Marvel Enterprises Q2 2006 Earnings Conference Call Transcript (MVL)

| About: Marvel Entertainment (MVL)
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Marvel Enterprises, (MVL)
Q2 2006 Earnings Conference Call
August 7, 2006, 9:00 a.m. EST Executives March 1, 0000 ET

Analysts

Michael Savner, Banc of America Securities

Eric Handler, Lehman Brothers

Barton Crockett, J.P. Morgan

Lowell Singer, Cowen & Company

Robert Routh, Jefferies & Co

Alan Gould, Natexis Bleichroder

Gordon Hodge, Thomas Weisel Partner

Joseph Hovorka, Raymond James

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Marvel Entertainment Second Quarter Results Conference Call. During the presentation all participants will be in a listen-only mode, after which we’ll conduct a question and answer session. At that time if you have questions please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator please press the * followed by the 0. As a reminder, this conference is being recorded, Monday August 7, 2006. I would now like to turn the conference over to Peter Cuneo, Vice Chairman of Marvel Entertainment.

Peter Cuneo, Vice Chairman of Board

Thank you, operator, and welcome everyone this morning, this is Marvel’s second quarter conference call. With me today in New York to participate on the call are John Turitzin, our Chief Administration Officer; Ken West, our Chief Financial Officer; David Maisel who is Vice Chairman of Marvel Studios and Executive Vice President of Marvel Entertainment; and Matt Finick, who is Senior VP, Finance and now responsible for international licensing. We will start with comments from Ken West, our CFO, and then we’ll right to questions and answers, but first we’ll read our Safe Harbor statement.

John Turitzin, Executive VP, CAO and General Counsel

Some of the statements that the Company will make on this conference call such as statements of the Company’s plans, expectations, and financial guidance are forward-looking. Our forward-looking statements reflect the Company’s good faith beliefs, they are not guarantees of future performance and involve risks and uncertainties, and the Company’s actual results could differ materially from those discussed on this phone call. Some of these risks and uncertainties are described in today’s news announcement and the Company’s filings with the Securities and Exchange Commission, including the Company’s reports on Form 8-K, 10-K, and 10-Q. Marvel assumes no obligation to publicly update or revise any forward-looking statements.

Peter Cuneo, Vice Chairman of Board

Thank you very much and we’ll have comments from Ken West.

Kenneth West, Executive Vice President and Chief Financial Officer

Thank you, Peter, and good morning everyone. For the second quarter 2006, total net sales were $84 million, a 4% decline from $88 million in the second quarter 2005. As anticipated, sales decreased in the licensing segment but were partially offset by increased sales in the publishing segment and to a lesser extent within the toy segment. Consolidated operating margins were approximately 31% in the second quarter 2006 as compared to 49% in the second quarter 2005, primarily due to lower sales in the licensing segment which generates the highest margins and an increase in expense due to primarily higher share-based compensation and employee benefit cost.

Now for a few second quarter divisional highlights: licensing segment net sales decreased 23% to $34 million in the second quarter 2006, primarily due to lower contributions from domestic and international licensing as a result of fewer contract renewals and lower revenues from our Spiderman merchandising joint venture with Sony. These declines were partially offset by studio revenue of $6.9 million in the second quarter 2006 compared to studio revenue of $1.2 million in the year-ago period. Operating margins in the licensing division were 59% this quarter, slightly below margins at 64% in the prior-year period. The higher level of joint venture sales in the second quarter 2005 benefitted operating margins in that period as the studio share expense of those sales was recorded as a minority expense and not as an SG&A expense.

As indicated, revenues increased 21% in the publishing segment, primarily due to higher sales of the Civil War special comic book series related to IM and reintroduced sales through newsstands. Operating margins increased to 41% compared to 38% in the 2005 second quarter, primarily due to increased sales of comic books and trace paperbacks without commensurate cost increases.

Marvel’s second quarter 2006 toy segment net sales reflect toy production by Marvel as compared to toys produced primarily by our master toy licensee in 2005 leading to a year-over-year increase in toy segment revenues to $25 million in the second quarter 2006 from $23 million in the year-ago period. Toy sales in the quarter primarily reflect core classic Marvel character lines. I’ll remind everyone that last year’s second quarter toy sales benefitted from strong royalty revenue related to the launch of licensed Fantastic Four movie toy line.

Early in this quarter Marvel relocated nearly all of its molds and tooling to a new group of vendors. This transition adversely impacted the second quarter 2006 toy production and related sales and is expected to continue to impact toy production and related sales throughout the balance of 2006. Operating margins decreased to 13% for the second quarter as compared to 56% in last year’s period, predominantly the result of a shift from sales recorded in 2005 as royalty and servicing income with no corresponding cost of revenue expense to toy product sales recorded in 2006 subject to the corresponding cost of revenues.

Consolidated net income and earnings per share amounts in the second quarter 2006 were $16.3 million or $0.19 per fully diluted share, net of a penny per share charge for share-based compensation expense versus $25.8 million or $0.24 per diluted share in second quarter last year. Marvel’s second quarter net income and earnings per share benefited from a lower than anticipated tax rate primarily to the release of save tax reserves resulting from a favorable tax ruling during the second quarter of 2006.

Our effective tax rate in the second quarter 2006 was 30% as compared to 38% in the year-ago second quarter. We projected full year 2006 effective tax rate in the range of approximately 37% to 39%. I will now turn to our balance sheet and recent share repurchase activity.

During this quarter, Marvel repurchased 8.4 million shares of its common stock for an aggregate consideration of $163 million under the Company’s May 2006 and subsequent June 2006 share repurchase authorization, principally financed by borrowings under our bank credit facility as well as cash generated from operations. Given the effect of these purchases, we closed the second quarter of 2006 with cash excluding restricted cash of approximately $11 million and bank borrowings of approximately $97 million under our working capital credit facility, which requires repayment by March 2008. We currently have $50 million remaining authorizations under our 100 million shares repurchase program.

Now for our financial guidance for the balance of the year. Marvel is maintaining its sales guidance range and has revised the 2006 net income and earnings per share guidance range as highlighted in today’s press release, principally due to the previously noted reduced effective tax rate coupled with a benefit of share repurchases since May 4th when we last provided financial guidance.

We are raising the low end of our net income guidance for 2006 from $40 million to $43 million and maintaining the high end at $53 million. Full year guidance for fully diluted earnings per share principally reflecting the benefit of the increase in net income guidance and the benefit of share repurchases to date but before any benefit from future repurchases is now $0.50 to $0.60, an increase from the previous range of $0.46 to $0.57 per share. Additionally, recognizing the lumpiness in the timing of entertainment merchandized licensing, we anticipate that first half 2006 net income and earnings per share represent a clear majority of our full year guidance ranges. Our full year earnings per share guidance is based on a weighted average diluted share count of approximately $86 million.

We continue to expect cash flow from operations to exceed $120 million in 2006 as cash payments from licensing contracts executed in prior years are collected. Cash flow will benefit from the elimination of approximately $40 million in cash taxes which were to be paid in the balance of 2006 as recent option exercises by senior management have created a tax benefit that effectively creates an NOL for 2006. This benefit to free cash flow will be partially offset by meaningfully higher expected incremental development costs in the second half of 2006 related to the expansion of activities within Marvel Studios, particularly anticipated development activities related to the Marvel Feature films slate. In the first half of 2006, these capitalized expenses approximated $1.4 million and they are expected to increase to approximately $28 million by year end owing to the acceleration of pre-production activities, principally for both Iron Man and The Hulk.

Let me now turn the call back over to Peter to commence our Q&A.

Peter Cuneo, Vice Chairman

Ken, thank you very much. Operator, we’d like to start with Q&A.

Question-and-Answer Session

Operator

Thank you. Ladies and gentleman, if you would like to register your question please press the 1 followed by 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your register, please press the 1 followed by the 3. If you are using a speaker phone please lift your handset before answering your request. One moment please for our first question. And our first question comes from the line of Michael Savner from Banc of America Securities; please proceed.

Michael Savner, Banc of America Securities

Hi, good morning, thanks, just a couple of quick questions. First, Peter maybe you can give us an update on how the transfer of the toy business is going. It has some productional start prior to the end of the year and some of that could be realized in the fourth quarter. And then secondly, maybe just a little bit more color on the timing of cash receipts for the duration of the year, obviously you don’t have a big cash balance on the balance sheet, and you talked about receiving royalty or licensing from contracts previously, can you give us a little bit more color on the exact timing on your EPS guidance? It probably feels like there could have been a lot more room for upside for the duration of the year given the strong results of this quarter, so maybe this is a little bit more on the earnings for the duration of the year today versus maybe what you thought last quarter. Thanks.

Peter Cuneo, Vice Chairman of Board

Michael, why don’t we start with your questions first on cash receipts and then we’ll do earnings for the rest of the year, and Ken West will respond.

Kenneth West, Executive Vice President and Chief Financial Officer

Michael, in those few prepared remarks that I just spelled before, we’re very confident in the amount of cash collections associated with licenses that were created and executed in 2004 and 2005 as we continue to earn royalties associated with those and collect those scheduled minimum guarantees that we’re very confident in the amounts of cash flow expected for the balance of the year, and we’re looking forward to that.

Peter Cuneo, Vice Chairman of Board

And with regard to the earnings for the second half of the year, Michael, again the only thing I can really say is that our business continues to be as you know very chunky, though it is very difficult to look at trends based on one quarter and project them to other trends later in the year. Licensing tends to be chunky, publishing business is fairly smooth, but also the toy business there are less sales in the fourth quarter than in the third quarter. With regard to your question on the toy transition, this is a difficult transition for us. As you know, at the beginning of the year, we took over Toy Biz Worldwide and Hasbro does expect some minimal sales in the fourth quarter this year. So, we have been asking retailers in effect to go in a short period of time from Toy Biz Worldwide to Marvel to Hasbro, and this is proving to be a little more difficult; the retailers are being a little conservative on their purchases, which we understand. So, the toy business is progressing we think well from a development point, from a sell through point, but logistically it has been a tougher road to hold than we thought.

Michael Savner, Banc of America Securities

Peter and Ken, thanks very much.

Operator

Our next question comes from the line of Eric Handler with Lehman Brothers; please proceed.

Eric Handler, Lehman Brothers

Thank you. Just as a partial followup to the previous question, can you tell us what the cash flow from operations was in the second quarter as well as what exactly your FAS 123 expense was? Also, is there anything preventing you in your film financing covenants from adding additional leverage beyond your credit line and is that something you would consider?

Peter Cuneo, Vice Chairman of Board

Let me take the film leverage first and then we’ll go to the cash flow and the FAS 123 questions. The film as far as adding leverage to our own films slate, that is not possible at this time, and we can talk more of that on Thursday, but that is not something that isn’t basically allowed under the current agreement.

Eric Handler, Lehman Brothers

No, I mean as far as doing additional buybacks, is there anything in your covenant that would prevent you…besides your line of credit, could you do any other type of debt deal?

Peter Cuneo, Vice Chairman of Board

The answer is yes we can, we are not restricted.

Eric Handler, Lehman Brothers

Would you consider it?

Peter Cuneo, Vice Chairman of Board

Well, the board is always looking at our debt situation and the board will always consider this, but I cannot guarantee that that would happen.

Kenneth West, Executive Vice President and Chief Financial Officer

Eric, with respect to the cash flow from operations, our Form 10-Q will be filed by tomorrow morning. That information will all be effected in detail in that document, and as far as the charge of FAS 123R that amount approximated about $2 million and also there will be even detail associated to that in our 10-Q, so look for that tomorrow.

Operator

Our next question comes from the line of Barton Crockett from JP Morgan; please proceed.

Barton Crockett, J.P. Morgan

Great, I understand you want to push back questions of the cash flow to the 10-Q tomorrow, but your stock could be trading today and there is a kind of a big question on my mind in terms of where the cash came from for all the share repurchase. Can you give us any rough color about the level of cash flow from operations and/or other sources of cash like the options exercises; you’re able to buy back more shares than I thought you could without tapping into your line of credit as much as I would have thought you would have needed to? The second thing is, in terms of one element of your guidance, I guess it was the variance in the results versus what we’re looking for, the publishing segment, the sales were up 21% to 22% and your guidance has continued moderate growth, which does not seem to reconcile with 21% to 22%, I was wondering what’s behind that, is that you see a big kind of retrenchment in the back half or is it just an element of conservatism in your guidance? Thank you.

Peter Cuneo, Vice Chairman of Board

Thanks, Bart. We’ll cover the cash flow first.

Kenneth West, Executive Vice President and Chief Financial Officer

Barton, as I mentioned before, the cash flow from operations will exceed $120 million and has benefited from the option exercises that were mentioned before also, specifically Isaac Perlmutter who exercised options and continues to hold those shares. And as a result that generates net operating loss carry forwards associated with deductions from those non-qualified stock options that were exercised. That will favor from cash flow and then as I mentioned also, we’ll be investing more in the development of these movies that are coming in the future and as a result we’re still confident to generate cash flow from operations well in excess of the $120 million.

Barton Crockett, J.P. Morgan

But if I can followup, I wasn’t asking about $120 million for the year, I was asking for the quarter, if you can provide us any more details? If you can’t at this point, I guess we’ll just have to leave it there; how much from options, how much from cash flow from operations did you generate?

Peter Cuneo, Vice Chairman of Board

While Ken is looking at some data let me talk about the publishing question, we’ll come back to Ken. The publishing group is doing a tremendous job; there’s no question. The biggest reason for this is really two fold -- first we continue to do a very good job with new channels of distribution including book stores, and the second reason is Civil War. Civil War is the major event this year in the comic book business and as a result we are getting a big upward blithe from those sales which have been very successful. We can’t anticipate that that blithe from Civil War will continue throughout the full year, but that is the reason that our future projections are more moderate.

Barton Crockett, J.P. Morgan

Okay, so if it was normal, kind of mid single digitish, we should expect to return in the back half, is that what you’re saying on the top line?

Peter Cuneo, Vice Chairman of Board

Yes.

Kenneth West, Executive Vice President and Chief Financial Officer

Barton, with respect to the cash flow just a followup, you will see in the 10-Q that will be filed tomorrow that our cash flow generated from operating activities is approximately $78 million, but that does not include the cash generated from the exercise of stock options, which is what I call a financing activity. That amount aggregated about $32 million and these represent year-to-date numbers for six months ended June 30th.

Barton Crockett, J.P. Morgan

And why were the cash flow from operations have so far been above the net income?

Kenneth West, Executive Vice President and Chief Financial Officer

Again, it relates to the collection receivables that are booked in prior years. So, as those continue to earn out and pay out the scheduled guaranteed minimum you will have a swing between cash flows versus P&L. Additionally, we are collecting advances on the merchandized programs surrounding the Spiderman 3 release that will be coming out next May, so those advances continue to generate cash flows.

Barton Crockett, J.P. Morgan

Okay great, I’ll leave it there, thank you very much.

Operator

Our next question comes from the line of Lowell Singer from Cowen & Company; please proceed.

Lowell Singer, Cowen & Company

Thanks, good morning. Peter, just a couple of questions; I notice in the film slate you provide in the release this morning you’ve put a date down for Iron Man, you also suggest that Ant-Man and Captain America are anticipated for 2008 release and I’m wondering if you can sort of talk more specifically about that? Secondly, while you do have $50 million still outstanding or least you did at the end of the quarter in the buyback, I know that your guidance assumes no further repurchases during the second half, and I’m wondering if you will or won’t be in the market in the back half of the year buying stock? Thanks.

Peter Cuneo, Vice Chairman of Board

Let me take the repurchase question first and then David Maisel will talk about the film slate. We have not indicated that Captain America and Ant-Man will come out in 2008; I want to say that very quickly, but David will talk about the slate in a second. It is true that we still have $50 million left in the board’s latest repurchase authorization. We do not know if we’ll be buying additional stock; we maybe. It’s again a matter of our overall cash flows to the Company and this is clearly done on an opportunistic basis. So, we’ve got to see how the board and the management are going in the near future. So, I really can’t give you a firm answer on that Lowell. David…

David Maisel, Vice Chairman Marvel Studios, EVP

Lowell, regarding the film slate we have announced as you said a release date for Iron Man for May of 2008 and we’ve also said that we intend to release the second film in 2008, but we haven’t yet said which film that is. We are developing those other properties that you mentioned, but we have not yet announced what the second film in 2008 will be.

Lowell Singer, Cowen & Company

So, is it safe to assume it could be one of those two or potentially Hulk?

David Maisel, Vice Chairman Marvel Studios, EVP

That’s safe to assume, yes.

Lowell Singer, Cowen & Company

Okay, thank you.

Operator

Our next question comes from the line of Robert Routh, Jefferies; please proceed.

Robert Routh, Jefferies & Co

Yes, good morning guys, a couple of quick questions. First, I was wondering if you could remind us a little bit about the Hasbro toy deal. I think the way I remembered it was $100 million upfront, $70 million with Spiderman 3, and then $35 million with Spiderman 4. I would assume that was booked as deferred revenue in cash and none of it has been reflected in the revenue line yet but will be probably as we go into ’07. Second I was wondering if you could comment on the buyback question a little bit as far as the lockup period goes with respect to Ike and anybody else since that has not been extinguished yet, is it safe to assume that certain individuals are still locked up as far as their ability to sell stock. Finally, I was wondering if you could give us any kind of sense as to what you think your free cash flow for ’06 could be or will be and any kind of hint as to what you think it could be in ’07 given how the slate is.

Peter Cuneo, Vice Chairman of Board

First on the Hasbro situation, you are correct, we did receive $100 million upfront; you’re also correct that was put into deferred income that we would start earning out when they start shipping goods, which we believe will be in the fourth quarter this year, a modest amount, Rob, so you’re correct on that one. With regard to free cash flow, Ken…

Kenneth West, Executive Vice President and Chief Financial Officer

Rob, I’m not sure what other comments we can provide other than those comments that we mentioned before and looking at our historical cash flow generated from operations that I mentioned of the $78 million approximately for the first half of the year. So, we’re very confident in the cash generating ability of the Company, we’re having a lot of new advances on the Spiderman 3 program, licensing continues, and all the other engines seem to be simultaneously working perfectly.

Peter Cuneo, Vice Chairman of Board

And John Turitzin will talk about the lockups on the buyback.

John Turitzin, Executive VP, CAO and General Counsel

Mr. Perlmutter has agreed not to dispose any shares or stock until the buyback is over, which occurs when we’ve used up the $400 million for June of next year.

Robert Routh, Jefferies & Co

And just one quick followup as far as the Hasbro deal goes with toys, is that a recoupable payment that they’re making or is that non-recoupable in the event that the amount of toys sold does not exceed the payments that you’ve already received?

Kenneth West, Executive Vice President and Chief Financial Officer

Rob, if we can, the answer is that the advances that have been collected are fully recoupable but nonrefundable, if that’s the focus of your question; these are recoupable advances so they will earn out as they toy shipments are made.

Robert Routh, Jefferies & Co

Okay great, but they can’t make you give them back money in the event they don’t sell?

Kenneth West, Executive Vice President and Chief Financial Officer

Correct, nonrefundable advance.

Robert Routh, Jefferies & Co

Great, thank you very much.

Operator

Our next question comes from the line of Alan Gould from Bleichroder; please proceed.

Alan Gould, Natexis Bleichroder

Thank you, I’ve got a few questions here. One, how much was the film financing expense in the quarter — about $4 million? Two, how much was the Marvel Studio overhead and what does that show up in corporate? Three, were there any shares repurchased subsequent to June 30th, I guess we’ll see it on the 10-Q tomorrow, but I was wondering if you can give us that information?

Kenneth West, Executive Vice President and Chief Financial Officer

The film finance expenses in the second quarter were approximately in the range of $3 million to $4 million and represented some incremental overhead but mostly the interest expense on the credit facility and the amortization that perceives to generate that $525 million credit facility. To date, since June 30th, we have not acquired any additional treasury sales in the open market.

Peter Cuneo, Vice Chairman of Board

Marvel Studios overhead is not in corporate expense, it is in the licensing expense, so it’s an SG&A licensing. As far as shares purchased since June 30th, there haven’t been any.

Operator

Our next question comes from the line of Gordon Hodge; please proceed.

Gordon Hodge, Thomas Weisel Partner

Good morning, a couple of things. One, just on the amount of overages in the quarter, I don’t think there is a mention of that in the release. Then, you haven’t commented on the Walgreen’s and 711 Comic book distribution, just curious if you have any feedback from how that has gone? Lastly, if you can refresh our memory on the milestone that caused the Spiderman 3 license payment this quarter. Thanks.

Peter Cuneo, Vice Chairman of Board

Fist of all with regard to the Spiderman 3 payment, I’ve mentioned that sales are two $5 million payments in front of the movies -- first is when Sony takes an auction for the sequel, we receive $5 million, the second is another $5 million when principle photography starts, and that is the payment we were referring to in our press release. With regards to Walgreen’s, the Walgreen’s experiment did not do well. There are certain demographics that will work for comics and certain that won’t. Walgreen’s tends to be an urban based change rug demographic. There are a lot of elderly people passing through Walgreen’s, so we had a test which was not successful. We will continue, however, to test many different channels of distribution and of course as you know we have had success in 711 and in bookstores and so on.

Gordon Hodge, Thomas Weisel Partner

So the 711 has gone well?

Peter Cuneo, Vice Chairman of Board

I think it has gone okay at this point.

Gordon Hodge, Thomas Weisel Partner

Okay, terrific, then overages in the quarter.

Peter Cuneo, Vice Chairman of Board

Yeah, Matt Finick will talk to that.

Matt Finick, Senior VP, Finance

Hi, Gordon, it’s Matt. We did about $5 million of overages domestically in the second quarter.

Gordon Hodge, Thomas Weisel Partner

Terrific, thanks.

Operator

Our next question comes from the line of Joe Hovorka from Raymond James; please proceed.

Joseph Hovorka, Raymond James

A couple of questions; one is on that overage question, can you give the year ago number for overages and then the share count at the end of the quarter as opposed to the average share count? Third, there was a comment in the prepared remarks about $28 million in total will be spent on pre-production for Iron Man and Hulk, can you go into that a little bit more, I don’t know if you’ve got any budget for the movie yet that you could share with us, what that $28 million is going to spent on, so on and so forth?

Peter Cuneo, Vice Chairman of Board

Why don’t we start with the $28 million and David Maisel will talk about that.

David Maisel, Vice Chairman Marvel Studios, EVP

Yeah, the $28 million represents the development cost and pre-production activity that’s starting on our films specifically and primarily right now on Iron Man. As you know, we’ve announced the director and we have a team of people engaged on that film right now in our Los Angeles studio offices. If you recall from our film facility we bridged the financing for those costs until the official green light of the movie, at which point we get fully reimbursed.

Joseph Hovorka, Raymond James

Okay, so you will be actually funding that out of your cash flow as opposed to the $525 million?

David Maisel, Vice Chairman Marvel Studios, EVP

Until the official green light at which point we get all the money back.

Joseph Hovorka, Raymond James

Okay, and would you have a budget at this point for Iron Man that you could share or no?

David Maisel, Vice Chairman Marvel Studios, EVP

No, we’ve not disclosed any budget numbers for our films yet.

Peter Cuneo, Vice Chairman of Board

With regard to overages, I think what we can tell you is that overages have been very strong year to date and have exceeded our expectations coming into the start of the year.

Joseph Hovorka, Raymond James

Did you have the number from the second quarter 2005; if it was $5 million this quarter what was it last year?

David Maisel, Vice Chairman Marvel Studios, EVP

Joe, I’ll get back to you on that, I don’t have that in front of me.

Joseph Hovorka, Raymond James

Okay, great.

Peter Cuneo, Vice Chairman of Board

Joe, you raised the question in regards to how many issued outstanding common shares we have at June 30th, and that amount is approximately $80 million that were used. And when you compare that to diluted share count, it will also include those other potentially diluted securities, principally options.

Joseph Hovorka, Raymond James

Okay, great, thanks guys.

Operator

Our next question is a followup from the line of Bart Crockett from JP Morgan; please proceed.

Barton Crockett, J.P. Morgan

Okay, I wanted to followup on the free cash flow as I understand it. So you said, Ken, I believe you did about $79 million in cash flow from operations in the second quarter if I recall correctly?

Kenneth West, Executive Vice President and Chief Financial Officer

Barton, for the first half.

Barton Crockett, J.P. Morgan

Oh, for the first half. So, that was my question as to whether you would kind of be generating cash over the back half of not, and it sounds you believe you will be? The other question I had was the $28 million in production cost, is that included in your cash flow from operations guidance of $120 million?

Kenneth West, Executive Vice President and Chief Financial Officer

Correct, it’s included in our cash flow forecast, that’s right.

Barton Crockett, J.P. Morgan

And is that included under the context that you’d expect to be repaid by the slate this year or is that a net $28 million hit on cash flow from operations?

Kenneth West, Executive Vice President and Chief Financial Officer

The $28 million would be consumed before the end of the year and it’s intended to be reimbursed sometime early 2007 at the latest.

Barton Crockett, J.P. Morgan

Okay, so the $28 million hit some net this year and hopefully we’ll get it back next year. And then the other question I had was the borrowings under the credit facility, the nearly $100 million for the share repurchase principally and you have to repay that by 2008, I believe then that we can interpret from that you would be expect to be generating enough cash flow from operations between now and 2008 to be able to repay at least what you’ve borrowed to date, is that correct?

Kenneth West, Executive Vice President and Chief Financial Officer

That is correct.

Barton Crockett, J.P. Morgan

And I also assume it will be your expectation you would be able to continue doing share repurchase between now and 2008 that wouldn’t have just basically done everything that we kind of see by this point, right?

Kenneth West, Executive Vice President and Chief Financial Officer

Right, in the sense that when there are opportunistic buy opportunities we will continue to evaluate those opportunities of buyback stock, but we’ll continue to generate strong cash flows in our future.

Barton Crockett, J.P. Morgan

Okay, and that’s even after funding the development of these movies for bridging?

Kenneth West, Executive Vice President and Chief Financial Officer

That’s correct.

Barton Crockett, J.P. Morgan

Okay, great, thank you very much.

Operator

Mr. Cuneo, there are no further questions at this time. I’ll turn the call back to you for your closing remarks.

Peter Cuneo, Vice Chairman of Board

Well, thank you all very much for calling in, we really appreciate it and we hope to see you again a quarter from now. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thanks.

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