reported by Jesse Desi, CyberScreenwriter.com

Going into 2007, Fitch Ratings expected U.S. Movie Exhibitors to benefit from a very promising film slate which has included a number of sequels to successful franchises. The absolute number of high performing releases has met Fitch's expectations with 19 films having already grossed more than $100 million compared to 19 in all of 2006. This summer has been particularly strong, up 10% and topping the $4 billion mark for the first time. Year to date, domestic box office receipts through August 26 show the high-to-mid-single digit growth (up 7.2% according to Media by Numbers) Fitch generally anticipated.

Price Hikes & (Underwhelming) Attendance Gains

While the outlook for the sector remains stable, Fitch asserts that exhibitor industry fundamentals are not as healthy as box office headline numbers might imply. Box office increases have been driven predominantly by average ticket price increases (up 4.7%). Exhibitors have driven their revenue by price hikes, increases in concession spending and likely some favorable shift in the mix of attendees. Fitch is cautious regarding the sustainability of these sources of revenue as movie exhibitors cannot expect to maintain this pricing power in future years, when film product may be less robust given already high prices, collapsing windows and competing alternatives for consumers' time and disposable income.

Fitch is concerned that the quality of film product has not had a more positive effect on attendance, up only about 2.5% in this year that featured several highly anticipated releases. Attendance per screen was down year-over-year in the quarter ended June 30, 2007 at each of the three major exhibitors (Regal Entertainment Group, rated 'B+' by Fitch, Stable Outlook; AMC Entertainment, rated 'B', Stable Outlook; Cinemark, not rated). Attendance at blockbuster films appears to have suffered from shorter theatrical shelf life, due to the clustered spring and summer release schedule. Fitch also reminds investors that exhibitors typically earn a lower split of the box office receipts (with the studios retaining a higher proportion) in the days nearest to the release date, so front-end loaded theatrical runs are typically less profitable for exhibitors than ones with more staying power.

These issues emphasize Fitch's longer term concerns that revenues and profitability of movie theater operators will be increasingly challenged by factors that are largely out of managements' control, such as increasing indirect competition from other distribution channels like DVD, video on demand (VOD) or the Internet. Fitch also remains concerned about the potential for further collapse of the window between the theatrical release and the announcement and subsequent release of the movie in a retail format, particularly in a less robust box office environment. The rise of the Internet and digital technology has also increased the threat of piracy and further simplified the pirating process, evidenced by the pre-release online appearances of some titles in the first half of 2007. These secular challenges cause concern as many of the operators maintain high debt levels and high lease obligations combined with fairly high levels of capital expenditures to maintain property and equipment and to reposition their theater portfolios.

Digital Opportunities and Financial Policies

Releases in the second half of the year including Harry Potter, the Simpsons and Bourne Ultimatum have performed well and there are some indications of a relatively healthy 2008 film slate. These factors, in combination with Fitch's expectation for continued slow economic growth indicate that operational trends are likely to remain stable for the U.S. Movie Exhibitors in the near term. The industry is making strides to take advantage of digital opportunities and develop ancillary revenue streams. Fitch notes the longer term opportunities presented by the introduction of digital cinema, which will replace the use of celluloid 35mm film and projectors. In March 2007, the three largest exhibitors (Regal, AMC and Cinemark) announced their joint partnership to create Digital Cinema Implementation Partners, LLC (DCIP), which will plan and implement the deployment of digital technology to partnership theatres with third party financing. With the enhanced experience and programming flexibility, digital cinema may help minimize defections of some moviegoers and improve capacity utilization in the long term.

The positive momentum in box office results has provided near-term credit stability for the sector in general, and provided opportunities for monetization of assets at attractive valuation levels as in the case of the National CineMedia (NCM) IPO in early 2007. Regal, AMC Entertainment and Cinemark received approximately $1.5 billion in proceeds from the NCM IPO and related transactions. AMC and Cinemark, whose private equity sponsors were looking to monetize a part of their stake through an exhibitor IPO, used the proceeds toward debt repayment. Overall, however, financial policies in the industry are expected to remain shareholder friendly, which is consistent with broader trends in the media landscape and broader corporate credit environment over the last several years.

Source: www.fitchratings.com