WINNIPEG, May 6 /CNW/ - Pollard Banknote Income Fund (TSX Symbol PBL.UN)
(the "Fund") today released the financial results of the Fund and Pollard
Holdings Limited Partnership ("Pollard LP") for the three months ended March
1st Quarter ended 1st Quarter ended
March 31, 2009 March 31, 2008
Sales(1) $ 47.0 million $ 39.1 million
EBITDA(1) $ 4.0 million $ 4.6 million
Adjusted Distributable Cash(1) $ 2.2 million $ 3.3 million
Distributions(1) $ 5.6 million $ 5.6 million
Cash per unit(1) $ 0.0930 $ 0.1381
Distributions per unit(2) $ 0.2376 $ 0.2376
Payout ratio(3) 255.5% 172.1%
(1) Sales, EBITDA, Adjusted Distributable Cash, Distributions and
Adjusted Distributable Cash per unit are for Pollard LP for the
period ended March 31, 2009.
(2) Distributions per unit are for the Fund for the period ended March
(3) Payout ratio is calculated as Distributions per unit divided by
Adjusted Distributable Cash per unit.
"The first quarter presented Pollard with a number of challenges," stated
John Pollard, Co-Chief Executive Officer. "Lower than normal order volumes
from one large client, coupled with additional expenditures relating to the
development of new capacity, resulted in a shortfall from our targeted
distributable cash. In addition, specific problems associated with two
significant orders resulted in a large one time reproduction cost."
"While our first quarter financial results are very disappointing, the
industry fundamentals remain strong, with consistent growth in the instant
ticket market creating ongoing opportunities to increase volumes. Our
charitable gaming market business has also grown during the first quarter of
2009 and we expect this growth to continue."
Since the IPO in 2005, Pollard had followed a policy of hedging the net
exposure to the U.S. dollar with monthly forward currency contracts. These
contracts were placed 24 months into the future and locked in the exchange
rates for that period. This practice was discontinued in October 2008, and the
last of these contracts will therefore expire in September 2010.
The average rates locked in between now and September 2010 are
approximately at par (meaning one Canadian dollar converts to one U.S.
dollar). This compares negatively to the average hedged rate in 2008 of $0.90
U.S. for every Canadian dollar. As a result, over the next 18 months the net
U.S. dollar cash inflow will convert to fewer Canadian dollars and be a
significant drag on our earnings during this period. Unfortunately, the
anticipated offset to this of expected increased sales and lower costs from
our new press line have been slower in materializing than we expected.
The Fund believes at this time it is prudent to reduce distributions to
retain additional capital within Pollard Banknote. As a result the Fund
announces today that beginning with the May monthly distribution (payable June
15, 2009) the monthly distribution will be reduced from $0.0792 per unit per
month to $0.0475 per unit per month, a 40% reduction. On an annual basis the
distribution is reduced from $0.9504 per unit to $0.57 per unit. The increased
financial requirements of developing the infrastructure and increased working
capital relating to the new press capacity require additional funds. In
addition, the significant capital expenditures incurred over the past 15
months have resulted in increased bank indebtedness and retaining cash flow
will allow Pollard to strengthen its balance sheet and capital structure. The
distribution reduction will also help ensure financial flexibility during this
time of uncertainty within the banking and financial sector.
"Management and the Trustees of the Fund recognize the importance of
distributions to Unitholders," stated Pollard, "but believe that the most
prudent decision at this time is to reduce our monthly distribution payout.
This will allow the Fund to continue to finance the increased working capital
and infrastructure expenditures required to bring our new capacity fully on
stream. It will also allow us to enhance our capital structure after a period
of significant capital expenditures. We will continue to monitor the situation
on an ongoing basis."
The Fund commenced business operations on August 5, 2005, and earnings
from the Fund's investment in Pollard LP have been accounted for using the
equity method of accounting. Under this method, the Fund's share of earnings
of Pollard LP is adjusted for the amortization of certain intangible assets
arising from the use of purchase accounting, certain administrative expenses
and any future income tax reductions. The results of operations of the Fund
are dependent on the performance of Pollard LP.
The Fund has declared distributions totaling $0.2376 per unit during the
period ended March 31, 2009.
Pollard LP is one of the leading providers of products and services to
lottery and charitable gaming industries throughout the world. Management
believes Pollard LP is the largest provider of instant-win scratch tickets
based in Canada and the second largest producer of instant tickets in the
SELECTED FINANCIAL INFORMATION
Three months ended Three months ended
(millions of dollars) March 31, 2009 March 31, 2008
Sales $47.0 $39.1
Cost of Sales 38.9 32.6
Gross Profit 8.1 6.5
Gross Profit as a % of sales 17.2% 16.6%
Selling and Administration
Expenses 5.6 4.7
Expenses as a % of sales 11.9% 12.0%
Realized foreign exchange loss (gain) 0.5 (1.5)
Loss (gain) as a % of sales 1.1% 3.8%
EBITDA 4.0 4.6
EBITDA as a % of sales 8.5% 11.8%
March 31, 2009 December 31, 2008
Total Assets $99.1 $113.0
Total Long Term Liabilities $60.9 $60.4
The previous selected financial and operating information has been
derived from, and should be read in conjunction with, the consolidated
financial statements of Pollard LP.
Results of Operations - Three months ended March 31, 2009
During the three months ended March 31, 2009, Pollard LP achieved sales
of $47.0 million, compared to $39.1 million in the three months ended March
31, 2008. Factors impacting the $7.9 million sales increase were:
During the three months ended March 31, 2009, Pollard LP generated
approximately 75% of its revenue in U.S. dollars including a significant
portion of international sales which are priced in U.S. dollars. During the
first quarter of 2009 the average U.S. dollar versus the Canadian dollar value
was $1.25, compared to $0.99 during the first quarter of 2008. This 26.1%
increase in the U.S. dollar value resulted in an approximate increase of $7.3
million in revenue relative to the first quarter of 2008.
The volume of instant ticket and related services sales generated during
the first quarter of 2009 was similar to the volume in the comparable three
months of 2008. A different mix of products resulted in an increased average
selling price providing $0.8 million higher sales when compared to the first
quarter of 2008. Charitable Gaming Products (pull-tabs and bingo paper) volume
increased during the quarter and, combined with a small volume decrease in
other product lines, generated lower sales by $0.2 million.
Cost of sales was $38.9 million in the three months ended March 31, 2009,
compared to $32.6 million in the three months ended March 31, 2008 due to the
higher exchange rate on U.S. dollar transactions in the first quarter of 2009
and other factors discussed below.
Gross profit increased from $6.5 million (16.6% of sales) to $8.1 million
(17.7% of sales) in the three months ended March 31, 2009. The increase in
gross profit reflects the greater impact on sales of the strengthening of the
U.S. dollar compared to the impact on cost of sales.
The margin was lower than the historical margin of approximately 21%, due
to a number of factors including: lower than historical order volumes; reduced
production volumes due to planned maintenance shut down in two of our plants
during the quarter and a large one time cost associated with the reproduction
of two significant orders. In addition, the start up period for the new press
has been longer than expected, with significant additional costs incurred
during the ramp up and testing process without corresponding higher production
Selling and administration expenses were $5.6 million in the three months
ended March 31, 2009, compared to $4.7 million in the three months ended March
31, 2008 due to higher wages, increased professional fees and higher travel
In the first quarter of 2009 a foreign exchange loss was incurred of $1.6
million, compared to a gain of $1.3 million in the first quarter of 2008.
Within the foreign exchange loss are unrealized losses of $1.0 million
relating to the foreign exchange loss on U.S. dollar denominated debt (caused
by the weakening of the Canadian dollar) and $0.6 million in realized losses
relating to forward hedge contracts (caused by a weaker Canadian dollar
relative to fixed exchange rates in the hedges).
EBITDA was $4.0 million in the three months ended March 31, 2009,
compared to $4.6 million in the three months ended March 31, 2008. EBITDA
margins were 8.5% in the three months ended March 31, 2009, compared to 11.8%
achieved in the three months ended March 31, 2008. The primary reasons for the
decline in EBITDA were higher gross profit offset by higher selling and
administration costs and higher foreign exchange losses due to the impact of
the weaker Canadian dollar compared to the fixed exchange rates of the hedge
A non-cash mark-to-market loss of $1.8 million was recorded in the three
months ended March 31, 2009, compared to a non-cash mark-to market loss of
$3.8 million recognized in the comparable period of 2008. The weakening of the
Canadian dollar in relation to the U.S. dollar during the first quarter of
2009 resulted in a non-cash write-down in forward foreign currency contracts
that Pollard LP had in place. These contracts expire during the next 18 months
with the final one maturing in September 2010.
In the three months ended March 31, 2009, $2.3 million was recorded as a
net loss in comparison to a net loss of $2.4 million in the three months ended
March 31, 2008. Increased gross profit and lower mark-to-market loss on
foreign currency contracts were offset by increased selling and administration
expenses and higher realized and unrealized foreign exchange losses.
Pollard LP generated $2.2 million in Adjusted Distributable Cash, or
$0.093 per unit for the three months ending March 31, 2009.
Use of Non-GAAP Financial Measures
Reference to "EBITDA" is to earnings before interest, income taxes,
amortization, unrealized foreign exchange gains and losses, mark-to-market
gains and losses on foreign exchange contracts and long term incentive plan
expense. Reference to "Adjusted Distributable Cash" is to cash available for
distribution to Unitholders, calculated as cash flow from operations, before
changes in non-cash working capital, less maintenance capital expenditures.
Management views Adjusted Distributable Cash as an operating performance
measure, as it is a measure generally used by Canadian income funds as an
indicator of financial performance. Adjusted Distributable Cash is important
as it summarizes the funds available for distribution to Unitholders. As the
Fund and Pollard LP will distribute substantially all of its cash on an
ongoing basis and since EBITDA and Adjusted Distributable Cash are metrics
used by many investors to compare issuers on the basis of the ability to
generate cash from operations, management believes that, in addition to Net
Income, EBITDA and Adjusted Distributable Cash are useful supplementary
EBITDA, Adjusted Distributable Cash, Maintenance Capital Expenditures and
Growth Capital Expenditures are not measures recognized under GAAP and do not
have standardized meanings prescribed by GAAP. Therefore, these measures may
not be comparable to similar measures presented by other entities. Investors
are cautioned that EBITDA should not be construed as an alternative to Net
Income or Loss determined in accordance with GAAP as indicators of the Fund's
and Pollard LP's performance or to cash flows from operating, investing and
financing activities as measures of liquidity and cash flows.
The 2009 outlook for the lottery industry, and in particular the instant
ticket product line, remains strong. Retail sales of instant tickets in North
America continue to grow approximately 4-5% annually, notwithstanding the
current general economic uncertainty.
Many of our most important existing customers extended their contracts
with us or awarded new contracts to us during 2008 and early 2009. The New
Jersey Lottery contract has been extended until July 2009 and Pollard has
responded to the Lottery's request for proposal to award a new long-term
contract. There are no other material contracts that come due in 2009 (when
extensions are considered), however there are a number of contracts which come
due this year where Pollard is not the main supplier. We will bid aggressively
on all new contract opportunities in order to expand our market share and
profitably utilize our expanding capacity.
Our volumes in the charitable gaming sector (pull-tabs and bingo paper)
have shown increases in the first quarter of 2009 due to improvements in our
market share and we expect this trend to continue.
The Canadian dollar weakened relative to the U.S. dollar dramatically
during the last half of 2008 and remained weak during the first quarter of
2009. Pollard has a net exposure to U.S. dollar inflows so a weaker Canadian
dollar results in increased cash flow. Historically we have hedged our net
exposure to U.S. dollar inflows through the use of monthly forward foreign
currency contracts. Continued volatility in these foreign exchange rates will
continue to generate significant volatility in our reported net income due to
the accounting rules requiring foreign currency forward contracts be marked to
market value. The full benefit of the weaker Canadian dollar will not be
realized until the expiry of those hedges in September 2010, assuming the
Canadian dollar remains weak.
Our recent announcement of the addition of music company EMI to our
licensed properties portfolio is an exciting new development that will allow
lotteries an opportunity to target an important demographic through such
mechanisms as social networking. We have already confirmed our first sale of
this new property and expect more in the near future.
Our balance sheet and capital structure will benefit from the
significantly reduced capital expenditures during 2009. In addition, the
reduced level of distributions coupled with our ongoing review of ownership of
land and buildings will strengthen our capital structure.
Legislation relating to the Tax Fairness Plan continues to evolve. When
the current draft legislation relating to tax efficient means to revert to
corporate status is finalized, Pollard Banknote will develop specific
strategic plans at that time. The introduction of taxation under the Tax
Fairness Plan is not expected to apply to the Pollard Banknote Income Fund
Pollard Banknote believes that its credit facilities and ongoing cash
flow from operations will be sufficient to allow it to meet ongoing
requirements for investment in capital expenditures, working capital and
distributions at existing business levels.
Certain statements in this report may constitute "forward-looking"
statements which involve known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. When used in this
document, such statements include such words as "may," "will," "expect,"
"believe," "plan" and other similar terminology. These statements reflect
management's current expectations regarding future events and operating
performance and speak only as of the date of this document. There should not
be an expectation that such information will in all circumstances be updated,
supplemented or revised whether as a result of new information, changing
circumstances, future events or otherwise.
For further information:
For further information: John Pollard, Co-Chief Executive Officer,
Telephone: (204) 474-2323 ext 204, Facsimile: (204) 453-1375; Gordon Pollard,
Co-Chief Executive Officer, Telephone: (204) 474-2323 ext 211, Facsimile:
(204) 453-1375; Rob Rose, Chief Financial Officer, Telephone: (204) 474-2323
ext 250, Facsimile: (204) 453-1375