(CINRAM LOGO)
2255 MARKHAM ROAD, SCARBOROUGH, ONTARIO, M1B 2W3
NEWS RELEASE
FOR IMMEDIATE RELEASE
CINRAM REPORTS THIRD QUARTER RESULTS
FUND TO ENGAGE ADVISOR FOR STRATEGIC REVIEW
(All figures in U.S. dollars unless otherwise indicated)
TORONTO (NOVEMBER 9, 2006) - Cinram International Income Fund ("Cinram" or the
"Fund") (TSX: CRW.UN) today reported its third quarter financial results. The
Fund's Board of Trustees also announced that it has directed management to
retain a financial advisor to review strategic and financial alternatives. This
will include a careful review of Cinram's business plan, growth strategy and
market valuation.
"Although it does not appear that Cinram will be directly impacted by the
Department of Finance's Tax Fairness Plan for Canadians, this plan will
significantly change the landscape for income trusts in Canada. Given these
circumstances, the Board of Trustees must consider such factors which could
ultimately impact the value of the Fund," said Henri A. Aboutboul, Chairman of
the Fund's Board of Trustees. "The Board of Trustees is focused on creating
long-term value for unitholders. To that end, we wish to carefully evaluate and
pursue strategic and financial alternatives which represent the best use of the
Fund's capital, taking into account our commitment to enhance the Fund's market
valuation and grow Cinram's business."
THIRD QUARTER PERFORMANCE
The Fund reported consolidated revenue of $477.2 million for the quarter ended
September 30, 2006, down from $544.7 million in 2005, principally as a result of
lower DVD and CD sales.
"Our results were in line with expectations of softer DVD sales in the third
quarter compared to the exceptionally strong third quarter performance we
reported in 2005," said Cinram Chief Executive Officer, Dave Rubenstein.
"Looking out to 2007, we are confident that our customers' upcoming slate of
releases will translate into DVD unit volume growth on a year-over-year basis."
Cinram generated third quarter earnings before interest, taxes and amortization
(EBITA(1)) of $89.3 million compared with $118.5 million in 2005, due to lower
DVD and CD volumes, increased one-time costs, and lower printing and
distribution revenue, which were offset by lower raw material costs as well as
cost reductions and efficiencies. As a percentage of consolidated sales, EBITA
margins fell to 19 per cent from 22 per cent in the third quarter of 2005. Third
quarter EBITA included unusual items of $0.8 million for transaction costs
related to Cinram's May 2006 income trust reorganization.
The Fund recorded net earnings of $18.4 million or $0.32 per unit (basic) for
the quarter, down from net earnings of $35.5 million or $0.62 per share (basic)
for the third quarter of 2005.
YEAR-TO-DATE PERFORMANCE
Consolidated revenue for the nine months ended September 30, 2006
(year-to-date), was $1.3 billion, compared with $1.4 billion in 2005. EBITA for
the nine months decreased to $215.4 million from $268.8 million in 2005.
Year-to-date EBITA declined relative to 2005 as a result of lower DVD, CD and
printing
revenue, as well as increased costs related to Sarbanes-Oxley compliance and
severance costs. EBITA for the nine months ended September 30, 2006, also
included unusual items of $11.1 million related to restructuring expenses and
costs incurred in relation to the May income trust reorganization.
The Fund reported net earnings of $3.7 million or $0.06 per unit (basic) for the
nine months ended September 30, 2006, compared with net earnings of $44.2
million or $0.77 per share (basic) in 2005.
PRODUCT REVENUE
Third quarter DVD revenue was down 15 per cent to $237.4 million from $279.6
million in 2005 principally as a result of lower volume for some from our major
customers and their comparatively strong performance in the third quarter of
2005. DVD sales remained our major source of revenue, representing 50 per cent
of consolidated revenue for the third quarter compared with 51 per cent last
year. For the nine months ended September 30, 2006, DVD revenue was down 10 per
cent to $650.1 million from $723.2 million in 2005. On a year-to-date basis, DVD
revenue accounted for 49 per cent of consolidated revenue, compared with 50 per
cent in the comparable prior year period.
Three months ended September 30 Nine months ended September 30
------------------------------- -----------------------------------
2006 2005 2006 2005
-------------- -------------- ---------------- ----------------
DVD $237,421 50% $279,593 51% $ 650,087 49% $ 723,162 50%
HIGH-DEFINITION DVD 1,646 -- -- -- 2,798 -- -- --
VHS 416 -- 4,068 1% 5,365 1% 14,374 1%
AUDIO CD/CD-ROM 71,823 15% 85,661 16% 198,369 15% 223,507 15%
AUDIO CASSETTE 631 -- 1,176 -- 1,966 -- 4,539 --
PRINTING 63,349 13% 65,203 12% 145,486 11% 167,583 12%
DISTRIBUTION 66,083 14% 68,899 13% 205,575 16% 197,669 14%
MERCHANDISING 31,762 7% 30,141 5% 97,107 7% 97,353 7%
OTHER 4,021 1% 9,910 2% 17,172 1% 19,868 1%
-------- --- -------- --- ---------- --- ---------- ---
$477,152 100% $544,651 100% $1,323,925 100% $1,448,055 100%
======== === ======== === ========== === ========== ===
Cinram recorded third quarter and year-to-date high-definition DVD revenue of
$1.6 million and $2.8 million, respectively, following the June retail launch of
both formats. We replicated over 30 HD-DVD and Blu-ray titles for our customers
in North America during the third quarter.
CD revenue was down 16 per cent in the third quarter to $71.8 million from $85.7
million in 2005, and decreased 11 per cent year-to-date relative to 2005, part
of which was attributable to cessation of CD manufacturing operations in
Louviers (France) earlier this year.
Printing revenue for the third quarter was down three per cent to $63.3 million
from $65.2 million in 2005, primarily due to lower DVD and CD replication
volume. For the year to date, printing revenue was down 13 per cent to $145.5
million from $167.6 million, principally as a result of lower DVD volumes for
customers for whom we also provide related printing products.
Distribution revenue declined four per cent in the third quarter to $66.1
million from $68.9 million in 2005. The impact of the decline in DVD revenue on
distribution was mitigated in the third quarter as some of our major customers
shipped a greater proportion of units from inventory that was replicated in
previous periods. On a year-to-date basis, distribution revenue increased four
per cent to $205.6 million from $197.7 million in 2005, with the full nine-month
contribution from new Twentieth Century Fox Home Entertainment business in
Europe.
Giant Merchandising generated revenue of $31.8 million in the third quarter up
six per cent from $30.1 million in 2005. For the nine months ended September 30,
2006, Giant Merchandising recorded revenue of $97.1 million compared with $97.4
million in 2005. Revenue from other non-core activities decreased to $4.0
million in the third quarter from $9.9 million in the comparable 2005 period
and to $17.2 million on
2
a year-to-date basis from $19.9 million in 2005. These activities included
authoring and other preproduction services, as well as the sale of components,
stampers and digital linear tapes.
GEOGRAPHIC REVENUE
North American revenue was down 12 per cent in the third quarter to $360.6
million, compared with $410.8 million in 2005, principally as a result of lower
DVD and CD sales. Year-to-date, North American revenue was down 11 per cent to
$981.0 million from $1.1 billion in 2005 as a result of lower DVD, CD and
printing revenue. North America accounted for 76 and 74 per cent of third
quarter and year-to-date consolidated revenue, respectively, compared with 75
and 76 per cent, respectively, in 2005.
European revenue decreased 13 per cent in the third quarter to $116.6 million
from $133.9 million in 2005 as a result of lower DVD, CD and distribution
revenue from The Entertainment Network (TEN). Year-to-date, European revenue
declined marginally to $342.9 million from $345.0 million in 2005. Third quarter
European revenue represented 24 per cent of consolidated sales compared with 25
per cent in the third quarter of 2005. Year-to-date, European revenue
represented 26 per cent of consolidated revenue, up from 24 per cent in 2005.
OTHER FINANCIAL HIGHLIGHTS
Gross profit for the quarter and nine months ended September 30, 2006, decreased
to $101.9 million and $241.3 million, respectively, from $122.9 million and
$274.9 million in 2005. The decrease in gross profit was principally
attributable to reduced DVD and CD business combined with lower selling prices
and reduced margins from the printing business, as well as an increase in
lower-margin distribution revenue. The declines were offset in part by raw
material cost savings and cost reductions and efficiencies. As a percentage of
consolidated revenue, gross profit decreased to 21 per cent and 18 per cent in
the third quarter and year-to-date, respectively, compared with 23 per cent and
19 per cent, respectively, for both the corresponding 2005 periods. Amortization
expense from capital assets, which is included in the cost of goods sold,
decreased to $36.3 million and $110.0 million in the third quarter and nine
months ended September 30, 2006, respectively, from $38.7 million and $115.8
million in the comparable 2005 periods.
BALANCE SHEET AND LIQUIDITY
Cinram's liquidity and balance sheet remained strong in the third quarter. The
Fund had cash on hand of $108.9 million, debt of $679.1 million, resulting in a
net debt position of $570.2 million at September 30, 2006. Cinram's $150-million
revolving line of credit was not used during the third quarter and currently
remains undrawn. Working capital was $208.4 million at September 30, 2006,
relatively unchanged from June 30, 2006.
DISTRIBUTIONS
The Fund paid distributions of $40.3 million in the third quarter. Cinram's
current annual distribution policy remains unchanged at C$3.25 per unit, to be
paid in monthly distributions of C$0.2708 on or about the 15th day of the month
to unitholders of record on the last business day of each previous month.
Cinram has declared a cash distribution of C$0.2708 per unit for the month of
November 2006, payable on December 15, 2006, to unitholders of record at the
close of business on November 30, 2006.
Cinram International Limited Partnership (the "Partnership") also declared a
cash distribution of C$0.2708 per Class B limited partnership unit for the month
of November 2006, payable on December 15, 2006, to unitholders of record at the
close of business on November 30, 2006.
UNIT DATA
For the three and nine-month periods ended September 30, 2006, the basic
weighted average number of units/shares and exchangeable limited partnership
units outstanding was 58.2 million and 57.7 million, compared with 57.3 million
and 57.1 million, respectively, in the prior year.
3
SUBSEQUENT EVENTS
Subsequent to quarter end, Cinram sold the land and building of its Commerce,
California, facility for $22.5 million and realized a gain of $15.2 million on
the disposition, which will be recorded in its fourth quarter financial results.
Also subsequent to quarter end, a majority of the Trustees of the Fund have
approved an amendment to the Fund's Amended and Restated Declaration of Trust
made May 5, 2006, pursuant to which Section 7.6 of the Amended and Restated
Declaration of Trust was modified, with the sentence "The Chairperson shall be a
Resident." deleted and replaced with the sentence "The Chairperson need not be a
Resident." A First Supplemental Indenture dated as of October 13, 2006, was
executed evidencing this amendment. The amendment was made pursuant to paragraph
11.1(b)(v) of the Amended and Restated Declaration of Trust.
FULL YEAR 2006 GUIDANCE
Cinram expects to generate EBITA for the year ending December 31, 2006, in the
range of $335 to $340 million, including unusual items for the full year which
are expected to result in a net gain of $4.1 million. Cinram also expects
capital expenditures to be in the range of $70 million for the full year in
2006. This guidance does not include the impact of any future merger or
unidentified restructuring charges, as well as sales and acquisitions of
operating assets that may occur from time to time due to management decisions
and changing business circumstances, which the Fund is currently unable to
forecast.
RECONCILIATION OF EBITA AND EBIT TO NET EARNINGS
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
(unaudited, in thousands of U.S. dollars) 2006 2005 2006 2005
------- -------- -------- --------
EBITA(1) $89,305 $118,549 $215,429 $268,771
------- -------- -------- --------
Amortization of capital assets $36,332 $ 38,684 $110,041 $115,808
Amortization of intangible assets $16,107 $ 15,944 $ 48,113 $ 48,199
Amortization of deferred financing fees $ 369 $ 1,486 $ 2,560 $ 4,432
Write-off of deferred financing fees -- -- $ 16,945 --
------- -------- -------- --------
EBIT(2) $36,497 $ 62,435 $ 37,770 $100,332
------- -------- -------- --------
Interest expense $12,540 $ 12,543 $ 35,996 $ 38,926
Investment income $ (762) $ (166) $ (3,030) $ (625)
Income taxes $ 6,348 $ 14,515 $ 1,124 $ 17,829
------- -------- -------- --------
NET EARNINGS $18,371 $ 35,543 $ 3,680 $ 44,202
------- -------- -------- --------
(1) EBITA is defined herein as earnings before interest expense, interest
income, income taxes, amortization, and a write-off of deferred financing
fees, and is a standard measure that is commonly reported and widely used
in the industry to assist in understanding and comparing operating results.
EBITA is not a defined term under generally accepted accounting principles
(GAAP). Accordingly, this measure should not be considered as a substitute
or alternative for net earnings or cash flow, in each case as determined in
accordance with GAAP. See reconciliation of EBITA to net earnings under
GAAP as found in the table above.
(2) EBIT is defined herein as earnings before interest expense, interest income
and income taxes, and is a standard measure that is commonly reported and
widely used in the industry to assist in understanding and comparing
operating results. EBIT is not a defined term under GAAP. Accordingly, this
measure should not be considered as a substitute or alternative for net
earnings or cash flow, in each case as determined in accordance with GAAP.
See reconciliation of EBIT to net earnings under GAAP as found in the table
above.
DISTRIBUTABLE CASH(3)
Distributable cash is defined herein as adjusted cash flow from operations less
the sum of capital expenditures and debt repayments and is a standard measure
that is commonly reported and widely used in the industry to assist in
understanding and comparing operating results. Distributable cash is not a
defined term under GAAP. Accordingly, this measure should not be considered as a
substitute or alternative for net earnings or cash flow, in each case as
determined in accordance with GAAP. The Fund excludes changes in non-cash
working capital from the distributable cash amount due to the significant
4
impact of the seasonality of the business. The Fund believes this is the most
meaningful presentation to the unitholders. The second quarter 2006
distributable cash disclosures were calculated using cash flow from operations
including changes in non-cash working capital.
THREE MONTHS ENDED SIX MONTHS ENDED
(unaudited, in thousands of U.S. dollars) SEPTEMBER 30, 2006 SEPTEMBER 30, 2006
------------------ ------------------
Cash flow from operations $ 31,573 $ 79,462
Add (deduct) changes in non-cash working capital 36,267 27,406
--------- --------
Adjusted cash flow from operations $ 67,840 $106,868
Less:
Capital expenditures (17,865) (31,125)
Debt repayments (3,556) (5,399)
--------- --------
Distributable cash $ 46,419 $ 70,344
Distributions declared(4) $ 41,143 $ 65,707
Payout ratio 89% 93%
(3) Had the Fund included the impact of changes in non-cash working capital,
the payout ratio would be 405% for the three months ended September 30,
2006, and 153% for the six months ended September 30, 2006, as compared to
the percentages shown in the table above.
(4) Includes distributions declared for May 2006 and June 2006. There was no
distribution declared in April 2006. Had the conversion taken place,
effective April 1, 2006, distributions for the six-month period would have
been $80,110, representing a payout ratio of 114%.
NOVEMBER 10 CONFERENCE CALL AND WEBCAST
Cinram's management team will host a conference call to discuss its results on
Friday, November 10, 2006, at 10:00 a.m. (ET). To participate, dial
1-866-249-1964. The call will also be webcast live at
http://investors.cinram.com/.
ABOUT CINRAM
Cinram International Inc., an indirect wholly-owned subsidiary of the Fund, is
the world's largest provider of pre-recorded multimedia products and related
logistics services. With facilities in North America and Europe, Cinram
International Inc. manufactures and distributes pre-recorded DVDs, VHS video
cassettes, audio CDs, audio cassettes and CD-ROMs for motion picture studios,
music labels, publishers and computer software companies around the world. The
Fund's units are listed on the Toronto Stock Exchange under the symbol CRW.UN
and are included in the S&P/TSX Composite Index. For more information, visit our
website at www.cinram.com.
Certain statements included in this release constitute "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Fund, or results of the multimedia duplication/
replication industry, to be materially different from any future results,
performance or achievements expressed or implied by such forward looking
statements. Such factors include, among others, the following: general economic
and business conditions, which will, among other things, impact the demand for
the Fund's products and services; multimedia duplication/replication industry
conditions and capacity; the ability of the Fund to implement its business
strategy; the Fund's ability to retain major customers; the Fund's ability to
invest successfully in new technologies and other factors which are described in
the Fund's filings with the securities commissions.
FOR MORE INFORMATION:
Lyne Beauregard Fisher
Tel: (416) 321-7930
lynefisher@cinram.com
5
(CINRAM LOGO)
INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
SEPTEMBER 30 December 31
2006 2005
------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 108,888 $ 89,921
Accounts receivable 450,725 589,417
Income taxes recoverable 24,388 --
Inventories 56,492 45,482
Prepaid expenses 22,893 20,610
Future income taxes 33,982 33,835
---------- ----------
697,368 779,265
Capital assets 543,456 601,481
Goodwill 330,729 330,274
Intangible assets 197,017 241,604
Deferred financing fees 5,539 18,954
Other assets 9,557 13,948
Future income taxes 29,508 28,416
---------- ----------
$1,813,174 $2,013,942
---------- ----------
LIABILITIES AND SHAREHOLDERS'/ UNITHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 126,504 $ 202,550
Accrued liabilities 335,083 351,580
Distributions payable 14,124 --
Income taxes payable -- 15,479
Current portion of long-term debt 12,511 62,136
Current portion of obligations under capital leases 721 727
---------- ----------
488,943 632,472
Long-term debt 666,563 674,137
Obligations under capital leases 2,974 3,272
Other long-term liabilities 55,617 55,135
Future income taxes 90,416 103,018
SHAREHOLDERS'/UNITHOLDERS' EQUITY:
Fund units 170,816 --
Exchangeable limited partnership units 13,971 --
Capital stock -- 173,775
Contributed surplus 4,766 4,634
Retained earnings 253,607 317,121
Foreign currency translation adjustment 65,501 50,378
---------- ----------
508,661 545,908
---------- ----------
$1,813,174 $2,013,942
---------- ----------
(CINRAM LOGO)
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS
AND RETAINED EARNINGS
(unaudited, in thousands of U.S. dollars,
except per share/unit/exchangeable LP unit amounts)
Three months Nine months
ended September 30 ended September 30
-------------------- -----------------------
2006 2005 2006 2005
--------- -------- ---------- ----------
Revenue $ 477,152 $544,651 $1,323,925 $1,448,055
Cost of goods sold 375,222 421,752 1,082,656 1,173,185
--------- -------- ---------- ----------
Gross profit 101,930 122,899 241,269 274,870
Selling, general and administrative
expenses 48,138 43,034 124,809 118,043
Amortization of intangible assets 16,107 15,944 48,113 48,199
Amortization of deferred financing fees 369 1,486 2,560 4,432
Unusual items 819 -- 28,017 3,864
--------- -------- ---------- ----------
Earnings before the undernoted 36,497 62,435 37,770 100,332
Interest on long-term debt 12,376 12,394 35,648 38,525
Other interest 164 149 348 401
Investment income (762) (166) (3,030) (625)
--------- -------- ---------- ----------
Earnings before income taxes 24,719 50,058 4,804 62,031
--------- -------- ---------- ----------
Income taxes 6,348 14,515 1,124 17,829
--------- -------- ---------- ----------
Net earnings 18,371 35,543 3,680 44,202
--------- -------- ---------- ----------
Retained earnings, beginning of period 276,379 246,263 317,121 240,367
--------- -------- ---------- ----------
Dividends declared -- (1,439) (1,487) (4,202)
--------- -------- ---------- ----------
Distributions declared (41,143) -- (65,707) --
--------- -------- ---------- ----------
Retained earnings, end of period $ 253,607 $280,367 $ 253,607 $ 280,367
--------- -------- ---------- ----------
Earnings per unit or share:
Basic $ 0.32 $ 0.62 $ 0.06 $ 0.77
Diluted 0.32 0.61 0.06 0.77
--------- -------- ---------- ----------
Weighted average number of units and
exchangeable LP units outstanding,
(common shares up to May 5, 2006)
(in thousands):
Basic 58,177 57,286 57,707 57,114
Diluted 58,259 57,932 57,799 57,718
--------- -------- ---------- ----------
(CINRAM LOGO)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, In thousands of U.S. dollars)
Three months Nine months
ended September 30 ended September 30
------------------- ---------------------
2006 2005 2006 2005
-------- -------- --------- ---------
Cash provided by (used in):
OPERATING ACTIVITIES:
Net earnings $ 18,371 $ 35,543 $ 3,680 $ 44,202
Items not involving cash:
Amortization 52,808 56,114 160,714 168,439
Write off of deferred financing fees -- -- 16,945 --
Stock-based compensation -- 62 132 425
Future income taxes (3,339) -- (14,573) --
Gain on disposition of capital assets -- (669) (408) (741)
Change in non-cash operating working capital (36,267) (52,528) (3,231) (90,736)
-------- -------- --------- ---------
31,573 38,522 163,259 121,589
FINANCING ACTIVITIES:
Increase in long-term debt -- 15,000 675,000 54,000
Repayment of long-term debt (3,556) (38,011) (732,199) (132,935)
Decrease in obligations under capital leases (197) (176) (569) (602)
Increase in financing fees -- (550) (5,993) (550)
Issuance of common shares/units 2,100 374 11,012 3,630
Dividends paid -- (1,439) (1,487) (4,202)
Distributions paid (40,272) -- (51,442) --
-------- -------- --------- ---------
(41,925) (24,802) (105,678) (80,659)
INVESTING ACTIVITIES:
Purchase of capital assets (17,865) (24,246) (44,052) (72,386)
Proceeds on disposition of capital assets -- 1,340 201 1,918
Decrease in other assets 2,078 1,736 4,425 15,194
(Decrease) in other long-term liabilities (3,912) (4,280) (1,276) (3,513)
-------- -------- --------- ---------
(19,699) (25,450) (40,702) (58,787)
Foreign exchange (gain) loss on cash held in
foreign currencies (127) 458 2,088 (1,544)
-------- -------- --------- ---------
(Decrease) increase in cash and cash
equivalents (30,178) (11,272) 18,967 (19,401)
Cash and cash equivalents, beginning of period 139,066 33,660 89,921 41,789
-------- -------- --------- ---------
Cash and cash equivalents, end of period $108,888 $ 22,388 $ 108,888 $ 22,388
-------- -------- --------- ---------
Cash and cash equivalents are defined as cash and short-term deposits, which
have an original maturity of less than 90 days.