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Final Transcript

LIONSGATE ENTERTAINMENT: 2013 1st Quarter Earnings Call August 10, 2012/6:00 a.m. PDT

SPEAKERS Peter Wilkes – Senior Vice President, Investor Relations Jon Feltheimer – CEO Michael Burns – Vice Chairman Patrick Wachsberger – Co-Chair, Motion Picture Group Steve Beeks – Co-COO and President, Motion Picture Group Kevin Beggs – President, Lionsgate Television Group Jim Keegan – CFO Rick Prell – Chief Accounting Officer ANALYSTS David Miller – Caris & Company Ben Mogil – Stifel Nicolaus Alan Gould – Evercore Partners James Marsh – Piper Jaffray David Bank – RBC Capital Markets Caroline Anastasi – J.P. Morgan Doug Creutz – Cowen & Company Matthew Harrigan – Wunderlich Securities Tuna Amobi – S&P Capital IQ David Joyce – ISI Group

LIONSGATE ENTERTAINMENT Host: Peter Wilkes

August 10, 2012/6:00 a.m. PDT

PRESENTATION Moderator Ladies and gentlemen, good morning. Thank you for standing by and

welcome to Lionsgate Fiscal 2013 1st Quarter Earnings Conference 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. As a reminder, this conference in being recorded.

I’d now like to turn the conference over to our host, Senior Vice President

of Investor Relations, Mr. Peter Wilkes. Please go ahead. P. Wilkes Thank you for joining us on the call this morning. Jon Feltheimer, our

CEO, will lead off with opening remarks. We’ll then open the call to Q&A. Joining us for Q&A will be Michael Burns, our Vice Chairman; Patrick Wachsberger, Co-Chair of our Motion Picture Group; Steve Beeks, Co-COO and President of the Motion Picture Group; Kevin Beggs, President of Lionsgate Television Group; Jim Keegan, our CFO; and Rick Prell, our Chief Accounting Officer.

The matters discussed on this call will include forward-looking statements,

including those regarding 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 risk factors, as set forth in Lionsgate’s 10-K filed with the SEC on May 30th, 2012. The company undertakes no obligation to publicly release any revisions to our forward-looking statements that may be made to reflect any future events or ….

Jon. J. Feltheimer Thank you Peter, and thank you all for joining us this morning. Having

completed the first quarter of the first full year of our operations as an integrated company, we’re right where we expected to be for the year in our three-year plan. More than two-thirds of the profitability of the first Hunger Games lies ahead of us. This translates into a typically back-loaded year where our profitability will grow every quarter, keeping us on track for our three-year guidance of $900 million in EBITDA.

We released five films in the quarter and all of them will be profitable.

However, this quarter was atypical relative to what you can expect for the rest of the year due to the marketing costs associated with these five films,


August 10, 2012/6:00 a.m. PDT

the $18 million in pre-release marketing costs for films slated for release later in the year, as well as some primarily non-cash stock-based compensation. In addition, you may have noted the non-cash charge for paying down our Summit debt early, as well as the impact in the quarter of $16 million in marketing costs associated with the releases of Lionsgate, U.K., which, as you will hear in a few minutes, is having a tremendous year. Although our costs were partially offset by The Hunger Games profitability in the quarter, you will see a more meaningful contribution from the film beginning in the second quarter.

Turning to the quarter’s operational highlights: The Hunger Games is nearing the end of its very successful theatrical run as the 12th highest grossing film of all time, but its growth into a transformative franchise continues. The trilogy’s book sales have more than doubled this year, passing the $50 million mark, and our motion picture event of the year will become the biggest home entertainment rollout in our company’s history next week. We finalized the remaining release schedule for the franchise and will release a Hunger Games sequel every November for the next three years, beginning with the November 22nd, 2013 release of The Hunger Games: Catching Fire, which begins shooting next month, coupled with this November’s release of Twilight: Breaking Dawn 2. This gives us significant forward visibility from our film business. The rest of the branded and franchise properties that comprise a large portion of our film slate are in equally strong shape. We anticipate a strong opening next Friday for The Expendables 2, which is tracking well and gives every indication of following in the footsteps of the original. Ender’s Game has already completed principal photography and we’ll be looking at it next month before it enters post-production to complete its visual effects. With Ender’s Game and Catching Fire back-to-back, we will have a six-week continuous run in IMAX theaters next November and December. Red 2, the sequel to another Summit franchise, will begin production next month for a summer 2013 release. Catherine Zeta-Jones and Anthony Hopkins will join the cast of Bruce Willis, Helen Mirren, John Malkovich, and Mary-Louise Parker, returning from the original film that grossed more than $200 million at the worldwide box office. By testing the summer for the first time with Madea’s Witness Protection, we found another great release period for Tyler Perry, whose brand


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continues to demonstrate its remarkable resilience. With nearly $65 million at the North American box office and counting, Witness Protection is Tyler’s second highest grossing film ever. We’ve also been exploring ways to position our franchise and branded properties to drive the profitability of our entire slate. Our expanded pipeline following our acquisition of Summit, have now enabled us to capitalize on one of the biggest growth opportunities in our industry, the international theatrical marketplace. A few months ago, we embarked on a strategy to take full advantage of our diversified portfolio of products by establishing output deals around the world that offer greatest stability in an uncertain global economy, increase the long-term visibility from our film business, and strengthen our partnerships with the leading distributors in the world. Because of the strength of our product, we’ve made rapid progress in implementing this strategy. We’ve just completed new output deals with Nordisk in Scandinavia, Village Road Show in Australia, and IDC in Latin America. We will announce additional deals in Germany, Spain, Russia, Korea, and Poland in the very near future. When we’ve finished executing our plan, we’ll be covering on average more than 50% of our film budgets, even before receiving the benefits of our tax credits, all without sacrificing the overages from our backend in success. In fact, these deals have allowed us to improve our back-ends in virtually every territory, mitigating our risks while enhancing our potential reward. We’ve also continued to grow our Lionsgate U.K. business and I’m pleased to report that we’re having the best year ever. Through the first four months of this fiscal year, we’ve already surpassed our box office in the U.K. for any previous year. Our U.K. operations are on track to generate more than $100 million in box office this year, ranking among the top five film distributors in that territory. The growth of our U.K. business will continue to be spurred by our pipeline of franchise movies including the next three Hunger Games films. But it’s interesting to note that more than half of Lionsgate U.K.’s box office performance this year will be attributable to third-party product. As a matter of fact, all of our overhead in the U.K. is covered by our success in distributing and co-financing third-party films, and this strategy is exemplified by Lionsgate U.K.’s resounding success this year with Magic


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Mike, which was bought well ahead of its North American release, and the early acquisition of Salmon Fishing in the Yemen. Our television business continues to fire on all cylinders as well. Anger Management debuted to the best ratings of any cable comedy series in history, and it continues to be one of the most watched shows on cable T.V. this summer. We expect strong ratings from next week’s episode introducing Martin Sheen as a recurring character, and FX has already expressed their confidence in the show’s ability to achieve a 90-episode pickup, which would make it another signature Lionsgate brand. We also have high hopes for our new broadcast series, Nashville, which debuts on October 10th on ABC in the coveted Wednesday, 10 o’clock time slot and Jenji Kohan’s Orange is the New Black, begins production next month and will premiere on Netflix next spring. As we’ve discussed the next wave of T.V. projects including a musical drama from American Idol creator, Simon Fuller; an adaptation based on Mystic River author, Dennis Lehane’s Gone Baby Gone; and a deal with comedy star, George Lopez, to develop a new sitcom, are all proceeding nicely. We also announced yesterday that GSN, formerly known as the Game Show Network, has just picked up our new reality series, Family Trade as part of our non-fiction programming initiative. Meanwhile, our current primetime cable series continue to perform well, earning another 22 Emmy nominations last month including another best drama nod for Mad Men. Weeds is completing its eighth and final season with strong ratings, ending its run on a high. We also continued to strengthen our library in the past year. Following on the heels of our distribution deal with Miramax, the acquisition of Summit and its library and renewal of our long-term distribution agreement with Studio Canal, we just announced our new partnership in home entertainment with A&E Networks. The new A&E Networks deal includes thousands of library titles in great brands, including award-winning documentaries, original movies and hit T.V. franchises from the A&E Lifetime and History channels as well as programming from A&E’s exclusive partnership, the major league baseball and Monty Python’s Flying Circus. With completion of this deal, Lionsgate now handles more than 15,000 titles. The agreement also deepens our overall relationship with A&E Networks with whom we’re already doing business across multiple channels.


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With 9% market share in our home entertainment business already this year, next week’s launch of The Hunger Games, not only marks the biggest home entertainment rollout in our history, but gives us an opportunity to build our position on digital and traditional platforms alike. Hunger Games is the ideal vehicle to launch our ultraviolet initiative and next week we will offer The Hunger Games on DVD, Blu-ray, VOD, and in partnership with Walmart and Slickster, in the ultraviolet format as well. But our continued inroads in the digital marketplace aren’t limited to our big franchises. By looking at the digital marketplace the same way we look at its physical media in terms of placement, promotion, and pricing, we found news ways to monetize our entire feature film slate on digital platforms. For example, last week, we had two of the top three titles on Apple iTunes. Interestingly enough, not with The Hunger Games and Madea, but with LOL, which ranked number one, and Friends with Kids ranking number three. While we continue to invest in our content business, we are also focused on significantly reducing our debt and interest expense. We’ve paid down $201 million of our $500 million Summit term loan in the seven months since the acquisition. We’re ahead of schedule on our commitment to pay it down completely within three years. We also recently redeemed $23.5 million of our convertible notes. By the end of this fiscal year, we anticipate having at least $200 million less leverage in terms of corporate debt on our balance sheet and we will continue to reduce, not only our leverage, but the cost of that leverage going forward. As I noted at the start of the call, we remain on track for the year and for our three-year plan. We anticipate significant and growing profitability beginning with the second quarter although, as usual, the year will be back-loaded. With most of the profitability of our first Hunger Games movie still ahead of us, coupled with the other catalysts in our film and T.V. business that we’ve discussed, we anticipate that the benefits of our Summit acquisition, the strength of our young adult franchises, and the continued evolution of our T.V. business, will translate into significant and growing contributions next quarter and for the balance of the three-year period. I’d now like to open the call to your questions.


August 10, 2012/6:00 a.m. PDT

Moderator The first question today comes from the line of David Miller, representing

Caris & Company. Please go ahead.

D. Miller Yes, hey guys; three questions. First of all, on the guidance of $900 million in EBITDA over three years, I recall that 90 days ago, I think I asked the question about whether or not that was adjusted or unadjusted. I’m pretty sure you guys said unadjusted. If you could just kind of reiterate that answer for maybe some of the other folks on the call today. I think there might be some confusion out there about whether that formal guidance is adjusted or unadjusted. I’m pretty sure you’re going to say unadjusted, but if you could drive that home for the folks out there; that’d be great.

Then, Felt, on Anger Management, how is this going to work with the

other 90 episodes, assuming that FX goes ahead with the 90-episode order, which it looks like that’s the way things might fall. I know you have a couple episodes to go. Should we assume that like another ten-episode block is going to air, kind of in January, February, and March; and then the other 80 will air in fiscal ’14, or is it going to be sort of muddier than that? Thanks very much and then I have a followup, thanks.

J. Feltheimer I think you owe me one more question, David. In terms of EBITDA; yes,

that’s an unadjusted number. In terms of Anger Management, I don’t want to speak for FX right now because I think they have a fair amount of flexibility, but I think you could assume a significantly larger amount of episodes airing over a period of time. I think—Kevin Beggs is in the room. Kevin, I don’t know if you want to add any color.

K. Beggs Sure, well our plan is to furnish them somewhere in the neighborhood of

40 episodes a year; how they then program them out, will be completely up to them and air them. But our writers are working in anticipation that it goes forward and we start shooting in September to be able to furnish new episodes in a large, large block for them as early as January the 13th.

D. Miller Okay great. Then it’s just a quick followup. Felt, were you guys in the

upfront this past June for TV Guide, and what were sort of the price and volume statistics, if you’re willing to give that out on the call. Thanks very much.

J. Feltheimer Sure. Yes, we definitely were in the upfront and from both a revenue

perspective and from CPM perspective, we were up about 5% in revenue


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and about, or perhaps 3% in terms of CPM. Pretty much really in line with other networks of our size; so we had a good upfront.

D. Miller Okay, wonderful, thank you. Moderator Our next question today comes from the line of Ben Mogil, Stifel

Nicolaus. Please go ahead. B. Mogil Hi guys. Thanks for taking the question. Good morning. So I want to

talk a little bit about P&A. It looks to us that the domestic P&A for titles released in the quarter was around $98 million, which seems pretty high given that Hunger Games would have been the quarter before. So can you maybe talk a bit about that, particularly given that they were pre-targeted releases and also maybe talk about whether or not you actually increased The Hunger Games P&A after the strong opening weekend.

M Sure, sure, okay. We had $116 million of total P&A. Say optimal marketing cost in like Q1, $18 million of that did pertain to the next quarter; there was not very much marketing cost associated with Hunger Games in my Q1. Most of it had been expensed in my Q4; and there were obviously five films that generated to be $98 million in marketing cost for theatrical.

B. Mogil So that seems like a bit of high number given that a couple of them were

targeted by African-American. A couple of them were pretty limited, not limited but sort of very … releases. Are you guys sort of thinking now that the P&A environment is one where you got to spend a little bit more than you historically had?

J. Feltheimer No, I wouldn’t say that all. Actually if you take away the pre-expense, we

had in some way atypical pre-expensing, specifically for Expendables; we wanted to hit the Olympics, which if you’ve been watching them, you can see we did a pretty extensive …, although I think it was pretty effective as well in terms of cost. But I think if you look at the five releases, particularly Tyler Perry’s was done, I think, on the last day of the quarter, if you do five releases and average $100 million, that’s what the $20 million minus that 18 pre-expense.

So I think that on a per-picture basis, we are definitely keeping our foot on the brakes in terms of cost, and I think that will be pretty much through the year. Obviously, a bigger release like Expendables will have more P&A than perhaps a genre movie; but at the end of the day, I think we’re still on


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track and where we’ve always been trying to be as targeted as we can be with our P&A spend.

Ben, does that answer your question?

Moderator Sir, it you’d like to respond, hit *1 again. Well, we’ll move on and we’ll

go to the line—he just responded, here you go. B. Mogil Okay, that’s great. Then I guess this is for Jon. Is the $200 million of

deleveraging that you talked about, does that include the 23 subsequent to the quarter or is that in addition?

J. Keegan That does not include that $23 million subsequently; that is in addition to

that $23 million. B. Mogil Okay, that’s great. Lastly, did you guys have kind of an update on TV

Guide, either on sort of the strategic review or on sort of, obviously it’s had a tough couple quarters now, any thoughts on sort of what to change around that.

J. Feltheimer I think, Ben, we’ll probably have a little bit more to say in the next

quarter. We are working on some interesting strategies. We think, obviously again, we have good upfront. We’ve done, I think, a very good job in the distribution side; perhaps have more to say about that as well next quarter. On the programming strategy, again, I’m working on some things that I think perhaps in the next quarter we can talk about then.

B. Mogil Okay, that’s great. That’s it for me, thanks guys. Moderator Thank you, and out next question comes from the line of Alan Gould with

Evercore Partners. Your line is open, sir. A. Gould Thank you. I’ve got a few questions, so let me take them one at a time.

First, with respect to The Hunger Games, I had anticipated a little more profits this quarter. I know, Jon, you say two-thirds of the profits lie ahead. Will most of that occur in the September quarter?

Steve, can you tell us what your sell-in is for the title and what

information you get from Amazon or others telling you about the consumer pre-buys?


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J. Feltheimer I think on the first question, another way to look at it would be to say 50%

or so of the entire profitability would lie in the next three quarters, if that’s helpful.

A. Gould Is the bulk of that, Jon, going to be in the—is more than half that 66%

going to be with the home video release in the September quarter? J. Feltheimer I think that’s fairly accurate. S. Beeks Yes, Alan, I can give you some directional information. The pre-orders

for The Hunger Games have been significant, not only at Amazon but a lot of the retailers are starting to take pre-orders now and iTunes is obviously taking pre-orders. So it’s moving up the charts. The sell-in, obviously, is going to be huge. I don’t know if I can give you the exact numbers, but it’s obviously the biggest release we’ve ever had. Product has already started shipping; we anticipate that with the demand, the conversion rate is going to be on the high side for a film of this size.

A. Gould Okay, let me move onto two more questions. One, for Michael, can you

tell us about the timing and annual savings you expect to get from the new credit facility and with the rates this low, does it make sense for you to lock in some of you debt position longer term, not the portion that’ll be deleveraging, but just whatever permanent debt you want to put in place.

Lastly, for Jim, could you just tell us why the accounts receivable reserve

for returns dropped by $13 million this quarter? M. Burns Hi Alan. What I’ll say is that we’re fairly deep in the process with our

existing bank group to refinance and upsize the existing credit facility. I’m happy to report that we’ve received bank commitments well in excess of our current facility. So as far as locking in long-term rates, that’ll be a LIBOR-based facility. When we do draw that down to a significant enough number, I suppose we can certainly look to lock those with our forward contracts. We’ve not done that, typically, in the past because we don’t want to be in the business of sort of guessing which way interest rates go, but we do want to take advantage of this low interest rate environment; that is for sure.

J. Keegan Then to answer your question; Breaking Dawn 1 was released in February,

so my 4th quarter home entertainment revenues had more receivables built into it. So we did not have as much revenue in my Q1 of this year from


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home entertainment, so we do an appropriate reserve based on outstanding AR, so it decreased.

A. Gould Okay, than you very much. Moderator Our next question today comes from the line of James Marsh with Piper

Jaffray. Your line is open, sir. J. Marsh Great, thank you. Two quick questions here: One, Jim, I was hoping you

could back up a little bit and discuss with everyone about this Summit film purchase accounting adjustments. Could you just elaborate a little bit on what the drivers to those adjustments are and then, just looking forward, should we assume that the pace and the size of these adjustments start to moderate? Just any insights you could give us there for forecasting this number, and then I have a followup.

J. Keegan Sure, well the drivers for the purchase accounting was primarily The

Twilight Series, Breaking Dawn 1, so that’s why last quarter when we announced we said there was about $26 million worth of purchase accounting related to that. So there will be purchase accounting related to Breaking Dawn 2 and there will be purchase accounting—what you’ll see driving, as I had indicated on the last call, that about maybe $90 million to $100 million of purchase accounting will be this year, impacting this year. Again, that impact is primarily from Breaking Dawn 2 and some rollover from Breaking Dawn 1.

M If this is helpful, I think you can assume that as you look at all of the

purchase accounting going forward, you might assume that the number Jim talked about is approximately two-thirds of the total amount of it going forward. So in other words, about a third of it is for the two remaining years, total.

J. Marsh All right, that’s helpful. Just a followup question on Epics. Obviously it’s

a fairly public battle between DIRECTV and Viacom over some blotter carriage issues and some of the trades were reporting that Epics carriage was a part of that discussion. In the end, it was resolved which was described as an “option to carry the network”. It just didn’t seem like very typical terminology to me. So I guess as partners of Epics, I was wondering how we should read that language. What’s your take on it?

M I don’t want to really talk specifically about that other than to say that

Epics was a part of that conversation, obviously, but in general I would


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say Epics stands alone. I think the financials from Epics and our contribution are becoming significant and consistent and that particularly, all of the people that are currently carrying it, digitally and linearly, are actually very pleased with the contribution and the results and the effectiveness of Epics. So any discussion of Epics with a carrier, …, can stand on its own and again, it’s going forward. We’re talking to everybody and obviously, we would hope to be carried by DIRECTV but we have significant carriage conversations going on with everybody, in the both linear and the digital space.

J. Marsh Just one last one, quickly. On The Hunger Games 2 and Ender’s Game in

IMAX, are those going to be international releases or just domestic releases or just digital only? Obviously, Hunger Games 2 is going to be using IMAX, cameras will be film based as well, but is Ender’s just going to be a digital-only release and do you know if it’s going to be an international release? I know there are some distribution issues related to IMAX films, so if you flesh that out a little bit, that’d be helpful if you’re aware of it.

P. Wachsberger You’re talking about Ender’s Game right now, correct? J. Marsh Yes. P. Wachsberger Okay, first of all, we don’t control the international rights of Ender’s

Game. We’re only involved in the domestic market and in the domestic market, we definitely will be playing at IMAX and I cannot basically answer to you in terms of the international.

J. Marsh Okay, all right. That’s helpful. Thank you. Moderator Now we’ll go to the line of David Bank, RBC Capital Markets. Please go

ahead. D. Bank Thanks very much guys, a couple of questions. The first one is part of the

extraordinary structural transformation of the company is that as you’ve laid out the release schedule; you kind of have visibility into one really enormous tent pole franchise annually. You sort of have that underlying some of the less big films, but still really meaningful franchise kind of rolling out relatively predictably. So my thought is can we start moving away from looking at this on a movie-by-movie basis and start thinking about kind of basic margin targets annually and talk about the differences over the next couple of years.


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What general EBITDA margin targets are we talking about for fiscal 13, 14, 15, where we’re seeing the guidance? The only real delta is the biggest delta in terms of the next couple of years, this is the year with the big P&A step up because you’ve got more films with the Summit franchise and that goes down. Can you just kind of help us flesh out the margins a little?

The second question is, I guess, for Kevin. What’s your plan for

syndication of Anger Management? Assuming it gets picked up, which looks pretty good, what’s your approach to the syndication process going to be? Mike and Molly, which seemed like would come out around the same time and that’s just been sold, so we know you can—we know there’s a lot of lead time on all this. So if could give a sense of what the approach would be.

Sorry for the long question, but modeling Lionsgate has always been pretty complicated. I think it’s getting a little bit easier, but thanks for clarity.

J. Feltheimer We agree that it’s going to continue to become easier and in terms of sort

of layout margins, we’ll try to help you with that in the future, but I would say that you also have to remember with T.V. becoming a growing part of our overall revenues, the early stages of a television show are clearly margins are depressed. As you get later, obviously, it will be a lot faster. The time will be compressed with a show like Anger Management and any of our 1090 models, but with T.V. becoming a larger portion of it, again, that will de-pressure over those corporate margins until the maturity of those. So really it would partly depend upon the blend of product between features and television and our branded and library contribution.

Kevin, do you want to answer? K. Beggs Sure, on the syndication front, Debmar-Mercury, which is our partner or

sister company that handles all the syndication of our T.V. product, they’ve had a lot of discussions, a huge amount of interest in the series. It all kind of hinges on the additional 90 episodes, but when that is in place, they will then make the appropriate station deals. Many of the off-net deals that you’ve read about are primarily focused on big cable sales, whether it’s Two Broke Girls or Mike and Molly; so they feel that the runway is wide open for what we need to do on Anger Management.


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J. Feltheimer But I think your point was actually well taken, David, which is these

conversations are happening earlier and earlier and actually, I think you can assume we’ve actually already had some conversations.

D. Bank Then the windfall, I guessing, that as part of your original guidance you

weren’t necessarily assuming this kind of extraordinary success, the likely extraordinary success, on Anger Management. So can we assume that that leaves us room for potentially some upside in guidance if we go to syndication?

J. Feltheimer I think perhaps that’s true, although the major contributions of Anger

Management, from a timing perspective, will come somewhat beyond the end of that three-year term.

D. Bank Thank you very much guys. Moderator Our next question comes from the line of Alexia Quadrani with J.P.

Morgan. Please go ahead. C. Anastasi Thank you. This is Caroline Anastasi for Alexia. Just following up on

your comments on P&A expense, how should we think about spending for the next two quarters, specifically around the last Twilight movie? How will that compare to the P&A spending on the previous Twilight film?

J. Keegan Well the P&A expenses, I think, are comparable for the Twilight films for

the next quarter. We have nothing changing. P. Wachsberger Absolutely. Nothing changed at all. Nothing changed at all. We have a

huge franchise and we’re spending exactly the same amount of money as the previous one.

J. Feltheimer I think you can actually look at, perhaps you can look at this quarter as a

proxy for the rest of the year when you look at total P&A expense for the year; perhaps slightly more than that.

C. Anastasi Okay, and then just a couple of questions on Anger Management; how can

we think about the expenses there, given your comments of 40 episodes a year and can you just update us on the international sales of Anger Management and where they stand today and if it were picked up, where do you think they could go?


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K. Beggs On the expenses side, I assume you’re just talking about the production

cost? C. Anastasi Yes. K. Beggs Well the production cost will be consistent with the 90 episodes, a little

less than the 10 episodes, and those are well handled by both the domestic licensee and the international. Since our last quarter we’ve added several more territories in the international lineup and there are many more countries clamoring to buy it. We’re in really great shape; it’s going to be a substantial number and compared to most comedies, it would be really, really good. So we feel quite good about this being in the black before we even start shooting.

J. Feltheimer I would say, to be a little more granular, we think the international sales

could approach 900 to a million dollars an episode when we’re finished. K. Beggs Nine hundred thousand. J. Feltheimer Nine hundred thousand to a million dollars. C. Anastasi Okay, thank you. Moderator Next we’ll go to the line of Doug Creutz with Cowen & Company. Your

line is open. D. Creutz Yes, thanks. Jon, at the top of the call you made a comment and I just

want to make sure I have the language part straight. You said that it will translated, it typically back load of the year where our profitability will grow every quarter. Does that mean your profitability in every quarter for the remainder of the year will grow year-over-year or should I take that to mean you expect sequential profit growth in every quarter for the remainder of the year? Thank you.

J. Feltheimer I’m trying very hard not to get back into the guidance business, but the

answer to your question is I’ll be giving you the year’s trajectory. D. Creutz Okay, thanks. J. Feltheimer Third quarter more than second quarter, fourth quarter more than third. D. Creutz Okay, that’s what I was asking, thank you.


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Moderator We’ll go to the line of Matthew Harrigan with Wunderlich Securities.

Please go ahead. M. Harrigan Good, thank you. On Ender’s Game, I think Jon indicated in the last call

that you’re effective profit or any perception in economics would be north of 50%. The way the rights are divied out is pretty complicated. You talked about the international distribution already. You’ve got 11 books. I mean you’ve almost got too much material to work with prospectively after that and, obviously, you want to see how the first movie does regardless of the buzz on it right now. Can you talk about what your plans are for that, your franchise longer term and what sort of long-term play you really have there?

Secondly, I think Michael in particular, has talked about in the past sort of

the geological layers in your profits with Hunger Games, Summit, Legacy, and Lionsgate. He provided a lot of detail on the revenues by year of release, but I know you were looking for a big ramp on the movie, … years ago. Some of that is masked, obviously, by the increased P&A you’re seeing this year. But on the movies that were out a couple of years ago, is that approaching your realization on the serial ramp rate, if you will. That’s it for me.

J. Feltheimer Patrick, if you could answer the question about the Ender’s Game

franchise? P. Wachsberger Well, the Hunger Games franchise, that has been, as you know, is going

extremely well, fantastic domestically and very, very well internationally. We are planning to start the next production of Catching Fire this September. This will be a significantly bigger movie and it will have a bigger budget. However, I should say that the presales of Catching Fire are generating substantially higher minimum guarantees financially.

We also secured a larger tax credit. We truly anticipate lots of arbiters. Then after that we’re going to be shooting Mocking Jay 1and 2, back to back, which should save money, and we expect the budget of Mocking Jay 1 and 2 to be slightly lower than Catching Fire. So as Jon said earlier, looking at the overall trajectory of the franchise, I would anticipate that the wider profitability of Catching Fire might decrease jut slightly due to the scope of the film. The profitability should come back up with the final two installments on 2014 and 2015.


August 10, 2012/6:00 a.m. PDT

M I hate to say it, but I think Patrick gave you more information than you

asked for. Just specifically in terms the Ender’s Game, obviously, you made the point there’s a lot of books. We’re excited about the franchise; it’s a very different kind of a franchise than Hunger Games and obviously, we just have to wait and see where we stand with the first movie.

In terms of your first question, if I got it right, I think the simple answer would say as you can see in our filing, our current backlog is $992 million and I think that pretty much gives you a sense. As you know, typically, the backlog rolls out over a reasonably short period of time, call it most of it over kind of a two-year period. So I think in terms of the past movies and sort of how that plays out, I think that’s probably the best way to look at the accumulation of those contributions.

M. Harrigan Great, thank you. Moderator Our next question comes from Tuna Amobi with S&P Capital. Please go

ahead. T. Amobi So much; I have a few questions as well. So first, I think it’s fair to say

you guys are well ahead of your deleveraging plan and I think you’ve laid out a case for very strong earnings and cash flow visibility. So I’m wondering if it’s fair to assume that by the end of fiscal 13, that you may not be looking to address possibly other capital allocation questions.

Separately, with regard to your China strategy, so first you got approval to screen Hunger Games in China, which was really, I would imagine, very positively surprising and you’re soon going to head to do some more … business in China, which my understanding is that is really your first major, if you want to call it splash, in that market. So I guess the question there is, how does that affect your overall strategy in China in a context of what some of your peers are doing in that market? I have a followup.

J. Feltheimer I’ll let Michael answer the first question. M. Burns Okay, I’m sorry, who asked that question? T. Amobi This is Tuna Amobi from S&P Capital IQ. M. Burns Okay, great, nice to talk with you. We are going to continue to de-lever

over the next three quarters, significantly, as we’ve said. We expect our


August 10, 2012/6:00 a.m. PDT

overall debt to come $200 million. Jon, are you going to answer the China question?

T. Amobi Sorry about that. You’ve laid out that and I was wondering if by the end

of 13, we can expect some maybe clarity as to other uses of cash, given the strong earnings and cash flow visibility.

M. Burns Well if you’re asking the question are we going to do acquisitions, is that

the question that you are asking? T. Amobi Well I guess that’s implied; or other uses, kind of I think dividends

probably, maybe, are we getting ahead of ourselves here? M. Burns Yes, I think so. Again, we don’t telegraph that but we don’t anything

imminent on the horizon. I will tell you, and Jon has said it over and over again on other calls, we’re looking to de-vest our non-core assets. So you should see us to continue to pursue that half, and as I said that at the moment there’s nothing imminent on the acquisition side. I mean our focus is really on deleveraging.

T. Amobi Okay. J. Feltheimer In terms of your question, I’ll let Patrick start, just specific to The Hunger

Games and then I’ll take it from there. P. Wachsberger Okay, yes, your question about The Hunger Games performance in China,

it was very strong; you’re absolutely right. It was by far the best box office performance of any Lionsgate or Summit film in China. We grossed about $25 million. To compare, previously box office of any one of our movies was between $7 million and $8 million. So we’re very, very, very happy there and we’re going to see a substantial amount of overages coming from this movie in this territory, which fare extremely well for the sequel.

J. Feltheimer One of the things that I mentioned before on these calls is the benefit from

our Celestial Tiger partnership where we have a team on the ground in Hong Kong representing our product, working together with us on sales, working together with us on potential co-financing, co-productions, etcetera, and it’s already paying off. We expect it to continue to grow and Patrick and I are intending to go back to China in a few months. We’re being invited to have a number of very interesting strategic conversations. Yes, we’re overall excited about the expansion of our business


August 10, 2012/6:00 a.m. PDT

internationally as I expressed on this call, the strategy that’s been done with output deals and great partners in almost every territory.

The other thing I wanted to mention, though, is the other territory that

we’re really concentrating on right now is India and Jim Packer, our head of sales, just spent ten days in India. I think you should also look towards a much bigger expansion of our revenues and contributions from that territory. We think not many people are talking about India right now. We think that’s really another tremendous opportunity going forward.

T. Amobi Okay, that’s helpful. Lastly, I had a question on your retail and

merchandising strategy. It seems like you’ve stepped up you efforts there pretty recently, perhaps more so than ever before on a variety of titles. Can you help us understand how you’re coordinating these efforts on an integrated basis with Summit and so on, and if you can update us on how that kind of fits into your three-year plan to the extent that you can quantify any upside that you see there as well, would be very helpful. Thank you so much.

S. Beeks This is Steve. On your retail merchandising question, I assume you’re

talking about primarily the package media business linked with licensing and merchandising products. Obviously, The Hunger Games gives us a huge opportunity at retail. As we’ve announced, next week there will be a giant event Friday night at every major retailer. The displays are being shipped in now. You’re seeing displays of all the licensed goods going up in Walmart right now.

Obviously, Summit has a lot of experience in these big franchises, so

obviously, we’re utilizing that. So we’re well positioned. We’ve got special packaging at every single retailer. I think this is going to be the entertainment event of the year for every retailer. I’m not sure what more you want. I know we have a co-promotion, a huge co-promotion going on with the Kindle Fire that’s going to launch right around the time of the DVD release. So you’re going to see a lot going on.

J. Feltheimer That sponsorship is not only in the U. S., but it’s international as well. I

think I could say we can’t quantify it for you specifically right now, but I would say that our revenues right now, from a licensing and merchandising of Hunger Games are ahead of our plan. We expect them to go up significantly for the second, third, and fourth movies; and it’s one of the reasons why although the budget is higher for the second Hunger Games, between our significantly higher international sales as well as


August 10, 2012/6:00 a.m. PDT

licensing and merchandising growth that we see, that movie will be very, very profitable. Does that answer your question?

T. Amobi Thank you. J. Feltheimer You’re welcome. Moderator Our final question today comes from the line of David Joyce representing

ISI Group. Please go ahead. D. Joyce Great, thanks for the question. One; could you please outline the kind of

timing for your major T.V. episode deliveries over the course of the next few quarters? Secondly, on your SVOD rights, internationally, what’s your Amazon; do you retain those rights or have those been pre-sold with your other theatrical rights sales? Thank you.

J. Feltheimer Jim, if you could do the— J. Keegan Sure, the T.V. episodes, you’re going to see a delivery that actually the

contributions coming Mad Men in Q3, then even stronger Q4; Weeds strong in Q2, that’s when the bulk of that we’ll hit; Anger Management, you’ll start, assuming with all happening, you would see something later on in on the year Q3 or Q4 depending on what occurs there. Those are the big—that’s how we’re—so the T.V. deliveries and actually profitability are pretty much back-loaded in the year. Steve.

S. Beeks On your SVOD, your SVOD question regarding international; what we do,

obviously, in every territory, with the exclusion of the U.K., we license generally all rights to the end-market distributor. The SVOD rights are usually linked to the pay television deal in that particular marketplace, but since we have a major library and these rights that we license do always come back to us, we are making major SVOD licenses and are entering into big SVOD licenses around the world. Particularly in the U.K, as you notice, that’s probably the most competitive marketplace with both LOVEFiLM and Netflix in that market and we do retain with the library. We also retain digital rights when we are licensing product in the library and we are opening in every iTunes store around Europe right now. So you’ll see that our worldwide for digital revenue begin to grow significantly, just like it’s doing here in the U.S. as we go forward.

D. Joyce Okay, thank you very much.


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Moderator I’d now like to turn the conference back over to Mr. Wilkes for closing

remarks. P. Wilkes For discussion of certain non-GAAP forward-looking metrics discussed on

this call, please refer to the presentations tab under the investment section of our company’s website at www.lionsgate.com. Thank you very much for joining us today.

Moderator Ladies and gentlemen, that does conclude our conference for today. We

thank you for your participation and for using the AT&T Executive TeleConference.

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