The Box Office Reaction to COVID-19

As many communities ban large public gatherings in response to the COVID-19 pandemic, a cross-section of businesses may suffer. One of those is the motion picture business. In our March 13 teleconference, GLG’s James Passeri spoke with David Ownby, formerly an Executive Vice President and Chief Financial Officer of Regal Entertainment Group, for his views on how the pandemic may affect major movie theater operators. His edited comments follow.

GLG: Overall, how do you think the pandemic will affect movie exhibitors?

With the situation changing so rapidly, any views I have may not be valid an hour from now. But I think most key for exhibitors is exactly how long a disruption this will be. Are we talking about a few weeks? If so, there’s one kind of answer. If we’re talking months, that could mean a very different answer. I’m confident that all the exhibitors are working through every detail right now, trying to cut costs, manage cash, keep theaters open or close them, and generally best preserve and manage their liquidity — all while considering their employees’ and customers’ health, which is paramount. We’re in uncharted territory.

GLG: Let’s look at the U.S. regional landscape. Where do you see the greatest drops in attendance?

Some states have already outlawed large gatherings of people, which affects theaters. Certainly, the Seattle, Northern California, and New York City markets have been affected. But markets are different. For example, I live in Knoxville, Tenn., and we’ve one reported case. The person traveled here and has been isolated, so things don’t feel as overwhelming as they may in some other parts of the country. But that’s likely to change. So we’ll have to wait and see what the full impact may be in the coming weeks.

GLG: On the supply side, studios have begun delaying release dates. How long do you expect this to continue?

 We’ve seen a fair number of delays in film releases already, starting with the James Bond movie and then Peter Rabbit 2. I can appreciate how difficult the decision to delay can be for a studio because so much money has been invested and they need to make a return. Delaying is probably the right decision, given the current level of uncertainty.

The big question is the longer term. Does a delay simply shift box office revenue from the early part of the year to the back part of the year or next year? At some point, life is going to get back to normal, but no one knows when that is yet. When it does, I believe there will still be demand for theatrical content and maybe even some pent-up demand after people have been confined to their homes for some period. Yet there is also some risk that if all the pictures from the front of the year are moved to the back part of the year, the slate gets very crowded and some of the revenue gets cannibalized.

GLG: Some exhibitors are highly leveraged. Can they sustain the short-term cash burn?

You have to look at liquidity and leverage together when analyzing stress. Typically, the end of the fourth quarter is a high point for exhibitor liquidity because they sell a lot of tickets in December and haven’t yet paid their film rent payments to the studios, which happens sometime in January. I’m sure exhibitors are now doing everything they can to maintain liquidity and keep their vendors and suppliers on good terms. The longer this goes on, the more difficult that’s going to become because there is a fixed-cost nature to a sizable portion of the cost model here – primarily, landlords.

GLG: What are some potential cost-cutting approaches?

 As you think about the cost structure for the exhibitors, the two big line items are purely variable costs: film rent payments to the studios and the cost of concession sales. If nobody shows up to the theater to watch a film or buy concessions, you incur no expense on those line items.

From there down, most everything tilts toward fixed. Most exhibitors report facility lease expense or rent expense as an individual line item. The other big line item, which everybody reports differently, is other operating expenses. At Regal back in 2017, we had three primary buckets: theater-level payroll, which accounted for about 40% to 45% of the number; non-rent occupancy cost, which includes real estate taxes, utilities and common-area maintenance charges, which was another 40% to 45%; and the remaining 10% or 15% included things like credit card processing fees and the amounts paid to third-party equipment suppliers like IMAX or RealD or 4DX – essentially, royalty payments.

Non-rent occupancy costs are primarily fixed, although exhibitors may scale back services by having trash picked up every other day rather than once a day, for instance, or switching to less frequent armored car pickups.

The smaller bucket expenses are primarily variable and will go down as revenue decreases. That leaves you with the third bucket: theater-level payroll. That’s fixed and variable since there are both salaried employees and those who are paid hourly. If you’re going to stay open, I would expect that somewhere between 50% and 70% of your payroll is fixed.

GLG: Do you expect landlords to work out rents with theater tenants?

Some landlords are more open to discussion than others. If you’ve got a good history and a good portfolio with a landlord, you may reach a compromise on when they’ll be paid. On the other hand, if landlords sense there’s a real liquidity crunch and a risk of bankruptcy or reorganization, they’re not going to be very flexible – they’ll want to be paid as much as possible so their rent stream doesn’t wind up as a bankruptcy claim. Those are tricky conversations because there are many savvy landlords out there. A lot of the big exhibitors have multiple properties with some big, savvy real estate developers, such as Simon or Westfield. They understand what’s happening and can make their own assessments of exhibitor liquidity.

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About David Ownby

David Ownby is the former Executive Vice President and Chief Financial Officer of Regal Entertainment Group. During his roughly 20-year tenure at Regal, he also held the title of Senior Vice President of Finance and Vice President of Finance.

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This article is adapted from GLG’s March 13 teleconference “AMC, Cineworld, and COVID-19 Box Office Pressure.” If you would like access to this teleconference or would like to speak with David Ownby, or any of our more than 700,000 experts, contact us.

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