Starz Entertainment Corp (STRZ) 2013 Q3 法說會逐字稿

Welcome to the Lions Gate fiscal 2013 third-quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. 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, SVP, Investor Relations, Peter Wilkes. Please go ahead.

Good morning. Thank you for joining us for our Q3 analyst call. Jon Feltheimer, our CEO, will have opening remarks. Following his remarks, we will open the call to Q&A. Joining him on the call this morning are Michael Burns, our Vice Chairman; Rob Friedman, Co-Chair of our Motion Picture Group; Steve Beeks, Co-COO and President of our 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 Lions Gate's Annual Report on Form 10-K filed with the SEC on May 30, 2012. 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. Thank you all for joining us. We had another strong quarter operationally and financially, and all of our businesses are meeting or exceeding expectations. I'd like to focus my remarks today on four areas. Continued expansion of our existing franchises and creation of new ones, momentum in our feature film business, our progress in building out our international business, and the ongoing diversification of our Television business. I'd also like to briefly recap the integration synergies we've achieved in the year since our acquisition of Summit.

The Hunger Games franchise continues to build momentum. Catching Fire was featured on the cover of Entertainment Weekly's 2013 preview issue and has been hailed by numerous media outlets as the most highly anticipated film of the year. We are already lining up major promotional partners in cosmetics, fast food, consumer electronics, and technology, as we expand the franchise's reach and will be rolling out a series of announcements in the coming months.

Divergent begins production in Chicago in April with a great cast rapidly taking shape. Directed by Neil Burger, the film stars Shailene Woodley of the Descendants and Academy Award winner Kate Winslet with more announcements to follow. Book sales of the Divergent franchise are approaching the 3 million mark and continue to compare favorably to the Hunger Games and Twilight franchises at a similar point in their trajectory. Divergent is slated for release on March 21, 2014 in the slot where we launched the Hunger Games. The rest of our slate is starting off the year where it left off 2012, a year in which we grossed over $2.5 billion at the worldwide box office and became the first nontraditional major studio to break $1 billion at the domestic box office in a single calendar year.

Warm Bodies opened strongly two weekends ago, as we counter-programmed effectively against the Super Bowl, and the film is another indication of our expertise and leadership in the young adult space. Texas Chainsaw 3D also performed well last month, following in the footsteps of Sinister, the Possession, and Cabin in the Woods, as our fourth straight successful horror release. Another genre in which we've established our leadership. Despite our track record, not every film will be a hit. The under performance of the Last Stand is a reminder of the benefits of a portfolio approach that smoothes out the inherent volatility of our business.

Our upcoming films reflect our usual mix of tent poles, strong brands with worldwide commercial potential, and critically exciting films. Even with the inclusion of our next Hunger Games film, the US GAAP for the average film on our slate defined as production capital at risk after international presales and estimates and before marketing spend is approximately $13 million, not much more than our historical average. In addition to our tent poles, we have high expectations for the second film in our Red franchise starring Bruce Willis, Mary-Louise Parker, Catherine Zeta Jones, John Malkovich, and Helen Nearing. Now You See Me, a film with another great ensemble cast starring Jesse Eisenberg, Mark Ruffalo, Morgan Freeman, Woody Harrelson and Michael Caine, and comedian Kevin Hart's, Let Me Explain, the first film from our Codeblack urban venture. In the back half of the fiscal year, we have several of our highest profile films, Ender's Game, Tyler Perry's Madea's Christmas, Divergent, and of course, Catching Fire.

Our momentum is equally strong internationally. We have established output deals for our films covering 80 percent of the world's movie-going population outside of China and India. We have also expanded our partnership with IDC, a Company in which we have a 50% investment to encompass both Lions Gate and Summit content in Latin, which has become a major market for us. The IDC partnership is a good example of creating significant growth and incremental revenue for our film business without taking commensurate risk. It enables us to achieve most of the benefits of self-distribution through uncrossed deals with local partners in each Latin American territory, generating solid returns through a combination of minimum guarantees and overages. All without significantly increasing our overhead.

IDC generated $125 million at the Latin American box office for Twilight Breaking Dawn 2, a record for any Company outside the traditional majors, and it scored another big Latin American hit with The Impossible. The Impossible performed well domestically, but the real story is at the international box office, where it will gross over $150 million. With leading digital and traditional distributors like IDC, Netflix, and Televisa, we are generating revenue and profit in Latin America that is several orders of magnitude greater than just a few years ago. We are well-positioned for future growth in the region. We expect to generate more than double the profit on Catching Fire in Latin America compared to the first Hunger Games. We are expanding our digital partnerships, not only in Latin America, but around the world capitalizing on the recent emergence of platforms such as Netflix, Amazon, iTunes, and Xbox that are helping to drive international growth and creating significant competition for our products where little or none previously existed.

On the Television side, Anger Management and Nashville returned to the air last month, and our upcoming Television pipeline is shaping up well. Anger Management has already shot 27 of the 100 episodes ordered by FX, and it debuted to solid ratings last month as it kicked off its second season. In addition, the show has been sold in 70% of the country, including the Fox station group for fall 2014 syndication. The next show for which we plan to use our 10 plus 90 model is the George Lopez Show, and we've just announced that Matt Williams, the creator and executive producer of Roseanne and the co-creator and executive producer of Home Improvement will be the show runner. Matt's addition to the team completes a process we began in July that shifted into high gear when we sighed Matt and his Wind Dancer production company to an overall first look deal last month, and we believe that we now have another great package to begin shopping to the networks.

We have also interviewed several leading show runners for the next series we expect to add to our 10 plus 90 pipeline, an odd couple pairing of stars, Martin Lawrence and Kelsey Grammer. Nashville returned to the air last month, and ABC cited the series as one of the major contributors to its success so far this season. The show is performing well even head-to-head with CSI, ranking as the number 2 freshman series on TV among adults, 18 to 34, and it's one of the two most DVRed shows on the air. Nashville's soundtrack recently reached number 3 on the country charts, and digital tracks from the show sold nearly 1.5 million downloads to date, increasing our confidence that the show could generate successful concert tours and merchandising as well. We've already completed most of the first 13 episodes of Jenji Kohan's Orange is the New Black, and Netflix is very pleased with what they have seen so far. All 13 episodes will be available simultaneously to subscribers in the summer just as Netflix is doing with House of Cards. And, as the Don Draper fans among you are already aware, Mad Men returns to AMC for season six on April 7.

I mentioned on a recent call that the Wendy Williams Show has turned a corner for us, and since then its ratings have not only continued to improve but have increased dramatically in a number of markets in the past couple of months. In fact, Wendy hit an all-time high with a 1.5 household rating two weeks ago and currently ranks among the top 4 talk shows in national demos. Its continued ratings' gains are significant, signaling that this show is becoming a long-term Lions Gate annuity. Wendy is also expanding her brand, launching a production company in partnership with Debmar-Mercury, to develop and produce reality, game, and talk shows for the cable and broadcast networks. The new venture got off to a fast start last week with NBC Universal's cable network, Oxygen, which signed the company to an overall development deal.

In a recent research note, one of our analysts said, with a smile, that Lions Gate was an overnight sensation that took 12 years to build. Well, it has been a disciplined and steady 12-year build, but the process was certainly accelerated by last year's acquisition of Summit. I'd like to provide a quick recap of the integration synergies we are seeing a year after that deal, which are translating into a combination of incremental margin, cost savings, and reduced cost of capital. These benefits are attributable to higher settlement rates with our theatrical exhibition partners, a new pick, pack, and ship deal with Fox, and a new replication deal with Cinram for our home entertainment content. A worldwide network of new output agreements, consolidation of our media buying, the soon-to-be announced new agency deal, and a significant improvement in our capital structure with a new revolving credit facility and early payment of the Summit term loan.

The incremental margin generated by these synergies is greater than we anticipated. Coupled with the continued strong performance of our business, these synergies give us even greater comfort with our three-year guidance of $900 million in EBITDA. We also believe that the $125 million in free cash flow we generated this quarter is indicative of our ability to continue delevering our balance sheet going forward.

Our job is far from complete. Our goal is to maintain our growth momentum and extend our financial trajectory beyond the three-year guidance we have already provided you. We intend to achieve this by continuing to capitalize on opportunities afforded by our critical mass, maintaining our international growth momentum, and continuing to grow our content businesses as we significantly delever our balance sheet. Now, I'd like to open the call to your questions.

(Operator Instructions)

Alan Gould, Evercore Partners. Please go ahead.

Thank you. I've got three questions, please.

First -- Jon, can you tell us how much international profits you recognized from Twilight Breaking Dawn 2 in the quarter, and how much is still to come? The film grossed over $500 million internationally during the quarter, yet your international revenue was only $90 million?

My second question is -- I am sure your $900 million three-year EBITDA target did not anticipate $24 million of debt extinguishment costs? How should we look at the -- should we be looking at EBITDA or adjusted EBITDA for that $900 million target?

Third, on the free cash flow, your film costs are still running negative. I know you are releasing 21 films this year and 14 next. I would assume at some point your amortization of 21 films will be more than your cost for the future 14 films. When should we see that film cost turn positive? And, what should we anticipate -- how much should working capital be negative in this March quarter with the video release of Twilight at the end of the quarter?

Is that all you've got, Alan?

That's it. Sorry, Jon.

All right. I am going to let -- well, I will let Jim go on your first and third question. But why don't I start in terms of the adjustments. Obviously, you are starting to look at a pretty big gap between unadjusted and adjusted; I think it's $57 million already. When we originally did our three-year guidance, there were two things we really didn't know or couldn't count on -- one, obviously, was the stock price move. As you note, that's making a pretty big adjustment on mostly a non-cash adjustment. The other thing was, we weren't aware of the charges for early repayment of debt.

Obviously, if the stock price keeps moving in this direction, that gap is going to grow even larger. I would tend to say, right now, given the adjustments are basically non-cash adjustments, probably I would say everyone will focus on both metrics. But I would say, probably adjusted EBITDA is becoming the most indicative metric of our operating performance.

Jim, would you answer the other questions?

Sure. There's -- to go revenue above and beyond the quarter on Breaking Dawn 2 -- internationally in the $130 million range. Contributions significant. I will say $50 million or $60 million-plus to come.

Will a lot of that hit this March quarter?

From the international, a portion of it will. About $30 million of revenue will hit in the quarter. That's about, say, 50% of that flowing through as a contribution. Q4 margin will be $30 million on that, so the revenue --

Okay. [Increased] cash flow?

You also have -- we are anticipating for the year, as you roll through -- and that kind of goes along with all of our guidance. We had indicated that it would be -- we are obviously at $157 million year-to-date now with all the ins and outs. We had indicated we would be paying down debt in the $200 million range. We have paid that down now about $145 million. So the two numbers kind of go hand in glove. I would anticipate Q4 in that range paying down, so I can get to the $200 million mark. I will let you do the math, but that's anticipated where we'll end up.

Okay. Thank you very much.

I will now go to the line of James Marsh with Piper Jaffray. Please go ahead.

Thank you. Two quick questions here.

First -- you discussed some of the parallels between Hunger Games and Divergent. Both young adult books, bestsellers, futuristic, dystopia, et cetera. Could you talk a little about the major differences between the two? And, also related to that, could you just talk about how it is so far to work with Veronica Ross relative to say, Stephanie Meyer, Suzanne Collins?

And I've got a follow-up.

Rob?

First -- Veronica Ross -- we have great relationships with all of our authors. They, obviously, are different personalities, but inevitably we have great relationships. We pay a lot of attention to them and to the fan base that they've created. So that's always an important component in our working with our filmmakers and our authors.

Divergent is a different -- it is different. The books are different. The society is different. One is about a society that is striving for survival and is revolution entanglements; and another really is about a way a society is surviving with distinct personalities and how those personalities interweave with each other.

Okay. That's helpful. Thank you.

And then, as you start to generate this substantial free cash flow, and it starts to move through the cash flow statement, could you just talk broadly about how you see your optimal financial leverage going forward? If there are any plans to return capital to shareholders?

Hi, James. It's Michael.

I will tell you that we don't have at the moment any plans for dividends, although it's obviously always an option. Our focus right now is going to be to continue to delever. We are going to -- we have a couple different choices. We could refinance our existing high yield later on in the year with another high yield because interest rates have come down so dramatically, so we could get fixed capital at what we think is a very attractive rate.

Or, we could do what we have been currently planning, which is to pay down -- to call our bonds, likely in November, at the 105, 105.25 with the LIBOR-based facility. The question for us is that, obviously, LIBOR floats up and down. Do we want to fix that? Or, do we want to use that facility? And we will make that decision as we get closer to that date.

Great. Thank you very much.

I will now go to the line of David Miller, B. Riley Caris.

Congratulations on the stellar results. First of all, a question for Rob.

You were obviously pretty aggressive in just pre-selling foreign rights to the first Hunger Games. The Catching Fire film is obviously a more expensive film. I think you are filming a number of scenes on water. If memory serves, you just wrapped production in Hawaii. So it's a higher negative cost, but I kind of have it in my models conceptually that you are pre-selling this one a lot more aggressively. When you get to that final number of what your overall negative cost exposure is, can you put any raw figure around that number?

Jon, I know you mentioned that your average is around $13 million net gap; but should we assume that the Catching Fire raw negative cost number, after all foreign pre-selling is done, is $30 million, $20 million, $10 million, $50 million? If you could put a number around that, that would be great.

And, I have a follow-up. Thank you.

I can tell you that the number is virtually identical to the first Hunger Games.

Okay.

Remember, our output deals are a percentage of budget. As the budget grows, so too does the contribution. I will say to you that we license, we don't sell. I think that answers your question about the gap? And we are very excited about the movie; is wrapped principal. We are going to do a couple of re-shoots, but otherwise it's looking great. We have some really exciting, creative materials that you will see in the coming months.

Okay, great.

For either Jon or Steve if you are on the call -- I would assume that the new Cinram deal that you are talking about was not in place when Twilight Breaking Dawn Part 1 was released on home video -- I think that was March of last year, although it did take place after the closure of the Summit deal. So, with the new Cinram deal in place, how should we think about the margin bump per DVD as you gear up for Twilight Breaking Dawn Part 2 on home video? Thank you.

Thanks, David. Yes, I'm here. You are correct.

The new Cinram replication deal takes place in the middle of the year, so Breaking Dawn 2, which comes out on DVD early March, will be manufactured under the current deal, which is the Summit deal with Sony, and distributed through its existing deal with Universal. That deal will play out to its normal expiration date, and then the savings that we will realize through the deal with Fox and with Cinram will take place.

Actually, the Fox deal has already taken place. It actually was a retroactive deal. The great thing about that, I think -- both Cinram and Fox recognized the value of our additional volume, as well as how much it will -- shipping together in the same box reduces their cost. We were able to renegotiate those deals to generate what will end up being significant savings in the tens of millions of dollars per year going forward.

Wonderful. Thank you.

I will now go to the line of Ben Mogil, Stifel Nicolaus. Please go ahead.

Good morning, and thanks for taking my question.

Steve, one for you while you are on the DVD topic. We look at Hunger Games DVD in the second quarter, and it was disproportionally physical-weighted. We look at it in the third quarter, it was disproportionally digital-weighted. Are you seeing customers -- sort of the initial customer -- opt for physical? But then, over time, the sort of later customer, if you will, opt for digital? I'm kind of curious on the mix shift between the two quarters for the same title?

Well, one of the great things about what's happening in the business -- not only, as we have said before, has packaged media stabilized, and if you look at overall sell-through transactions, they are almost identical when you include EST and digital. But the great thing about what's happening in VOD and digital -- those two categories are growing tremendously, especially with something like the Hunger Games. The amount of digital revenue, including Internet-delivered as well as VOD has even surprised us with how much that is. We are actually having to raise our ultimates in both of those categories, which is really heartening.

I think we are actually seeing strength in the overall business, particularly in digital. When you look at our Q4 revenue, not only was the Hunger Games revenue in digital really surprisingly robust, but we had a tremendous quarter in library. And we are seeing that the digital is really embracing library. So, you look at our library numbers, which are way up -- I think we had $135 million in library, a lot of that coming from digital, which is really the first time that we have seen digital becoming a library medium.

I guess I meant sort of specific to -- so, the way the consumer is buying for new releases. So, in the second quarter of '13, could you have VOD for Hunger Games? Or, is it just DVD?

It was both.

It was both. Are you seeing consumers -- are you seeing the later consumer who is not as gung-ho on the title but says three weeks later, I want to see it -- be more digitally focused? The mix shift was kind of interesting to me.

I think what we are seeing, Ben, is that it has longer legs. The digital and VOD revenue have longer legs. We are seeing it doesn't really diminish in accordance with the same curve that we are seeing in packaged media.

Packaged media has a huge impact in the first couple of weeks. Definitely first couple of months. Even though we see a little bit of that in VOD and digital, it has much longer legs. Particularly as we are seeing new retailers come in and grow, like Xbox, Amazon. Voodoo is growing tremendously. I think we are just seeing it have a lot longer legs and much greater strength in the follow-on quarters.

That's great. Thanks.

And then, the next question, just on the TV production side -- do you expect to end the year up? Or flat? Remind us -- I know that Mad Men for the broadcast window for AMC is a 2014 fiscal event. Is the Netflix delivery for Season -- I guess this is Season 5-- is it going to be a 4Q event?

I guess I will add, there's a lot of timing [going on]. This is Jim Keegan.

I do anticipate the TV production revenue and MR -- there's going to be a big spike in Q4. A lot of deliveries are occurring; so it's going to be up significantly. But you're right. Remember last year we did have seasons one through four of Mad Men delivering in July, so that created a lot of library revenue last year. The other part of your question was Season --?

So, Season 5 -- Netflix delivery going to be in the fourth quarter of '13?

The answer is yes.

And, that's the first one on the new deal with the higher rates, because it is -- it has not yet repeated on AMC. Is that correct?

That's on the normal deal. That's just a one-year holdback. The season precedes -- or follows the current season.

Ben, it just comes really on a payment schedule. It really isn't thought of with Netflix as a first run or a second run. It's just on a delivery and payment schedule basis.

Okay. I thought that the license fees for Season 1 through 4 with Netflix were lower than Seasons 5 through 7 will be? Is that correct?

No, it's not.

Okay. I get it. Season 5 -- that's why it will be in the fourth quarter. I think that's it for me. Thanks.

I will now go to the line of Doug Creutz with Cowen.

Just a question on your investment in film and TV programming from the cash flow statement. You're at a little over $700 million for the year, which is above what you spent for the entire year last year. I know you've got more film this year. I was just wondering if you could give an indication of where you think this year will shake out? And then, what kind of step-down we might see in fiscal '14? Thanks.

I guess for the year, obviously, you're right. We're at about $776 million for the nine months. I'll give you a breakdown -- it's about $242 million for TV; $534 million, motion pictures. You are going to end the year somewhere -- TV, $320 million-ish range; and motion pictures, $580 million to $590 million, all-in. So, around $900 million, all-in. I'm not really comfortable projecting next year's investment.

Is it fair to say it should step down, though?

I guess I'd like to withhold comment as we are still working on our plan. You're right. We did release 20 pictures this year.

Okay. All right. Thank you.

I will now go to the line of Alexia Quadrani with JPMorgan. Please go ahead.

This is Caroline Anastasi for Alexia. Just a couple of questions.

First -- the losses at TV Guide seemed a bit worse this quarter? Can you tell us what's going on there? And, update us on your strategic plan for the network going forward?

And then, secondly, can you update us on how Nashville is doing versus your original expectations? And give us a sense of the economics there? And maybe, at what point it should become profitable?

Kevin, I will let you take Nashville first.

Nashville is performing very solidly for ABC this fall. It has become one of their breakout successes in a fall that has generally been a little down for all the networks. But specifically, in the 18-to-34 demo, it's particularly strong, especially with women. So, they are very happy. It's one of the number 2 most DVRed shows on TV right now. It's routinely coming in just behind CSI on Wednesday nights and making inroads against Idol. They are very happy with it, and that means we are very happy with it. It also has worked -- been sold pretty effectively around the world.

In terms of the long-term economics, network shows are a little more risk-intensive than cable, so we are going to be losing a little money in the interim. But we think when you get to a second season, you have a very good chance of getting to three or four, and that's really when the network shows pay off in a big way. All the conversations we've had with ABC have been about the future and about what happens next season, so we are cautiously optimistic about getting there. But the show itself has become both a critical success and a real strong 18-to-34 ratings story for ABC, so we are quite pleased.

So, on TV Guide, we have had a couple quarters of program write-off -- one-time write-offs -- that have definitely hit the bottom line. I think there's some very good things going on at the Channel. We do have some management changes that we are in the process of right now. New branding. Four new pilots that we are doing for the network. We have just concluded a new affiliate arrangement with one of our MSOs with higher sub fees. We continue down the path of cleaning up the real estate in terms of the scroll. We are going to be -- by the end of this year, we will probably be 80% full-screen.

But the ratings have certainly been challenged over the last year. We are in the process of working on it. As well, we are talking to a number of strategic partners, as we have indicated to the Street. Not prepared to talk about them yet, but we are in the middle of some interesting conversations.

Specifically with the network, we feel we are on the right path to making it better and making the real estate better; and I hope that you will see that projected in better earnings going forward.

Great. Thank you.

I will now go to the line of Jim Goss, Barrington Research. Please go ahead.

Thanks.

I was wondering if you could address the seasonality of your product flow? It would seem to me that it should be less than for many of the traditional studios due to your focus on using March and November. So I was wondering if you could look at it both in terms of the film flow and also the international aspect? And, perhaps even the home entertainment; and whether the home entertainment might be influenced a lot by the UltraViolet initiative, given that it would seem to tie into the demographic you appeal to quite a bit?

This is Rob.

The flow of our product really is release date-driven. As far as we are concerned, the second most important decision we make after we greenlight a movie is its release date. We do tend to stay out of the heart of summer or the heart of the Christmas season. It tends to be giant tentpole territory for the major studios. Normally, our flow is spread throughout the year other than that.

As it relates to the home entertainment flow, it is -- obviously, we look for opportunity based on our release dates -- our theatrical release dates. Internationally, always comes into play. We release a lot of our bigger titles, day and date. The international marketplace is playing very similar to the domestic marketplace as it relates to seasonality these days.

Steve, UltraViolet?

Jim, I would say our films perform particularly well in digital, especially when you look at the amount of revenue we are generating from a film like the Hunger Games, and obviously, the Twilight saga. Surprising to us. While I'm not sure that UV necessarily is particularly different than the overall digital marketplace; but we have seen tremendous growth in UV in general. We are pretty excited about UV, believe it's on a great trajectory.

You've seen that we've got over 10 million accounts open, at least 5 million of those accounts opened in the fourth quarter alone. We are looking at the amount of revenue we are generating through retailers such as Walmart, which is, obviously, a UV supporter. During the coming year, we are expecting even greater growth of the digital marketplace, driven by UV as additional retailers announce their support.

You've probably noticed CES, the studios announced a partnership with the CEA. Much similarly to what we did with DVD back in the late '90s, which is what we used to really drive and promote the DVD business. We're pretty excited about the prospects for UV. I think this is going to be the year you see UV really become a marketplace.

Are you seeing your mix be any different from other studios, though, because of the demographic issues?

Not driven by digital. I think we have a particular focus on digital in general. If you look at the alternative windowing strategies that we've employed -- the day and date with theatrical, I think we've been one of the pioneers there. I think we were one of the first studios to support UV just because of our focus on digital. I do think that it is a side benefit of our genre focus with, whether it's action or horror, or obviously, the young adult films. These films tend to appeal to the kind of younger, digitally-avid marketplace. I think that has been to our benefit.

Okay. Last question.

In terms of 3D and IMAX premium-type strategy, are there any comments you'd want to make on direction you had, had with those areas?

Well, we, like the consumer, are very excited by both of those formats. We do them selectively. You will see both Ender's Game and Hunger Games coming out IMAX this year. And I, Frankenstein will come out in 3D. But, we're selective. We do it where we think it is appropriate for the creative as well as for the consumer enjoyment.

Okay. Thanks.

I will now go to the line of Matthew Harrigan, Wunderlich Securities. Please go ahead.

Thank you.

I guess another UV question -- tangentially, since Steve was up on the stage. When you think about marketing at beyond the CE bundle initiatives -- Sony and other guys that you've put out there -- given that this is such an ubiquitous proposition, would you do things like look at databases, loyalty programs at theaters when people go in to see Catching Fire, and maybe even try to sell into that directly at the original point of sale in the theater? How are you -- you've done great on the conversion ratios. It looks like the library with Summit layered in has ever-more critical mass. But, particularly with things like UV, it almost feels like there's a chance to almost reinvent the sales proposition to a certain extent.

I think that you are going to see a revolution out there, given that you look at what's happening to -- I would look at the positive side of what's happening in music. Music is growing primarily because of digital. I think that's where we are going to grow. I think UV is going to provide that.

Particular promotions, whether or not we are going to -- we are looking at everything. We're looking at loyalty programs. We're looking at attachment. It's a lot easier to -- when you have the consumer data -- it's a lot easier to attach to upsell to promote additional films. We are having those conversations with retailers right now, as we speak. Whatever the exact form that takes, I'm not sure, but I think it gives us a tremendous amount of opportunity to do a lot of things.

Would that apply to the exhibitors as well?

I think that's -- everything's in the conversation. We are not having those conversations right now, but we have had tangential conversations around that. Nothing concrete just yet.

Great. Thank you.

I will now go to the line of David Bank, RBC Capital Markets. Please go ahead.

Thanks.

Interesting update on the potential for the Martin Lawrence-Kelsey Grammer thing. There's been some chatter around maybe George Lopez. I guess my question is that, the 10-90 things gives really the Holy Grail of visibility in earnings and syndication and stuff for content. Why is it that you seem to have an edge on 10-90? It's such an obviously great model, right? Is competition heating up? How do you maintain your edge there?

There are a number of places that are talking about doing it, but one of our edges is really Debmar-Mercury and what Mort and Ira do, specifically in the sales side. They came up with this model. They pioneered it, so we are first movers. As first movers, we are also getting the most interesting talent. We've got some great people in the pipeline. We've turned down some other impressive packages; but we just kind of home in on this, and really, those guys can bring that added value in the secondary markets. We can contribute the international side.

Because it is a different model, the buyers are very focused on track record. Charlie Sheen in Anger Management performing successfully this summer on FX opened a lot of doors; and a lot of inquiries coming from broadcast and cable are coming in about what's next. So, it's kind of a disciplined and creative model that -- a business and disciplined creative model that people are excited about. We want to move quickly and keep our edge, which is why we have these two in the pipeline that you mentioned. Martin and Kelsey as well as George Lopez, who is working with Matt Williams.

I'm sorry. Can I ask one follow-up as well? If you were done answering that one; I'm not sure.

Yes, I'm done.

Okay. Can I just have some follow-up, too, on your outlook strategically for EPIX as well? If you could just kind of give your general thoughts of what you see doing with your stake in it -- with the entity over the next kind of couple-year timeframe. Do you think it just continues to operate as a private JV? What's your view?

Well, we are very pleased with EPIX. I think we continue to have very interesting conversations with both nontraditional digital players as well as the traditional MSOs. We like the optionality that EPIX has afforded us, and again, we are profitable. We are able to do things, I think, that people who license their product to third-party pay television providers aren't able to do. And I'm really confident, as we go down the road, like any other channel, that we will make changes that make this a very attractive product for all of the MSOs. And so we like the trajectory of EPIX.

Okay. Thank you very much.

We have time for one more question. I will go to the line of Tuna Amobi, Standard & Poor's.

Thank you so much. I've got three questions, if you don't mind.

Jon -- thanks for those comments on the franchise creation and the expansion It was very helpful. I was wondering in the context of the 14 to 15 films, normalized output per year? If you see opportunities potentially to explore into other genres beyond your close-knitting? Or, are you just going to stick to what you do best in horror and the young adults, et cetera? That would be helpful.

Secondly, on the Summit synergies that you alluded to, you rattled off a list of outperforming areas. Settlement, output, agency deals, et cetera. I'm just wondering now that you are coming off the one-year anniversary of that deal, seems to be a good time to kind of look back and see if there were any potential area that has not lived up to your expectations in terms of that deal?

Lastly for -- I guess for either Michael or Jim -- can you provide some color on how much liquidity that you need to run your business on a steady-state basis? And, related to that, I know Michael took dividend off the table. I'm wondering -- the focus of delevering, if I look at your adjusted EBITDA, it seems to me at the rate you are going, you are going to be having even more ample headroom for other uses. So, I'm wondering if buybacks could be a potential use? And any comments as well on your share count? I see that it's been kind of a little volatile. Some of that had to do perhaps to do with some options coming into money. If you could provide some guidance on that, that would be helpful.

Sorry for the list of questions.

It's Michael. Let me take the last one first.

The fully diluted share count has gone up because what happens is, at a certain point when your converts -- we have two converts outstanding. One is $66 million, and the other, $45 million. When they go so deeply in the money, it's obviously prudent to add that to your future share count from a fully diluted standpoint.

On the second point is that, should we choose to delever completely, we should have that option in the next, call it, 30 months. So, we could, effectively, pay down all of our debt, which would include our credit facility. Obviously, that is an $800 million facility that we use as a working capital account in many ways. That's at LIBOR plus 2.5%.

I would say that there is probably some degree of leverage that will drive equity returns, but we will be on the conservative basis is my guess about how much leverage we have. It will, certainly, as Jon said in his remarks, we will dramatically delever over the next few years.

To go back to a couple of your other questions -- actually, I'm very pleased with all aspects of the integration of our two Companies. Obviously, some recent results from the films that are in the pipeline; obviously, Breaking Dawn 2 in terms of particularly the international performance. I'm expecting the DVD is coming out in about a little less than a month, and I'm expecting actually very good performance there as well. The Impossible, Perks of Being a Wallflower -- these movies have actually performed very well. They are also indicative of a piece of our business that people don't concentrate. But, the Impossible and Perks are going to be very profitable pictures for us.

That leads me a little into the '14, '15 slate. We are certainly looking at a Lions Gate -- meaning Lions Gate/Summit -- releasing slate of, call it, around 14, 15 pictures as Rob has said before. I would also point out that we are in a couple of other businesses through Roadside Attraction. Things like Arbitrage and Margin Call, which we are ramping up that business. We have got, I think, five or six movies in the pipeline already. These are primarily movies that will be released by Roadside, but where we benefit from most of the economics. We also have Pantelion, a partnership with Televisa.

We have a very robust slate. We certainly believe that there is no movie that we can't do, but we like the fact that we are focused on young adult, focused on horror, focused on branded action, focused on urban. We are very excited about this new relationship we have with Kevin Hart and with Codeblack. We think Kevin is, in a totally different way, sort of our next -- potentially next Tyler Perry. Very excited about that. Again, it is a robust slate, but from the main pipeline, we ended up with 20 films due to the integration. I think we feel that we don't need to do that many films.

I might also add, again, that these synergies, as I noted in my remarks, are significantly larger than we expected. Obviously, we had to negotiate a number of those terms, so we didn't really know exactly how those negotiations would turn out. I would say to give the Street a sense of it, we are looking at -- assuming the size of business that we are projecting -- we are looking at gross synergies of over $100 million of which will benefit to us after our participation is over $50 million per year. It's really pretty significant.

Again, extremely pleased with the Summit transaction. Extremely pleased with the Management that we have inherited and integrated. Overall, again, I think we are in really, really good shape going into '14 and '15.

Okay, great. Well said. Thank you.

Speakers, please go ahead with your closing remarks.

Thank you all for joining us, and maybe the operator can just give you the replay information. Thanks again.

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