Pollard Banknote Limited

Good morning, everyone. Welcome to the Pollard Banknote Limited second 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 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 Cedar Plus database found at cedarplus.ca. I would like to remind everyone that this conference call is being recorded today, Thursday, August 14th, 2025. And I would now like to introduce Mr. Doug Pollard, Co-Chief Executive Officer of Pollard Banknote Limited. Please go ahead, sir.

Okay, thank you very much, Jenny. And thank you everyone for joining with us today. On the call is John Pollard, Co-CEO and Rob Rose, CFO. We released our second quarter 2025 results yesterday. You can access our news releases as well as our financial statements and MD&A on our website at PollardBanknote.com. and also on CDAR+. Today we will start with prepared remarks from myself highlighting our 2025 second quarter operating achievements and overall business update. And John will then follow up discussing our second quarter results. As usual, we'll then open it up to questions. So the second quarter was a solid quarter. We continue our investments and we continue to benefit from the breadth of our gaming offerings. We had lower instant ticket contributions relative to last year. And some ongoing startup costs of our Kansas iLottery operation were mostly offset by higher contributions from our Neopolar joint venture, as well as higher contributions from our printed charitable products and higher results from our retail solutions offerings. John will provide some specific financial details shortly. Overall demand for our product at the consumer level remains positive. with sales of retail scratch-off instant tickets and retail dollar sales up slightly over last year. This comes on the heels of a year or two of relatively flat sales, which in turn followed significant increases during the pandemic years. Our actual sales volume of instant tickets during the second quarter of 2025 remained steady compared to the first quarter of 2025, but lower than the second quarter of last year, mostly due to the timing of customer orders and some sales being pushed into the third quarter this year. Based on our current schedules, our third quarter volumes are expected to be higher than the volumes produced and sold in the first two quarters of 2025. We also continue to focus our pursuit of work from our customers that have higher margins versus chasing lower value work. Our average selling prices of our instant tickets continues to increase relative to last year. owing to the higher selling prices reflecting the full impact of our repriced contracts during 2025. We continue to look at opportunities to appropriately raise our prices and ongoing bid opportunities. And we are singularly focused on improving our instant ticket margins with a number of identified strategies to improve not only the revenue side of the margin equation, but also improving our cost structure and our efficiency in order to enhance our margins. In fact, towards that end, we have recently added to our instant ticket senior management group to ensure that we have the necessary resources to accomplish our objectives. Demand for our other products and solutions remains solid, including charitable gaming printed products and e-tabs, and ancillary products and solutions such as retail, point-of-sales, and dispensers. A good example of our success building the complete suite of lottery products and solutions was the three-year extension during the quarter of our warehouse and distribution solution for the Arizona Lottery, where we essentially run this critical component for the lottery instant ticket and full tab operation. Now, our Kansas iLottery solution completed its first full quarter of operations in the second quarter, and it continues to meet expectations. As expected in a new startup operation of this size, We will be absorbing a negative contribution to our financial results while the player base builds, but Kansas has become an important calling card in our focus of building our state-of-the-art Catalyst gaming platform and proprietary eInstant games. Interest by iLotteries in expanding their offerings to include an iLottery solution, both in greenfield solutions or situations, I should say, and existing operations looking to replace existing technology, that remains very active. Formal RFPs are still in process, including the Massachusetts Lottery and the Belgian Lottery, and a number of other lotteries continue the discussion in this area. As you know from our previous discussions, the RFP and sales process for iLottery can be a very long cycle, but we are optimistic that further jurisdictions will go down the path of introducing or updating their iLottery technology, as this has shown to be a critical component for lottery success. Our Neopollard Interactive Joint Venture achieved new record results in the second quarter of 2025, after establishing a prior record in the first quarter of 2025. Continued very strong sales of e-instance led the way in Virginia and North Carolina. Our joint venture contracts continue to generate meaningful results in cash flow, and with a number of long-term contracts and extensions already on the books, we will be doing so for a number of years. Our e-Instant game studio is producing more e-Instant game content and increasing the number of games and customers. In addition to our existing e-Instant games deployed in a number of places like Ireland and Kansas, during the quarter we went live with our games in Norway, Virginia, and West Virginia. And the feedback we're receiving on these games is very positive. Effective game content is an extremely important success factor in the lottery and charitable gaming world. And ultimately, one of Pollard's greatest strengths throughout our history has always been great game content. And this is true for both printed and electronic products and solutions, which allows us to not only develop original content, but also the ability to cross over successful game content across multiple platforms, such as iconic franchises like Pac-Man and Frogger. Schaefer Retail Solutions Plus generated higher contributions in the second quarter, led by our legacy ticket dispensers, and bolstered by the growing success of our new innovative retail products, including our Halo solution, a light surround ancillary, which effectively highlights and draws attention to retail ticket displays, and thereby grows instant ticket sales, and our digital menu board, a creative and individualized way of reaching out to customers at retail to boost sales of lottery tickets. On April 1st, 2025, we acquired Pacific Gaming, a leader in the charitable bingo market, particularly in the provision of handheld electronic bingo devices, an important segment in that market. The integration has gone well and combined with our purchase last year of Clarence J. Venn, a leading manufacturer of bingo daubers, provides a complete suite of products and solutions for the charitable gaming market. We are already seeing revenue synergy developing in these customers, as we offer items like printed products in connection with these new bingo-related solutions. ETAB gaming within the charitable gaming market has been a strong performer. Starting January 1st, 2025, the state of Minnesota adopted certain regulatory changes on what type of gameplay was allowed. These changes have resulted in a reduction in gameplay and gross gaming revenue across the entire Minnesota market and all suppliers. including us, have had their offerings affected. We are currently aggressively developing additional eTab game content and expanding our game content in Minnesota to further adopt to the new regulations and targeting a recovery in gross gaming revenue as a result. As well, we are investing significantly and now rolling out our newest eTab icon cabinets in a number of existing jurisdictions to provide innovative gaming interactions, as well as building capacity for new greenfield jurisdictions. We anticipate more jurisdictions coming on stream in the next 18 months, and we will look to expand aggressively into these opportunities. And I'll finish my comments by providing out that we recently celebrated our 20th anniversary, just a couple days ago, of our initial public offering back in 2005. The lottery and charitable gaming world continues to evolve as it has the past two decades, and we are very pleased that Pollard Banknote has evolved during that time while still staying true to our core mission, being a partner of choice to the lotteries and charities that generate money for good causes around the world through our partnerships. Now I'll turn it over to John Pollard to highlight our first quarter results.

Sorry, second quarter results. Go ahead. Okay. Thanks, Doug. So during the second quarter, we achieved a traditional gap sales of $142.7 million compared to $137.8 in the first three months of last year. Although we like to focus on the combined sales, which also includes our proportionate share of our Neopolar joint venture. And on that basis, we attained revenue of $174.89 in this quarter compared to $166 million last year. Our higher instant ticket average selling price in the second quarter of this year increased sales by 4.5 million compared to 2024, primarily due to the impact of the reprice contracts we've been talking about so much for the last year or so. And we had a slight improvement, a change in customer mix. Unfortunately, offsetting this increase to revenue was a decrease in instant ticket sales volumes of 9.2 million compared to 2024. mainly as a result of certain customers getting pushed later in the year. Higher sales of our ancillary lottery products and services increased revenue in the second quarter of 2025 by 1.2 million. This growth was largely due to increased sales of our retail merchandising products and the distribution services that Doug just talked about. These increases were partly offset by decreased sales of some of our digital products. Higher charitable gaming volumes increased sales by 6.8 million in the second quarter of 2025 compared to the Q2 of 2024. This was largely due to our recent acquisitions of CJ then and Pacific Gaming. In addition, the higher average selling price of charitable printed products further increased sales by half a million dollars. These increases in sales were partially offset by a decrease in charitable e-gaming or e-tab revenue of 1.5 million compared to 2024. which was largely due to the impact from the regulatory changes that Doug just talked about in Minnesota. Lower Michigan iLottery sales decreased revenue in the second quarter by 0.9 million compared to 2024, reflecting the ongoing competitive environment in Michigan from private iCasino gaming. Lastly, the weakened Canadian dollar compared to the US dollar and Euro compared to the same period in 2024 resulted in an increase of approximately 3.5 million in sales. Our gross profit decreased to 23.9 million or 16.7% of sales in the second quarter of 2025 from 29.2 million or 21.2% of sales in the second quarter of 2024. This decrease of 5.3 million in gross profit and the decrease in gross profit percentage that goes with it were caused roughly equally by three things. One, our lower instant ticket margins, which is largely the result of lower instant ticket volumes that we just talked about. Secondly, the impact of our iLottery startup costs related to the Kansas iLottery operation. And thirdly and lastly, due to our lower ETAB sales margins, largely due to the Minnesota situation that we just talked about. Partially offsetting these decreases in gross profit, however, were the increased margin from charitable gaming products, including the impact of the acquisitions of CJ Van and Pacific. Administrative expenses were $17.6 million in the second quarter of 2025, premiered to $16.5 in Q2 of 2024. That increase of $1.1 million is largely the result of increased software licensing costs and the addition of CJ Van and Pacific to our administration expenses. Sequentially, the $17.6 million in this quarter is very similar to the $17.3 million of admin expenses in the first quarter of this year. Our selling expenses increased to $16.5 million from $5.7 million in Q2 of last year, and that increase of $0.8 million was primarily due to the addition of CJ Venn and Pacific. Our share of income from our iLottery joint venture increased to $17.7 million in Q2 from $14.1 million last year. This $3.6 million increase was primarily due, as Doug just referred to, to the continued strong instant sales growth in North Carolina, Virginia. Those jurisdictions continue to go really well. And, of course, as we pointed out, that is a record quarter for our joint venture. Our adjusted EBITDA decreased to $29.2 million in the second quarter of 2025 compared to $32.3 in the second quarter of 2024. The primary reasons for that $3.1 million decrease were the decrease in gross profit that we just referred to, which net of amortization depreciation was $4.1 million. Substantial to that was the result of those three things that we just referred to, the instant ticket to lower volumes, our high lottery operational cost during the start of Kansas, and the lower retail sales margins in Minnesota. Further reducing adjusted EBITDA were the increased administration expenses of $1 million and the increase in selling expenses of $0.8 million and the increase in foreign exchange realized loss of $0.8 million. Partially offsetting those decreases to adjusted EBITDA were the increase in our joint venture, neopolar joint venture income of $3.6 million. Interest expense increased to $3.1 million in the second quarter from $2.5 million in the second quarter of 2024 And that was primarily the result of an increase in average long-term debt outstanding compared to the last year, largely due to our two acquisitions that we completed in that time. Our net income was $8 million in the second quarter of 2025, compared to $11.9 million in the second quarter of 2024. That decrease of $3.9 is primarily due to that decrease in gross profit that we referred to above. Further reducing income with the administrative expenses of $1.1 million and the selling expense of $0.8 million also referred to and the foreign exchange realized loss of $0.7 million. Also the increase in our interest expense of $0.6 million. And then offsetting those decreases in income where the increase in our neopolar joint venture income of $3.6 million and the decrease in other expenses of $1.1 million. So net income per share on a basic inflated basis decreased to 30 cents and 29 cents per share respectively. And in the second quarter of 2025, that was 44 cents and 43 cents respectively. During the second quarter, our cash flow from operations generated approximately 26 million in positive cash flow. The nature of our business is we can generate significant swings in working capital from quarter to quarter, particularly on our accounts receivable. During the second quarter, our investment in non-cash working capital was reduced following a significant buildup in the first quarter of 2025, and we anticipate that trend to continue with further reduction in the third quarter of 2025. Just talking quickly about the international trade and tariff environment, obviously there remains significant uncertainty about the nature and extent, duration of various protectionist trade measures, including tariffs that have been and may be enacted within North America. We continue to believe that our current structure of our business model, including our extensive manufacturing facilities located both in Canada and the US, will ensure there is no material impact to our operations and financial results. We have the ability to produce almost all of our products we sell to our US customers in our US manufacturing facilities, and similar capacity to service most of our Canadian customers from our Canadian capacity. As well, our supply chain has options, in situations where there could be cross-border flows impacted by tariffs for either of our Canadian or U.S. manufacturing facilities, that will also help us to mitigate negative impacts. Lastly, of course, historically, the lottery and charitable gain markets we participated in have been generally very resilient to any negative impacts of economic downturns, and so should the overall economic environment be impacted negatively by these ongoing trade challenges, we're well-suited to withstand those. We'll continue to monitor developments and assess any additional short and long-term measures in this area that need to be taken to mitigating potential negative impacts. Overall, though, we really feel we're in a good position with respect to the whole tariff situation. Lastly, I'll just end with a quick comment about the results in the first six months combined of 2025. When taken as a whole, our financial results met our expectations for that period and produced strong numbers. We have achieved record revenue of $288.9 million in the first six months of the year and also record combined revenue of $352.7 million. And the adjusted EVA number for our six months of the year is also a record of $59.8 million. So this really reflects just the underlying strength of our lottery and charitable gaming business and the measures that we've been taking over the last number of years. As Doug mentioned, we expect higher contributions from our instant ticket business in the third quarter this year based on greater volumes and improved average selling prices. And we look forward to continued opportunities in other areas of our business, including our iLottery area and our electronic pull tabs in the charitable space. That's the end of our prepared part of our discussions, operator, and we'd be happy to entertain any questions at this time.