But the company’s share price faded by as much as 10 per cent to $27.00 after Cinram confirmed it will convert into an income trust but reported a year-over-year revenue increase of less than one per cent in its latest quarter.
The stock revived later, changing hands at $29.44 late in the afternoon on the Toronto Stock Exchange, down 66 cents or 2.2 per cent.
“We see physical media to be here for a long time, for a lot of reasons,” chief financial officer Lewis Ritchie declared during a conference call.
“Video on demand (via cable TV) has not taken off, per se, and video on demand is really a competitor towards the rental market, not the sell-through market.”
Ritchie also noted that movie studios now get more than half of their revenue from DVDs, and that major retailers regard movie discs as major drivers of traffic.
Meanwhile, sales of audio CDs have shown “surprising” strength, recovering from a decline caused by “over-hyped” Internet music downloading.
However, he acknowledged that Cinram is suffering from “lower margins on the DVD side, resulting from lower selling prices.”
Cinram, based in Toronto but with the bulk of its business in the United States and its accounts kept in U.S. dollars, reported fourth-quarter revenue of $650 million, up from $644.2 million a year earlier.
Its October-December net income of $38.2 million, 66 cents per share, was up from $34.6 million, 60 cents a share, in the year-ago quarter. Higher prices for plastics had a $4.1-million impact on the latest quarter.
Full-year earnings were $82.4 million, up from $75.8 million in 2004, as revenue grew 3 1/2 per cent to $2.1 billion.
The year’s DVD revenue was up four per cent to $1.06 billion as higher unit volumes were largely offset by lower selling prices.
Audio CD revenue rose 11 per cent while VHS videotape sales sagged 72 per cent and CD-ROM sales crumbled 43 per cent.
The planned conversion into an income trust – after nine months of work complicated by last year’s federal policy uncertainty and by Cinram’s heavy presence in the United States and Europe – is based on “conservative” assumptions, Isadore Philosophe, CEO and co-founder, stressed during the conference call.
A budget of $120 million US in annual capital spending will enable the company to “sustain its growth in an evolving industry,” he said.
The trust conversion, to be complete in May, will result in annual distributions of about $3 Cdn per unit, a payout ratio of roughly 81 per cent.
Philosophe noted that all of this will be dividends from cash flow – with none of the return of capital or interest that other income trusts use to bulk up their distributions.
CFO Ritchie said Cinram is refining its manufacturing to launch high-definition DVDs in both the HD and Blu-Ray formats. He observed that a market-dominance victory for one of these contending formats “would be a positive development for Cinram.”
Dave Rubenstein, president and chief operating officer, expressed confidence that Cinram – capable of churning out 1.75 billion discs a year and holding 40 per cent of the DVD market in the United States and 29 per cent in Western Europe – “will have a significant role for many years to come.”
Since its inception 37 years ago in the era of vinyl records and eight-track tape players, “we’ve stayed ahead of the curve through multiple generations of consumer technology,” Rubenstein said.
Going forward, he observed that other income trusts “have enjoyed spectacular access to capital in the market, and have leveraged that access to make large strategic acquisitions.”
Analysts on the call congratulated management on an “elegant solution” to the trust conversion, while suggesting the amount being held back for capital investment is “excessively conservative.”
After Friday’s release and conference call, Amaranth LLC said it and its Amaranth Global Equities Master Fund had snapped up 797,300 Cinram shares at $27.83 each.
The Greenwich, Conn., investment firm said it now owns or manages 9.4 million Cinram shares, 16.4 per cent of the company, “for investment purposes only.”