Pollard Banknote Limited

Welcome to the Pollard Banknote Limited fourth quarter 2024 and year-end 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 actual results may differ materially from those expressed or implied in such statements. 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 CEDARplus's database found at cedarplus.ca. I'd like to remind everyone that this conference call is being recorded today, Monday, March 10th of 2025. I would like to introduce Mr. Doug Pollard, Co-Chief Executive Officer of Pollard Banknote Limited. Please go ahead, sir.

Okay, thank you, operator, and thank you, everyone, for joining us on this very late call. Unfortunately, travel, time zones, and business commitments left us no other viable option to being able to reach out to you after our release. But this will not be the usual or regular time for future quarterly calls. With us on the call today is John Pollard, Co-CEO, and Rob Rose, Chief Financial Officer. We released our 2024 fourth quarter and annual results earlier today. You can access our news releases as well as our complete financial statements and MD&A on our website at PollardBankNote.com and also on CDAR+. Today we will start out with prepared remarks from me highlighting our 2024 accomplishments and an overall business update, and John will then follow up discussing our fourth quarter results. Then we'll open it up to questions. 2024 has been an extraordinary year for Pollard Banknote on a number of fronts across our many business units, attaining many milestone achievements. Record financial results and our KPIs were achieved this past year, including record sales of $557.1 million and combined sales, including our share of our iLottery joint venture sales, of $665.9 million. Higher average selling prices of our instant tickets due to the success of our repricing strategy, higher sales of ancillary lottery products and solutions, such as licensed products and loyalty programs, and higher sales in charitable games products, including both printed products and e-tabs, all drove the record sales. Our strategy of offering a complete line of products and solutions within the focused lottery and charitable gaming markets is underpinning the success. Adjusted EBITDA attained a record of $114.5 million in 2024, up $23.2 million from 2023. primarily due to higher gross margins in instant tickets propelled by our successful repricing strategy on our instant ticket contracts. And we have now repriced the majority of our contract portfolio with the full impact expected in 2025. Income from operations increased by 51% to a new record $69.8 million, driven by improved financial performance across our business lines. We love our business for many reasons, and one of these is the strong operating cash flow that we generate, reaching record levels this year with $73.9 million produced, giving us ample resources to fund our investments and acquisitions while maintaining a very conservative debt level. Now of significant importance, in August of 2024, we were formally awarded the Kansas Eye Lottery contract, which successfully went live on February 13th, 2025, in what was the fastest iLottery implementation ever in North America. And not only did it go very fast, I would also add that from the customer perspective, it went very well. I'm very confident that we have a very positive reference from the Kansas Lottery. And although it is early days, you know, we're very early into this process, it is delivering results in line with expectations, which is very important for securing that reference and the word of mouth that that can generate in this lottery business. Regarding Kansas, the award and implementation of our state-of-the-art Catalyst gaming platform and eInstant game portfolio, it's a recognition of the value of our long-standing relationship with the Kansas Lottery, our extensive experience with implementing long-term complex technology solutions, and providing the most advanced iLottery platform on the market today, including complete central gaming capabilities covering both internet and retail business in an omni-channel approach modern modular design in a cloud-based environment. Equally as important has been the success of our internal e-Instance game studio, which continues to expand and went live in a number of important jurisdictions including Ireland and Alberta. We are currently in the process of implementing our e-Instance in other jurisdictions, as these popular games will be implemented both in partnership with our Catalyst gaming platform, as well as independently with other third-party iLottery platform providers. The early feedback on our games is very positive and reflects the history of what Pollard has done for decades. Pollard has always created outstanding games. Whether these games are printed on instant tickets or pull tabs, produced as e-instances in lottery or in e-tab electronic gaming machines, creating fun and exciting game experiences is one of Pollard's greatest strengths. In addition to the successful deployment, or development, sorry, of our in-house proprietary iLottery gaming platform and instant game content, our Neopollard Interactive joint venture continues to produce important successes. With its extension of its contract with Virginia Lottery, taking that contract until October 2028, with remaining extensions still available after this latest extension concludes. The West Virginia iLottery contract also went live in 2024, And these two important milestones illustrate the strength and the longevity of our joint venture. We are confident the Dye Lottery opportunities will increase in both North America and internationally, and we are very confident that Pollard will continue to be a leading player in this exciting growth area. Important investments were made in CapEx and intangibles with more than $54 million invested during the year. including important press upgrades, increases in key digital game content for eTabs, expanding our inventory of our state-of-the-art ICON eTab machines, and primarily significant development of our Catalyst gaming platform and expanded eInstant game content financed through our internal organic cash flow. This substantial level of investment will continue in 2025 as we address the opportunities that exist in our markets. In addition, in the fourth quarter, we renewed and expanded our debt facility, providing stability and long-term access to significant capital with this new four-year agreement. In 2024, we closed on two important acquisitions, adding a leading bingo marker manufacturer in Clarence J. Venn to our family, and we added a very popular linked electronic bingo game and those assets to our ETAB game content assets. both helping to fill out our charitable gaming group and generating strong financial results. And our overall markets are still good, positive environments for our company to succeed in. Instance and charity remain strong, and as discussed, digital areas for both charity and lottery is, sorry, lottery through iLottery is very robust. Retail sales of instant tickets remain relatively steady in 2024 relative to the prior year, while still remaining at the high levels attained with significant growth during 2020 and 2021. Instant tickets are a significant part of our business, representing nearly 50% of our sales, and with our improving margins and cash flow, the old adage of never fall out of love with your core business has never been truer. And consumer demand for charitable products remains strong, with particularly high interest among jurisdictions looking at expanding e-gaming opportunities. Now I'll turn it over to John to highlight the fourth quarter results.

Thank you, Doug. During our fourth quarter, we achieved sales of $140.3 million compared to $135.5 million in the three months ended December 31, 2023. And in addition, looking at our combined sales, which includes our proportionate share of our neopolar joint venture revenue, our revenue was $180.6 million, another quarterly record, and up almost 15% from the $157.3 million combined sales that we had last year. Our higher average ticket selling prices in the fourth quarter of 2024 increased sales by $2.7 million compared to 2023. primarily due to the impact of the reprice contracts that we've been talking about all year and a change in customer X, partly offset by a decrease in proprietary products. However, the increase in average selling price in this revenue is partly offset by a decrease in instant ticket volumes of 7.9 million as compared to 2023. Our fourth quarter is traditionally a time of lower volumes after the higher volumes we produce in the lead up to the holiday season. We also are still seeing the impact of lower orders due to not pursuing aggressively incremental sales work where profit margin targets don't meet our requirements due to those contracts having not yet been repriced. In addition, we also just did have an unusual circumstance in the fourth quarter with a timing of orders that were lower than normal that pushed our volumes down. However, when we look ahead to 2025, we see our instant ticket volumes coming in very similar to the level that we had overall in 2024. Also, higher sales of our ancillary lottery products and services increased revenue by 3.8 million. This growth was largely due to increased sales of licensed products, digital loyalty products, and distribution services compared to the fourth quarter of 2023. And our higher charitable gaming volumes increased sales by 5.4 million in the fourth quarter of 2024. primarily as the result of the acquisition of CJ Venn in the third quarter of 2024. Our cost of sales were 117.9 million in the fourth quarter of 2024, compared to 110.7 in the fourth quarter of 23. This increase of 7.2 million was primarily due to higher charitable gaming volumes, increased sales of ancillary lottery products, and unfortunately some instant ticket production inefficiencies in the quarter. Also increasing cost of goods sold was the increase in Pollard iLottery operational costs, including Kansas startup expenditures as we were getting ready to go live with our Kansas iLottery contract. Partially offsetting those increases in cost of sales was lower expenses related to those reduced instant ticket sales volumes. During the quarter, we had some manufacturing issues on certain instant ticket games that increased our costs which does occasionally occur due to the nature and complexity of our production process, but these were unusually large and not expected to be recurring. Gross profit was 22.4 million or 16.0% of sales in the fourth quarter of 2024 compared to 24.8 million or 18.3% in the fourth quarter of 23. This decrease of 2.4 million in gross profit And the decrease in gross profit percentage was primarily the result of lower instant ticket sales margins, largely as a result of the lower instant ticket volumes and impact of the higher costs due to the aforementioned production inefficiencies that we had in the quarter. Additionally, the reduction in Michigan iLottery gross profit and the increased Pollard iLottery operational costs, again in the ramp up to the Kansas launch, reduced our gross profit. Partially offsetting those decreases in gross profit were increased charitable gaming product sales, including ETABS, and also improvements in digital and loyalty margins. Administration expenses increased to $16.1 million in the fourth quarter of 2024 compared to $15.6 in the fourth quarter of last year, 2023. This increase of $0.5 million was largely the result of increased compensation expenses and software licensing costs as we continue to invest in resources to expand our digital and iLottery footprint. Our selling expenses actually decreased slightly to $5.3 million in the fourth quarter of 2024 compared to $5.6 in the fourth quarter of 2023. That decrease was primarily due to lower compensation costs, including some lower incentive accruals, partly offset by the increase in selling expenses from the acquisition of CJ Venn. All our share of income from our NPI joint venture increased to $12.6 million in the fourth quarter of 2024 compared to $11.0 million in the fourth quarter of 2023. That $1.6 million increase primarily due to continued strong e-instant sales in our North Carolina contract, which followed their instant launch in the fourth quarter of 2023. Our net foreign exchange loss was $4.4 million in the fourth quarter of 24 compared to a net foreign exchange gain of $2.9 million in the fourth quarter of 23. The 2024 net foreign exchange loss of $4.4 million resulted from a net unrealized foreign exchange loss of $4.2 million primarily due to the increased Canadian equivalent value of our U.S. dollar denominated accounts payable and long-term debt that was due to the significant weakening of the Canadian dollar relative to the U.S. dollar in the quarter. Adjusted EVDA decreased slightly to $25.2 million in the fourth quarter of 2024 compared to $25.7 in the fourth quarter of 23. The primary reasons for the decrease was the decrease in gross profit that we discussed above of $2.3 million, partly offset by the increase in our equity investment joint venture income of $1.6 million. Income tax expense was unusual in the quarter with an $8.8 million expense, an effective tax rate of 125.2%, obviously higher than our normal domestic rate of 27.0%, which was due to the effect of one-time withholding taxes that were associated with certain intercompany dividends. The magnitude of these expenses are not expected to recur going forward. The net loss of $1.8 million in the fourth quarter of 2024 compared to net income of $11.3 million in the fourth quarter of 2023, and the main reasons for that were non-operational, including the increase in unrealized foreign exchange loss of $7.3 million and the increased income tax expense of $5.8 million. Partially offsetting those increases to the net loss was the increase in our joint venture equity investment income of $1.6 million. So net loss per share, basic and diluted, was $0.07 and $0.06 per share, respectively, in the fourth quarter of 24, compared to an income of $0.42 and $0.41 per share, respectively, again, basic and diluted, in the fourth quarter of 23, due to the aforementioned unrealized foreign exchange loss and higher income tax expense primarily. And so before I wrap up and we get to questions, we do want to just address the whole tariff and trade protection environment that, of course, everyone's been so aware of that we've been living the last number of days. There's obviously uncertainty regarding the nature, extent, and duration of various protectionist trade measures, including tariffs, that may have been and may be enacted within North America. However, we believe that the current structure of our business model, which includes extensive manufacturing facilities located both within Canada and the U.S., will significantly help mitigate any negative impact that we may have as we have the ability to produce almost all of our products that we sell to our U.S. customers in our U.S. manufacturing facilities. And the same would go the other way from the Canadian side that we could produce all of our products required in the Canadian market from our Canadian facilities. But there's two sides, of course, to the tariff thing. You have to look at your finished goods flow and you also have to look at your flow of inputs. Also on the input side, the good news is that in our U.S. manufacturing facilities, we will be able to source virtually all of our inputs required for producing those U.S. goods in our U.S. facilities. And therefore, there won't be any tariff issues with that. And likewise, even in Canada, we should be able to source most of our inputs in Canada, although we have a little bit of exposure there because there are a few items that we have to source from the United States. However, it isn't certain even yet that there will be Canadian retaliatory tariffs on all those input items that we do have to source from the U.S., but there may be some. So, in summary, we feel we're very well positioned to withstand these tariffs with very modest impact, but, of course, we'll continue to monitor these developments and assess any short-term and long-term measures that we need to take to continue to manage any potential negative effects we might have there. That is the end of our prepared part of our discussions. Operator, we'd be happy to now entertain any questions that people may have at this time.