Disney Studios margins up, may end outside funding

By Gina Keating

LOS ANGELES, Sept 9 (Reuters) - Walt Disney Studios' profit margins have increased five-fold since it cut costs and its film slate, studio president Alan Bergman said on Tuesday.

Bergman also told the Merrill Lynch 2008 Fall Preview Conference that the company has not decided whether to turn to outside film financing again when its deal with Kingdom Films LLC runs out in mid-2009.

Bergman said the studio sees no problem finding new investors even in a down market but may not want to share profits or ownership going forward.

"I think we could replace (the funding) in this market. We aren't actually sure if we are going to," Bergman said. "We are focused on Disney-branded movies because that's a strong area for us, we are not sure we want to do a deal."

Bergman also forecast that film production costs would stay stable. "It depends on the timing of movies as they come in and out. Over the next few years I don't think it will change materially," he said.

Marketing costs also continue "flat or maybe up a little bit," he said.

"There is a lot of clutter out there and a certain amount of money you need to spend," he said.

The deal with Kingdom Films, which was set up in 2005 by Credit Suisse First Boston, raised $505 million to foot 40 percent of the production and distribution costs for 32 films.

The film fund gave 40 percent of profits to investor hedge funds, insurance companies and mezzanine funds. Disney keeps 60 percent of profits from its live-action, non-sequel films and has the option to buy the fund's ownership stake in them.

Disney turned to outside funding under Chairman and Chief Executive Michael Eisner in 2005 when production costs were spiraling and during a downturn in North American box office grosses.

The studio cut its overhead and production costs under CEO Bob Iger, boosting profitability from 3 percent margins that delivered operating profit of $207 million in fiscal 2005 to 16 percent margins resulting in operating profit of $1.2 billion in fiscal 2007, Bergman said.

Revenue for the division has remained flat, at about $7.5 billion, on a smaller slate of films. The studio division's performance has been uneven in recent quarters, and dragged on earnings for Walt Disney Co (DIS.N) in its most recent quarter.

Shares of Walt Disney Co closed down 1.5 percent, or 49 cents per share, at $32.43 on the New York Stock Exchange on Tuesday. (Editing by Gary Hill)