Starz Entertainment Corp (STRZ) 2013 Q2 法說會逐字稿

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the Lionsgate fiscal 2013 second-quarter earnings call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time.

(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, Investor Relations, Mr. Peter Wilkes. Please go ahead.

Good morning. Thank you for joining us today. Jon Feltheimer, our CEO, will begin with remarks and then we will open the call to questions. Joining the call are Michael Burns, our Vice Chairman; Rob Friedman and Patrick Wachsberger, Co-Chairs of the Motion Picture Group; Steve Beeks, Co-COO and President of the Motion Picture Group; Kevin Beggs, President of our Television Group; Jim Keegan, our CFO; and Rick Prell, our Chief Accounting Officer. The matters discussed on this call include forward-looking statements, including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties.

Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the risk factors as set forth in Lionsgate's Annual Report on Form 10-K filed with the SEC on May 30, 2012, which risk factors are incorporated by reference. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. Jon?

Good morning, everyone, and thank you all for joining us. As I mentioned in our earnings release, this quarter's solid performance was driven by the core values on which we have been building our Company over the past 12 years -- remaining agnostic while delivering content to the growing spectrum of digital and traditional buyers; innovating new models in our Television business designed for multi-platform environment; growing our library organically and through third-party acquisitions; producing film and TV content differentiated for passionate, targeted audiences; and continuing to aggregate a business where the sum is greater than its parts.

Here are some of the quarter's highlights. We've continue building out our international film distribution network, as part of our ongoing commitment to lower our risk and extend our visibility and predictability while maintaining our upside. With the recent announcements of deals in Germany, France, Spain, Australia, Latin America and Russia, among others, we've established partnerships in major territories, representing approximately 80% of the world outside of China and India.

These output arrangements and partnerships will cover more than the majority of the costs of our Lionsgate and Summit Feature Film Production slates, significantly reducing our capital at risk on each film we produce. To give you a significant and recent example, while the scope and therefore the budget of Hunger Games - Catching Fire is substantially larger than the first Hunger Games film, thanks to these output deals and the tremendous sales achieved by our International team led by Patrick Wachsberger, we actually have the same domestic exposure on Catching Fire than we had on the first movie.

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

We are also pleased with the ratings for the first five episodes of Nashville. In today's time-shifted environment, it is particularly encouraging that Nashville's live plus 3 numbers continue to average more than 50% higher than the ratings for its live plus same day airing, make it one of the most time-shifted shows on television. With eight songs debuting high on iTunes charts this month and generating over 0.5 million downloads already, Nashville is that rare show that has the opportunity to expand its marketing reach and revenue base through touring, soundtracks, and merchandising. We believe that the show will continue to grow and become an important asset for both Lionsgate and ABC.

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

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

Speaking of Twilight, if you're in downtown LA this weekend and you want to have some fun, visit the Twilight fan camp at Nokia Plaza for movie screenings, a fan concert presented by Time Warner Cable, or a fan breakfast, as 1000's of fans begin their preparation for next week's opening of Breaking Dawn - Part 2. Advance ticket sales for this fantastic installment are running ahead of Breaking Dawn - Part 1 and pre-release tracking is strong. We are looking to a big opening weekend that will take our slate past the $1 billion at the domestic box office this year.

On the channel front, Epix signed a new carriage deal with Amazon during the quarter as its advanced technology and young subscriber base continues to be a magnet for digital platforms. Digital consumption of our content has become one of the fastest-growing segments of our business. We entered the digital space early and we've assembled a dedicated working group with the institutional knowledge to negotiate complex deals involving our films, TV shows and library content on digital platforms in dozens of territories around the world. With 600 million smartphones and 100 million tablets sold this year alone, demand for content continues to grow and the spectrum of digital buyers is expanding worldwide.

We are aggressively selling our content on iTunes platforms in Europe, Asia, and Latin America; on Xbox in Europe, Mexico and Australia; through Netflix in Latin America and the UK; and Vivendi in Germany, just to name a few. This digital growth is reflected in our numbers today, as well is in the composition of our library sales. Just five years ago, 70% of library revenues were generated by packaged media. This year, our library revenues should be up approximately 20% with only 38% being generated by packaged media as digital becomes an increasingly important and high-margin component. Lionsgate already has tens of millions of digital customers worldwide; however, as we continue to convert digital rental customers to sell-through, our focus on online digital initiatives will generate even greater rewards in the future.

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

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

Now, I'd like to open the call to your questions.

(Operator Instructions)

Alan Gould, Evercore Partners.

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

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

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

Okay.

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

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

Steve?

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

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

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

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

The $133 million, yes, but that number -- it varies as we go along and we are (multiple speakers) income in the quarter and six-months out lower that, but yes.

David Miller, Caris & Company.

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

Yes, I'm not sure what you mean on the back half. I would say it's an easy way for everyone to understand the numbers and to add what Jim was saying is, I would say most of the value or, I would say, upside here on these numbers in terms of, at least our yearly expectations, is that most of the upside here is value, not timing, if that is what you are referring to. Some value upside here and so, again, in terms of our expectation for the year, this is a really great and positive start.

Obviously, when you're talking about three-year guidance, which is the only guidance we've given, we are not going to change that only two quarters into three years. But obviously, again, this was a value bump. We are very pleased with the performance and again expect this year to continue to be very strong and again, we are on our way in terms of the three years.

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

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

Ben Mogil, Stifel Nicolaus.

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

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

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

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

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

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

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

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

Doug Creutz, Cowen and Company.

Couple of questions. First one is, when I look at your theatrical revenue in the quarter, it looks like it outperformed a bit versus what your actual box office was you printed. I think when you had talked about the Summit deal you had talked about the potential to get better exhibitor splits domestically. I just wondered if that is something we're already seeing in the numbers? Second question is, you had just an absolutely enormous international revenue number in the quarter. I just wondered if you might go through where that was coming from? Thanks.

Jim?

Well I guess I'll talk. The enormous revenue growth that you're [basically] -- is the second part of the quarter. It is the release of the Hunger Games on the video was huge but we also have the, as you indicated, the significant revenues coming from our theatrical releases but then we also had quite a bit of revenue in our international line item. It's jumped significantly and that's international revenue for a lot of the other titles that are now hitting the international window. So, international has gone strong, home entertainment has gone strong, and with five theatrical releases in the quarter, that grew the theatrical line so -- firing on all cylinders is revenue coming from all sources.

Rob, do want to talk about exhibition?

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

Actually, can I just follow-up for what Jim answered. I was specifically asking about the international revenue line. What drove the big number there? Were there are a few films that came through that had big contributions?

Well, the answer is yes. Hunger Games has actually hit the different windows on a revenue cycle recognition. That hit fairly significantly in the quarter. I know the -- I'll give you the breakdown of the other items.

While Jim looks, I'd like to make an interesting point though about, particularly the UK, which is the way we are structured there. Again, it's a very full service business in terms of feature film business and because on the Lionsgate side, we actually aren't delivering that many pictures for the UK, three or four a year at this point, Zygi Kamasa and his team have actually built a really significant business there. I would say, they'll probably have this coming year about 20 releases, of which only three or four are going to be supplied by Lionsgate.

The Summit side actually has an output deal there with E1, so these guys have really -- they are knocking the cover off the ball. I think you can expect for the next two or three years based upon what they already have in their pipeline, which is movies like Magic Mike, for example, this year that performed very well, which is a totally independent buy by the UK team. So I think you're going to continue to see over the next two or three years some significant, frankly, revenue and we believe a margin contribution from the UK. I don't know, if Jim, you want to add a couple of titles but that is the overview, Ben, of what is going on there -- or Doug, I'm sorry.

And just to give you, on back to the international line, back to the question -- we just had in the international general revenues we had about What to Expect When You're Expecting has significant international revenues, Step Up Revolution, Step Up 4 -- Revolution had significant international revenues and Breaking Dawn 1 had fairly strong international revenues.

James Marsh, Piper Jaffray.

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

Yes, this is Jon and Rob may want to jump in as well on it because you've asked a couple of questions there. I would say, number one, I saw what [less] did yesterday. It is pretty obvious, really, and we're seeing it on Nashville as well. I mean, everyone's jumped up and down, looks at the ratings the next day and then we look at the ratings a week later and it's 50%, 60%-plus a percent up in the key demos. Obviously, that is what relevant as you're trying to build a hit show. I think there certainly will be, particularly in the media business, I think there will particularly be, if they were to go to a live plus seven given the timeliness of our marketing spend.

I think we will have to look at those numbers and actually, in a sense, get some kind of an adjustment based upon the fact that obviously, if it's seven days and our movie is coming out in three days, we're not going to get the benefit of those additional viewers. But I think, clearly, we have to start with metrics that make the most sense and then we'll all make the adjustments accordingly. So, I think we need to move in that direction and again, specifically in our television business, we think that's the only smart way to look at it. Rob, I don't know if you want to add more on the feature side.

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

Yes, the only other thing, again, that I would add is, I've mentioned this publicly a couple of times recently, there is no question that we are seeing significant amounts of awareness, particularly on our, frankly, more targeted movies from social media, from the Internet. And I think that is going to give us a tremendous opportunity, again with the more targeted movies, for sure, to potentially reduce our overall marketing spend.

I think you're even seeing some of that in this quarter where we had five releases, but the P&A didn't significantly impact negatively our EBITDA. I think that we're going to be able to, certainly with the horror movies, some other movies that we see, to continue to lower our, and be very creative about lowering our P&A costs. I think that trend will continue.

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

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

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

The music is -- it is twofold. It's an added ancillary benefit and as Jon mentioned, we are at 0.5 million downloads in only 4.5 weeks of airing, which is fantastic and we have the whole season in front of us if we get additional episodes. That will become meaningful money. It is not making up, again, shortfall; it is just added to the pot. But it really works as a marketing tool as much as anything. The music is infectious. People listen to that. They want to go back to the show and it has the same circular and viral marketing hook, as something like Glee, which is why ABC was so excited about it when we brought it in. And they are doing an amazing job on the marketing side. We have a soundtrack deal which was announced with Big Machine Records, which is part of the Universal family and it will be in stores as early as December 11, on the first soundtrack to complement the digital strategy.

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

Jim Goss, Barrington Research.

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

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

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

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

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

Okay, thank you. Because it seemed like there was getting to be a little bit of a gridlock with physical copies stalling a little bit and the other not picking up yet. So that's good to hear. The other question is that philosophically, as the Company evolves and recognizing that risk mitigation is a hallmark of Lionsgate, are there any places you feel you should now step up your risk profile to achieve higher returns in areas where consistency, footprint, and/or your confidence is building?

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

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

David Bank, RBC Capital Markets.

Three questions. The first is, can you give us a -- I'm sure it's pretty close, it's a pretty high number but a ballpark percentage of the $151 million of fiscal 2012 home video? What percent of it was Hunger Games and within Hunger Games, can you give us a breakdown of Blu-ray versus standard def revenues in units, if possible? The second question is, and related to that, by the way, you had said that you thought Hunger Games was likely to index similarly to Twilight 1 despite the higher box office. Was that on a units basis or a revenue basis?

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

And the last question is it's -- no one really, I mean it would be incredible for you to replicate the success you had with Hunger Games. It seems like the franchise you are incubating at this moment is Divergent. How are you building that franchise? How are you incubating it? What can we watch for? How do you re-create the success you had in Hunger Games with Divergent, I guess is the question. Thanks for taking so many.

All right, you've got it. Steve, you take the first one.

Hi David. This is Steve. I'll take the first one regarding Hunger Games. Of the things I can share with you, more than 40% of the sales of Hunger Games were Blu-ray, which I think is not only an indicator of the strength of that growing format, but it's also shows the growing acceptance of the films. We found that in the theatrical box office, over 60% of the ticket sales were to females and our research shows that with the DVD sales, only 50% were females. So 50% were male which shows that, that format is growing.

We haven't broken out specifically the revenue of the Hunger Games for the quarter, but when I mentioned the conversion being equal to that of Breaking Dawn 1, I was talking revenue. We generally always talk revenue because in the end, that's what important. But it's even more interesting to show that not only do we convert at the same level as Breaking Dawn 1, in every media and in some cases better, when you talk about VOD. But the title also converted -- the sales in packaged media for the Hunger Games was essentially equal to one of the biggest films of all-time, the biggest film of the year, The Avengers, which shows the strength of that franchise.

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

Sure, what is going on with -- currently as we stand as of literally today, I'm in to the $800 million facility, about $490 million. We currently have no longer anything outstanding on the term loan. So that is paid and the other items on the balance sheet, the $436 million high yield is still there and there's still about face value about $111 million of some converts.

Yes, it's Michael. I'm going to mention, Jon talked about critical mass and we truly have achieved critical mass. So our focus on -- is what we have, not in the world of acquisitions. So, we believe we have critical mass here and that is incredibly important for us in all of our businesses. And as far as the -- David, your question is specifically about the interest?

Can you specifically remind us of how much debt you've paid down and have you done anything else with the free cash flow?

Well, here's -- our plan is to do exactly that, is to take -- to quickly deliver. We -- there were two separate transactions, but obviously, the money on our credit facility was cheaper than the money on the Summit side. So, we ended up now drawing our own facility later on to pay out the Summit facility. So that $300 million that was remaining on our Summit term loan is now paid off. We have, as Jim just mentioned with the balance on our current credit facility on the Lionsgate side, obviously, cheaper money, LIBOR plus 2.5%.

I think as Jon mentioned, he talked about significant interest saving moves in the future. You will see us, as you know, from the public filings, our high yield bonds, I'll call it 10% money, we will be able to call those for the first time in about 11.5 months at 105.25 and that is, if interest rates stay approximately the same, that will be about a 700 basis point savings. When you're talking about, call it, $300 million or $400 million, that adds up to a lot of money.

Great and on Divergent?

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

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

Matthew Harrigan, Wunderlich Securities.

I have three questions. One, you're -- one of those singularly nice aspects of Lionsgate is you don't have too much angst over the economy. I guess there are a few things at the periphery in terms of the TV Guide maybe technology diffusion, a little bit of packaged media. But is there anything we need to worry about with reference to a wide recession, how it could affect Lionsgate?

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

I guess thirdly, with the amount of profile that you are getting, do you think you're going to have a break-out on the merchandise licensing side in terms of how that can gain the economics out longer term? That's it.

Look, on the economy, Matthew, obviously we believe, like I think most people do, that entertainment media has been somewhat recession-proof. I do think, actually the way that we do our business with less exposure in most of our businesses and particularly, what Patrick has gone off and done, the -- I think he can speak a little bit more about this. But I would say that given some of the shakiness around the world, the fact that we went out early with major strong obligors, went and made output deals so that we actually have tremendous visibility and predictability.

In terms of the majority of the cost upon each of our productions, the fact that we have businesses like Arbitrage, Margin Call, Friends With Kids, were actually very significant contributions coming from movies that we can put out on a platform basis where we only put $2 million, $3 million, $4 million into marketing at first, instead of $30 million, $40 million, $50 million going into a wide release. I think all of it gives us some flexibility, it's, frankly, some of the major conglomerates don't have if the economy were to worsen. So I guess I would say the long answer to a short question is we are not particularly concerned about it. Patrick, I don't know if you want to expand a little bit more on the international front.

Well, as Jon noted, our output deals, definitely pleased. First of all, they are made in dollar currency, so we don't take any risks in terms of currency. They are here to lower risk capital but also we have some very, very strong back-ends for movies that will perform in individual territories. We are not crossed. So if one movie works in one country and doesn't work in the other one, we are going to get the benefits of the overages on the country where the movie works. So, I think we are in very, very good shape and to add to what Rob said earlier, to give you an example, Divergent was, which we started selling at the [American] markets, we did extremely well and I think we've probably going to cover about 80% of our projected budgets.

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

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

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

(laughter) Thank you.

Alexia Quadrani, JPMorgan.

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

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

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

Well, in our third quarter, you're going to see about $130 million in theatrical marketing.

Okay, and then just a quick follow-up on something you've discussed a bit on the call are ready. The home video release of the Hunger Games moving into also into the December quarter. Since revenue is up so you recognize on delivery I would assume that the majority of the revenue fell into the September quarter. I guess, how -- is it just re-ups of further deliveries you're going to see benefiting this current quarter or other delivery mechanisms? I guess any more color you can give us on that to give us a sense of how much more we still have to come.

Yes, Alexia, this is Steve. With regard to home entertainment which is primarily packaged media and digital sales, obviously the majority of, as I mentioned before in the previous question, the majority of it fell into the quarter. We are just going to see follow on revenue for the fourth quarter through the holiday season. I don't know if that answers your question.

No, that's helpful. Thank you.

Tuna Amobi, S&P Capital.

So I wanted to understand better your digital philosophy talking about your bias for sell-through given the understandable high margins there. But perhaps you can help us understand better how you view your digital [windows] strategy in the context of [Epix and VOD] providers also given your joint venture in Netflix I'm sure there's a lot of moving parts that you can probably help us understand better.

And separately, with regards to Tyler Perry's television deal with OWN, I wanted to ask if perhaps that limits your options on TV Guide. I would imagine that was also somewhat of a disappointment to you, if that's my take. And then lastly, India, you mentioned that you barely scratched the surface. I'm wondering if that is purely to do with timing or any structural issues or hurdles that you are facing in that market, that would be helpful. China, by the way, I assume that you are also interested in pushing further there. Thanks.

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

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

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

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

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

Well, this is Jim. Yes, the international, absolutely, with our theatrical releases, absolutely international has been a growing component as it had the releases. Yes, so I think you're seeing that grow significantly.

We have time for one final question. David Joyce, ISI Group.

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

David, there was about [candidly] Breaking Dawn 2 to had about $2 million of [marked] theatrical P&A in our second quarter.

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

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

Yes, I was talking about the library, David.

Okay, great. Thank you.

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

We'll turn the conference back over to Mr. Wilkes for closing remarks.

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

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