WINNIPEG, Aug. 5 /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 and six months ended
June 30, 2009.
2nd Quarter ended 2nd Quarter ended
June 30, 2009 June 30, 2008
Sales(1) $ 49.5 million $ 44.6 million
EBITDA(1) $ 5.0 million $ 7.4 million
Adjusted Distributable Cash(1) $ 3.1 million $ 5.8 million
Distributions Declared(1) $ 4.1 million $ 5.6 million
Adjusted Distributable Cash
per unit(1) $ 0.1312 $ 0.2487
Distributions per unit(2) $ 0.1742 $ 0.2376
Payout ratio(3) 132.8% 95.6%
(1) Sales, EBITDA, Adjusted Distributable Cash, Distributions and
Adjusted Distributable Cash per unit are for Pollard LP for the
period ended June 30, 2009.
(2) Distributions per unit are declared by the Fund for the period ended
June 30, 2009.
(3) Payout ratio is calculated as Distributions per unit divided by
Adjusted Distributable Cash per unit.
"Our second quarter continued to be impacted by the challenges
experienced during the first quarter," stated John Pollard, Co-Chief Executive
Officer. "Our volumes during the beginning of the second quarter were lower
than expected and the ramp-up of our new press was slower and more expensive
than anticipated. These factors, combined with higher realized foreign
exchange loss on our U.S. dollar denominated accounts receivable due to the
strengthening of the Canadian dollar, resulted in our underlying distributable
cash falling short of our target."
"We are encouraged, however, with the increasing volumes witnessed as the
second quarter progressed and are anticipating higher production and sales
volumes for the third quarter. The performance of our new press has improved
and our volumes produced on this press have increased significantly towards
the end of the second quarter and are scheduled to be higher in the third
"The fundamental strength in the instant lottery ticket market remains
and we are working diligently to acquire new sales. Our focus on cost
reduction has resulted in a number of positive trends including reduced
overtime and reduced direct material costs and we believe that this trend, in
conjunction with improved operating results from the new press, will generate
increased distributable cash in the upcoming quarters."
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 $0.1742 per unit during the
period ended June 30, 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
(millions of dollars) Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
Sales $49.5 $44.6 $96.5 $83.7
Cost of Sales 40.0 34.5 78.9 67.1
Gross Profit 9.5 10.1 17.6 16.6
Gross Profit as a % of sales 19.2% 22.6% 18.2% 19.8%
Selling and Administration
Expenses 5.6 4.9 11.2 9.7
Expenses as a % of sales 11.3% 11.0% 11.6% 11.6%
Realized foreign exchange loss
(gain) 1.9 (1.0) 2.5 (2.4)
Loss (gain) as a % of sales 3.8% (2.2%) 2.6% (2.9%)
EBITDA 5.0 7.4 9.0 12.0
EBITDA as a % of sales 10.1% 16.6% 9.3% 14.3%
June 30, December 31,
Total Assets $101.9 $113.0
Total Long Term Liabilities $78.1 $60.4
The 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 June 30, 2009
During the three months ended June 30, 2009, Pollard LP achieved sales of
$49.5 million, compared to $44.6 million in the three months ended June 30,
2008. Factors impacting the $4.9 million sales increase were:
- During the three months ended June 30, 2009, Pollard LP generated
approximately 69% of its revenue in U.S. dollars including a
significant portion of international sales which are priced in U.S.
dollars. During the second quarter of 2009 the actual U.S. dollar
value was converted to Canadian dollars at $1.19, compared to a rate
of $1.02 during the second quarter of 2008. This 17% increase in the
U.S. dollar value resulted in an approximate increase of $5.0 million
in revenue relative to the second quarter of 2008.
- Instant ticket volumes for the second quarter of 2009 were lower by
approximately 4% which reduced sales by $1.6 million. Increased sales
of related services generated an additional $0.9 million in sales.
Charitable Gaming Products (pull-tabs and bingo paper) volume was
similar during the quarter, however there was an increase in higher
priced product mix generating $1.1 million in additional sales. A
volume decrease in other product lines reduced sales by $0.5 million.
Cost of sales was $40.0 million in the second quarter of 2009 compared to
$34.5 million in the second quarter of 2008. Higher exchange rates on U.S.
dollar transactions in the second quarter of 2009 increased cost of sales
approximately $3.5 million. Higher costs associated with the new press
including inefficiencies relating to the start up, and overall production
inefficiencies increased cost of sales $2.0 million.
Gross profit decreased from $10.1 million (22.6% of sales) in the second
quarter of 2008 to $9.5 million (19.2% of sales) in the second quarter of
The gross margin percentage was lower than 2008 due to lower order
volumes and higher cost of sales as discussed previously.
The ramp-up of the new press continued during the second quarter.
Production volumes and effective capacity has increased steadily during the
three months with additional staff being trained at the end of June and early
July to increase the number of shifts. Spoilage and other inefficiencies have
Selling and administration expenses were $5.6 million in the second
quarter of 2009 which is higher than $4.9 million in the second quarter of
2008 due to higher resources committed to increasing sales volumes including
higher staff costs and increased travel costs.
Foreign exchange gain increased to $1.0 million in the second quarter of
2009 compared to a gain of $0.8 million in the second quarter of 2008. Within
the 2009 foreign exchange gain are unrealized gains of $2.9 million relating
to the foreign exchange gain on U.S. dollar denominated debt (caused by the
strengthening of the Canadian dollar) offset by $1.0 million in realized
losses relating to forward hedge contracts (caused by fixed exchange rates in
the hedges being lower than the actual rates) and $0.9 million in realized
losses on write-downs of U.S. dollar denominated receivables.
Over the course of the second quarter in 2009 the Canadian dollar
strengthened significantly versus the U.S. dollar. While our cash flow during
this period remained effectively hedged, our ongoing investment in U.S dollar
denominated accounts receivable is impacted negatively when the Canadian
dollar strengthens. These realized losses are non-recurring, assuming the
relationship of the Canadian dollar remains steady relative to the U.S.
In the second quarter of 2008 the foreign exchange gain consisted of an
unrealized loss of $0.2 million relating to the foreign exchange on U.S.
dollar denominated debt and $1.0 million in realized gains relating primarily
to forward hedge contracts having exchange rates higher than the actual rates.
During the second quarter of 2009, Pollard LP disposed of a surplus
office building and land in Winnipeg, Manitoba to an affiliate of Equities for
total proceeds of $3.4 million resulting in a gain of approximately $1.7
million. The selling price was based on current fair market value as
determined through an independent valuation.
EBITDA was $5.0 million in the second quarter of 2009 compared to $7.4
million in the second quarter of 2008. EBITDA margins were 10.1% in the second
quarter of 2009 compared to 16.6% in the second quarter of 2008. The primary
reasons for the decrease in EBITDA was the lower gross profit, higher selling
and administration costs and a change to a large realized foreign exchange
loss from a gain in 2008, due to the impact of the exchange rates of the hedge
program. Partially offsetting this reduction in EBITDA was a gain on the sale
of property, plant and equipment.
A non-cash mark-to-market gain on foreign currency contracts of $5.9
million was recorded in the second quarter of 2009, compared to a non-cash
gain of $0.1 million recognized in the second quarter of 2008. The
strengthening of the Canadian dollar in relation to the U.S. dollar during the
second quarter of 2009 resulted in a non-cash increase in the fair value of
forward foreign currency contracts that Pollard LP had in place. These
contracts expire during the next 15 months with the final one maturing in
Net income was $11.3 million in the second quarter of 2009 and in the
second quarter of 2008 net income was $4.5 million. The difference was
primarily due to a gain on the sale of property, plant and equipment, and a
large mark-to-market gain on foreign currency contracts.
Pollard LP generated $3.1 million in Adjusted Distributable Cash, or
$0.13 per unit, for the second quarter of 2009. Adjusted Distributable Cash
will vary on a quarter-to-quarter basis due to changes in the product mix and
short term variation in the order quantities from customers.
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 healthy. Retail sales of instant tickets in North
America continue to grow approximately 4-5% annually and sales in certain
jurisdictions outside North America also show significant incremental growth,
notwithstanding the ongoing general economic uncertainty.
We have no material contracts that come due in 2009 (when extensions are
considered). The New Jersey Lottery contract has been extended to September
30, 2009 and Pollard has responded to the lotteries' request for proposal to
award a new long term contract. We are bidding aggressively on all new
contract opportunities as well as working to increase our market share for
individual contracts where we share work with other suppliers.
Our volumes in the charitable gaming sector (pull-tabs and bingo paper)
remain strong and we expect to maintain our current volume level.
The Canadian dollar strengthened relative to the U.S. dollar during the
second quarter. Our historical strategy of hedging our future net U.S. dollar
cash flow has locked in our exchange value for U.S. dollar cash inflow until
September 2010 at rates that are lower than the current exchange rate. On
average our exchange rates for our U.S dollar cash flow will be converted at
$1.03 Canadian for every $1 U.S. cash flow. This will result in higher
realized foreign exchange losses over the next five quarters. We have
discontinued hedging our net U.S. dollar cash flow with the final hedges
expiring in September 2010.
Notwithstanding that we have locked in the exchange rate for our current
U.S. dollar cash inflow, significant swings in the Canadian dollar relative to
the U.S. dollar will still result in significant volatility in our reported
net income due to the accounting rules requiring foreign currency forward
contracts be marked to market value. In addition, net income and distributable
cash will be impacted due to the change in value of our investment in accounts
receivable, accounts payable and long term debt denominated in U.S. dollars.
Sales and production volumes increased during the later half of the
second quarter and we are currently expecting our volumes during the third and
fourth quarter to exceed the first half of the year. The third quarter
traditionally generates slightly stronger volumes in preparation for the
holiday season in December. Order levels from a number of our larger customers
have returned to expected levels. The continuing improvement in the new press
operations should also assist us in generating higher volumes of production.
The nature of the industry will result in some ongoing variability in volumes
on a quarter-to-quarter basis due to changes in our customers marketing plans,
inventory management and the introduction or delay of new product offerings.
Licensed property sales continue to be an important growing part of our
product offering and traditionally the third and fourth quarter has seen
higher sales in this area as lotteries produce specialty products for the
holiday season. We expect sales of this line of product offering to be higher
than the first half of the year.
Production efficiencies and volumes on the new press improved throughout
the second quarter and we are hopeful that this trend will continue through
the third and fourth quarter of 2009.
Our balance sheet will continue to strengthen over the next few quarters
reflecting the impact of lower capital expenditures compared to recent history
and the lower level of distributions introduced near the end of the second
quarter. These factors combined with our recently renewed bank facility will
allow us to strengthen our balance sheet.
Legislation relating to the Tax Fairness Plan continues to evolve. The
legislation relating to tax efficient means to revert to corporate status has
been enacted and Pollard Banknote is currently reviewing the alternative
strategic plans. The introduction of taxation under the Tax Fairness Plan is
not expected to apply to the Pollard Banknote Income Fund until 2011.
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