Pollard Banknote Limited

everyone. Welcome to the Pollard Banknote Limited third quarter 2024 results conference call. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties related to Pollard's future financial or business performance. Certain material factors or assumptions are applied in making forward-looking statements and After results may differ materially from those expressed or applied in such states. The risk factors that may affect the results are detailed in Pollard's annual information form and other periodic filings and registration statements, and you can access these documents at Cedar Plus's database found at cedarplus.ca. I'd like to remind everyone that this conference call is being recorded today, Thursday, November 14, 2024. And I would now like to introduce Mr. Doug Pollard, Co-Chief Executive Officer of Pollard Banknotes Limited. Please go ahead, sir.

Okay, thank you very much, operator, and thank you, everyone, for joining us today on this conference call. With us on the call is John Pollard, Co-Chief Executive Officer, and Rob Rose, our Chief Financial Officer. We released our 2024 third quarter results yesterday after the markets closed, You can access our news releases as well as our complete financial information and MD&A on our website at PollardBankNote.com and also on CDAR+. So today we'll start out with prepared marks from John and me highlighting the third quarter results and providing an overall business update and review of our strategy. This will be followed by a review of some of the underlying financial numbers for the third quarter by Rob, and then we'll open it up to questions. Let me start off by saying we are extremely pleased with our third quarter results, which have continued the very positive trends that we've seen throughout 2024. Not only did we set a number of new financial records, we also attained a number of milestone moments from an operational and business development perspective. And these successes are a result of our singular focus on our vision, which drives our strategic plan. And that vision is, We're going to be the partner of choice to help our lottery and charitable gaming customers responsibly grow revenue for good causes through outstanding games, retail excellence, and digital innovation. Let's do a review of each of our major business operations and highlight the major accomplishments and successes over the last quarter. I'll start with instant tickets. The sales and production of instant tickets for lotteries remains a critical core product line for us and generates approximately 50% of our revenue. Over the last few years, our gross margins have been negatively impacted in a significant way due to the large inflationary cost increases on our key inputs like paper and ink. Since 2022, we have been very successful in repricing our long-term contracts as they come up for renewal and rebid. and we have repriced the majority of our instant ticket contract portfolio, and one of the significant positive factors in our improved results was these higher selling prices flowing through to our revenue. By the end of 2024, all of the contracts that we have repriced will be live and affecting our financial statements. In addition, we're also experiencing some minor reductions in the cost of our instant ticket inputs, which also helps to improve our gross margins. So we will continue to focus on the instant contracts that have not yet come due to identify additional repricing opportunities. At the same time, when we look at the broader lottery market, instant market, we are seeing data indicating the retail dollar sales of instant tickets is growing compared to last year in the low single digit range after being stable over the previous year. You may recall that retail sales dollars jumped very significantly, like 25% coming out of the pandemic, and essentially remained at those high levels for a few years, and now appear to be back in a more typical historic growth mode. The charitable gaming market, including paper products such as Poltav and Bingo Paper, and the e-gaming solutions via kiosks and tablets, That remains a very important market for Pollard Banknote as well. And consumer demand for these products remains very strong, with many jurisdictions looking at expanding e-gaming opportunities. Charitable gaming products generate significant positive cash flow for Pollard Banknote. An important and evolving market in the lottery world is the ongoing development of iLottery. Pollard Banknote is committed to being a leader in the provision of iLottery solutions, through provision of a state-of-the-art platform technology and innovative e-instant game content. And to achieve this, Pollard has established two parallel approaches to capitalizing on this opportunity. First, we have our Neopollard Interactive joint venture, which operates six iLottery installations in North America, with the latest being the iLottery of West Virginia, which just went live on October 31st, 2024. And so Neopolar continues to be the market leader with a number of long-term contracts, ensuring strong cash flow for many years as those contracts run forward. Secondly, we are also extremely excited with our own in-house developed iLottery technology. This is our polar technology we call Catalyst, a leading-edge, omnichannel, modular platform that has the capability to seamlessly operate lotteries, existing brick-and-mortar gaming systems, in addition to running their iLogger. So one system to operate all gaming systems. And complementing the development of our own platform technology is the growing internal development of our own exciting game content through an expanding eInstant game portfolio. The exciting news this past quarter was that our strong belief in our Catalyst solution was confirmed during that third quarter. with an award, an exclusive award to Pollard Banknote of the Kansas Lottery iLottery contract. This is our first direct contract for iLottery in North America utilizing our Pollard Banknote technology, the Catalyst technology. This milestone reflects the results of the enormous investment in people and dollars over the last three and a half years, which continues today with the ongoing implementation. And we are very excited. We have a go-live date expected in very early 2025. When it comes to the iLottery market, Pollard Banknote brings unique expertise, very successful experience in large complex project management, years of successful iLottery operational management, and history of seamless on-time implementations through our experience with iLottery, as well as with our play on loyalty club installations and multifaceted app and user interfaces focused on the gaming market. We also achieved our first North American installation of our own in-house developed e-instance for iLottery, installing games and going live in Alberta. We've had success in Europe now for a number of years providing e-instance games, and this expansion into North America with its very unique regulatory requirements is another critical success in establishing our in-house iLottery technology offerings as a leader within the industry. During the quarter, we also acquired the business of Clarence J. Venn, LLC. We called him Venn. A leading manufacturer of bingo markers, utilized primarily in the charitable gaming bingo market. That acquisition was approximately $17.4 million. For over 60 years, Venn has manufactured the world's finest and most innovative line of bingo markers, also known as dabbers or daubers. Venn's products are sold in every bingo market throughout North America, as well as in 23 foreign countries. This follows on our purchase for $5.4 million in the second quarter of certain assets used in the operation of electronic charitable games with licensed charitable gaming organizations. These acquisitions are a clear illustration of our strategy in both the lottery and the charitable gaming markets of ensuring we have a complete portfolio offering all solutions to ensure that we can be partner of choice. Our mergers and acquisition approach has been integral to our success and will continue to be used to expand our offerings. Now I'll turn it over to John to highlight some of the major financial numbers.

Thank you, Doug. So starting off with looking at the third quarter this year, well, we achieved record quarterly sales of $153.3 million and also record adjusted EBITDA of $33.3 million and a strong added income of $18.2 million. And in addition, our combined sales, which includes our share of the Neopolar joint venture revenue, was also another quarterly record, 180.6 million. So pretty good news on the sales and earnings front this quarter for sure. So compared to our third quarter in 2023, our sales increased 24 million, or 18%, and our adjusted EBITDA increased by 8.5 million, or 34%. The sales growth was driven across a number of areas. different product lines, but for sure the biggest one was the instant ticket product line. So higher volumes on our instant ticket product line combined with the important thing that Doug talked about, the higher average selling prices that we've achieved increased our revenue by $17.7 million compared to last year in the same quarter. And those higher average selling prices are a direct role of our strategy that Doug talked about of repricing that we've been underway for a couple of years now and is we're really starting to see the positive financial impact of that in our results. And in addition, as is often typical in the third quarter, we had also a lot of higher value proprietary products, including our signature ScratchFX games, which has been a big player for us for years, our laminated Fusion games, and one of our newest innovations called EasyPack, which is a unique pouch ticket specifically designed to be vendable through ITVMs in the U.S. market Great new product we launched. So had good overall sales from those proprietary products as well in the quarter. Journal gaming also continues to generate strong results. Our revenue grew by 3.6 million in the quarter versus last year, partly the acquisition of Venn that Doug just referred to, and also driven by a higher number of machine placements in our e-gaming portion of the charitable side. And lastly, a weaker Canadian dollar also contributed to an increase in sales by $2.9 million in this quarter compared to the last quarter. So that sales growth that we just talked about, of course, continues to drive our gross margin higher, which is a big factor we've been focusing on. We got to 20.2% in Q3, which is 250 basis points higher than the same quarter of last year. You know, and we would hope to see that the full impact of our repriced instant tickets come into effect in the year 2025 and see further improvement in those. Of course, we saw the impact of those higher selling prices for craft tickets gradually come into play in a greater effect as we've got through the quarters in 2024, but we should see those things more fully in 2025. Our administration expenses were up to $17 million in this quarter compared to $14.8 last quarter. Just as a result of growth in our business, this is due to increased compensation expenses and consulting costs, software licensing costs going up and acquisition costs as well. Partly offsetting these, we had a decrease in the professional fees in the quarter. Same story in selling expenses up a little bit to $5.9 million from $5.2 million in the same quarter last year. Again, just due to the growth in the business, mostly driven by higher compensation expenses and expansion of our charitable gaming division and the acquisition of CJ Venn. You know, the joint venture, our Neopal joint venture continues to do well, of course. So our share of income from that increased to $13.6 million in the third quarter, up from $11.1 million in the third quarter of last year. That 2.5 million increase was largely just due to organic growth on our stable of contracts there, but particularly we should give a shout out to North Carolina, which is one of our newest launches that continues to drive really strong sales. As I referred to a minute ago, record adjusted EBITDA in the quarter, $33.3 million compared to $24.8 million in the third quarter of last year. That $8.5 million increase was largely driven by the gross profit increase from the expansion of the instant ticket prices and margins that we talked about just a second ago. And, of course, our share of the increase in our joint venture, neopolar joint venture income, and slightly offset by the higher administration selling expenses that I just talked about as well. If we just quickly mention net income, increased to $18.2 million in the quarter from $7.7 million last year. Same story there, the increase largely due to the increase in gross profits of $8 million flowing from our instant ticket margins. Also, a net foreign exchange gain increase of $5.4 million and the increased share of our joint venture income in our neopolar joint venture of $2.5. Partly offsetting those increases, we had a higher income tax expense of $2.5 million And then our administration and selling expense increases of $2.2 million and $0.7 million that we talked about before. And a little slight increase in interest expense of just $0.3 million. So that was Q3. If we flip now to the nine-month year-to-date numbers for 2024, sales were up to $416.8 million, which is an increase of $31.8 million, or 8%. Same story there. The higher average selling prices from the repricing over instant ticket contracts drove that up. A little bit offset by slightly lower volumes for the year on instant tickets. But we also had some increased sales of about $12 million from a better mix of product. Again, those higher value proprietary things. And also strong growth in our loyalty solutions and digital products. And also our merchandise products through Schaefer's systems as well. And so good growth in those areas. In charitable gaming, our volumes were up as well, both in paper products and e-gaming. So we had an increase of 6.6 million year-to-date in charitable gaming. Our gross margin percentage improved to 19.6% in the quarter from 15.9% last year. a really nice increase of 370 basis points. Again, largely reflecting those improved instant ticket margins due to the higher selling prices on our repricing. Just like in the Q3, our selling and admin expenses were up somewhat. We increased by 8 million to 65.9 million from 57.7. Again, higher compensation costs and the acquisition of Venn and some higher software licensing costs just driven by the growth in our business. Of course, our Neopollard joint venture also produced some really strong results year-to-date. Our share of profit was up to $39.9 million, which is up 11.9 million, or 42% from the year-to-date number last year. You know, just driven by organic growth in sales, but again, North Carolina is the particular star this year in that portfolio. So just looking at adjusted EBITDA for the year now, we are up to $89.3 million for the first nine months of 2024. Really nice increase from $65.6 million in the first nine months of last year. 36% increase. Again, primary reasons for this growth were the gross profit increase from our instant ticket margins and licensed products, and also growth in some resale merchandising products and e-gaming systems sales that we talked about. And of course, Strong contribution from our share of our joint venture in the Neopolar joint venture, where we had $11.9 million increase there. Partially offsetting that was our increases in selling and administration expenses of $7.9 million that we referred to. And then lastly, just looking at net income, our net income increased year-to-date up to $37 million. $16.9 million increase, or 84% compared to the same period last year. Again, an increase in gross margin due to our improved instant ticket margins. And, of course, our share of the joint venture, Neopollard Income, were the major contributors there, offset again by the selling and admin increase of $8 million and income tax expense increase of $5 million and a small increase in foreign exchange loss of $2 million. A lot of numbers to throw at you all there, but obviously a lot of records and really strong improvements that we're pretty excited about. So I think I will now turn it back to Rob Rose for a few further comments before we get ready for questions.