of have underlying some of the less big films, but still really meaningful franchise kind of rolling out relatively predictably. So my thought is, is it -- can we start moving away from looking at this on a movie-by-movie basis and start thinking about kind of basic margin targets annually and talk about the differences over the next couple of years? What general EBITDA margin targets are we talking about for fiscal '13, '14, '15, where we're seeing the guidance? And is -- the only real delta is the biggest delta in terms of the next couple of years, this is the year with the big P&A step-up because you've got more films with the Summit franchise, and that goes down. Can you just kind of help us flesh out the margins a little? And the second question is, I guess, for Kevin, what's your plan for syndication of Anger -- assuming it gets picked up, which looks pretty good, what's your approach to the syndication process going to be? Mike & Molly would seem like it would come out around the same time, and that's just been sold. So we know you can -- we know there's a lot of lead time in all this. So if you can give a sense of what the approach would be? Sorry for the long question, but it's -- modeling Lionsgate has always been pretty complicated. I think it's getting a little bit easier.

Jon Feltheimer

Yes. We agree that it's going to continue to become easier. In terms of sort of trying to lay out margins, we'll try to help you with that in the future. But I would say that you also have to remember with TV becoming a growing part of our overall revenues, the early stages of a television show are clearly -- margins are depressed. As you get later, obviously it'll be a lot faster. The time will be compressed with a show like Anger Management, any of our 10-90 models. But with TV becoming a large portion of it, again, that will depress your corporate margins until the maturity of those. So it really would partly depend upon the blend of product between features and television and our branded and library contribution. And Kevin, do you want to answer?

Kevin Beggs

Sure. On the syndication front, Debmar-Mercury, which is our partner, our sister company that handles all the syndication of our TV products, they've had a lot of discussions, a huge amount of interest in the series. It all kind of hinges on the additional 90 episodes. But when that is in place, they will then make the appropriate station deals. And many of the off-net deals that you've read about are primarily focused on big cable sales, whether it's 2 Broke Girls or Mike & Molly. So they feel that the runway is wide open for what we need to do on Anger Management.

Jon Feltheimer

But I think your point was actually well taken, David, which is, these conversations are happening earlier and earlier. And actually, I think you can assume we've actually already had some conversations.

David Bank - RBC Capital Markets, LLC, Research Division

Great. And then one follow-up would be I'm guessing that as part of your original guidance, you weren't necessarily assuming this kind of extraordinary success -- the likely extraordinary success on Anger Management. So can we assume that, that leaves us room for potentially some upside in guidance if we go to syndication?

Jon Feltheimer

I think, perhaps that's true, although the major contribution of Anger Management from a timing perspective will come somewhat beyond the end of that 3-year term.

Operator

Our next question comes from the line of Alexia Quadrani with JPMorgan.

Caroline C. Anastasi - JP Morgan Chase & Co, Research Division

This is Caroline Anastasi for Alexia. Just following up on your comments on P&A expense. How should we think about spending for the next 2 quarters, specifically around the last Twilight movie? How will that compare to the P&A spending on the previous Twilight film?

James Keegan

Well, I mean the P&A spends, I think they're comparable for the Twilight...

Patrick Wachsberger

Absolutely.

James Keegan

Twilight films for the next quarter. Yes, nothing changing.

Patrick Wachsberger

Nothing changed at all, nothing changed at all. We have a huge franchise, and we're spending exactly the same amount of money as the previous one.

Jon Feltheimer

And I think you can actually look at -- perhaps, you can look at this quarter as a proxy for the rest of the year when you look at total P&A spend for the year, perhaps slightly more than that.

Caroline C. Anastasi - JP Morgan Chase & Co, Research Division

Okay. And then just a couple questions on Anger Management. How can we think about the expenses there given your comments of 40 episodes a year? And can you just update us on the international sales of Anger Management and where they stand today? And if it were picked up, where do think they could go?

Jon Feltheimer

Kevin?

Kevin Beggs

On the expenses side I assume you're just talking about the production costs?

Caroline C. Anastasi - JP Morgan Chase & Co, Research Division

Yes.

Kevin Beggs

Yes. Well, the production cost will be consistent with the 90 episodes, a little less than the 10 episodes, and those are well handled by both the domestic licensing and the international. Since our last quarter, we've added several more territories to the international lineup, and there are many more countries clamoring to buy it. We're in really great shape. It's a really substantial number, and compared to most comedies, it would be really, really good. So we feel quite good about this being in the black before we even start shooting.

Jon Feltheimer

I would say, to be a little more granular, we think the international sales could approach $900,000 to $1 million an episode when we're finished.

Kevin Beggs

$900,000.

Jon Feltheimer

$900,000 to $1 million.

Operator

Next, we'll go to the line of Doug Creutz with Cowen and Company.

Douglas Creutz - Cowen and Company, LLC, Research Division

Jon, at the top of the call, you made a comment. I just want to make sure I had the language parsed right. You said that it will translate into typically back-loaded year where all profitability will grow every quarter. Does that mean your profitability in every quarter for the remainder of the year will grow year-over-year? Or should I take that to mean you expect sequential profit growth in every quarter for the remainder of the year?

Jon Feltheimer

I'm trying very hard not to get back into the guidance business. But the answer to your question is I was giving you the year's trajectory. Third quarter more than second quarter, fourth quarter more than third.

Operator

And we'll go to the line of Matthew Harrigan with Wunderlich Securities.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

On Ender's Game, I think Jon indicated in the last call that your effective profit or the percentage on the economics could be north of 50%. The way the rights are divvied out is pretty complicated. You talked about the international distribution already. You've got 11 books. I mean, you've almost got too much material to work with prospectively after that. And obviously, you want to see how the first movie does regardless of the buzz on it right now. Can you talk about what your plans are for that in your franchise longer term? Or what sort of long-term play you really have there? And then secondly, I think Michael, in particular, has talked about, in the past, sort of the geological layers in your profits with Hunger Games, Summit and legacy Lionsgate. You provided a lot of detail on the revenues by year of release. But I know you were looking for a big ramp on the movies from a few years ago, some of that is masked by, obviously, the increased P&A you're seeing this year. But on the movies that were out a couple years ago, is that approaching your realization on the serial ramp rate, if you will? And that's it for me.

Jon Feltheimer

Patrick, if you could answer the question about the Ender's Game franchise.

Patrick Wachsberger

Well, the Hunger Games franchise has been, as you know, done extremely well -- fantastic domestically and very, very well internationally. We are planning to start the next production of Catching Fire this September. This will be a significantly bigger movie, and it will have a bigger budget. However, I should say that the presale of Catching Fire are generating substantially higher minimum guarantees internationally. And we also secured a large tax credit. We truly anticipate loss of our reserves. And then after that, we're going to be shooting Mockingjay 1 and 2 back to back. We should save money, and we expect the budget of Mockingjay 1 and 2 to be slightly lower than Catching Fire. So as Jon said earlier, looking at the overall trajectory of the franchise, I would anticipate that while the profitability of Catching Fire might decrease just slightly, due to the scope of the film, the profitability should come back up with the final 2 installments of 2014 and 2015.

Jon Feltheimer

David (sic) [Matthew], I think Patrick gave you more information than you asked for, specifically in terms of the Ender's Game obviously. You made the point, there's a lot of books. We're excited about the franchise. It's a very different kind of a franchise than Hunger Games, and obviously, we just have to wait and see where we stand with the first movie. In terms of your first question, if I got it right, I think the simple answer would say, as you could see in our filing, our current backlog is $992 million, and I think that pretty much gives you a sense. And as you know, typically, the backlog rolls out over a reasonably short period of time, call it -- most of it over a kind of a 2-year period. So I think in terms of the past movies and sort of how that plays out, I think that's probably the best way to look at the accumulation of those contributions.

Operator

Our next question comes from Tuna Amobi with S&P Capital.

Tuna N. Amobi - S&P Equity Research

I have a few questions as well. So first, I think it's fair to say you guys are well ahead of your deleveraging plan. And I think you've laid out a case for very strong earnings and cash flow visibility. So I'm wondering if it's fair to assume that by the end of fiscal '13, that you may, in fact, be looking to address possibly other capital allocation questions. Separately, with regard to your China strategy, so first, you got approval to screen Hunger Games in China, which was really, I would imagine, very positively surprising. And you've since gone ahead to do some more-than-decent business in China, which my understanding is, that is really your first major, if you want to call it, splash in that market. So I guess the question there is, how does that affect your overall strategy in China in the context of what some of your peers are doing in that market? And I have a follow-up.

Jon Feltheimer

I'll let Michael answer the first question.

Michael R. Burns

Okay. Sorry, who asked that question, Jon?

Tuna N. Amobi - S&P Equity Research

This is Tuna Amobi from S&P Capital IQ.

Michael R. Burns

Okay, great. Nice to talk with you. We are going to continue to delever over the next 3 quarters significantly as we've said. We expect our overall debt to come down $200 million. And Jon, are you going to answer the China question?

Tuna N. Amobi - S&P Equity Research

Well, sorry about that. So you've laid out that, and I was wondering if by the end of '13, we can expect some maybe clarity as to other uses of cash given the strong earnings and cash flow visibility.

Michael R. Burns

Well, if you're asking the question, "Are we going to do acquisitions?" Is that the question that you're asking?

Tuna N. Amobi - S&P Equity Research

Well, I guess that's implied. Or other uses kind of -- I think dividend is probably -- maybe, are we getting ahead of ourselves here?

Michael R. Burns

Yes, I think so. And again, we don't telegraph that, but we don't have anything imminent on the horizon, I will tell you, and Jon said it over and over again on other calls. We're looking to divest of our non-core assets. So you should see us continue to pursue that path. And as I said, at the moment, there's nothing imminent on the acquisition side. I mean, our focus is really on deleveraging.

Jon Feltheimer

In terms of your question, I'll let Patrick start, just specific to The Hunger Games, and I'll take it from there.

Patrick Wachsberger

Okay, yes. Your question about the Hunger Games' performance in China. It was very strong. You're absolutely right. It was, by far, the best box office performance of any Lionsgate or Summit film in China. We grossed about $25 million. To compare previously box office of any one of our movies was between $7 million and $8 million. So we're very, very, very happy there, and we're going to see a substantial amount of overages coming from this movie in this territory, which fare extremely well for the sequel.

Jon Feltheimer

One of the things that I've mentioned before on these calls is the benefit from our Celestial Tiger partnership, where we have a team on the ground in Hong Kong representing our product, working together with us on sales, working together with us on potential co-financing, coproduction, et cetera, and it's already paying off. We expect it to continue to grow, and Patrick and I are intending to go to -- back to China in a few months. We're being invited to have a number of very interesting strategic conversations. And so yes, we're overall excited about the expansion of our business internationally, as I expressed on this call, the strategy, in fact, growing with output deals and great partners in almost every territory. The other thing I wanted to mention though is the other territory that we're really concentrating on right now is India, and Jim Packer, our Head of Sales just spent 10 days in India. And I think you should also look towards a much bigger expansion of our revenues and contributions from that territory. We think not many people are talking about India right now. We think that's really another tremendous opportunity going forward.

Tuna N. Amobi - S&P Equity Research

Okay, that's helpful. And lastly, I had a question on your retail and merchandising strategy. It seems like you've stepped up your efforts there pretty recently, perhaps more so than ever before on a variety of titles. Can you help us understand how you're coordinating these efforts on an integrated basis with Summit and so on? And if you can update us on how that kind of fits into your 3-year plan? To the extent that you can quantify any upside that you see there as well would be very helpful.

Steven Beeks

This is Steve. On your retail merchandising question, I assume you're talking about primarily the packaged media business linked with licensing and merchandising products. Obviously, The Hunger Games gives us a huge opportunity at retail. As we've announced, next week, there'll be a giant event, Friday night, at every major retailer. Displays are being shipped in now. You're seeing displays of all the licensed goods going up in Walmart right now. Obviously, Summit has a lot of experience in these big franchises. So we're obviously utilizing that. So we're well positioned, and I -- we've got special packaging at every single retailer. I think this is going to be the entertainment event of the year for every retailer. I'm not sure what more you want. I know we have a co-promotion, a huge co-promotion going on with the Kindle Fire that's going to launch right around the time of the DVD release. So you're going to see a lot going on.

Jon Feltheimer

And that sponsorship is not only in the U.S., but it's international as well. I think I could say we can't quantify it for you specifically right now. But I would say that our revenues, right now, from licensing and merchandising of Hunger Games are ahead of our plan. We expect them to go up significantly for the second, third and fourth movies. And it's one of the reasons why -- although the budget is higher for the second Hunger Games, between our significantly higher international sales, as well as licensing and merchandising growth that we see that, that movie will be very, very profitable.

Operator

The final question today comes from the line of David Joyce representing ISI Group.

David Carl Joyce - ISI Group Inc., Research Division

One, could you please outline the kind of timing for your major TV episode deliveries over the course of the next few quarters? And secondly, on your SVOD rights internationally on Netflix or Amazon, do you retain those rights? Or are those -- have those been presold with your other theatrical rights sales?

Jon Feltheimer

Jim, if you could do the...

James Keegan

Sure. The TV episodes, you're going to see the deliveries and actually the contributions coming: Mad Men, Q3, then even stronger Q4; Weeds, strong in Q2, that's where the bulk of that will hit; Anger Management, you'll start, assuming it's all happening, we would see something later on in the year, Q3, 4, depending on what occurs there. Those are the big -- that's how -- so the TV deliveries and actually profitability are pretty much back-loaded in the year.

Jon Feltheimer

Steve?

Steven Beeks

And David, on your SVOD question regarding international, when we do obviously in every territory, with exclusion of the U.K., we license, generally, all rights to the end market distributor. The SVOD rights are usually linked to the pay television deal in that particular marketplace. But since we have a major library and these rights that we license do always come back to us, we are making major SVOD licenses. We're entering into big SVOD licenses around the world, particularly in the U.K., as you'll notice, that's probably the most competitive marketplace, with both Lovefilm and Netflix in that market. And we do retain -- with the library, we also retain digital rights when we aren't licensing product in the library, and we are opening in every iTunes Store around Europe right now. So you'll see that our worldwide digital revenue begin to grow significantly, just it's like – just like it's doing here in the U.S. as we go forward.

Operator

And I'd now like to turn the conference back to Mr. Wilkes for closing remarks.

Peter D. Wilkes

For a discussion of certain non-GAAP forward-looking metrics discussed on this call, please refer to the Presentations tab under the Investors section of the company's website at www.lionsgate.com. Thank you very much for joining us today.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.

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