WINNIPEG, March 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 months and
year ended December 31, 2007.
December 31, 2007
Sales(1) $ 164.5 million
EBITDA(1) $ 23.6 million
Net Income(1) $ 23.4 million
Adjusted Distributable Cash(1) $ 18.2 million
Distributions(1) $ 22.6 million
Adjusted Distributable Cash per unit(1) $ 0.7709
Distributions per unit(2) $ 0.9504
Payout ratio(3) 123.3%
(1) Sales, EBITDA, Net Income, Adjusted Distributable Cash,
Distributions and Adjusted Distributable Cash per unit are for
Pollard LP for the year ended December 31, 2007.
(2) Distributions per unit are for the Fund for the year ended
December 31, 2007.
(3) Payout ratio is calculated as Distributions per unit divided by
Adjusted Distributable Cash per unit.
"Although 2007 was a very challenging year in a number of respects, and
our fourth quarter results are particularly disappointing, we also begin 2008
with some very positive opportunities before us," stated John Pollard,
Co-Chief Executive Officer. "In the first half of 2007 our customer orders
were short of what we needed to meet our targets, but picked up significantly
in the second half. Unfortunately, we encountered a number of production
problems in the fourth quarter that increased our costs and kept us from
meeting the production and sales levels that we had available to us. While
some of these issues will spill over into the first quarter of 2008, impacting
our financial results, we believe our production volumes and efficiencies will
improve dramatically by the second quarter."
"On the positive side we are currently experiencing unprecedented demand
for our instant ticket products, due to both the acquisition of new customers
and strong organic growth from a number of existing ones."
"As a result, we are extremely pleased to announce our commitment to
expand our manufacturing capacity through the acquisition of a new press line.
Expected to be installed during the third quarter of 2008, this new press will
be our first "all-in-line" press, providing important production efficiencies
and cost savings as well as significant added capacity."
"So although there is no doubt our 2007 results are a disappointment, and
the first quarter of 2008 may still be somewhat impacted, the combination of
very strong customer demand, improved efficiencies and increased production
capacity we believe positions us very well for the balance of 2008 and
This news release should be read in conjunction with the Management's
Discussion and Analysis of the Fund and Pollard LP as at December 31, 2007.
Consolidated Statement of Net Income and Unitholders' Equity
Year ended December 31, 2007
(in thousands of dollars, except for unit amounts)
Share of income of Pollard Holdings Limited Partnership $ 4,433
Administrative expenses (168)
Future tax reduction 418
Net Income for the year 4,683
Opening Unitholders' equity 58,219
Closing Unitholders' equity $ 56,928
Basic and diluted earnings per unit $ 0.75
Number of Fund Units outstanding December 31, 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 is adjusted for the amortization of certain intangible assets
arising from the use of purchase accounting, certain administrative expenses
and a future income tax reduction. The results of operations of the Fund are
dependent on the performance of Pollard LP.
As the Tax Fairness Plan 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 basis of its assets
and liabilities that are expected to reverse in or after 2011. A future income
tax asset has been recorded for those current temporary differences that are
expected to exist at January 1, 2011. The Fund has reduced the asset by a
valuation allowance for the amount of the temporary differences between the
carrying amount and the tax basis of the investment in Pollard LP that it does
not expect to reverse in the foreseeable future.
The Fund has declared distributions totaling $0.9504 per unit during the
year ended December 31, 2007.
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) Year ended Year ended
December 31, December 31,
Sales $164.5 $176.7
Cost of Sales 130.5 136.5
Gross Profit 34.0 40.2
Gross Profit as a % of sales 20.7% 22.8%
Selling and Administration Expenses 19.1 19.3
Expenses as a % of sales 11.6% 10.9%
EBITDA 23.6 29.9
EBITDA as a % of sales 14.3% 16.9%
December 31, December 31,
Total Assets $107.1 $104.6
Total Long Term Liabilities $ 46.9 $ 49.6
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 - Year ended December 31, 2007
During the year ended December 31, 2007, ("Fiscal 2007") Pollard LP
achieved sales of $164.5 million, compared to $176.7 million in the year ended
December 31, 2006 ("Fiscal 2006"). Factors impacting the $12.2 million sales
Strengthening of the Canadian dollar
During Fiscal 2007, 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 Fiscal 2007 the actual Canadian dollar
value versus the U.S. dollar was converted at $1.0802 compared to $1.1293
during Fiscal 2006. This 4.3% change in the U.S. dollar value resulted in an
approximate decrease of $5.2 million in revenue.
Change in sales volume
The volume of instant ticket sales was lower by approximately 6% in
Fiscal 2007 compared to Fiscal 2006. During the first half of 2007 reorders
for certain laminated and pouched products introduced to the market place in
2006 were delayed until later in 2007. The timing patterns of the orders for a
number of our core group of lottery customers resulted in lower sales during
the early part of 2007. In addition, production difficulties in the fourth
quarter of 2007 impacted negatively on the sales volume for that quarter. The
volumes of pull tab tickets decreased by approximately 10.2% due partially to
a reduction in certain lottery pull tab orders. Bingo paper volumes remained
consistent. In contrast, our Lottery Management Services volume increased over
Fiscal 2006 due to a full year providing services to the Maryland Lottery in
Cost of sales and gross profit
Cost of sales was $130.5 million in Fiscal 2007 compared to
$136.5 million in Fiscal 2006 reflecting the decrease in sales volumes and the
lower U.S. Dollar denominated costs due to the strengthening of the Canadian
Dollar relative to the U.S. Dollar.
Gross profit decreased from $40.2 million in Fiscal 2006 to $34.0 million
in Fiscal 2007. The reduction in gross profit and gross margin reflects the
lower sales and production volumes experienced in the first three quarters of
the year, and certain production difficulties encountered in the fourth
quarter. The gross profit margin decreased to 20.7% in Fiscal 2007, from 22.8%
in Fiscal 2006.
Selling and administration expenses
Selling and administration expenses were $19.1 million in Fiscal 2007,
which is slightly lower than $19.3 million in Fiscal 2006.
EBITDA was $23.6 million in Fiscal 2007, compared to $29.9 million in
Fiscal 2006. EBITDA margins were 14.3% in Fiscal 2007 compared to 16.9% in
Fiscal 2006. The primary reason for the decrease was the lower gross profit.
Net Income increased by $8.4 million to $23.4 million in Fiscal 2007 from
$15.0 million in Fiscal 2006. This was primarily due to higher mark-to-market
gains on the foreign currency contracts, increased foreign exchange gains and
a lower effective tax rate.
Adjusted Distributable Cash and Adjusted Distributable Cash per unit
Pollard LP generated $18.2 million in Adjusted Distributable Cash, or
$0.7709 per unit, for Fiscal 2007. This falls short of the target of $0.9504.
The shortfall of Adjusted Distributable Cash compared to the target is due
primarily to a decreased level of EBITDA.
Results of Operations - Three months ended December 31, 2007
SELECTED FINANCIAL INFORMATION
(millions of dollars)
Three months Three months
December 31, December 31,
Sales $ 39.7 $ 42.3
Cost of Sales 34.2 33.7
Gross Profit 5.5 8.6
Selling and administration 4.8 4.9
Interest 0.7 0.7
Foreign exchange gain (1.6) (0.8)
Mark-to-market loss on foreign currency
contracts 1.4 4.2
Other (0.1) (0.2)
Income (loss) before undernoted 0.3 (0.2)
Employee profit sharing plan 0.2 0.4
Income (loss) before income taxes and
extraordinary gain 0.1 (0.6)
Current 0.3 0.3
Future (recovery) (0.2) 0.3
Extraordinary gain 0.6 -
Net income (loss) $0.6 ($1.2)
Interest 0.7 0.7
Unrealized foreign exchange loss (gain) (0.7) 0.3
Mark-to-market loss on foreign currency
contracts 1.4 4.2
Income taxes 0.1 0.6
Amortization 1.6 1.6
Other - (0.1)
EBITDA 3.7 6.1
Cash taxes (0.3) (0.3)
Interest (0.7) (0.7)
Maintenance capital expenditures (0.2) (0.2)
Other - 0.1
Cash Available for Distribution
(before Fund expenses) 2.5 5.0
Expenses of the Fund (0.1) (0.1)
Adjusted Distributable Cash $ 2.4 $ 4.9
During the three months ended December 31, 2007, Pollard LP achieved
sales of $39.7 million, approximately $2.6 million lower than the three months
ended December 31, 2006. Sales were reduced by $3.6 million due to the
strengthening Canadian dollar relative to the U.S. dollar. This decrease was
partially offset by an increase in instant ticket sales volume.
Cost of sales was $34.2 million in the three months ended December 31,
2007 compared to $33.7 million in the three months ended December 31. 2006.
Gross profit margin was 13.9% which was lower than the 20.3% in the three
months ended December 31, 2006.
Due to significant growth in order volumes from both existing and new
customers, the company has been ramping up production levels during the third
and fourth quarters to meet the increased demand. This involved substantially
increased costs for labour and overheads to put the resources in place for
these higher production levels. During the fourth quarter of 2007 actual
production volumes for instant tickets fell short of planned amounts, despite
the higher costs that were in place. Production levels were negatively
impacted by a number of factors, including delays in implementation of the
automated finishing and packaging line and a more challenging mix of games and
average run lengths.
The confirmed sales orders were available to produce; however, the
production difficulties resulted in these orders being delayed until later
The shortfall in production coupled with the higher level of production
input costs resulted in a significant reduction in our gross margin
percentage. A number of the problems experienced in the fourth quarter were
specific to certain individual games and are not expected to recur. Overall
production volumes are expected to return to targeted levels in the latter
part of the first quarter of 2008.
Selling and administration expenses, although consistent in absolute
terms at $4.8 million, as a percent of sales were 12.1% versus 11.6% in the
three months ended December 31, 2006 due to lower sales.
EBITDA of $3.7 million in the three months ended December 31, 2007, was
$2.4 million less than $6.1 million EBITDA for the three months ended
December 31, 2006. EBITDA margins were 9.3% in the three months ended
December 31, 2007 compared to 14.4% achieved in the three months of 2006, due
primarily to a lower gross margin in 2007.
Income tax expense decreased to $0.1 million in the three months ended
December 31, 2007 compared to $0.6 million during the three months ended
December 31, 2006. The decrease in the income tax expense was due to less
taxable income earned in Pollard LP's incorporated subsidiaries in the three
months ended December 31, 2007.
On December 24, 2007, Pollard LP purchased 100% of the outstanding shares
of Nacako Sdn Bhd ("Nacako"), a Malaysian company, for a nominal amount.
Nacako provides certain administrative and support services to lotteries in
Malaysia and south-east Asia. The net financial assets acquired exceeded the
purchase price, resulting in an extraordinary gain of $0.6 million.
In the three months ended December 31, 2007, net income of $0.6 million
was recorded in comparison to a net loss of $1.2 million in the three months
ended December 31, 2006. This change is primarily due to a reduction in the
mark-to-market loss on foreign currency contracts in the three months ended
December 31, 2007.
Pollard LP generated $2.4 million in distributable cash, or $0.1001 per
unit for the three months ended December 31, 2007.
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 2008 outlook for lottery markets is positive, with ongoing growth in
retail sales of instant tickets in both North America and internationally
expected. 2007 data suggests a growth rate in retail sales of instant tickets
in the 4-5% range, slightly lower than the 8-9% level witnessed for many
years. This is partially a reflection of fewer new lottery start-ups, as most
jurisdictions in North America now have established lotteries. The continued
demand from state and provincial governments for revenue, however, will
continue to result in opportunities for lotteries to aggressively grow their
businesses, particularly in the instant ticket product line.
Factors historically used by lotteries to grow their instant ticket
sales, both in North America and internationally, will continue to be refined
and improved throughout 2008 and beyond. Increased prize payout percentages,
higher price points, frequent introduction of new games, interesting and
varied play formats and increasing use of branded or licensed properties are
utilized by lotteries in varying degrees to expand the instant ticket
business. The past success of the instant ticket product line has varied by
lottery jurisdiction, presenting additional opportunities for continued market
growth through effective application of these factors in all jurisdictions.
Many of our key customer contracts were extended during 2007 including
New Jersey, Western Canada Lottery Corporation, Massachusetts and Arizona.
Important new contracts or renewals were awarded by La Française des Jeux
(France National Lottery), Minnesota, Connecticut, Mifal Hapayis (Israeli
National Lottery) and Denmark, providing a strong foundation of customer
contacts to grow our business. We will bid strategically on new opportunities
and requests for proposals in order to maximize profit and distributable cash.
We continue to see impressive organic growth from many of our core
existing lottery customers including Ontario Lottery and Gaming Corporation
("OLG"), Western Canada Lottery Corporation, Maryland and Taiwan and the
success of our clients' operations are reflected in increased sales and
opportunities for Pollard.
The first quarter of 2008 will see a continuation of lower production
volumes due in part to the scheduled annual maintenance shutdown in January at
our Ypsilanti plant. As well the mix of a high number of short run games
witnessed in the fourth quarter of 2007 continued into the early part of the
first quarter of 2008. This lower production will result in an expected
shortfall in our distributable cash target for the quarter. However, we
believe the continuing improvement in our production processes resulting in
increases in our production output, combined with a return to a more
traditional mix of games and run length sizes, will allow us to return to
generating distributable cash consistent with, or above, our existing target
during the remainder of 2008.
Notwithstanding our low production in the fourth quarter of 2007 and the
start of 2008, our current sales order book for 2008 remains full, based on
our existing clients. In addition, we believe there remain additional sales
opportunities, both with existing and new customers, which we will be able to
pursue more aggressively once we ease our current capacity constraints and
In response to these constraints and to help ease some of the production
challenges experienced during 2007, we have initiated the acquisition of a new
press line. This new "all-in-line press" will add significant new capacity to
our existing manufacturing capabilities and improve our flexibility in
producing our clients' work. In addition, the increased efficiency of the new
press will help reduce our ongoing costs of production. The estimated
US$8.5 million purchase is expected to be delivered in the third quarter of
2008 with live production beginning later that quarter. The full impact of the
new press capacity and increased efficiency is expected in Fiscal 2009.
2007 witnessed an increase in the number of licensed properties Pollard
added to its portfolio and sales of this product line, including the related
merchandising, are an important segment in our growth strategy. A number of
comprehensive products and services are included in our licensed properties
offerings including prize package fulfillment services, second chance drawing
management and provision of merchandise prize packages. We will aggressively
market these products to the lottery industry and increase our portfolio of
key properties during 2008.
Our newest facility has recently opened in Sault Ste. Marie, Ontario,
providing finishing and packaging services for the Ontario Lottery and Gaming
Corporation under our ten-year contract awarded in the fall of 2006.
Lotteries increasingly are looking at outsourcing various parts of their
operations which provides opportunities to increase our Lottery Management
Services. Distribution, warehousing, marketing and retail support are all
services that we currently offer to select customers and will continue to be
marketed to receptive lotteries.
During the first quarter of 2008 we expect to complete the purchase of
the land and building housing our Council Bluffs, Iowa charitable gaming
operation. This US$3.3 million purchase will eliminate our existing rent and
provide a positive impact on our distributable cash even after consideration
of financing charges. A number of other cost improvements have been initiated
in our charitable gaming business and we believe this will improve the
financial performance in this area.
2008 will see a number of ongoing manufacturing initiatives to both
increase our capacity as well as improve our cost structure in addition to the
new press line. Although slower coming than we had anticipated, we are
achieving steady improvements in the efficiency of our new automated finishing
and packaging line and we will be able to reap the long-term benefits in
output and reduced costs once fully functioning.
Pollard Banknote will continue to review and investigate possible
acquisition targets within the lottery and charitable gaming industries.
However, potential acquisitions must be accretive to the Unitholders and as
such will only be completed where financial and strategic objectives are
Developments relating to the Tax Fairness Plan will be monitored and as
additional legislation and regulations are enacted, particularly in regards to
tax efficient means to revert to corporate status, Pollard Banknote will
develop specific strategic responses at that time. The introduction of
taxation under this legislation will not 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, including the acquisition
of the new press line, working capital and distributions at existing business
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