Pollard Banknote Limited

Good morning, everyone. Welcome to the Pollard Banknote Limited First Quarter 2025 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 risk 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 CDAR Plus' database found at cdarplus.ca. I'd like to remind everyone that this conference call is being recorded today, Thursday, May 8th, 2025. I'd now like to introduce Mr. Doug Pollard, Co-Chief Executive Officer of Pollard Bank Note Limited. Please go ahead, sir.

Thank you, Kelsey, and thank you, everyone, for joining us. With us on the call today is John Pollard, Co-Chief Executive Officer, and Rob Rose, Chief Financial Officer. We released our first quarter 2025 results today. You can access our news releases as well as our financial statements and MD&A on our website at PollardBankNote.com and also on Seder Plus. Today we will start out with prepared remarks from me highlighting our 2025 first quarter operating achievements and an overall business update. And John will then follow up discussing our first quarter financial results. Then we'll open it up to questions. The first quarter of 2025 was an exceptional quarter for Pollard with a number of key milestones and business goals achieved to help drive our strategy of being the partner of choice in the lottery and charitable gaming space. These were achieved in conjunction with strong financial results, which we'll discuss in detail a bit later. We are particularly proud of the implementation and startup of the Kansas iLottery solution, which began on February 13th, 2025. We worked very closely with the team from the Kansas Lottery, and the rollout of the day-to-day art Catalyst gaming platform and our proprietary Instant Games was the fastest rollout ever in North America for iLottery, and illustrates clearly our extensive experience with both iLottery and complex technological solutions which are necessary to be a leader in the lottery market. The go-live went extremely smooth and continues to meet expectations in all areas. Of course, consistent with operations such as these, there is a ramp-up period as revenue grows to generate a profit, and we continue on the expected trend from a financial perspective. In addition to providing our instant games in combination with the iLottery platform in Kansas, our games continue to perform well in other jurisdictions. We are optimistic that our E-instant results will allow us to aggressively expand the number of third-party sites hosting our games. We also continue to see significant interest by lotteries in expanding their offerings to include an iLottery solution, both for greenfield solutions for new states to begin, and for existing operations who are looking to replace their suppliers and their technology. Recently, the Massachusetts Lottery issued a request for proposal for the implementation of a greenfield iLottery solution, and we believe other jurisdictions are looking closely at doing the same. As we have discussed before, the sales cycle of an iLottery solution is long, but recent evidence supports it as a critical piece in the lottery suite of offerings. In addition to the successful development of our own in-house proprietary iLottery gaming platform and our instant game content, our Neo-Pollard Interactive joint venture achieved record results in the first quarter of 2025, Very strong sales of e-instance led the way, especially in Virginia and North Carolina. Our joint venture continues to generate meaningful results and cash flow, and with a number of long-term contracts and extensions already on the books, we'll be doing so for a number of years. Our success in the iLottery area has been remarkable, and we are very confident we'll continue to be a leader for years to come. We also saw the benefits of our strategy of repricing instant ticket contracts, and we have now successfully repriced a large majority of our volume. With all of those contracts now live, we will see the full positive impact throughout 2025, as evidenced by the high average selling price we achieved in the first quarter. There are a few longer-term contracts still remaining in place and will come up for rebid in the next few years, at which time we'll then have opportunities to assess our pricing on those remaining contracts. Subsequent to quarter end, we closed the purchase of another complimentary charitable gaming business, Pacific Gaming. Pacific is a leader in a charitable bingo market, particularly in the provision of handheld electronic bingo devices, an important segment of that market. And while small, this investment continues to expand our product portfolio so that we provide the complete requirements for charitable gaming operators. Our overall markets remain very positive. Retail sales of instant tickets remain steady in 2025 relative to the prior year, while still remaining at the high levels attained with significant growth during 2020 and 2021. Demand for charitable products remains robust with particular high interest among jurisdictions looking at expanding ETAB and other electronic opportunities And we believe our digital areas, including iLottery and eInstance, offer significant growth opportunities both in North America and internationally. Now I'll turn it over to John Pollard to highlight the first quarter results.

Thank you, Doug. During our first quarter, we achieved traditional gap sales of $146.2 million compared to $125.7 million in the three months ended March 2024. We prefer to focus really on our combined sales revenue number, which includes our proportionate share of our neopolar joint venture revenue. And that measure obtained $177.1 million in the quarter compared to $151.2 million last year. A significantly higher instant ticket average selling price in the first quarter of 2025 increased sales by $17.1 million compared to 2024. primarily due to an increase in our proprietary product sales, also the impact of the repriced contracts that Doug just alluded to, and we had a favorable change in customer mix in the quarter. Partially offsetting that increase to revenue was a decrease of instant ticket sales volumes of 5.8 million compared to the prior year, And that is primarily as a result of us declining to produce work for certain low margin accounts that we've talked about in the past. Our higher charitable gaming volumes increased sales by 4.4 million in the first quarter of 2025 compared to the first quarter of 24. This was predominantly the result of the acquisition of CJ VIN in the third quarter of 2024. This increase in sales was partially offset by a decrease in charitable ETAB revenue of $1.7 million compared to 2024, which was due to a regulatory change in one of our larger jurisdictions that has temporarily depressed sales there a bit. Lower Michigan I lottery sales also decreased revenue in the first quarter of 2025 by $1.5 million compared to 2024. which is reflecting the ongoing competition in the Michigan market with the private iCasino gaming operators. Gross profit was 25.4 million or 17.4% of sales in the first quarter of this year compared to 21.7 million or 17.3% of sales in the first quarter of 2024. This increase of $3.7 million in gross profit was primarily the result of higher instant ticket sales margins largely flowing from our higher instant ticket average selling price that we just talked about. Now our overall gross margin percentage was similar in Q1 of this year to Q1 of last year. The higher margins that we talked about on instant tickets were partially offset by about three other things primarily. The largest one was startup costs that we're facing in the startup of the Kansas iLottery contract. Obviously, we only had revenue for a portion of the quarter. And as Doug talked about, revenue starts smaller and builds up. So there was definitely a negative impact on our margins from the Kansas iLottery startup that will gradually improve every quarter going forward. Secondly, the lower Michigan iLottery revenue that I just referenced, does have an outsized effect on our gross margin percentage because those are high margin sales and the decline affects gross margin disproportionately. And similarly, that temporary decline in ETAB revenues that I talked about from the regulatory change, similar effect to the lower Michigan iLottery revenue. If we compare our 17.4% gross margin percentage from Q1 of this year with our sort of high watermark of the 21% that we achieved in the second quarter of last year, those three factors that I just talked about account for almost all of that change in percentage. Administration expenses increased to 17.3 million in the first quarter of 2025 compared to 15.4 million in the first quarter of 2024. That $2 million increase 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 footprints. Selling expenses were up a little bit to $6 million in the first quarter this year compared to $5.4 million last year. That increase also primarily the result of higher compensation expenses, but also a little bit of the result of including CJVAN in our results this year. Our share of our income from our neo pollard I lottery joint venture increased to 16.2 million in the first quarter 2025 up from 12.2 million in the first quarter of last year. That strong $4 million increase was primarily a result of continuing great results that we're getting on instant sales in North Carolina and Virginia. Moving on to adjusted EBITDA, this increased to $30.6 million in the first quarter of this year compared to $23.7 million in the first quarter of last year. The primary reasons for that $6.9 million increase in adjusted EBITDA were the increase in the gross profit we talked about above of $4.5 million, again, primarily due to higher instant ticket and charitable gaming sales margins. In addition, the increase in our equity investment income from our Neoplar joint venture of $4 million and an increase in realized foreign exchange gain of $1.2 million also contributed to the increase in adjusted EBITDA. Partly offsetting those increases were the $2 million increase in administration expenses and the $600,000 increase in selling expenses referenced above. Interest expense increased slightly in the quarter to $2.8 million from $2.4 million in the first quarter of 2024, largely the result of an increase in our average long-term debt outstanding compared to last year. but partially offset by the impact of slightly lower interest rates in the first quarter of this year. Net income was $11.7 million in the first quarter of 2025, compared to $6.9 million in the first quarter of 2024. That increase of $4.8 million was primarily due to the increase in gross profit of $3.7 million, due again to the higher incentive and charitable sales margins. In addition, the $4 million increase in our Neopollard equity investment income and the increase in foreign exchange gains of $3 million further contributed to the increase in net income as compared to 2024. And of course, partially offsetting those increases were the increase in income tax expense of $2.7 million, the increase in administration expenses of $2 million, and the increase in excelling expenses of $600,000, and a slight increase in interest expense of $400,000. So net income per share was $0.43 basic and $0.43 diluted in this year, in the first quarter. That compares to $0.26 per share basic and $0.25 per share diluted in the first quarter of 2024. Just a quick comment on our first quarter cash flow. Look, the nature of our business can generate significant swings in the levels of our working capital, particularly in accounts receivable. And during the quarter, our investment in working capital did increase by a fairly large $46 million, the bulk of that through an increase in the accounts receivable. So that was large, but this does follow from Q4 of last year, where we did generate a fairly large drawdown in our working capital. The timing of our sales in the first quarter of this year was more heavily weighted to the end of the first quarter, and also the particular customer mix we had impacted our recounts receivable, and just a general return to more historic absolute levels of our normal trade receivables all factored into that increased investment. However, look back even just at April, we've already collected a significant amount of those that larger buildup in accounts receivable. And we do just anticipate a return in the second quarter to more normal levels of investment in working capital. And so we should have a strong positive cash flow in the second quarter. Also, just a quick further comment on the whole tariff and trade protectionism environment. I've been talking about this quite a bit lately, of course. There does remain a fair bit of uncertainty about the nature, extent, and duration of various protectionist trade measures, including tariffs that may be enacted within North America. However, we continue to believe that the current structure of our business model, which includes extensive manufacturing facilities located both within Canada and the United States, will largely mitigate any negative effects as we have the ability to produce almost all the products that we sell to our U.S. customers in our US manufacturing facilities. Looking at our production input side and the effects from tariffs there, our supply chain does include options and various suppliers where there may be cross-border flow for production in either our Canadian or US manufacturing facilities to shift those flows to stay within the country where the product is being produced. And so that ability will also help to mitigate the negative impacts of tariffs. Lastly, just a general comment that, of course, if this trade environment, tariff and trade environment, does cause an overall decline or negative impact on the general economy, as we've stated over the years, historically the lottery and charitable gaming markets that we're in have been generally very resilient to any negative impacts or negative effects, I'm sorry, of economic downturns. So we feel that that will also bode well for us in this environment. We will continue to monitor developments here and assess any additional short-term and long-term measures that need to be taken if anything changes. That is the end of our prepared part of our discussions. Operator, we'd be happy to entertain any questions now at this time.