WINNIPEG, Aug. 8 /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, 2007.
June 30, 2007
Sales(1) $ 40.6 million
EBITDA(1) $ 5.9 million
Net Income(1) $ 10.0 million
Distributable Cash(1) $ 4.7 million
Distributions(1) $ 5.6 million
Distributable cash per unit(1) $ 0.1979
Distributions per unit(2) $ 0.2376
Payout ratio(3) 120.1%
(1) Sales, EBITDA, Net Income, distributable cash, distributions and
distributable cash per unit are for Pollard LP for the three months
ended June 30, 2007.
(2) Distributions per unit are for the Fund for the three months ended
June 30, 2007.
(3) Payout ratio is calculated as distributions per unit divided by
distributable cash per unit.
"The second quarter of 2007 was disappointing primarily due to a slower
than anticipated build up of volume from the first quarter," stated Co-Chief
Executive Officer John Pollard. "We have seen both the volume levels increase
and the movement to higher margin product improve toward the end of the second
quarter and expect this trend to continue through the second half of the
"We continue to work diligently on a number of initiatives to improve our
manufacturing efficiencies and develop value added, higher margin product
offerings. In July we were pleased to formally sign our new ten-year contract
with the Ontario Lottery and Gaming Corporation, which we were awarded in the
fall of 2006. The unprecedented length of this contract is confirmation of the
success we have had in building long-term relationships with important lottery
"Our confirmed book of orders for the third quarter is at the highest
level seen during our existence as a public company and the mix of this
business reflects a more profitable blend of work than seen in the first half
of the year. The outlook for the lottery industry continues to be strong and,
based on our ongoing client portfolio and outlook for the third and fourth
quarter, we are confident that our distributable cash will exceed our target
for the year."
Consolidated Statement of Net Income and Unitholders' Equity
Three months ended June 30, 2007
(in thousands of dollars, except for unit amounts)
Share of income of Pollard Holdings Limited Partnership $2,227
Administrative expenses (36)
Net Income for the period 2,191
Opening Unitholders' equity 57,128
Closing Unitholders' equity $57,826
Basic and diluted earnings per unit $0.35
Number of Fund Units outstanding June 30, 2007 6,285,700
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, adjusted for the amortization of certain intangible assets
arising from the use of purchase accounting and certain administrative
expenses, is reflected in the statement of income of the Fund. The results of
operations of the Fund are dependent on the performance of Pollard LP.
As the legislation is now enacted, the Fund is required to recognize
future income tax assets and liabilities with respect to temporary differences
between the carrying amount and tax bases of its assets and liabilities that
are expected to reverse in or after 2011. No future income tax asset or
liability has been recorded for the current temporary differences relating to
capital assets as these differences are expected to reverse prior to 2011. The
Fund does not expect the temporary difference between the carrying amount and
tax base of intangible assets to reverse in the foreseeable future and
accordingly has reduced the asset by a valuation allowance for the full
The Fund has declared the following distributions totaling $0.2376 per
unit during the three months ended June 30, 2007.
Period covered Date of record Payment Date Per unit amount
April April 30 May 15 $0.0792
May May 31 June 15 $0.0792
June June 29 July 16 $0.0792
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,
2007 2006 2007 2006
Sales $40.6 $43.3 $82.7 $91.5
Cost of Sales 31.7 32.5 64.7 69.6
Gross Profit 8.9 10.8 18.0 21.9
Gross Profit as a % of sales 21.9% 24.9% 21.8% 23.9%
Selling and Administration
Expenses 4.6 4.9 9.5 9.7
Expenses as a % of sales 11.3% 11.3% 11.5% 10.6%
Adjusted EBITDA 5.9 8.1 12.3 16.2
Adjusted EBITDA as a % of sales 14.5% 18.7% 14.9% 17.7%
June 30, December 31,
Total Assets $98.6 $104.7
Total Long Term Liabilities $47.5 $49.8
The previous selected financial and operating information has been
derived from, and should be read in conjunction with, the unaudited interim
consolidated financial statements of Pollard LP.
Results of Operations - Three months ended June 30, 2007
During the three months ended June 30, 2007, Pollard LP achieved sales of
$40.6 million, compared to $43.3 million in the three months ended June 30,
2006. Factors impacting the $2.7 million sales difference were:
Strengthening of the Canadian dollar
During the three months ended June 30, 2007, Pollard LP generated
approximately 73% 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 2007 the actual Canadian dollar value versus the U.S dollar
was converted at $1.11, compared to $1.13 during the second quarter of 2006.
This 2% change in value resulted in an approximate decrease of $0.6 million in
Decreased sales volume
The volume of sales generated during the second quarter of 2007 was lower
than the comparable three months of 2006. Overall instant ticket and related
services volumes for the second quarter of 2007 were lower by approximately
9.1% compared to the second quarter of 2006 due to the impact of the timing of
instant ticket orders from current customers. As well, two large sales of
pouched instant tickets in the second quarter of 2006 are not being reordered
until the second half of 2007. The volume of pull-tab tickets decreased by
approximately 22.1% due to the timing of orders from certain distributors.
Bingo paper volumes were consistent with the second quarter of 2006. Sales in
the licensed properties line continue to increase relative to 2006 as new
licensed properties were added to the portfolio, which resulted in increased
sales. While still small in absolute dollars, licensed property revenue
increased 21.8% compared to 2006.
Our core group of lottery customers remains unchanged from 2006. During
the course of a quarter a number of factors will impact the actual order
pattern. These include the status of inventory levels, timing within the
lottery's marketing plans, impact of new or changed marketing strategies and
new product development, among others. The second quarter of 2007 witnessed
fewer orders from a number of existing customers based on the factors
described above. Over the course of the year, however, we anticipate orders
from our customers to balance out and maintain their expected levels.
Many lotteries, often in conjunction with Pollard, develop new products
or new marketing strategies, which involve increased production and sales
during product introduction periods. The timing of these strategies will vary
and, based on this timing, impact the quarterly order patterns and sales.
During the first half of 2006 a number of these new products and market
strategies were successfully introduced by some of our customers, resulting in
subsequent reorders. However, the timing of these reorders will not occur
until the second half of 2007.
Cost of sales and gross profit
Cost of sales was $31.7 million in the second quarter of 2007 compared to
$32.5 million in the second quarter of 2006 reflecting the lower sales in
Gross profit decreased from $10.8 million in the second quarter of 2006
to $8.9 million in the second quarter of 2007. The gross profit margin
decreased to 21.9% from 24.9% in the second quarter of 2006, reflective of the
lower production volumes. For Fiscal 2006 the gross profit margin was 22.8%.
Selling and administration expenses
Selling and administration expenses were $4.6 million in the second
quarter of 2007 down from $4.9 million in the second quarter of 2006.
Total selling and administration expenses as a percentage of sales
remained consistent at 11.3% for both the second quarter of 2007 and 2006.
EBITDA was $5.9 million in the second quarter of 2007, compared to
$8.1 million in the second quarter of 2006. EBITDA margins were 14.5% in the
second quarter of 2007 compared to 18.7% in the second quarter of 2006. The
primary reason for the decline in EBITDA was the lower volumes.
Net Income increased by $1.7 million to $10.0 million in the second
quarter of 2007 from $8.3 million in the second quarter of 2006.
Distributable cash and distributable cash per unit
Pollard LP generated $4.7 million in distributable cash, or $0.1979 per
unit, for the second quarter of 2007. This fell short of the target of $0.2376
as established in the final prospectus of the Fund dated July 27, 2005. The
decrease in distributable cash compared to the target is due primarily to
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 "Distributable Cash" is to cash available for
distribution to Unitholders. Management views Distributable Cash as an
operating performance measure, as it is a measure generally used by Canadian
income funds as an indicator of financial performance. 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 is a metric 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
Distributable Cash are useful supplementary measures.
EBITDA, 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.
On July 6, 2007 the Canadian Securities Administrators issued a
replacement of National Policy 41-201 "Income Trusts and Other Direct
Offerings" which includes disclosure guidance for income trusts. In addition,
the Canadian Institute of Chartered Accountants issued an Interpretive Release
on Management's Discussion and Analysis Guidance on Preparation and Disclosure
entitled "Standardized Distributable Cash in Income Trusts and Other
Flow-Through Entities". Management is currently evaluating the impact of these
guidelines and will incorporate the applicable guidance in our Management's
Discussion and Analysis for the period ended September 30, 2007.
The outlook for the third quarter and the rest of Fiscal 2007 is very
positive. Confirmed instant ticket orders are above levels necessary to meet
our Distributable Cash targets in the third and fourth quarters. The projected
orders reflect the variability of the timing of customer orders as witnessed
by the lower volumes in the first half of 2007. In addition to the increased
volume, the mix of instant ticket orders is weighted toward higher margin
products, offsetting the lower margins attained in the first half of the year.
Based on these orders, we anticipate exceeding our Distributable Cash target
for the third and fourth quarters by a significant margin and meeting or
exceeding our target for the year. Our core group of lottery customers
continues to grow their instant ticket product lines, notwithstanding
quarter-to-quarter variations in order patterns which were evident in the
first half of 2007. The growth trend in the instant ticket market remains
strong and we expect that to continue.
We have no major contracts that expire in 2007 and have retained our
contract relationships with our existing clients. In July we formally signed
our new contract with the Ontario Lottery and Gaming Corporation, which was
originally awarded in the fall of 2006. This ten-year contract, with an
additional five-year option available for exercise by the lottery, is the
longest commitment we have received from a customer and will include the
opening of a finishing facility in Sault Ste. Marie, Ontario.
A number of new licensed properties have been added to our portfolio and
we are working at expanding sales and marketing opportunities with these newly
developed proprietary products.
Work continues on our various manufacturing initiatives including
principally our first automated finishing and packaging line. The line is
currently undergoing testing and we expect it to be operational by the
beginning of the fourth quarter.
The charitable gaming market remains stable and we have maintained a
significant portion of the increased market share obtained during 2006.
Florida has recently approved the sale of pull-tabs and we are initiating
sales efforts in the state in the third quarter.
We are monitoring the status of the Tax Fairness Plan. The legislation
relating to the Tax Fairness Plan was passed into law during the second
quarter, however significant detailed rules and regulations are still lacking.
As these gaps in the regulatory framework are filled, we will develop specific
strategic responses at that time. The introduction of additional taxation
under this legislation will not apply to the Pollard Banknote Income Fund
We believe that our credit facilities and cash flow from operations will
be sufficient to allow us to meet our ongoing requirements for capital
expenditures, working capital and distributions to Unitholders at existing
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