Lions Gate Entertainment's (LGF) CEO Jon Feltheimer on Q1 2015 Results - Earnings Call Transcript

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Lions Gate Entertainment (LGF) Q1 2015 Earnings Call August 8, 2014 9:00 AM ET

Executives

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

Jon Feltheimer - Chief Executive Officer and Non-Independent Director

Steven Beeks - Former President

James W. Barge - Chief Financial Officer and Principal Accounting Officer

Michael R. Burns - Vice Chairman

Kevin Beggs - President of Television Programming & Production

Brian Goldsmith - Co-Chief Operating Officer

Analysts

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

Benjamin E. Mogil - Stifel, Nicolaus & Company, Incorporated, Research Division

David W. Miller - Topeka Capital Markets Inc., Research Division

James M. Marsh - Piper Jaffray Companies, Research Division

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Barton E. Crockett - FBR Capital Markets & Co., Research Division

Douglas Creutz - Cowen and Company, LLC, Research Division

David Bank - RBC Capital Markets, LLC, Research Division

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

James C. Goss - Barrington Research Associates, Inc., Research Division

Marla S. Backer - Ascendiant Capital Markets LLC, Research Division

Tuna N. Amobi - S&P Capital IQ Equity Research

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Lionsgate Fiscal 2015 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Mr. Peter Wilkes. Please go ahead, sir.

Peter D. Wilkes

Good morning. Thank you for joining us for our Fiscal 2015 First Quarter Call. We'll begin with opening remarks from our CEO, Jon Feltheimer. Following his remarks, we'll open the call for your questions. Joining us on the call today are our Vice Chairman, Michael Burns; Motion Picture Group Co-Chairmen, Rob Friedman and Patrick Wachsberger; Chairman of the Lionsgate Television Group, Kevin Beggs; Steve Beeks, our Co-COO and President of the Motion Picture Group; Brian Goldsmith, our Co-COO; Jimmy Barge, 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 factors, including the risk factors set forth in Lionsgate's 10-K filed May 29. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. Jon?

Jon Feltheimer

Good morning, and thanks for joining us. We reported strong adjusted EBITDA and earnings yesterday in what is historically our lightest quarter, achieving robust margins across our business and getting our fiscal year off to a fast start. Complementing our strong financial results we made significant progress operationally and strategically in the quarter, partnering with entrepreneurial companies with complementary resources and skills to accelerate the growth of our content business.

We launched the new drama series, Manhattan, on WGN America, while at the same time creating a unique next-day window for Hulu to bring the show to an expanded audience. We collaborated with Comcast to create a film-specific app cross-promoting our newest franchise, Divergent, while helping to accelerate their growth in the EST space. We formed an alliance with consumer electronics giant, Samsung, on Mockingjay, to create an immersive fan experience that was the talk of the recent Comic-Con convention. And we announced an innovative content partnership with the Alibaba Group, one of the most prestigious consumer brands in China.

Nowhere are these partnerships more in evidence than the continued evolution of our portfolio of brands and franchises. We completed production of Mockingjay 1 and 2. And with a full complement of world-class promotional partners, including Samsung, the online debut of 3 teaser trailers that have generated over 45 million views to date, and last week's announcement that Grammy-winning multiplatinum recording star Lorde will curate the Mockingjay soundtrack and write and perform its first single, we believe that all the elements are coming together to make the November 21 global rollout of Mockingjay the biggest in the franchise's history.

During the quarter, we also continued to extend The Hunger Games franchise into new lines of business. In addition to the mobile game partnership and The Hunger Games traveling museum we announced on the last call, we're deep into conversations with prospective partners on 4 continents to explore theme park attractions and other location-based entertainment opportunities.

I'm going to talk a lot this morning about Divergent, because all the signs are pointing to it growing into another big young adult franchise like Twilight and The Hunger Games. Book sales are soaring at the rate of 500,000 to 750,000 copies a week, increasing from 17 million in March to 26 million today. And not unlike the evolution of the Harry Potter franchise, author Veronica Roth continues to build out the Divergent universe with new material. Her latest book, Four: A Divergent Collection, explores the back story of the charismatic male lead, played by Theo James, and climbed to #1 on the bestseller list last week.

Divergent's home entertainment rollout got underway with its July 22 launch on electronic sell-through platforms and is on track to become the biggest EST title in Lionsgate history, underscoring both the tremendous vitality of the franchise but also the rapid evolution of the EST space. The title also got off to an enormous first 3 days on packaged media, significantly over-indexing what would be expected of a film at its domestic box office level and running approximately 30% ahead of our expectations. With the first Insurgent trailer slated to debut with the release of Mockingjay in November, skyrocketing book sales, a stellar home entertainment launch and stars Shailene Woodley, Theo James and Ansel Elgort, generating ever-increasing online buzz, I think you can understand why we believe that the Divergent series is becoming very special.

We made significant progress in growing our other brands during the quarter as well. Together with Saban Entertainment, we hired Roberto Orci, the writer of Transformers, Star Trek and Mission: Impossible III, to shepherd the first of our planned series of live-action films based on Saban's iconic Power Rangers brand. X-Men writers Ashley Miller and Zack Stentz are currently working on the script.

Now You See Me 2 is slated to begin production this fall with most of the original cast returning. It will be filmed in the U.S., Europe and Macau, continuing to grow the worldwide box office potential of an emerging franchise whose first installment grossed over $350 million.

Gods of Egypt has wrapped principal photography in Australia and now heads into an extended postproduction period to maximize its array of visual effects. It's scheduled for release on February 12, 2016. And as we said on previous calls, we have great expectations for its potential to become one of our next big properties.

We begin shooting The Last Witch Hunter in the fall with an all-star cast, led by action megastar Vin Diesel, Academy Award winner Michael Caine, Lord of the Rings' Elijah Wood and Game of Thrones star Rose Leslie.

Completing our news on the franchise front, the action heroes of The Expendables 3 stormed the U.K. for the film's London premiere earlier this week. With one of the greatest casts of action stars ever assembled, we're very excited about its opening next weekend in over 3,000 theaters.

In addition to our franchises, our entire portfolio of films is deeper and more diverse than ever. We're currently assembling a world-class cast for Deepwater Horizon, which will be directed by J.C. Chandor, with whom we collaborated on Margin Call and All Is Lost, and who is emerging as one of the hottest directors in Hollywood. Based on the New York Times story about the final hours of the Deepwater Horizon oil rig, this is becoming one of the most highly anticipated projects in town.

You've heard us mention The Glass Castle, the New York Times bestseller about a young woman coming of age in a dysfunctional family. Currently in negotiations with a major star to be teamed with Academy Award winner Jennifer Lawrence, we're creating another prestige package built on great underlying intellectual property that we believe will have tremendous worldwide commercial and critical appeal.

As you know, we complement our mainstream wide releases with specialty titles from our Roadside Attractions, Pantelion and CodeBlack partnerships, part of our managed brands and ancillary-driven film business that contributed more than $60 million in profit last year. Our latest film with Roadside, A Most Wanted Man, stars the late Philip Seymour Hoffman in a brilliant performance that's earning rave reviews on its way to becoming one of the year's most successful indie films and a significant profit contributor for us.

We also took significant steps in the quarter to continue globalizing our business. As you may have read this morning, we moved our international sales operations to London to position us closer to our overseas markets and to benefit more fully from increasing growth opportunities worldwide. Our new international sales headquarters will be based at Lionsgate U.K., which is coming off 2 banner years in a row and is continuing to achieve the promise we envisioned when we bought its predecessor company, Redbus, in 2005.

We continue to utilize our output agreements in most other territories, remaining the most important supplier for major independent distributors around the world. In fact, during the quarter, we extended our agreement with STUDIOCANAL and the Tele München Group in Germany, Roadshow Pictures in Australia, Nordisk in Scandinavia and Belga Film in Benelux. And we established our first output agreement in Italy by partnering with the fast-growing Leone Film Group.

On the other side of the world, we recently announced an innovative new content partnership with the Alibaba Group in China, complementing a number of licensing arrangements we have already established there, including our licensing deal with Youku Tudou for Orange Is The New Black and Mad Men, and our growing array of theatrical distribution partnerships.

Our television business has also been building scale and diversity. During the quarter we replenished our pipeline with our strongest development slate ever, continued the progression of our shows toward syndication and developed new windows with our partners that will create incremental revenue and profitability.

The continued and growing success of Orange is the New Black demonstrates our ability to create exciting, quality programming for new buyers. Now in its second season on Netflix and already renewed for a third, Orange earned 12 Emmy nominations, graced the cover of Time Magazine and is the most-watched television series on Netflix around the world. It's emerging as an important new brand for Lionsgate, following in the footsteps of some of our most successful shows.

Chasing Life, the first television series from our partnership with Televisa, debuted on ABC Family in June as the #1 cable series in its time period with young women. Other new shows include The Royals, the first scripted drama for E!, currently in production in London; Partners, our 10+90 series teaming Kelsey Grammer and Martin Lawrence for FX; and Ascension, our space travel adventure thriller for SyFy.

Our television division continues to develop properties driven by big talent and great underlying IP, as evidenced by the previously announced pilot for Adult Swim, based on our cult hit Harold & Kumar; our syndicated game shows, Celebrity Name Game, hosted by late-night star Craig Ferguson; and Lifetime's order of the Earth's Children pilot from world-class producers Brian Grazer, Ron Howard and Alli Shearmur, a show based on Jean Auel's best-selling novel that we're coproducing with Fox 21.

As we've previously discussed, we expect significant growth in revenues and margins as our television business continues to build scale and our shows move into syndication. Although the first quarter is typically our lightest revenue quarter in television, our margins are strong and we expect them to grow from under 7% last year to approximately 11% for the full year.

The favorable environment for content is having a positive impact on our channel investments as well, and momentum at EPIX continues to grow. Only a few months after its rollout on Time Warner Cable, EPIX signed new carriage deals with AT&T and Bright House that increased its reach to more than 50 million households. As its profitability continues to grow, we will begin to create original programming that complements the channel's lineup of blockbuster films, original documentaries and music and comedy specials.

Our business continued its strong cash generation in the quarter as we reported nearly $160 million in free cash flow, a strong underpinning for our strategy of allocating cash towards repurchasing our stock, growing our yearly dividend and reinvesting in content. Since the recent increase in our share repurchase authorization, we have repurchased 4.7 million shares of common stock totaling $126.4 million and we still have over $100 million left in our current authorization.

In closing, we see several factors shaping our industry landscape: The continued emergence of new platforms worldwide, strong demand for premium-branded content from digital and traditional buyers alike, proliferation of new windows that accommodate changing consumption patterns and a recent trend towards industry consolidation that is accelerating.

We believe that we're well positioned to flourish in this environment as a pure play content company with few legacy constraints, a history of innovating new business models and windowing strategies, a track record of entrepreneurial partnerships around the world, a strong balance sheet, a liquid currency and a deep and growing portfolio of content.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from the line of Alan Gould with Evercore.

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

I've got 3 questions. My first one is to either Jon or Steve, the Divergent EST and home video results. One, I assume it's a little early to extrapolate on the packaged goods because we don't know what returns and such are. But can you tell anything from this data as to what the implications are for Insurgent on that? And then I'll come back to Jimmy with a couple of questions.

Steven Beeks

Alan, this is Steve. I'll take that first one. As Jon mentioned, the film was released on EST at a premium price 2 weeks ahead of DVD and Blu-ray's release, which was this week. I can tell you that EST revenue, after 2 weeks, is already equal to EST revenue of Catching Fire earlier this year. So obviously, a great sign in terms of the trajectory of this series. And the packaged media release, as you mentioned, was just this Tuesday. But after 3 days, it's gotten off to such a great start, it even surprised us. And it's tracking more like a picture that did 40% to 50% of its box office. Again, as you just mentioned, the story is going to become more clear after the weekend, but the trajectory is very, very good. And it looks like -- so far, we've shipped a lot of units, but it looks like we're going to sell through at least every unit that we've so far shipped.

Jon Feltheimer

I think Steve meant to say 40% -- tracking like a movie that did 40% to 50% more of box office.

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

And then for Jimmy, I've got 2 questions, one on taxes and one on production spending. On taxes, you're now at 20%. I never appreciated being a Canadian company as much as I am now. In this consolidation world, in a hypothetical example, if Lionsgate were to be acquired, would an acquirer be able to take advantage of this lower tax rate? And can you get it even lower than the 20%? And my second question is, are your investment in production spending this year, does it look like it will top $1 billion? Can you give us some handle where that's going to be?

James W. Barge

Sure. Let's take the effective tax rate question first. First of all, I'm focused on the sustainability of the adjusted effective tax rate. And the adjusted effective tax rate in the quarter was 15.5%, and that's down from 37% in the prior year quarter. So that really reflects the downward trend that we're able to achieve in fiscal '14 that we foreshadowed on previous calls. Absolutely, in terms of if we were to acquire U.S.-based asset, these clearly -- these savings would clearly project into any acquisition that we might make. Likewise, under inversion rules, there's opportunities that, that would similarly benefit companies that were to -- if they were to acquire Lionsgate. So it's certainly transferable. But more importantly, this mid-teen rate at levels of pretax income we're projecting is absolutely sustainable. And it reflects the effective tax planning that we've already put in place, as well as, to your reference, our status as a Canadian multinational. So what that means, as a result of this, is we don't end up with trapped cash offshore. Likewise, we can efficiently return cash to Canada where we can use it to drive shareholder value. This is also -- it reflects future cash tax savings. And I would just add, we don't expect to pay U.S. federal taxes before we're well into fiscal '17. With regards to your question about film and TV investment, we're tracking somewhere between $800 million and $900 million for the year with about a 60-40 split between film and TV, and theatrical P&A is tracking somewhere between $300 million and $350 million for the year.

Operator

And we do have a question from the line of Ben Mogil with Stifel.

Benjamin E. Mogil - Stifel, Nicolaus & Company, Incorporated, Research Division

Wanted to talk about the margins in Motion Picture because Jon have already given sort of guidance in TV, and I know you can't give guidance in Motion Picture margins because of the performance expectations. But when you look at the quarter, and I get that obviously, Catching Fire in DVD certainly helped on the margin front, maybe you can talk about how digital, not just on the mega-titles like the Catching Fire and the Divergent, maybe you can talk about digital impacting margins sort of more structurally going forward on Motion Picture Group.

Steven Beeks

Ben, this is Steve again. As we've mentioned in prior calls and as you just said, the growth of digital formats with EST and VOD both have impacted the operating margin. And if you look at the results kind of across the industry, which we do a lot and have been saying for a long time, operating margin at the studio level across the industry is actually growing. It has been growing for the last few years and is now at its highest point since 2009. So a lot of people have been focusing on revenue because of the maturation of the packaged media market. But the truth is -- the story is the operating margin, and that story is all good.

Benjamin E. Mogil - Stifel, Nicolaus & Company, Incorporated, Research Division

And then sort of second question. Just in terms of some of the sort of smaller -- the minority interest assets. You sold FEARnet in the quarter. Maybe can talk about FEARnet, the reason -- the decision to sell it. EPIX is kind of more core. And maybe talk about TV Guide, what the path there is, if you will.

Jon Feltheimer

You know what, we actually felt FEARnet -- FEARnet was a partnership with Sony and Comcast. We weren't getting the kind of growth that we like from any investment. As I look at the future, frankly, I think, for us, subscription and even potentially online channels, something more akin to what we're doing with Alibaba, we think of things that we can control. We think that's perhaps where the interesting growth is. You can see actually, we didn't take advantage of the profit that we got from the sale, we actually took it out of our adjusted EBITDA numbers, even though actually we had incurred some losses before and could easily have kept it in that number, but try to have it as -- create as much visibility there as we could. But at the end of the day, we actually believe we have a strong horror brand. And we believe, if we do it, perhaps again, doing it on our own and doing it perhaps in a different way, it might be more valuable. We're very pleased with the growth of TV Guide. We're going to have actually really good year. It will be profitable before onetime expense. The ratings are up and ad revenue is up, never as much as you want it to be, but we're extremely pleased with the partnership with CBS. They have been fantastic and we're working together. But look, I wouldn't be surprised if, down the road, CBS were to want to own the entire asset. And we think it's going to be very profitable, and FEARnet was profitable and there's nothing wrong with making money. But we do think that we have to build some brands that actually are more intrinsically Lionsgate.

Benjamin E. Mogil - Stifel, Nicolaus & Company, Incorporated, Research Division

And on the TV Guide front, is there any affiliate renewal concentrations by year?

Jon Feltheimer

Are you talking about TV Guide?

Benjamin E. Mogil - Stifel, Nicolaus & Company, Incorporated, Research Division

Yes. Any MSO affiliate concentration time, years in particular?

Jon Feltheimer

I don't want to address that right now. I mean, there's a couple coming up that we'll start working on soon, one that was just extended for a period of time. I don't think it's appropriate that I deal with that on this call.

Operator

And we do have a question from the line of David Miller with Topeka Capital Markets.

David W. Miller - Topeka Capital Markets Inc., Research Division

A couple of questions, one for Jimmy and one for Michael. Jimmy, that's just an off-the-charts free cash flow number. I think it -- correct me if I'm wrong, that's either a near record for a fiscal Q1 or a record for a fiscal Q1. Usually, in your fiscal Q1, you guys are either a net cash user or just a mild free cash flow producer. It looks sort of what was going on here was some working capital differences and just lower investment spending in film in general. But I was just wondering if there was any other components there that you're willing to call out. And then Michael, obviously, it's just been a very sort of dramatic 3 weeks with M&A and talk about M&A and theories as to who's going to buy who and so on and so forth. And I've always thought that's what more appropriate to talk about with you guys vis-à-vis M&A is film libraries. And I'm wondering if, in the last 6 months, you've seen any fluctuation in private multiples with regard to the film libraries that are out there? And at the end of the day, are there really a lot of film libraries to buy that are actually willing to be sellers at this time?

James W. Barge

Sure, David. It's a great quarter for free cash flow, as you noted. Not going to comment on the fact whether it's a record or not, but certainly, records are made to be broken. So we feel very good about that and also feel great about our ability to generate significant cash going forward. And we expect to continue converting a significant amount of our adjusted EBITDA out of free cash flow. And between our cash generation and the strength of balance sheet, this puts us in a great position to continue to drive shareholder value. And with regards to timing, just one thing to remember with regards to our business is that we've got a great deal of diversity across all of our businesses. And as we just reported, we have $1.3 billion of backlog, okay? This generally runs off and it's very high-margin business, generally runs off into our business over 18 to 24 months. In addition to that, we're generating $500 million a year in library, also with very healthy 35%-type margins. So across the board, we have a lot of things that go well beyond just whatever is the great content that we're putting in place every quarter, quarter-to-quarter, in and out throughout the year. But we have this underlying business that you -- continues to drive profits and free cash flow. So we feel very good about where we are.

Michael R. Burns

And David, it's Michael. On the library question, it's a scarce commodity at the moment. And -- but we look at everything. But remember we, as Jon mentioned, we have 16,000 titles. So unless we think a library purchases, a specific library will be complementary to what we already have, we're not going to pay up for it.

Operator

And we have a question from the line of Jay Marsh with Piper Jaffray.

James M. Marsh - Piper Jaffray Companies, Research Division

Two quick questions. First, on EPIX, obviously, you highlighted as a growing and valuable asset. But in many ways, it feels like it's a hidden asset. And just wondering if you guys have considered any ways to kind of make the value of this asset more obvious, maybe potentially a spin-off or something similar. And then I have a follow-up.

Jon Feltheimer

Yes. Look, we've got 3 partners in EPIX. I think we've talked about all the possibilities, every way that we can to expand it. But whether that was international, whether it's spinning it off, it's going to require all 3 studios to agree on that strategy. But I can tell you that I'm -- we're extremely pleased that the initial reaction from customers at AT&T has been very strong, as I had previously mentioned, extremely strong Time Warner Cable. I think this asset is growing very significantly. And I think as it does, the 3 partners are going to have to strategize about how to maximize that value.

James M. Marsh - Piper Jaffray Companies, Research Division

Okay. And then on Anger Management, obviously, you're poised to -- monetize that in a syndication market. I was wondering if you could give us some sense for how that process has been moving domestically as well as internationally?

Jon Feltheimer

Well, internationally, the sales have been very strong. It is rolling out in syndication, and our numbers are strong. We're, I think, episode 83 in production. Charlie's been great. Charlie's always ready to go out and promote the show. And again, we're very pleased with Anger Management.

Operator

And we do have a question from the line of Alexia Quadrani with JPMorgan.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Just a couple of questions. First, on the incredible success you've had with Orange Is The New Black, what -- like you told, just renewed, do you -- does that change your thinking anymore about how you might position through your products in terms of where you want to license them? I mean, maybe you can talk a bit about how the possibility can eventually compare licensing it directly to a digital player versus a more traditional TV player?

Kevin Beggs

Well, I -- this is Kevin. We go into any new platform conservatively not knowing exactly how we'll compare to more traditional buyers. And on every measure, Orange is the New Black has exceeded expectations, the international numbers, the home entertainment numbers. So we have obviously revised our estimates upward on the show. And we do believe it will compare with some of our most profitable franchises. And we're very bullish on the digital space. Not only are we thrilled about our business with Netflix, we're in business with Hulu on Deadbeat, which was recently renewed. We're in business with Amazon on a couple of pilots in development. We're deep in discussion with Yahoo on doing more series with them. And we look at this opportunity in the streaming space much the same way we looked at the cable space 10 years ago as an emerging -- an open market and for a nimble player and disciplined producer like ourselves, huge opportunity and lots of upside.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

And then just a follow-up question. I think you mentioned a book Four, coming out or came out on the Divergent series. Is there opportunities, I guess, around for these franchises, with Four being an example, to do other films that haven't been announced yet?

Jon Feltheimer

I think as I've said before, we certainly hope so.

Operator

And we do have a question from the line of Barton Crockett with FBR Capital Markets.

Barton E. Crockett - FBR Capital Markets & Co., Research Division

I was interested in this repurchase pace that you guys put up here, which is a great -- I think new part of the story. How do you feel about the sustainability of this going forward? Obviously, you have your authorization, which -- those can always be reset as time goes on. I was wondering if you could kind of frame what you see doing over time there?

Jon Feltheimer

Michael?

Michael R. Burns

As we said before, we're obviously -- I just finished Flash Boys [ph], so we're not in the business of telegraphing when we're going to be in the market and when we're not. But I will tell you that we haven't, as we said before, when we see our stock as an accretive transaction and we're going to purchase more of it, our current board authorization, we have over $100 million of capacity with that current authorization, and our sense is to continue to be opportunistic in the marketplace when we think it makes sense.

Barton E. Crockett - FBR Capital Markets & Co., Research Division

Okay, great. And then if I could switch gears a little bit on the Alibaba deal, which is very interesting, I was wondering if you could give us a bit of color. And I know there's a limit to how much want to say about it, but a little bit of color about how meaningful you think that will be for your income statement over the next couple of years, and where we might see it hit the financials.

Brian Goldsmith

This is Brian Goldsmith. As you know, digital distribution is prevalent in China and growing, and digital platforms are generating significant licensing revenues for shows like Orange Is The New Black and Mad Men. In fact, we just sold Manhattan for our highest license fee ever in that territory. So it's really a great environment to partner with a big consumer brand and technology partner to create a valuable piece of digital real estate. The Alibaba collaboration is really going to take the form of a branded streaming service that offers premium content to Chinese consumers on a subscription basis and potentially in other models. Beyond that, we really -- I can't comment on the collaboration at this time, given the quiet period ahead of Alibaba's IPO.

Operator

And we do have a question from the line of Doug Creutz with Cowen and Company.

Douglas Creutz - Cowen and Company, LLC, Research Division

You guys talked about consolidation. Obviously, you have been consolidated in the past with a fair amount of success. Can you talk a little bit about how you're thinking about opportunity in terms of both the scale and the scope of the company? And maybe talk about any content verticals that you see as being attractive but you may not have a lot of experience in yet.

James W. Barge

Jon, can I take a pass at this first?

Jon Feltheimer

Sure.

James W. Barge

I was going to say -- we really believe that we needed to get to a critical mass place. And yes, we've had a history going way back of consolidation. But the Summit transaction, we really put this over the top, our ability to renegotiate or get better settlement rates with the theater chains, on top of that, consolidating our media departments and our and media buy, our new pick-pack-and-ship deals with Cinram and Fox, and all of that -- and obviously, we've refinanced our debt and cut our interest payments in half. All of that, we believe, sort of put us in -- over the tipping point of being large enough to compete globally. And that's what's happening obviously with all these strategic relationships around the world. We don't have to do another big acquisition. We look at everything. If we think it's accretive, we'll step up. And we have looked at a couple of deals that, frankly, we were outbid for, particularly in the television space. But again, we're trying to be very cognizant of making sure that whatever we do is very accretive. And if we can't find anything more accretive than our stock, then that's what we're going to buy.

Jon Feltheimer

I'd say basically, the environment, we think, as much as -- of course, when we look at some of these potential mergers with expanded scale that we're going to keep a close eye on them, how they're going to affect our business. But we think, frankly, there's more of an opportunity than a threat. And I think that as a disruptive opportunistic company, this -- in a disruptive environment, I think that we're going to be poised to take advantage. I think Michael pointed out television. We continue to see television as a tremendous opportunity for us with the brands that Kevin has created and the relationships. But we've also proved that we're pretty good at growing things. So when there's an opportunity to expand television or other businesses in an accretive fashion, I think we're going to take advantage of that opportunity on our balance sheet, but we don't feel that we have to do anything.

Operator

And we do have a question from the line of David Bank with RBC Capital Markets.

David Bank - RBC Capital Markets, LLC, Research Division

Could you give us an update on the status of the Kevin James project? Do you kind of know where that's going to wind up at this point? And can you also give us a sense of how -- like did you factor it in the guidance as kind of a broadcast TV -- network TV show or winding up on cable or some sense of that? And then second, can you give us a sense of the numbers on Manhattan versus what you were expecting? And would you think, at this point, that there will be a season 2 renewal? And were there are any presales into digital on that one? And then lastly, the premiere date on Kelsey Grammer and Martin Lawrence, when are we looking for that?

Kevin Beggs

All right. Just starting with Kevin James, we'll be pitching that to broadcasters and cablers alike in mid-September, when Kevin wraps up the current movie that he's on. Obviously, in a perfect world, we would like any or all of these to be on broadcast, but we're not planning on broadcast per se. So I think our guidance is about finding a home in cable. On...

David Bank - RBC Capital Markets, LLC, Research Division

And you would see that as a mid-season? Is that a fall of '16 show at this point or fall of '15 show?

Kevin Beggs

Well, for broadcast, it certainly could be or even a summer launch. The -- now, television truly is year round. When you look at Under the Dome and other networks launching summer shows very successfully. So I don't -- the 10+90, we look as kind of a year-round proposition. So it is wherever it has the most strategic value at that moment for the broadcaster. And again, the cable business is entirely year-round. They like to launch in January and June traditionally, but even they are shaking things up because summer can get crowded with so many buyers out there.

Jon Feltheimer

Yes. We would see a launch to pinpoint a little bit more. Probably, this would be a fiscal '16 launch, if that's helpful.

Kevin Beggs

On Manhattan, Manhattan premiered absolutely in line with what we and WGN were expecting, that 1.8 million households on its premiere evening, which lifted to 2.2 million 3 days later, if you include the live-plus-3. We're also quite excited about the digital SVOD sale to Hulu, which was kind of an unprecedented structure with a 1-day holdback. And in its first week on Hulu, its first day and into the second week, it's trending -- it's the second most popular show, which we think is a great time. We're going to get more details on Monday. But Brian alluded to a significant digital sale in China. And all of our international clients are lining up to buy this and look at this as a tour-driven [ph] series in the vein of Mad Men and we feel the same way. I can't speculate on its renewal at this early stage. It's only been on for 2 weeks. But I -- but WGN has been very positive about the show. And since -- and dating back to Mad Men, we have probably never seen a show with this much critical acclaim across the board.

David Bank - RBC Capital Markets, LLC, Research Division

And on Kelsey Grammer and Martin Lawrence?

Kevin Beggs

So Kelsey Grammer and Martin Lawrence premiered on Monday, a few days ago. It premiered solidly. But we would obviously like to grow those numbers over the next 4 weeks. They're running 2 episodes a night. It premiered well ahead of FX's 2 original comedies that have premiered already this summer, Married and You're The Worst. And we just obviously have to wait and see week to week how it trends. We're extremely proud of the show and feel good about it. And it's nice to know that we're ahead of the other offerings that FX put forward this summer.

Operator

And we do have a question from the line of Matthew Harrigan with Wunderlich Securities.

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

I don't think this is a forboden Alibaba question. But when you look at your business, it's a really nice barbell, theatrical, very healthy splits, streaming, even very growthy [ph] . When you go to a market like China or Korea, and China in particular, you get much lower splits, kind of how does that change the equilibrium between streaming and box office in the windows and just kind of the percentage of revenues from each of those buckets for you? I mean, do you think that theatrical percentages move up a lot or somewhat over a period of time? And then secondly, in line with your horror emphasis, Hammer Films, did you look at that? I mean Christopher Lee's only 92, so it's pretty young for Dracula. He could sort of fit in as sort of the young adult Dracula. You could bring him back. That seems like something that would actually work pretty well for Lionsgate.

Jon Feltheimer

Okay. Well, getting a little granular there, Matthew. We like Hammer Films. We've done stuff with them before. We think they have actually some good assets. And it's something actually we'll keep an eye on as we grow our Lionsgate U.K. business. In terms of China, I mean, look, I'm sure Paramount would like even better split on the box office revenues, but I think they're pretty darn happy with Transformers. We think -- look, China's going to probably be, in not that many more years, the #1 film market in the world. We think it's pretty amazing what's happening there, not only in the film business, but in terms of particularly the distribution of content through online channels. And so we think there's going to be a tremendous opportunity to monetize our content in China. We've talked about China and India before as 2 places where we think we're particularly underleveraged. We're spending a lot of time right now in India, as well as China, and we think there's great opportunities. I can't speak to whether the box office split's going to change. But you do tend to believe that as you get more and more competitors, as you get more and more distributors as there are more and more theaters and they'll be higher and higher in theaters, you do believe that the splits probably will ultimately get better and the market will operate like every other market in the world.

Operator

And we do have a question from the line of Jim Goss with Barrington Research.

James C. Goss - Barrington Research Associates, Inc., Research Division

I have a couple of them. First, could you provide some color on the -- that significant favorable variance and the distribution and marketing expense line? What went into the last year versus this year, the growth, EPIX variance? And what do you expect that line item to be like in the subsequent quarters?

James W. Barge

Sure, Jim. Look, we're not going to break out kind of the P&A spend, if you will, on a film-by-film basis or try to really project the future quarters. But obviously, it's affected by the timing with regards to our big theatrical releases. So during the quarter, the primary impact of savings in P&A was related to the fact that we had 2 wide releases in the quarter versus 3 last year. So that's the most significant driver. Having said that, we also had some very valuable savings that will roll over into the full year. So we did -- and we were able to scale back some of the P&A spend on some films. So there's some real savings there as well, but it's primarily driven by timing of the releases in the period.

James C. Goss - Barrington Research Associates, Inc., Research Division

And with that last comment you made, are you suggesting, Jimmy, that it could be -- some of that favorable type variance, maybe not to that degree, could roll over into some of the subsequent quarters, aside from the issues of when films are released when P&A is taking...

James W. Barge

Those savings in particular were related to specific titles that have already rolled through the quarters, so they don't necessarily transition into the future. But as Michael alluded to earlier and as we've mentioned before, certainly, we are benefiting from savings in the broad media space as a result of the scale achieved through the Lionsgate-Summit merger.

James C. Goss - Barrington Research Associates, Inc., Research Division

Okay. And then perhaps, a broader strategic definition nature. As I listened to the earlier parts of the call, I'm wondering what is Lionsgate? What makes it what it is? And I'm wondering what core original principles remain untouchable and unchangeable and what ones might be more flexible? For example, young female target demo is very important. There are a couple of other target demos that have been important. Does that variety of target demos get expanded over time? If you look at the international distribution, that's evolving a bit too. Are there certain things that define you and certain things that may evolve?

Jon Feltheimer

That's a really good question, it's a really big question. I think the characteristics that define us are the entrepreneurial culture and the fact that we've built a really strong diversified business with scale and significant resource and pipeline that allow us to not only be entrepreneurial in focus, perhaps more focused as a principle than the other studios, not that, that's better or worse, but it's different. But that the scale and diversity actually also allows us to be opportunistic. So it's allowing us to go after something that is a 4-quadrant picture as far as we're concerned, like Power Rangers, and feel very strongly that we can do a good job with that. But in general, we're going to continue with our core principles, which is focusing our television business on high-end premium cable and paid television as our primary distribution outlet domestically and including the high-end subscription online services. We're going to continue to be focused on genres and specific affinity groups and audiences, as you've mentioned, young adult, but also through CodeBlack, our urban, our focus on the Latino growing market, which we're really excited about, had tremendous success with a couple of movies this past year in our partnership with Televisa. So we're going to continue to stay focused and a little differentiated. But again, we do believe we have the market power, the balance sheet, the portfolio of brands to be opportunistic when it makes sense.

Michael R. Burns

Jon, it's Michael. Let me just add one thing, Jim. We're going to stick to our financial discipline. That's been the mantra for the last 14 years, and it's not going to change. So if you look at our risk capital per picture, premarketing, post-output deals or foreign sales plus the subsidies, we've kept that at a very reasonable level without taking excessive risk on any one picture. And we're going to stick to that, and the same thing applies to the television business.

James C. Goss - Barrington Research Associates, Inc., Research Division

One final thing. In terms of television where some of the growth, I think, can materialize, how would you rank the attractiveness, from your point of view, of an opportunity with -- another opportunity with Netflix versus cable versus broadcast?

Jon Feltheimer

Well, I think, yes. I'd say, we believe Orange is going to be as successful financially as most of the other really high-end cable and paid television shows over the last 5 or 10 years. So we think there's a tremendous opportunity with Netflix, with Amazon, with Hulu, maybe with Yahoo, to create extremely successful and profitable shows. So again, I think Kevin would agree that the proliferation of tremendous new buyers around the world is really creating a great playing field for our company.

Operator

And we do have a question from the line of Marla Backer with Ascendiant.

Marla S. Backer - Ascendiant Capital Markets LLC, Research Division

I have a couple of questions on the Divergent franchise. So with the first film, as we usually see, there's not a tremendous licensing platform. Are you thinking that there will be more of an opportunity to license the brand as we move closer to the sequel?

Jon Feltheimer

As you've seen historically in franchise development, usually, the second film is what starts to really catapult the licensing and promotional and merchandising opportunities. And we're very, very aggressive in what we're doing now with the Insurgent -- with the Divergent franchise as it relates to that.

Marla S. Backer - Ascendiant Capital Markets LLC, Research Division

And then the last thing on Divergent is, you launched -- you originally launched Hunger Games in that same March window, but then you moved it to holiday. Would you consider a similar move for Insurgent depending upon its performance? Or are you happy with that March timeframe?

Jon Feltheimer

We love the March timeframe because right now, we still have 2 more Mockingjays in the November window, and we have 3 more in the Divergent series for the March window. So we're very, very comfortable that having 2 great young adult franchise windows in the year is great, and we're going to grow that as well.

Operator

And we do have a question from the line -- our last question comes from the line of Tuna Amobi with S&P Capital IQ.

Tuna N. Amobi - S&P Capital IQ Equity Research

Jon, I think in the -- one of your earlier answers on Alibaba, just a quick clarification, I think you were suggesting that the subscriptions, online channel model is kind of where you see the future. And I'm wondering if this deal with Alibaba is something that you might think about expanding into other markets? Or is this something that's unique and specific to China because of the unique nature of that market and perhaps the partner that you have. And if you do plan to expand that, does that kind of -- I'm wondering how your relationship with Netflix might kind of vein in that, given Netflix is international expansion. I'm just kind of trying to clarify how you see that partnership evolve and then the scope of the arrangement.

Jon Feltheimer

Yes. I think that's a good question. I do believe, as I said earlier, that these online subscription channels are a wave of the future. I believe, for us, mostly, we'll look at them on a more branded basis. I think obviously, Netflix is a huge general entertainment channel. I think they would describe it the same way. It's got something for everybody, including -- they've expanded significantly their children and family presence lately. I think that we see, if we are doing these, more specific to our brands and more focused at specific demos or genres, perhaps doing them with interesting branded partners. I think you will perhaps see us announce 1 or 2 of -- others of these in the not-so-distant future. And I don't believe in any way, shape or form this will impact our tremendous relationship with Netflix or Amazon or any of our online partners.

Tuna N. Amobi - S&P Capital IQ Equity Research

So just to clarify, it's not out of the question that in the 1 or 2 markets that you might launch it, you would be in a position to compete with Netflix? Is that something that you would try to avoid or...

Jon Feltheimer

Yes. I don't see it as competition any more than you would say that with TVGN or with EPIX, we're competing with our other distributors in terms of our original content. And I do believe you're talking about much more specific, a niche product. And as you see right now, I think -- I believe that the consumers that also subscribe to Hulu Plus, 60% of them are subscribed to Netflix as well. I think you're starting to be in an environment where people have multiple services for different reasons, and that's how I would perceive this.

Tuna N. Amobi - S&P Capital IQ Equity Research

Okay, that's helpful. And then separate and last question. Obviously, I think the numbers that you gave on the Divergent home video early trends are pretty impressive. And I'm just wondering if it's fair to say that, in EST market specifically, that you guys are over-indexing in large part because of the young adult target audience that you have? And also, I wanted to ask if you've seen this kind of correlation between EST and packaged media in the past. I mean, what's kind of driving that? Is this specific to this title? Or have you had cases in the past where both of them were kind of tracking positive for any period of time? Or is there any evidence that there could be potential cannibalization? So I'm just trying to understand overall the trends in there and how that's kind of related to the kind of films that you make.

Steven Beeks

This is Steve. I think that -- well, first of all, you're saying the EST market is growing in general. As a matter of fact, the numbers that DEG came out with last week indicate that EST market alone grew almost 40% just in the first half of the year, and it's on track to be -- to approach $1.5 billion at the consumer level for the year. So it's huge growth driven by growth everywhere, but particularly the MVPDs getting to the business, Comcast being the first and really showing that there's tremendous growth there. And we're seeing great EST revenue, not just with the young adult franchise, but in particular, the male-oriented pictures. We just -- just this last quarter, we released both Hercules and I, Frankenstein, both overperformers on EST. But again, as you indicated, I don't think it's cannibalistic at all. And we're showing with the release of Divergent this week and then 2 weeks ago with EST. EST, we saw great -- we wondered how that would impact the packaged media release, and the first indicators are that doesn't impact it really at all. And even if it is slightly cannibalistic, the margins are so much higher. So I think it's growing overall. We've always focused on genres that overperform in the ancillary markets, particularly in EST. And I think we've been one of the first movers in terms of pushing at the windows in terms of making product available to consumers in more avenues. And I think that's driving not just margin, not just revenue, but also obviously, the margin.

Jon Feltheimer

Well, thank you, all for participating. We look forward to talking with you on our next quarter.

Operator

And ladies and gentlemen, today's conference will be available for replay after 8 A.M. Pacific today through August 15. You may access the AT&T TeleConference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 332282. International participants may dial (320) 365-3844. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive TeleConference Service. You may now disconnect.

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