Hoyts NZ cinema unit almost doubles annual profit after selling distribution arm, converts to digital

The Hoyts cinema chain in New Zealand almost doubled annual profit in 2013 after it sold its local distribution arm to French company Canal Plus Group and invested in switching its cinemas over to a digital format.

Profit rose to $10.1 million in the year ended June 30, from $5.5 million a year earlier, according to Hoyts' local unit HCH Bidco (NZ), which is owned by Australian private equity firm Pacific Equity Partners. The company booked a $2.7 million gain on the sale of its Hoyts distribution unit.

Hoyts, acquired by Pacific Equity Partners six years ago, converted all its New Zealand cinemas to digital in the six months leading up to the April school holidays as studios such as 21st Century Fox end distribution of traditional 35mm analogue reel films in favour of digital files, saving on print fees and projection costs and boosting film quality.

"We are now 100 percent digital in New Zealand," said Hoyts New Zealand general manager of operations Matthew Garelli. "It's getting pretty difficult to source 35mm stock now. You have got to transition or you will be in a bit of trouble."

Fox moved to only distributing digital prints in Hong Kong and Macau from 2012 and signalled other markets in the Asia Pacific region would follow. Some 60 percent of New Zealand's estimated 400 screens have so far converted to digital, at a cost of about $100,000 per screen, according to the Motion Picture Distributors' Association. Countries such as Norway and the Netherlands are already fully digital.

For the industry, the change is of a similar magnitude to the switch from black-and-white to colour TV, said Garelli, who estimates New Zealand will be fully digital within the next six months as supplies of 35mm film become scarce.

"The good thing from a consumer perspective is the quality of the film is significantly better, there is no fading like there was in 35mm back in the day," he said.

In New Zealand, Hoyts has 10 cinemas spanning Auckland, Hamilton and Christchurch while rival Event Cinemas has 12 cinemas and Reading Cinemas has eight, according to the company websites.

Garelli was unable to provide a total cost for the conversion, which he said varied depending on the scale of upgrade needed at each cinema.

At the end of September, Hoyts opened its first 'Metro' cinema brand in Hamilton's Centre Place Shopping Centre, featuring five digital screens, a bar and American diner-style food which can be taken into the theatre, with the new offering marketed as a blend of "your favourite movie house with a New York City street".

The new model has met expectations so far but will face its first real test of market response with the opening of its first blockbuster movie 'The Hunger Games: Catching Fire' in two weeks' time, Garelli said. Should it prove successful, the model will likely be rolled out to other smaller sized cinema sites in coming years, he said.

In August, the company closed its six-screen cinema at Dunedin's Octagon that it had operated since 1993, relocating equipment from the two digital screens to other parts of its chain.

In the 2013 financial year, the New Zealand Hoyts unit increased revenue from continuing operations by 18 percent to $66.3 million as expenses rose 7.3 percent to $48.9 million.

"The major challenge like always is summer," Garelli said. "Last year was a tough December, January because we had that fantastic weather and that did take us a while to recover from which was that April, May, June period of this year to get back on top of things."

"That is the key thing ahead of us in the next six months," Garelli said. He expects cinema admissions in 2014 to be similar to 2013 with the potential for some films to outperform.

Hoyts NZ's cash on hand and at the bank tripled to $16.7 million at the June 30 balance date compared with the year earlier and the company subsequently paid a dividend of $15 million to its Australian shareholder on Aug. 19, according to its accounts.

In June, Hoyts Group and Pacific Equity Partners secured a US$450 million refinancing facility, the first time an Australian private equity firm has tapped the US Term Loan B market, to refinance Hoyts Group's existing debt arrangements, return funds to investors and provide future flexibility, according to the firm's legal advisers Gilbert + Tobin.


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