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Lionsgate Entertainment Corp. (NYSE:LGF)

Q2 2013 Earnings Call

November 9, 2012 9:00 am ET

Executives

Jon Feltheimer – Chief Executive Officer

Jim Keegan – Chief Financial Officer

Rick Prell – Chief Accounting Officer

Michael Burns – Vice Chairman

Rob Friedman – Co-Chair, Motion Picture Group

Patrick Wachsberger – Co-Chair, Motion Picture Group

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

Kevin Beggs – President, Television Group

Peter Wilkes – Senior Vice President, Investor Relations

Analysts

Alan Gould – Evercore Partners

David Miller – Caris & Co.

Ben Mogil – Stifel Nicolaus

Doug Creutz – Cowen & Co.

James Marsh – Piper Jaffray

Jim Goss – Barrington Research

David Bank – RBC Capital

Matt Harrington – Wunderlich Securities

Alexia Quadrani – JP Morgan

Tuna Amobi – S&P Capital

David Joyce – ISI Group

Operator

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the Lionsgate Fiscal 2013 Second Quarter Earnings call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. If you should require any assistance today, please press then zero and an AT&T operator will assist you. As a reminder, this conference is being recorded.

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

Peter Wilkes

Good morning. Thank you for joining us today. Jon Feltheimer, our CEO, will begin with remarks and then we will open the call to questions. Joining the call are Michael Burns, our Vice Chairman; Rob Friedman and Patrick Wachsberger, co-Chairs of the Motion Picture Group; Steve Beeks, co-COO and President of the Motion Picture Group; Kevin Beggs, President of our 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 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 as set forth in Lionsgate’s annual report on Form 10-K filed with the SEC on May 30, 2012, which risk factors are incorporated by reference. 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 everyone and thank you all for joining us. As I mentioned in our earnings release, this quarter’s solid performance was driven by the core values on which we’ve been building our company over the past 12 years, remaining agnostic while delivering content to the growing spectrum of digital and traditional buyers, innovating new models in our television business designed for a multi-platform environment, growing our library organically and through third party acquisitions, producing film and TV content differentiated for passionate targeted audiences and continuing to aggregate a business where the sum is greater than its parts.

Here are some of the quarter’s highlights. We’ve continued building out our international film distribution network as part of our ongoing commitment to lower our risk and extend our visibility and predictability while maintaining our upside. With the recent announcements of deals in Germany, France, Spain, Australia, Latin America and Russia, among others, we’ve established partnerships in major territories representing approximately 80% of the world outside of China and India. These output arrangements and partnerships will cover more than the majority of the costs of our Lionsgate and Summit feature film production slates, significantly reducing our capital at risk on each film we produce.

To give you a significant and recent example, while the scope and therefore the budget of Hunger Games: Catching Fire is substantially larger than the first Hunger Games film, thanks to these output deals and the tremendous sales achieved by our international team led by Patrick Wachsberger, we actually have the same domestic exposure on Catching Fire that we had on the first movie.

Turning to our television business, we’re deep into production on the second order of Anger Management, and the show looks great. In addition to its 90 episode pick-up by FX, Anger Management had an excellent start to its syndication rollout. Debmar-Mercury’s deal with the Fox TV stations gives us great time slots on great stations across the country. As we’ve mentioned before, we’ll be in syndication at least three years earlier than a traditional television rollout.

We’re also pleased with the ratings for the first five episodes of Nashville. In today’s time shifted environment, it’s particularly encouraging that Nashville’s live-plus-three numbers continue to average more than 50% higher than the ratings for its live-plus-same-day airing, making it one of the most time shifted shows on television. With eight songs debuting high on iTunes’ charts this month and generating over half a million downloads already, Nashville is that rare show that has the opportunity to expand its marketing reach and revenue base through touring, soundtracks, and merchandising. We believe that the show will continue to grow and become an important asset for both Lionsgate and the ABC.

On the feature side, we continue to be pleased with the performance of our film slate this year with Sinister and The Possession doing particularly well recently. Even more important is the continued development of our young adult franchises. I just got back from the set of Catching Fire and I’m very excited about what I saw. As you’ve read in the press, we just signed Francis Lawrence to the next two installments and we’re obviously impressed with what he’s doing with the franchise.

Divergent is a new brand designed to continue building on our leadership in the young adult space. We’ve signed a terrific filmmaker in Neil Burger, the director of Limitless and The Illusionist, and a great up-and-coming talent in Shailene Woodley from The Descendants to star. We’ve already scheduled Divergent for a March 21, 2014 release, the same slot we used to launch The Hunger Games. To remind everyone, the books have already sold more than 2 million copies and are tracking ahead of both the Twilight and Hunger Games books at a comparable stage in their growth trajectory.

Speaking of Twilight, if you’re in downtown LA this weekend and you want to have some fun, visit the Twilight Fan Camp at Nokia Plaza for movie screenings, a fan concert presented by Time Warner Cable, or a fan breakfast as thousands of fan begin their preparation for next week’s opening of Breaking Dawn Part 2. Advanced ticket sales for this fantastic installment are running ahead of Breaking Dawn Part 1 and prerelease tracking is strong. We’re looking to a big opening weekend that will take our slate past a billion dollars at the domestic box office this year.

On the channel front, Epic signed a new carriage deal with Amazon during the quarter as it’s advanced technology and young subscriber base continues to be a magnet for digital platforms. Digital consumption of our content has become one of the fastest growing segments of our business. We entered the digital space early and we’ve assembled a dedicated working group with the institutional knowledge to negotiate complex deals involving our films, TV shows and library of content on digital platforms in dozens of territories around the world. With 600 million smartphones and 100 million tablets sold this year alone, demand for content continues to grow and the spectrum of digital buyers is expanding worldwide. We’re aggressively selling our content on iTunes platforms in Europe, Asia and Latin America, on Xbox in Europe, Mexico and Australia, through Netflix in Latin America and the U.K., and Vivendi in Germany, just to name a few.

This digital growth is reflected in our numbers today as well as in the composition of our library sales. Just five years ago, 70% of library revenues were generated by packaged media. This year, our library revenue should be up approximately 20% with only 38% being generated by packaged media as digital becomes an increasingly important and high margin component. Lionsgate already has tens of millions of digital customers worldwide; however, as we continue to convert digital rental customers to sell through, our focus on online digital initiatives will generate even greater rewards in the future.

The last topic I want to discuss is our capital structure. We recently closed a new five-year, $800 million revolving credit facility. Additionally, we paid down the remaining balance on our Summit term loan more than two years ahead of schedule. These are the first of a number of moves that will save us millions of dollars of interest every year. With an $800 million facility, a record $1.2 billion backlog that represents a sizeable portion of our future revenue stream, a 15,000 title library, significant box office market share, and a successful and diversified TV slate, we have now achieved critical mass and leveled the competitive playing field.

As a result, we’re in a stronger position than ever to secure competitive terms with our distribution partners, create new output agreements around the world, attract A-list creative talent, and support the continued growth of all of our businesses. And as this quarter’s results demonstrate, we’re beginning to see the financial benefits of 12 years of patient and disciplined growth.

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

Question and Answer Session

Operator

[Operator instructions]

Our first question today comes from the line of Alan Gould representing Evercore Partners. Please go ahead.

Alan Gould – Evercore Partners

Thank you. I have three questions. First Jon, on the last call you told us that this year was going to be back end loaded and the profitability would grow each quarter. I assume that’s no longer the progression. What was the major cause of the positive surprise over the last three months?

Jon Feltheimer

Sure. Jim, why don’t you take that one?

Jim Keegan

Sure. In the first three months, we had some internal over-performance. Hunger Games continued to over-perform and the ultimate of that has continued to grow. The Possession has been exceedingly strong, outperformed our estimates, and our television division, shows like Nurse Jackie, has continued to over-perform and actually increased our syndication ultimates on that. So we’ve had significant over-performance throughout the feature film business and our television business.

Jon Feltheimer

I would add to that, obviously we still think the next six months is going to be very strong.

Alan Gould – Evercore Partners

Okay. Following on that, I thought the Hunger Games sold close to 10 million units, but I see the fiscal ’12 slate contributed 151 million of home entertainment revenue in the quarter, so it couldn’t have been that big. Is there still more Hunger Games video profits to come in the current quarter?

Jon Feltheimer

Steve?

Steve Beeks

Yeah, Alan, the majority of them have been recorded. There definitely is continuing—there will be continuing sales, especially as we go through the holiday season. We have high expectations through the holiday season, and obviously in a couple of weeks we’ll start a Black Friday promotion going all the way through the rest of the year.

Alan Gould – Evercore Partners

Okay. And my last one is for Jim or Rick, an accounting question – particularly in light of how strong the current quarter was and what looks like a pretty clear path to predictability, will you reverse your tax valuation allowance? And could you remind me of the mechanics – it looks like you could recognize almost $1 a share of non-cash earnings but then would begin recording taxes at a more normal rate for book purposes.

Jim Keegan

Well you’re right, Alan. We have to follow the accounting rules under the—you know, for the reserve. We do have a significant reserve there. But what we’re going to do is as we go along, we’re going to review and look how our current performance is and to future performance, but if we continue to perform as we’re performing, we will reverse the reserve, and what that will do, that’s going to result in a one-time significant positive non-cash contribution to net income at that time.

Alan Gould – Evercore Partners

And Jim, in the 10-K you had a 133 million of U.S. valuation allowance and 15 million in Canada. Could you be reversing that whole 150 million in one shot?

Jim Keegan

The 133, yes. But that number, it varies as we go along and with our current income in the quarter and six months (inaudible). But yes.

Alan Gould – Evercore Partners

Okay, thank you very much.

Operator

Our next question today comes from the line of David Miller with Caris & Company. Please go ahead.

David Miller – Caris & Co.

Hey guys. Congratulations on just the spectacular numbers. Following up on Alan’s question, was there any pull forward of economics on Hunger Games that you guys thought were going to land in the December quarter that landed in the quarter that you just reported? I would reckon that if the ultimate on the title continues to grow, then at least theoretically you should still have kind of a sequential bump in EBITDA and adjusted EBITDA as you get into Q3 and Q4, and you would have a continuous back end loaded year, but it sounds like you guys are sort of rhetorically backing off of that. And then I have a follow-up, thank you.

Jon Feltheimer

Yeah, I’m not sure what you mean on the backing up. I would say an easy way for everyone to understand the numbers and to add to what Jim was saying, is I would say most of the value or the upside here on these numbers in terms of at least our yearly expectations is that most of the upside here is value, not timing, if that’s what you’re referring to. Some value upside here, and so again in terms of our expectation for the year, this is a really great and positive start. Obviously when you’re talking about three-year guidance, which is the only guidance we have given, we’re not going to change that only two quarters into three years. But obviously again, this was kind of a value bump. We’re very pleased with the performance and again expect this year to continue to be very strong, and again we’re on our way in terms of the three year.

David Miller – Caris & Co.

Okay, wonderful. And then Jim, on net cash from operating activities, that came in as a net cash use, so obviously free cash flow trailed net income. I would assume that reverses itself as we get into Q3 and Q4. Was the dynamic just simply that investment in film and PD just eclipsed amortization, or were there other sort of components there that you want to share with us? Thanks.

Jim Keegan

The big component would be the fact that we shipped Hunger Games in this quarter, in our second quarter, and the cash is going to come in our third quarter. You’ll see a huge—that’s the movement.

David Miller – Caris & Co.

Wonderful, okay. Thank you very much.

Operator

The next question today comes from the line of Ben Mogil with Stifel Nicolaus. Please go ahead.

Ben Mogil – Stifel Nicolaus

Hi guys, and thanks for taking the question. So maybe you could talk a little bit about some of the feedback that you’re getting from your new output deals on sort of how Catching Fire is being viewed abroad, how the Hunger Games franchise is being viewed abroad, book sales, those kind of trends. And then as sort of a side note to that, are all these output deals existing Summit relationships that you’re sort of re-upping with, or were you able to sort of politely, if you will, upgrade some of your output partners post-Hunger Game franchise?

Jon Feltheimer

That’s a great question, Ben, and I’ll have Patrick answer it.

Patrick Wachsberger

Okay first of all regarding the Hunger Games, I have to report that the pace of readership internationally is now pretty high compared to where it was when the movie was released, the original movie was released internationally. Second of all, Jennifer Lawrence has also become extremely popular internationally and we are basically looking for an enormous growth in terms of the results of Catching Fire, which is Hunger Games Part 2.

In terms of the output deals that we’ve done, we’ve done now—we have roughly about 10 output deals internationally. Some of them are with the same distributors for both labels Lionsgate and Summit; in some other cases, we have different output deals for the Summit and Lionsgate. And I have to say that in general, we have improved the output yield especially when it comes to the back end of the most recent output deals that we’ve done.

I hope I answered your question.

Ben Mogil – Stifel Nicolaus

Yes, that’s great. Thanks, Patrick. And then shifting gears a little bit because we wouldn’t have a question period if there wasn’t one about TV Guide, you had no transactions in the quarter with them at all. Is that a change in strategy?

Jon Feltheimer

When you say a transaction, I’m not sure, Ben, what you mean. I will say that there are a number of both operational and strategic moves that we are working on at TV Guide, and I think we’ll probably be able to talk a little bit more about that in the very near future.

Ben Mogil – Stifel Nicolaus

And then lastly just for Steve, when you look at the DVD market and the packaged media market in general, are you seeing the retailers go very deep on The Hunger Games, the Twilights, that kind of product, but really still winnowing out the library stuff? If you could talk just sort of generally what you’re seeing on the retailer front.

Steve Beeks

Actually we’ve seen—especially with some of the larger retailers, we’ve seen the retailers re-embrace the packaged media business. We’re seeing growth in certain retailers. We’ve talked about our library growth, which is kind of across all media, but it’s fairly strong. Yes, they’ve embraced films like The Hunger Games. The Hunger Games did so well that actually our conversion rate is going to be about that of Breaking Dawn 1, even though it did over $100 million at the box office. So this shows the strength of that franchise, strength in the packaged media marketplace.

Ben Mogil – Stifel Nicolaus

Okay, that’s great. Thanks guys.

Operator

We’ll go to the line of Doug Creutz with Cowen & Company. Please go ahead.

Doug Creutz – Cowen & Co.

Yeah, thanks. A couple questions – first one is when I look at your theatrical revenue in the quarter, it looks like it outperformed a bit versus what your actual box office was you printed. I think when you had talked about the Summit deal, you had talked about the potential to get better exhibitor splits domestically, and I just wondered if that’s something we’re already seeing in the numbers.

Second question is you had just an absolutely enormous international revenue number in the quarter. I just wondered if you might kind of go through where that was coming from. Thanks.

Jon Feltheimer

Jim?

Jim Keegan

Well, the enormous revenue growth that you’re (inaudible), the second part that is in the quarter, it is the release of The Hunger Games on—the video is huge. But we also had, as you indicated, the significant revenues coming from our theatrical releases, but then we also had quite a bit of revenue in my international line item. It’s jumped significantly, and that’s international revenue for a lot of the other titles that are now hitting the international window. So international has gone strong, home entertainment has gone strong, and with five theatrical releases in the quarter, that grew the theatrical revenue line. We’re really firing on all cylinders with revenue coming from all sources.

Jon Feltheimer

Rob, do you want to talk about exhibitions?

Rob Friedman

Our relationships with exhibition couldn’t be stronger and we are starting to enjoy the benefit of change in rental structures.

Doug Creutz – Cowen & Co.

And actually, could I just follow up for what Jim answered? I was specifically asking about the international revenue line, kind of what drove the big number there. Where there a few films that came through that had big contributions?

Jim Keegan

The answer is yes. Hunger Games actually as it hits the different windows on the revenue cycle recognition, that hit fairly significantly in the quarter. I know the—let me give you the breakdown of the other items.

Jon Feltheimer

While Jim looks, I’d like to make an interesting point, though, about particularly the U.K., which is the way we’re structured there—again, it’s a very full-service business in terms of feature film business, and because on the Lionsgate side we actually aren’t delivering that many pictures for the U.K., three or four a year at this point, Zygi Kamasa and his team have actually built a really significant business there. I would say they’ll have probably this coming year about 20 releases, of which only three or four are going to be supplied by Lionsgate. The Summit side actually has an output deal there with E1. And so these guys have really—they’re kind of knocking the cover off the ball, and I think you can expect for the next two or three years, based upon what they already have in their pipeline, which is movies like Magic Mike, for example this year that performed very well, which is a totally independent buy by the U.K. team.

So I think you’re going to continue to see over the next two or three years some significant, frankly, revenue and we believe a margin contribution from the U.K. I don’t know, Jim, if you want to add a couple titles, but that’s kind of the overview, Ben, of what’s going on there—or Doug, I’m sorry.

Jim Keegan

And just to give you—back on the international, back up to the question we just had, in the international general revenues we had about what you’d expect when you’re expecting a significant international revenue - Step Up Revolution, Step Up4 Revolution, significant international revenues, and Breaking Dawn 1 had fairly strong international revenues.

Doug Creutz – Cowen & Co.

Okay, thanks. That’s very helpful.

Operator

And we have a question from James Marsh representing Piper Jaffray. Please go ahead.

James Marsh – Piper Jaffray

Great, thank you. First of all, I just wanted to discuss marketing for your theatrical releases. It seems like it’s been a common theme on a lot of the media conglomerates’ earnings calls so far about moving out from a live-plus-3 to maybe a week or longer because there’s some DVR measurement issues. Obviously that sets some challenges for timing your marketing messages, so I was hoping you could just broadly discuss how you kind of navigate this changing landscape to get your marketing messages to your targeted audience.

Jon Feltheimer

Yeah, this is Jon, and Rob may want to jump in as well on it because you’ve asked kind of a couple questions there. I would say number one, I saw what Les did yesterday. It’s pretty obvious really, and we’re seeing it on national as well – I mean, everyone jumps up and down, looks at the ratings the next day, and then we look at the ratings a week later and it’s 50, 60%-plus up in the key demos. Obviously that’s what’s relevant as you’re trying to build a hit show. I think there certainly will be, particularly in the media business, I think there will particularly be—if they were to go to a live-plus-seven, given the timeliness of our marketing spend, I think we’ll have to sort of look at those numbers and actually get some kind of an adjustment based upon the fact that obviously if it’s seven days and our movie’s coming out in three days, we’re not going to get the benefit of those additional viewers. But I think clearly we have to start with metrics that make the most sense and then we’ll all make the adjustments accordingly.

So I think we need to move in that direction and, again, specifically in our television business. We think that’s the only smart way to look at it.

Rob, I don’t know if you want to add more on the feature side?

Rob Friedman

No, I think you answered it absolutely correctly. Since our message is very timely, we’re going to be very aware of what our costs are as it relates to any other metrics that are being used for the ratings.

Jon Feltheimer

Yeah, the only other thing, again, that I would add is—I’ve mentioned this publicly a couple of times recently, there’s no question that we are seeing significant amounts of awareness, particularly on our frankly more targeted movies from social media, from the Internet, and I think that’s going to give us a tremendous opportunity, again, with the more targeted movies for sure to potentially reduce our overall marketing spend. I think you’re even seeing some of that in this quarter where we had five releases, but the P&A didn’t significantly impact negatively our EBITDA. I think that we’re going to be able to—certainly with the horror movies, some other movies that we see, to continue to lower our and be very creative about lowering our P&A costs. I think that trend will continue.

James Marsh – Piper Jaffray

That’s interesting. Thank you. And then I had a follow-up on the success of the Nashville show. Obviously the buzz has been great and you’ve had some success at the broadcast network level here. Could you talk just a little bit about the monetization – are there potential challenges, you think, with the drama genre, and maybe even with the country theme as you think about moving this abroad? Is that, number one, a fair characterization? And then two, can the music sales and the touring and the other things that you mentioned in your prepared remarks, can that make up for any potential shortfall abroad?

Jon Feltheimer

Okay, good. I’ll have Kevin answer that question.

Kevin Beggs

We’re really bullish on our international prospects, and we’re not presenting it or marketing it as a country show. Country, in essence, has been eclipsed by pop, so if you think about Taylor Swift and who she is, she started as a country artist and is now a crossover mainstream artist. So really, it’s in the 10:00 ABC kind of genre of prime time serials like Revenge, Once Upon a Time, Grey’s Anatomy, Private Practice. That’s how we’re marketing it internationally and the response has been really terrific, even early on.

The music – you know, it’s twofold. It’s an added ancillary benefit, and as Jon mentioned we’re at half a million downloads in only 4.5 weeks of airing, which is fantastic. We have the whole season in front of us if we get additional episodes. That will become meaningful money. It’s not making up against shortfall; it’s just added to the pot, but it really works as a marketing tool as much as anything. The music is infectious, people listen to that, they want to go back to the show, and it has those same kind of circular and viral marketing hook of something like Glee, which is why ABC was so excited about it when we brought it in. They are doing an amazing job on the marketing side.

We have a soundtrack deal which was announced with Big Machine Records, which is part of the Universal family, and will be in stores as early as December 11 on the first soundtrack to complement the digital strategy.

Jon Feltheimer

I think I would add to what Kevin just said. This year alone in the first year of the show, we expect to make our share from this about $1 million from the music. So it’s not insignificant money, and frankly if you know about the touring of some of these big shows, actually the money is extremely significant. So I think you kind of hit the nail on the head that there is significant money to be made from the ancillary sales of this on the music side, but going in actually we have a pretty good economic model to start with.

James Marsh – Piper Jaffray

Okay, excellent. Thanks very much.

Operator

We have a question from the line of Jim Goss with Barrington Research. Please go ahead.

Jim Goss – Barrington Research

Okay, thank you. Actually just one follow up on what you were just talking about with Nashville – does that also provide a platform for high profile guest stars, so that will be part of the issue? I suppose it would raise costs, but it would raise the potential ratings and that sort of thing.

Kevin Beggs

High profile guest stars usually on an ongoing series aren’t really a cost issue because it’s a bit of a stunt and you have an allowance in every budget for guest stars. But for sure, this is a great platform. We were all in Nashville last week to watch the CMAs, which broadcast on ABC, and spent a lot of time with a bunch of huge music artists, all of whom love this show, are addicted to it, and have offered to be in it. So we’re going to expand our guest star roster, especially now that we’ve established our regulars, so you’ll see bigger names coming in and out of it, and that is a priority for both us and ABC.

Jim Goss – Barrington Research

All right. A couple of questions I had – first, given the targeted demographic with Hunger Games and your general targeted demographic, I was wondering if you could talk a little bit more about what Ben started to get into, about home video and that growth in packaged media. Is there a streaming element, and as we move toward not just DVD Blu-ray but into ultraviolet and the other options, how is that playing in? Is this one of those titles that might push the mix a little more toward that direction?

Steve Beeks

Hey Jim, this is Steve. I think you’re absolutely right. I think there are certain titles that come along almost every year that can be a catalyst for certain media. I mentioned the film did great in packaged media. In VOD, it’s currently tracking to be higher in revenue than any other competitive release this year, and it will be one of the top three or four VOD of all of time. You mentioned UV, and we’ve long been a supporter of UV, and Hunger Games was our first release in that format. So far, we’ve had over 600,000 total digital copies redeemed by purchasers of the DVD or the Blu-ray, and over 150,000 of those are UV redemptions, which is second only to the final Harry Potter, which didn’t offer an iTunes redemption option.

So we can see that the UV model is working and we expect additional retailers beyond Voodoo and Flixster to announce support of UV soon. And when that happens, we foresee a fast-growing awareness of the UV locker model which is going to translate into overall increase in electronic ownership, which we think is important to our industry and it’s started to be a significant contributor to the home entertainment marketplace. Actually when you look at sell-through overall, including electronic sell-through, basically consumer purchases of filmed entertainment actually are down less than 2% for the year and we think have a chance of being flat for the year, and obviously when you consider that the electronic copies come at extraordinarily high margin, I guess all good news for the business, and The Hunger Games is a big part of that.

Jim Goss – Barrington Research

Okay, thanks. It seemed like there was getting to be a little bit of gridlock with physical copies stalling a little bit and the other not picking up yet, so that’s good to hear.

The other question is philosophically as the company evolves, and recognizing that risk mitigation is a hallmark of Lionsgate, are there any places you feel you should now step up your risk profile to achieve higher returns in areas where consistency, footprint, and where your confidence is building?

Jon Feltheimer

You know, actually I would say no because I think the track that we’ve already put ourselves on, and you can see it in the margins in this quarter, I think we’re already there. I think the amazing thing that I keep scratching my head about is the fact that when you see this Hunger Games: Catching Fire, the scope of it, the size of it, it’s a huge leap. We think it’s going to be amazing; we think it’s going to expand, certainly, looking at the two installments after, really continue to expand on a worldwide basis the audience. And the fact that we were able to go out with our output deals and with the additional sales that we’ve made and end up with a domestic exposure that’s the same as the first movie was pretty incredible.

So I think that given the franchise, the young adult franchises that we’ve got, that we’re on a track already. If you look at money into building library already, the kinds of things that Steve was talking about particularly in the digital space in terms of our ability to continue to exploit that library with higher margin digital revenue pushing, as I said in my remarks, pushing our digital on demand, if you will, customers into the sell-through space, I think we have an opportunity frankly without taking a particularly more risk. I think we have the opportunity based on what we’ve built already to continue to push into a higher margin space with a lot of efficiency. So I kind of think that’s where we are right now.

Jim Goss – Barrington Research

All right, well thanks for the explanation.

Operator

We’ll go to the line of David Bank with RBC Capital. Please go ahead.

David Bank – RBC Capital

Good morning. Thanks very much, guys. Three questions. The first is can you give us a—I’m sure it’s a pretty high number, but sort of a ballpark percentage of the $151 million of fiscal 2012 home video, what percent of it was Hunger Games? And within Hunger Games, can you give us a breakdown of Blu-ray versus standard def, revenues in units if possible? And related to that, by the way, you had said that you thought Hunger Games was likely to sort of index similar to Twilight 1, despite the higher box office. Was that on a units basis or a revenue basis?

The second question is on the balance sheet, part of our thesis and a lot of others, I think, is the discipline you talked about with respect to taking the cash flow generation from the success and paying down the debt. So can you just review for us the debt balances as of the close of the Summit transaction, and then kind of post-the Q where debt balances are today and how much of your free cash flow was used to pay off the debt.

And then the last question is no one really—I mean, it would be incredible for you to replicate the kind of success you had with Hunger Games. It seems like the franchise you’re incubating at this moment is Divergent, and how are you building that franchise? How are you incubating it? What can we watch for? How do you recreate the success you had in Hunger Games with Divergent, I guess is the question?

Thanks for taking so many.

Jon Feltheimer

All right, you’ve got us. You take the first one, Steve.

Steve Beeks

All right. David, this is Steve. I’ll take the first one regarding Hunger Games. So of the things I can share with you, of the sales of The Hunger Games, more than 40% of the sales in Hunger Games were Blu-ray, which I think is not only an indicator of the strength of that growing format but it also shows the kind of growing acceptance of the film. We found that in the theatrical box office, over 60% of the ticket sales were to females, and our research shows that in the DVD sales only 50% were female, so 50% were male which kind of shows that that format is growing. We haven’t broken out specifically the revenue of the Hunger Games for the quarter, but when I mentioned the conversion being equal to that of Breaking Dawn 1, I was talking revenue. We generally always talk revenue because in the end, that’s what’s important. But it’s even more interesting to show that not only did we convert at the same level of Breaking Dawn 1 in every media, and in some cases better when you talk about VOD, but the title also converted—the sales in packaged media for Hunger Games was essentially equal to one of the biggest films of all time and the biggest film of the year, The Avengers, which shows the strength of that franchise.

Jon Feltheimer

Okay, Jim, why don’t you take the first part, at least, of the balance sheet question.

Jim Keegan

Sure. What’s going on currently as we stand as of literally today, I’m into the $800 million facility of our 490 million. We currently have no longer anything outstanding on the term loan, so that’s paid; and the other items on the balance sheet, the 436 high yield is still there and there’s still about a face value of about $111 million of converts.

Michael Burns

Yeah, it’s Michael. I’m going to mention—Jon talked about critical mass, and we truly have achieved critical mass, so our focus is on what we have, not in the world of acquisition. So we believe we have critical mass here, and that is incredibly important for us in all of our businesses.

And as far as, David, your question specifically about the interest—

David Bank – RBC Capital

Yeah, can you specifically remind us of how much debt you’ve paid down, and have you done anything else with the free cash flow?

Michael Burns

Well, our plan is to do exactly that, is to quickly de-lever. There were two separate transactions but obviously the money on our credit facility was cheaper than the money on the Summit side, so we ended up drawing our own facility later on to pay off the Summit facility. So that $300 million that was remaining on our Summit term loan is now paid off, and we have—as Jim just mentioned, with the balance on our current credit facility on the Lionsgate side, obviously cheaper money – LIBOR plus 2.5. I think as Jon mentioned, he talked about significant interest-saving moves in the future. You’ll see us, as you know from the public filings, our high yield bonds, call it 10% money, we’ll be able to call those for the first time in about 11.5 months at 105 ¼, and if interest rates stay approximately the same, that will be about a 700 basis point savings. And when you’re talking about, call it 300 to $400 million, that adds up to a lot of money.

David Bank – RBC Capital

Great. And on Divergent?

Rob Friedman

This is Rob. Like on Twilight, Hunger Games – and by the way, our very exciting franchise Ender’s Game as well – we constantly are focused on working with our book sales around the world. Fan engagement is always a critical part of the way we market these franchises. We’re constantly in communication with our fan base and we do that on a worldwide basis on an ongoing basis. We take a very long view in the way we market these franchises.

Jon Feltheimer

Yeah, I would say what we’re indicating to our Twilight and Hunger Games fans, by putting Divergent, by talking about it early and putting it, frankly, in the original Hunger Games time slot is we are indicating the amount of support that we have for it. We’ve mentioned the book sales are ahead on the trajectory in terms of both Hunger Games and Twilight. We are sort of putting out to our fans right now, we think this is the next big franchise.

David Bank – RBC Capital

Okay. Thanks very much for taking so many questions.

Operator

We’ll go to the line of Matt Harrington with Wunderlich Securities. Please go ahead.

Matt Harrington – Wunderlich Securities

I’ve got three questions. One, one of the singularly nice aspects of Lionsgate is you don’t have too much angst over the economy. I guess there are a few things at the periphery in terms of TV Guide and technology diffusion, a little bit of packaged media. But is there anything we need to worry about with reference to (inaudible) and how it could affect Lionsgate?

Secondly, you talked about the delta in the ultimate on the first Hunger Games. I’m sure some of that is digital and such, but when you look at the franchise value of the whole series with some of the just ridiculous international box office, and Skyfall, Ice Age, et cetera, do you feel already like the ultimate profitability on that series and maybe an Ender’s Game or Divergent or whatever is already higher, just since you did the Summit deal?

And I guess thirdly, with the amount of profile that you’re getting, do you think you’re going to have a breakout on the merchandise licensing side in terms of how that could kind of gain the economics out longer term? That’s it.

Jon Feltheimer

Look, on the economy, Matthew, obviously we believe, like I think most people do, that entertainment media has been somewhat recession-proof. I do think actually the way that we do our business with less exposure in most of our businesses, and particularly sort of what Patrick’s gone off and done, I think he can speak a little bit more about this. But I would say that given some of the shakiness around the world, the fact that we went out early and with major strong obligors, went and made output deals so that we actually have tremendous visibility and predictability in terms of the majority of the costs on each of our productions, the fact that we have businesses like Arbitrage, Margin Call, Friends with Kids were actually very significant contributions coming from movies that we can put out on a platform basis where we only put 2, 3, $4 million into marketing it at first instead of 30, 40, $50 million going into a wide release. I think all of it gives us some flexibility that frankly some of the major conglomerates don’t have if the economy were to worsen.

So I guess I would say the long answer to a short question is we’re not particularly concerned about it. Patrick, I don’t know if you want to expand a little bit more on the international front.

Patrick Wachsberger

Well as Jon noticed, our output deals definitely—first of all, they are made in dollar currency so we don’t take any risk in terms of currency. They are here to lower our risk capital but also we have some very, very strong back end for movies that will perform in individual territories. We are not crossed, so if one movie works in one country and doesn’t work in the other one, we’re going to get the benefit of the (inaudible) on the country where the movie works. So I think we are in very, very good shape, and to add to what Rob said earlier, to give you an example – Divergent was—we started selling at the American free market. We did extremely well, and I think we’re probably going to cover about 80% of our projected budgets.

Jon Feltheimer

Yeah. I’m not sure if your next question was if we see all the upside already built into the international market, and I think the answer there would be no. I think we’re starting just to hit the tip of the iceberg in terms of China, and we haven’t really even scratched the surface in India. We had seen on a couple of our pictures Japan starting to come back, but we actually believe obviously absent some huge worldwide recession, Latin America obviously with our partnership with IDC, if you start comparing—I’ve said this before, the numbers we got from the first Hunger Games to what the numbers that Summit has been getting from the partnership on all the Twilights, we see some tremendous upside there, and I think Brazil and Latin America are going to be very, very robust growth territories going forward.

So again, I would say we’re not even halfway there in terms of my expectations of where the international market is going.

Rob Friedman

And on the licensing and merchandising front, obviously with our experiences on the Twilight series and The Hunger Games series, you know, moving into Divergent and our other franchises, we’re very, very active in that landscape not only from a licensing and merchandising perspective but also bringing them in as promotional partners to help lower our marketing costs as well.

Matt Harrington – Wunderlich Securities

Well at least I got your quarter directionally correct for once. Congratulations.

Jon Feltheimer

Thank you.

Operator

And we’ll go the line of Alexia Quadrani with JP Morgan. Please go ahead.

Alexia Quadrani – JP Morgan

Thank you. Just a couple of questions. First, do you have any sense of how big your film slate is going to be for fiscal ’14? I assume it probably can’t match quite this year following Summit, but I’m counting about 11 films. Is that about right?

Jon Feltheimer

We’ll probably be very close to what we are looking as a normalized 14 to 15 films on an annual basis.

Alexia Quadrani – JP Morgan

Okay. And then when you look into the December quarter, any color you can give us on what we should expect for P&A spend in the quarter?

Jim Keegan

Well, third quarter you’re going to see approximately $130 million in theatrical marketing.

Alexia Quadrani – JP Morgan

Okay. And just a quick follow-up on something you discussed a bit on the call already. The home video release of The Hunger Games moving also into the December quarter, since revenue’s obviously recognized on delivery, I would assume that the majority of the revenue fell into the September quarter. Is it just re-ups of further deliveries you’re going to see benefiting this current quarter, or are there other delivery mechanisms? I guess any more color you can give us on that to get a sense of how much more we still have to come.

Steve Beggs

Yeah Alexia, this is Steve. With regard to home entertainment, it’s primarily packaged media and digital sales. Obviously the majority of it, as I mentioned before in the previous question, fell into the quarter and we’re just going to see follow-on revenue for the fourth quarter through the holiday season.

I don’t know if that answers your question.

Alexia Quadrani – JP Morgan

No, that’s helpful. Thank you.

Operator

And our next question comes from the line of Tuna Amobi with S&P Capital. Please go ahead.

Tuna Amobi – S&P Capital

Hi, thank you very much. So I wanted to understand better your digital philosophy. You talk about you bias for sell-through, given the understandable high margins there; but perhaps you can help us understand better how you view your digital window win strategy in the context of (inaudible) providers, also given your joint venture in Netflix since I’m sure there’s a lot of moving parts that you can probably help us understand better.

And separately with regard to Tyler Perry’s television deal with OWN, I wanted to ask if perhaps that kind of limits your options on TV Guide, and I would imagine that was also somewhat of a disappointment to you, if that’s my take.

And then lastly – India, you mentioned that you’ve barely scratched the surface, and I’m wondering if that is purely to do with timing or any kind of structural issues or hurdles that you’re facing in that market. That would be helpful. China, by the way, I assume that you are also interested in pushing further there. Thanks.

Steve Beeks

Hey Tuna, this is Steve. I think part of your question regarding windows can maybe be addressed with how we look at—how we sequence in the ancillary markets, and we’ve had a tremendous amount of success playing with those windows, experimenting, trying to find the right model for different movies. The one thing we have found is that there is a different model for different movies. We’ve been a pioneer in that regard. You’ve seen us with day-and-date releases, obviously the most successful ones being Margin Call and Arbitrage, which ended up being extraordinarily profitable on a relative basis. You’ve seen us with early electronic sell-through going 30 to 40 days prior to DVD with films like What to Expect When You’re Expecting and Cabin Fever, and you are going to see us do more and more of that in the future. We just feel that you don’t try to make one size fit all. You’ve seen us do some VOD prior to DVD with films like Abduction, so it’s really about finding the right model for the right film, recognizing that we’re in partnership with exhibition partners, our retail partners, our VOD partners, trying to keep that all in balance.

Jon Feltheimer

Okay. I’m not sure what you were referring to with our Netflix partnership. We have a number of different pieces of business we’re doing with Netflix. They were early on a distribution partner for Epix. As I think all of you know, we’ve come out of our exclusivity period and immediately got Amazon to come on board. We think Netflix is a fantastic company, and again we are doing one of their first original series, Orange is the New Black. I’ve seen two episodes already. It’s really a fantastic show. Jenji Kohan, the creator of Weeds is doing it; but again as we’ve said, we are aggressively looking at various models that take advantage of the way people are watching content these days. Every single piece of business—as Steve has mentioned, every business has a new deal attached to it. We like to be flexible, we like to be able to be entrepreneurial and move quickly to take advantage of these new models, and we’re going to continue doing that as we move into, frankly, higher margin replacement revenue.

In terms of Tyler, we have a tremendous business. We just actually green-lit two new movies, including a Medea Christmas movie we think is going to really be extremely strong and profitable for us. He can’t do every single piece of business. I believe his deal at OWN is to do two series for them, and that was one of the possibilities that we had been talking about in terms of TV Guide and this, in the short run, probably prevents. But again as I mentioned earlier, we have a number of different things we’re working on with TV Guide.

And to move on to the India question, I think the way we’re looking at India, not dissimilar from China, is you’ve got 1.1 billion, 1.2 billion people of which probably half of them—in a sense, it might be the largest English-speaking country in the world right now. They love entertainment. I did help years ago to build Sony Entertainment Television in India and recognized the incredible value that we can get there, and I’m sure there’s a lot of different reasons why it hasn’t been as open to U.S. content as it could be, but I can tell you we’re concentrating on them significantly right now. Jim Packer just came back from a trip there and I think you can see in the next year some significant revenue benefits from our concentration that territory.

Tuna Amobi – S&P Capital

Great, those are very helpful answers. Just a quick housekeeping clarification on the backlog – is it fair to assume that the international component of that number has been growing, or--? Any color on that would be helpful, thank you.

Jim Keegan

This is Jim. Yeah, the international absolutely—with our theatrical releases, absolutely been (inaudible) growing component (inaudible) release; so yeah, you’re seeing that grow significantly.

Tuna Amobi – S&P Capital

Thank you.

Operator

And we have time for one final question today, and that will come from the line of David Joyce with ISI Group. Please go ahead.

David Joyce – ISI Group

Morning, thank you. If you could just provide a little bit more color on a few items such as P&A – was there any Twilight P&A in the second quarter? Also, DVD release schedule from the film releases over the summer, are they all going to be in the third quarter with cash flowing in January? That all would be helpful. Thank you.

Rob Friedman

David, it’s Rob. Breaking Dawn 2 had about $2 million worth of (inaudible) P&A in our second quarter.

Steve Beeks

To answer your question, David, on the DVD releases, the biggest release we have in the fourth quarter really is The Expendables 2, which we have in a really strong date just prior to Thanksgiving, which really worked well for us two years ago with the first Expendables. As you might expect, we’ve got Witness Protection that we just released, which is the Tyler Perry picture; and that’s really about it. We didn’t really have many more summer releases that are coming out in the fourth quarter.

David Joyce – ISI Group

Okay. And if you could clarify – Jon had mentioned 38% of the library revenue was packaged media, but in the quarter it seemed like it was about 20%, at least from the film side. What am I missing in that calculation?

Jon Feltheimer

Yeah, I was talking about the library, David.

David Joyce – ISI Group

Okay, great. Thank you.

Jon Feltheimer

Yeah. And again, guys, I’ve mentioned we’ve been building the company for 12 years and it doesn’t go beyond us that most of you have been supportive along the way, and we certainly appreciate that support and look forward to the next quarter.

Operator

And we’ll turn the conference back over to Mr. Wilkes for closing remarks.

Peter Wilkes

No closing remarks. Thank you all for joining us. Talk to you next quarter.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using the AT&T executive teleconference. You may now disconnect.

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