Starz Entertainment Corp (STRZ) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Lions Gate fiscal 2011 second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded. I would now like to turn the conference over to our host, Senior Vice President of Investor Relations and Executive Communications, Mr. Peter Wilkes. Please go ahead.

Thank you for joining us today for our second quarter analyst call. We will open with remarks from our CEO, Jon Feltheimer, after his remarks we will open the call to your Q&A, and he will be joined by Michael Burns, our Vice Chairman, Steve Beeks, President and Co-COO, and Joe Drake, President of the Motion Picture Group and Co-COO, our CFO, Jim Keegan, and our Chief Accounting Officer, Rick [Krause]. The matters discussed on this call will 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 Lions Gate Annual Report on Form 10-K filed with the SEC on June 1st 2010. Its risk factors are incorporated herein by reference. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements, that may be made to reflect any future events or circumstances. Jon?

Thank you, Peter. Thank you all for joining us. This morning I would like to discuss several trends that highlight the successful continued execution of our business plan, and then Michael, Joe, Steve, and Jim, and Rick will join me for Q&A. We had a strong quarter with adjusted EBITDA and free cash flow trending positive and putting us on track for the year. The diversification of our assets which include the highly diversified film slate, and net contributions from our television production business, Debmar-Mercury, Mandate Pictures, Lions Gate UK, and our home entertainment managed brand business, is keeping us on track for our full year EBITDA and free cash flow numbers. Let's talk specifically about our diversified slate for a few minutes.

THE EXPENDABLES our biggest box office hit ever was a negative pick-up, and we were able to mitigate risk by distributing in the US, Canada and the UK, without any of the production risk for its $70 million budget. Typically when you think about mitigating risk you think limiting the upside. So it is important to note that this film will be one of our most profitable films ever. THE LAST EXORCISM was an acquisition that cost us less than $1 million for the minimum guarantee, and grossed over $40 million at the North American box office.

FOR COLORED GIRLS was a targeted film that combines two powerful brands, and reflects Tyler Perry's ability to branch our into more ambitious commercial projects, that we believe will continue to broaden his audience and expand his reach. It opened with nearly $20 million at the domestic box office last weekend, a performance that The Wall Street Journal characterized as outstanding when you consider its R rating. The Journal also noted that it became only the third R-rated drama this year to have an opening weekend in the $20 million range.

SAW 3D reflected continued successful execution of one of our core competencies and proved once again that audiences will pay more for premium content, whether it is 3D, HD, faster, sooner, or easier to access. More than 90% of SAW's ticket sales came from its 3D screens, returning it to the box office levels of most of its predecessors. SAW 3D also highlighted the breadth of our distribution operations, with the biggest opening weekend of any SAW film in the UK, and SAW is the highest-grossing horror franchise in UK history.

When you put these four films together, they represent four different genres, four different business models, and the four pillars of our motion picture strategy. Discipline, low cost production, acquisitions and negative pick-ups that mitigate our risk, targeted focused brands, and emphasis on our core competencies. When we talk about next year's slate on the next call, you will hear about a slate of around 14 films that reflect these four key elements of our strategy, and represent total risk capital of approximately $200 million, about $14 million per film, not an overly aggressive investment of capital by any means.

In addition to a strong quarter at the box office, we are in the middle of a very productive period in terms of new franchise creations, a key element of our growth strategy. We are already in development on THE EXPENDABLES 2 and we expect to repeat a similar financial formula to what made THE EXPENDABLES so successful. We are in preproduction on Hunger Games, with multiple Academy Award nominated director, Gary Ross, who directed Seabiscuit and Pleasantville, with over 100 straight weeks on The New York Times Best Seller List, Hunger Games continues to outperform such enormously popular book franchises as the Twilight series. We set an August 19th 2011 release date for Conan 3D. Both the action genre and 3D films have been staples of our recent success, encompassing such hits as THE EXPENDABLES, KICK ASS, RAMBO, SAW, and MY BLOODY VALENTINE. We think the marriage of the two categories and a big action franchise with 3D immediacy and impact gives Conan a lot of potential, and it is a film to watch for next summer.

In addition, writer Shauna Cross is working on the script for our first film in the What to Expect franchise, due to begin production next spring for a fall 2011 or spring 2012 release. Tyler Perry, one of the most successful entertainment brands in the world today, continues to generate two films a year for us. After FOR COLORED GIRLS, the next Tyler film on our slate is Madea's Big Happy Family, based on one of his most popular stage plays. We will release Madea's Big Happy Family on Easter weekend.

We are expanding into other niches as well. In January we are exciting to be releasing the comedy From Prada To Nada, the first of our slate of English and Spanish language films, that we are doing in partnership with Televisa, supported by the three largest theatrical exhibition chains in the country. The most important element of our growth strategy right now is the continued development of our portfolio with branded channels. TV Guide Network gained significant momentum with the launch of our own hit series Weeds last month. More than 12 million viewers watched Weed's debut week marathon, generating the highest-rated week in the channel's history, during its prime time and late night time periods among adults 18 to 49.

Weed's ratings continue to hold well in its second week, reaffirming our premise for TV Guide Network, that if we provide great content, the viewers will come. With three scripts on the air, and exciting new programming in development, we believe TV Guide Network's transformation, from a channel dedicated primarily to navigation, to a general entertainment network is on its way. By the end of this year, we forecast that whether cable, satellite or digital, a total of 54% of our TV Guide Network homes will be full screen, and we are continuing to build on our position, as one of the most highly distributed channels in the U.S.

We are announcing a deal today with Sally Ann Salsano and 495 Productions, the creators of Jersey Shore, and some of the hottest reality programming in the business, to create an exciting new non-scripted docu-soap The Nail Files for TV Guide Network, chronicling the adventures of a 32-year-old entrepreneur and her celebrity clients. With Sally Ann Salsano, Weeds' Jenji Kohan, and Curb Your Enthusiasm's Larry David among others, we believe that we are creating a critical mass of creative voices for TV Guide Network, that will build its brand with audiences for years to come.

Our team just got back from the CASBAA Asia Convention in Hong Kong, and I am happy to report that our Tiger Gate platform continues to gain momentum with several new distributors. We have already launched the KIX and Thrill channels in Singapore, Hong Kong, and Indonesia, where they are among the top general entertainment and movie channels on the leading network and divisions. In Hong Kong, subscription uptake tripled in the September quarter over the previous quarter, due to a targeted marketing campaign, and Hong Kong Broadband will launch KIX and Thrill on its ITPV platform next week. We are about to close a major carriage deal in the Philippines, and major announcements in other Asian territories are expected next year. On October 1st, we did a soft launch of FearNet, adding a linear component to our successful VOD and broadband channel, and we will be announcing several distribution deals shortly.

Turning to television production, both Lions Gate Television and Debmar-Mercury continue to generate a strong pipeline of fresh content for our buyers. Mad Men ended season four on a high note as its final episode earned the highest ratings in its history. Weeds remarkably completed its 6th season with its highest ratings ever, and has been picked up for a seventh season, which will bring it to 89 total episodes, positioning it well for its syndication run on TV Guide Network. Nurse Jackie has been picked up for a third season, and will be a staple on cable television for years to come. And Blue Mountain State recently premiered to record numbers in its second season on Spike, and is delivering solid sales on DVD and digital.

We are replenishing our pipeline of programming with three pilots already in preproduction, including one that we are prepping for TNT, and two new comedies for Comedy Central. The big news on the Debmar-Mercury front is two new talk shows in the works. Debmar's talk show from Fran Drescher, the star of The Nanny, will begin testing the day after Thanksgiving. If it is successful, the show will launch on FOX in the fall of 2011 in major markets around the country, including New York, Los Angeles, Philadelphia, Phoenix, Minneapolis, and Orlando.

The Jeremy Kyle talk show which Debmar is anticipating a green light and partnership with British Network ITV, has already cleared more than 50% of major markets around the country. We are expecting additional positive announcements in the next few weeks. Jeremy Kyle has been the number one daytime show in the UK for five years, and with the right line-up of distribution partners, we will reach the critical mass needed to start us on the way to replicating that success here.

With Wendy, Fran and Jeremy, coupled with almost 500 episodes of filmed entertainment content, from Tyler Perry's House of Payne, Meet the Browns, and the new sitcom from Joe Roth and Ice Cube, Are We There Yet?, Debmar-Mercury continues to provide long-term value creation with minimal investment risk. As we said on the last call, we are not going to comment on any strategic transaction or shareholder activist issues, beyond what we have already said on the public record.

But in closing I would like to note that we have built a unique platform at Lions Gate, and we are pleased with the contributions from our diversified businesses in the quarter. We can continue to generate profitable motion picture and television production slates on a standalone basis. But we also continue to look for opportunities to leverage the unique platform we have built, by partnering with other valuable and properly-priced assets, to provide our shareholders with significant accretive synergies, incremental revenue sourcing, and significant new platform creation.

I would now like to open the call to your questions.

Thank you. (Operator Instructions). And our first question comes from James Marsh with Piper Jaffray. Please go ahead.

Good morning gentlemen. Two quick questions. I just wanted to discuss SAW 3D which saw a rebound there, obviously the box office was much better, but I also just wanted to talk about how the returns looked. I didn't know what you guys had to spend to do that in 3D, but I wanted to get a sense of what the numbers looked like compared to the incremental dollars that you brought in to the box?

We spent what we always spend on these. We didn't actually spend more, we spent $24 million in P&A. Actually you broke up, I didn't get the second half of the question?

The second part of the question related to how much you spent to convert it into 3D, or shoot it in 3D? And what were the incremental returns associated with the box?

Our production budget was about 20% higher than the past to do, to actually do the 3D. We got some great benefits. We shot it up in Canada where we always do, and we are currently expecting to track to a little bit over $40 million on the title, which will deliver a nice return for us.

And then just a quick follow-up on the TV Guide Network. Obviously the program is really coming together. What are you doing on the ad sales side? Is it too early to see the results of that better programming on the ad sales yet?

Well, our ad sales are solid. What is important to note on the ratings is that as we predicted, we are seeing a little slippage as we convert to digital, until digital is fully penetrated, we are going to be down a little in terms of our sub count. So the ratings actually have been up year-to-year for the last couple of weeks I think is actually indicative of even better performance, in terms of the content. What was also interesting to note, was that the ratings we got were significantly higher on the full screen product. That is important for us.

Because we want the audience to be coming to the channel for the programming, not for the scroll. So again I think we are heading in the right direction. We are also being very proactive, particularly with Weeds, talking to our studio friends, because it is a great comp for them, in terms of particularly Thursday night, that is why we put the show on Thursday and Sunday. We want to attract that Thursday night advertising from the studios.

Okay. Thank you very much.

And our next question will come from David Miller with Caris and Company. Please go ahead.

Hi, guys, good morning, nice print. Couple of questions, Jim Keegan if you are on, investment spending on film was light in the quarter. Usually in the second quarter it is fairly heavy. Could you just talk about any timing differences that may have occurred in the quarter, or is this just more risk mitigation, or anything you want to flesh out there, that would be great. That yielded a fairly nice free cash flow number. We had you guys being a net cash user in the second quarter. And Joe Drake, on The Next Three Days, if you, any kind of thumbnail you want to give on the economics there. Do you guys own the world? Any preselling involved? Any granularity there would be great. Thanks very much.

Dave, this is Jim. I will take one. It was just basically due to the size of the releases and timing in the quarter. But to give you the update, so I am showing that for this year we are going to spend about $334 million in total on the motion picture division. We had about $215 million through the six months, so have $119 million to go. And the television division is going to spend about $186 million. Spent about $121 million so far, with $66 million to go.

On The Next Three Days we did presell the title incredibly well. It was a big driver for us a few markets ago. We sold about $24 million or $25 million on it internationally, bringing actually the gap domestically down below our average, which is nice. It has set up nicely for us. Our plan on it, we think that there has always been a great opportunity for a dramatic action picture this time of year. We look at it in the expectations of Crash, where if we can open up to a nice low double-digit weekend, the title has a great ability to run over the holiday season here.

Great. Thank you.

And our next question will come from Doug Creutz with Cowen and Company. Please go ahead.

Hi, Greg. Hi. I just wondered if you could talk a little bit about, you had a pretty substantial equity loss in EPIX in the quarter. My understanding though is that the Netflix deal kicks in beginning in the December quarter. Should we see that loss go to something closer to breakeven in the December quarter? Thanks.

Sure we are actually functioning at, we are recording it at a lag, so I think you will see it uptick not in the December quarter, but I think it will be our March quarter where you can see the uptick. Rick? So expect the uptick coming in the March quarter.

Okay. Thank you.

And our next question will come from the line of Ben Mogil with Stifel. Please go ahead.

Hi, guys, good morning. Quick question for you, sort of following-up on Doug's question on Netflix. Forgetting about the EPIX deal, on the stuff that you have got on Netflix on your own, like Mad Men and Weeds, do you guys have any sense of how it is downloading, the sort of effective ratings if you will? Do you have any data from Netflix that you can share with us on how those shows are doing?

First of all, we don't have Mad Men on Netflix. In terms of Weeds, Weeds does very well on Netflix, in any form that it is in. Turns out Weeds does very well no matter where it plays. That is I think the only new show that we have got essentially on Netflix in terms of subscription.

Okay. And in terms of the TV sort of your TV sales to, or your motion picture sales to TV, a little bit stronger in the quarter than I think a lot of us were looking for. Do you see the sort of year-over-year strength you saw in the quarter for the rest of the year, or does it sort of taper off afterwards?

Jim?

The TV sales, yes, it was a very strong quarter, a little light next coming back strong. This was an exceptionally strong quarter. Next quarter will be out above your range, $20 million and then going to about $25 million next quarter, just to give you the potential.

Okay. I think you said earlier you expect to be around flat to slightly up from last year. Does that still hold?

You are talking TV within the motion picture? It is about flat compared to last year.

Yes. That is what I thought. That is it from me. Thanks guys.

Our next question will come from the line of Vasily Karasyov with JPMorgan. Please go ahead, sir.

Good morning. Two quick ones, one, can you please just talk about the guidance, I am sorry if I missed it? But I thought you say you maintained your guidance for the year, and I think that is about, not worse than $75 million in adjusted EBITDA. And the second question is about EPIX again. In the10-Q, you are saying that EPIX had around $9 million in revenue in the June quarter. Can you help us understand what that revenue came from? How recurring that is? Thank you.

What was the first?

Guidance. The first one was on guidance.

The first point, when Jon opened up he said that, thanked the countries just from all of our diversified businesses, we are currently on track.

The second one Jim or Rick can answer.

The revenues we have when we break out the revenue from EPIX has $8.9 million. I am sure it is just coming from subscription fees. We don't have the pure visibility, but I am sure it is subscription fees just for that quarter.

Alright. Thank you very much.

Thank you. We have time for three more questions, and our next question will come from Matthew Harrigan with Wunderlich Securities. Please go ahead.

Good morning. You are clearly not getting any credit in your stock price from what you have done at TV Guide. So it seems a little silly to move on to Tiger Gate and KIX and Thrill. But can you talk about the opportunity in Asia? It always sounds sizzly, but if you go back even to the1990s with NewsCorp and Star, it has always been tricky to monetize, and it does not sometimes equate to too much economically. Give us a little bit more detail on that. And then secondly, very broadly, you have been in the cat's bird seat for a while now, in terms of your opportunities, given what happened in the indie market, and film financings, and all of that. Can you see how you see things evolving on the margin, in terms of your position, relative to other guys who are up and coming, and maybe capital becoming a little bit more freely available to the industry, if the economic recovery continues?

I am going to go to the last question first. I think the critical part of that is you are always going to have new guys coming in who think they can produce better movies, or they can distribute and try different things. But the point really for us is we built a diversified entertainment company over the last 10 or 11 years. This quarter was a perfect example of getting contributions from so many different sources. We are looking at a market place right now, where Joe would tell you he just came back from the film market, and we had more opportunity to buy actually expensively produced movies than we have ever had before. And I really do believe we are the distributor of choice for all of those. Same thing in television, we built a brand. We built relationships as a supplier to nine or ten different networks. So again if somebody has got a project, a script, whatever it might be, frankly they are coming to us first. I think of course there is always going to be competition. But I think that we built something very, very important, that is very hard to duplicate.

Number two, Asia, the whole point of that Asia was that we did not feel that we were getting our fair share from all of the production and distribution activity. We felt we had to get closer to both the consumer and the distributors on the ground. That is exactly what is happening. While we have a not significant investment there, we are starting to create relationships on the ground, and in some territories, like India and China, that I think are going to be very, very important, in terms of building branded channel blocks, in terms of distributing our content. For an almost $2 billion company to be getting less than $1 million from each of China and India is not acceptable.

What we believe is having this experienced management team on the ground, led by William Pfieffer, who I have worked with for many years. And as I said being closer to the distributor and closer to the consumer, we believe that we will be able to create much more successful revenue and profit generation on the ground. I will say that your caution is actually very appropriate. Many years ago I produced 300 hours of drama in China, and I would say it is definitely, they make it very hard for you to get money out of the country. But I think we are doing it in a smart way.

And your last point is, TV Guide, I agree with you completely. We are not getting nearly the value for the growth that we have had. We bought TV Guide at a very, very low point, in terms of the overall economy and where channels were, the distribution pattern is following exactly as we expected it. We are renewing our deals with almost every single cable operator. In each one of the deals, we are converting to a full screen product. The full screen product is working from a ratings perspective. We believe that that channel ex-TVGuide.com, taking TVGuide.com out of it, that channel is already worth twice what we paid for it. TVGuide.com has had tremendous sub growth as well. We are 23 million uniques at this point. We are doing 75% of the search for television, in terms of the internet.

We think TVGuide.com in and of itself is a very valuable enterprise. We don't believe that we are getting the value for some of these equity investments including Break, and a number of others, but we think that we will as the economy continues to improve, as internet companies go out on the public markets and get extremely high values, and clearly with TV Guide as we continue to grow its revenue, to ad sales, and the bottom line.

Thank you.

And our next question will come from the line of Marla Backer with Hudson Square. Please go ahead.

Thank you. I have two questions. One is on the TV side and specifically about the syndication market. Trade publications have been saying that there is some strengthening of trends right now in syndication. So I am wondering are you seeing that? And does that imply the new licence potential for additional syndication deals, in a different time slot, or sequentially, for Weeds, given how strong the ratings are?

Can you repeat the first question, Marla?

Okay, sorry. Are you seeing strengthening trends in the syndication market, and if so would there be any opportunities to cut additional deals for Weeds, in addition to the TV Guide syndication deal?

So in general syndication improves when the economy improves, and when ad sales improve. We are definitely seeing a straightening. We are responding to that, particularly Debmar-Mercury in terms of these new talk shows. Obviously we see talk shows with significant annuity opportunities. We have got Wendy Williams right now doing about 1.1. At a 1.3, it becomes a very successful long-term annuity. That is what we are working on. We are trying to get better and better guests, but clearly the idea of launching a Fran Drescher, Jeremy Kyle, is that we see great upside, there are not a lot of whole lot of independent companies doing that right now. We see great upside, great long-term value being created in those genres.

And in terms of Weeds, no, we kind of went the other way with Weeds. We decided not to go into syndication, and to give TV Guide all of the value, all of the benefit from that driving viewership. We got a nice price from them. And the only other place that we play it is on Netflix. By the way, I do stand corrected, that I wasn't thinking of Canada, but we do have Mad Men on Netflix in Canada. However, it is very, very early. Netflix just launched in Canada, so it is way too early to note the efficiency of that there.

We should have figured that you were an early adopter.

Okay, one other, two other housekeeping questions. I just want to make sure I understood what you said about EXPENDABLES 2. The economics will be similar to EXPENDABLES the first one, which you said was $70 million negative, but you got it at a substantially lower cost. The economics be similar on the sequel?

Yes. The point there is, it will be again a negative pick-up. We are not paying for the production. Probably my guess is our percentage of the gap against the total budget will be very similar.

And then last, Hunger Games, that looks great. The books are great. Do you have the right to all three titles?

Yes, we do.

Okay. Thank you.

And our final question will come from David Joyce with Miller Tabak and Company. Please go ahead.

Thank you. I was just wondering if you can provide some color on the home entertainment market. The theatrical side looked fine, but the TV side was light versus our estimate was down 46%. I was wondering what sort of planning factors came into play there, and what we can expect for that going forward?

This is Steve. I think the downturn in what you say is a decrease in television on DVD purely is a matter of timing. It has to do with when the series are releasing, because both Weeds, Mad Men and Blue Mountain State, are all still doing pretty well in packaged media, and we are looking forward to our Q4 we will be releasing, we will start releasing some of the TV series again.

Okay, thank you.

Thank you, everybody. We look forward to our next call.

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