Pollard Banknote Limited

Good morning, everyone. Welcome to the Pollard Banknote Limited Third 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 SIDAR Plus' database found at sidarplus.ca. I'd like to remind everyone that this conference call is being recorded today, Thursday, November 13, 2025. And I would like to introduce Mr. Doug Pollard, Co-Chief Executive Officer of Pollard Bank Note Limited. Please go ahead, sir.

Thank you very much, operator, and thank you, everyone, for joining us. As Jayden said, I'm Doug Pollard. I'm joined on the call today by John Pollard, the other co-CEO, and also Rob Rose, the Chief Financial Officer. We released our third quarter 2025 results yesterday. Reminder, 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'll start out with prepared remarks from me, highlighting our 2025 third quarter operating achievements and overall business update. And John will then follow up discussing our, I think, quite strong third quarter results. And then, as usual, we'll open it up to questions. The third quarter was truly a transformational quarter for PolarBankNote, with a number of very noteworthy contract wins in a highly competitive marketplace, covering a number of our different product offerings, and product and solution offerings, and I'll address each of these in detail shortly. And at the same time, we did generate very strong financial results, which reflect the strength of our business across a number of different business lines. On September 12th, the Loterie Nationale, the National Lottery of Belgium, announced the intent to award a contract to us to deliver and operate a next-generation gaming platform. That contract was officially awarded on October the 8th. You know, this is really a monumental achievement for our team on a number of levels. It shows our commitment to provide an innovative omnichannel approach to the lottery industry, and it shows that that is being recognized as, in fact, the future of the industry, where lotteries are going to want to go. The Belgian Lottery is a large, recognized, and respected leader in the international lottery space, and this contract covers all of their technology ecosystem, including an omnichannel central gaming system, which covers both retail and iLottery sales, the player account management, or PAM, including the wallet, the game aggregation bridge to deliver diverse game content from leading game providers in one unified player experience, an instant ticket management system to optimize warehousing, inventory control, and instant ticket distribution for that important category, and an integrated marketing engagement platform to deliver personalized data-driven experiences at every player touchpoint to help that lottery responsibly drive their sales. It's important to note that this is a 12-year contract, and it was won in a competitive RFP process, and the contract's valued at approximately $289 million Canadian, and it's not insignificant that we replaced a long-time incumbent provider. Our teams between the lottery and us are already working extensively together As we begin this long-term collaboration with the Lottery, so far it's going very well. I'm very pleased with the way we've kicked it off. I just highlight this is really a game-changing win for our organization. We are truly honored for the trust that the Belgian Lottery has placed with Pollard. And as we've done with other accounts, we look forward to delivering this on time and delivering on everything we've promised. In addition, on September 25th, The California State Lottery named Pollard Banknote as their new primary contractor for their instant ticket products and related services, which they call Scratchers. This new primary contract starts December 1, 2025. It has a six-year term followed by an option to renew for up to an additional six years and has an estimated value over the entire 12 years of $375 million Canadian. Now, we had already been... a longtime secondary provider of scratchers tickets to the California lottery. And with this new primary relationship, we'll now be increasing that to providing approximately 70% of the lottery's instant ticket games. Now, replacing a longtime incumbent ticket supplier for one of the largest sellers of instant tickets in the world, those kinds of changes do not happen frequently in our industry. And we are very proud of that change because it really reflects the value of the long-time existing relationship that we've developed, and it shows the importance of the innovative and creative solutions that we've been offering to lotteries that they want to work with us. So truly a massive win for our team. We look forward to helping California Lottery continue to be a leader in this space. Speaking of instant tickets, which is a core part of our portfolio, It's nice to see that overall demand for instant tickets remains positive. Retail sales growth has come back to the low single-digit range, still driven by higher selling price points, but also some other getting into new retail channels. Higher selling price points, I should note, also mean a much greater likelihood for us of higher value features being added, and as a result, that delivers higher average selling prices for polar banknotes. And in that space, one of our most important is ScratchFX, and 2025 is on pace to record record annual sales of this very popular proprietary holographic ticket process. ScratchFX jumps out at retail, and it has historically generated significant sales increases for the lotteries that far outweigh the incremental cost of the product and the feature. Demand for our other products and solutions remains solid, including charitable gaming, printed products, and, of course, digital ETABS. And ancillary products and solutions, such as retail point-of-sales and dispensers, demand for those products also remains robust as lotteries and charitable gaming operators look for new ways to grow revenue. Our Kansas iLottery solution continues to meet all of our expectations, including it was quite notable that during the quarter in August and September, we had the large billion-dollar-plus Powerball jackpot run, and our solution handled that without any issues. In conjunction with the Canvass Lottery, we are now starting to institute a number of our planned roadmap initiatives that are going to move towards the phase of accelerating revenue growth and doing things like improving the website access, some improved targeted digital marketing and player acquisition tactics, and enhancing some of the game features that we offer that will make the games more attractive. I remind you that Kansas does remain a critical calling card and reference point for our state-of-the-art Catalyst platform, and it is absolutely serving that with anyone who checks into the Kansas Lottery. Hand-in-hand with our platform solution is our expanding e-Instant game content, which we're developing in our in-house game studio. It's not enough just to have a great platform. You also need exciting game content for success in the digital world. We provide that through our own platform in Kansas, but also through other third-party iLottery operations. Our games are now live in nine jurisdictions around the world, and that is growing rapidly. You should note that Pollard Bank has always been a strong creator of lottery game content, and so it's a very small step for us to now be bringing games our decades of experience to more digital media in addition to our print and other channels. I always like to remind people that lotteries remain very engaged in discussions with us about adding to or updating their iLottery technology and offerings. And we remind you that the RFP and sales process for the iLottery process, and really all lotteries products, but especially iLottery, that that is a very long cycle. I can assure you we are highly engaged in that cycle and at the forefront of those discussions in a number of jurisdictions. During the quarter, from an MTI perspective, our Neopollard Interactive Joint Venture announced the award of a two-year extension to continue to operate the iLottery for the North Carolina Lottery. That extends that contract to June 2028, and it highlights the confidence that the North Carolina Lottery has in our joint venture operation. NPI continues to generate meaningful results in cash flow, and with a number of long-term contracts and extensions already on the books, NPI will be doing so for a number of years. It's been autumn in the lottery world, and that means conferences, and I wanted to highlight how excited we were about our recent involvement in two of the more prominent conferences. September saw both the European Lottery Congress and trade show held in Bern, Switzerland, and And the big North American conference is NASFL, or North American Association of State and Provincial Lotteries. That took place, Ontario Lottery hosted that in Niagara Falls. We were very present in those conferences. We showcased a number of exciting, new, innovative products and solutions, such as our successful EasyPack pouches for printed instant tickets. And one of the products that generated the most buzz was our unique EasyServe self-service lottery pouches. product, which dovetails seamlessly with the overall retailer's move towards self-service, which we know is coming, and we want to find a way to get instant tickets really seamlessly into those self-service lanes. So we enjoyed significant engagement with lotteries in both of those conferences. Their enthusiasm with our roadmap and our creativity was clearly evident, and it really shows, in my opinion, the high regard that lotteries have for Pollard Banknote, and it's where we really enhance and build those relationships that lead to the significant wins that we had this quarter with lotteries like Belgium and California. So, you know, an exciting quarter for us. And I'm going to now turn it over to my brother, John Pollard, to highlight the first quarter results.

Thank you, Doug. So during our third quarter, we achieved traditional gap sales of $156.3 million. This is a new quarterly record. compares to $153.2 million for the quarter ended September 30th last year, 2024. We like to talk about our combined sales, which then also includes our proportionate share of our neopolar joint venture revenue. And when we look at combined sales, we reached $187.3 million in the quarter, also a new record, and that compares to $180.4 million in the same quarter last year. Higher charitable gaming volumes increased sales by $2.8 million in the third quarter compared to 2024. This was predominantly the result of the acquisition of CJ Venn and Pacific Gaming. And in addition, the higher average selling price of charitable game printed products increased sales by a further $0.6 million. These increases were partially offset by a decrease in charitable ETAB revenue of $1.1 million compared to 2024. which is primarily due to the impact from regulatory changes in our Minnesota market that began in January 1, 2025. I should say that we did have a decline due to those regulatory changes, but we've been steadily improving those results throughout the year since that time. Lower instant ticket averages selling price in 2025 decreased sales by 2.1 million as compared to 2024, mainly results of customer mix. And in addition, a slight decrease in instant ticket sales volume for the third quarter of 2025 further decreased sales by 0.3 million. Higher sales of ancillary lottery products and services increased revenue in the third quarter of 2025 by 0.5 million compared to 2024. This growth was primarily due to increased digital sales, including of course our iLottery startup in Kansas, and higher distribution-related sales. This was partially offset, sorry, partially offset in these increases was a decrease in sales of licensed products in the quarter, which is a product category which can be kind of lumpy. The weakening of the Canadian dollar compared to the US dollar and the Euro compared to the same period in 2024 resulted in an increase in sales of approximately $2.2 million as well. Our gross profit decreased to $28.1 million, which would be 18.0% of sales in the third quarter of 2025, from $31.4 million, which would be 20.5% of sales in the third quarter of 2024. This decrease of $3.3 million in gross profit and the decrease in gross profit percentage will primarily result in the startup losses on our Kansas Eye Lottery operation and also slightly lower ETAB sales margins due to the previously mentioned regulatory changes in Minnesota. These two factors pretty much exactly account for the shortfall in the margin from last year. Administration expenses were $19.2 million in the third quarter of 2025 compared to the $17.0 million in the third quarter of 2024. And the increase of $2.2 million was largely the result of our ERP implementation-related costs and the addition of Pacific Gaming administration costs in the quarter. During the quarter, we also initiated the implementation phase of our new ERP system for our lottery and corporate operations. Selling expenses increased to $6.5 million in the third quarter of 2025 from $5.9 million in the third quarter of last year. This increase of $0.6 million was primarily due to the addition of Venn and Pacific Gaming and their selling expenses. Sequentially, the $6.5 million is consistent with the same $6.5 million of selling expenses that we had in the second quarter of this year. Pollard's share of income from our Neopollard iLottery joint venture increased to $15.3 million in the third quarter of this year compared to $13.6 million in the third quarter of last year. This $1.7 million increase was primarily due to just continued strong e-instant sales growth in both North Carolina and Virginia, two jurisdictions that continue to perform really strongly for us. We also saw some increased draw game sales in the quarter because of the impact of the Powerball jackpot run that we saw in later August and early September. But those gains that I just mentioned there now were partly offset by the expiry of the New Hampshire contract, which expired right at the end of last quarter or the beginning of this quarter. So our adjusted EBITDA decreased slightly to $32.0 million in the third quarter of this year compared to $33.3 million in the third quarter of last year. And the primary reasons for this $1.3 million decrease were our decrease in gross profit, net of amortization depreciation, which was $1.4 million. That was largely due to the result of our iLottery startup costs that I just mentioned on Kansas and the lower ETAP margins that I just talked about as well. Further reducing our adjusted EBITDA were the increase in administrative expenses, net of our ERP implementation costs of $1.1 million, and increase in selling expenses of $0.6 million. Then partially offsetting those decreases, of course, was the increase in our neopolar joint venture income of $1.7 million and an increase in realized foreign exchange gain of $0.2 million. Interest expense increased slightly to $2.9 million in this quarter compared to $2.7 million in the third quarter of last year as a result of an increase in our average long-term debt outstanding compared to last year due to the acquisitions that we completed and a higher investment in non-cash working capital. This was partly offset by lower interest rates in the third quarter of this year. Net income finally getting to it, it decreased by 10.3 million in this quarter compared to 18.2 million in the third quarter of last year. So the primary reasons for this 7.9 million decrease was the decrease in gross profit of 3.3 million. Again, prints of the results of the Kansas lottery startup costs and the low retail margins. Further reducing net income where the decrease in net foreign exchange gain of 2.3 million The increase in administration expense of $2.2 million, primarily the results of our ERP implementation costs. Increase in income tax expense of $0.7 million, increase in selling expenses of $0.6 million, and the decrease in other income, $0.3 million, and an increase in interest expense of $0.2 million. And partially offsetting those decreases in income was the Neopollard joint venture increase in income of $1.7 million. So net income per share, basic and diluted, decreased to $0.38 and $0.37 per share respectively in the third quarter of this year from $0.67 and $0.66 per share respectively in the third quarter of 2024. Just in regard to the international trade environment, obviously there remains 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. We continue to believe that the current structure of our business, including extensive manufacturing facilities located in both Canada and the US, will ensure there is no material impact on our operations and financial results. We have the ability to produce almost all of our products that we sell in our US market, in our US manufacturing facilities. And similarly, we have capacity to service almost all of our Canadian customers from our domestic Canadian capacity. So we'll be continuing to monitor those developments and assess any additional short and long-term measures that might need to be taken to mitigate any other negative impacts, but we continue to be pleased with how that's working out for us. So it's been a good year generally for our instant ticket business as we've seen strong volumes and higher average selling prices that Doug talked about. And we're looking for this trend to continue as we move into 2026, particularly, of course, as we bring on the additional volumes from our new California instant ticket contract that we're very excited about. And at the same time, we're investing in new initiatives to improve our manufacturing efficiencies in instant tickets. The other things that we're really looking forward to coming up in the new year, of course, our Belgian contract. Super exciting to us. We'll see positive results from that in 2026 as we bring on revenues from that contract beginning right away next year. And of course, with our Kansas iLottery operations, we continue to have sales growth there and we'll continue to see improvements in our margins on the Kansas iLottery business as well. We haven't talked too much about charitable gaming. But we made a lot of investments in charitable gaming last year to improve our product offering with our new icon cabinets and lots of investment in new game content. We're starting to see the fruits of that, and we've got lots of also new jurisdictions that are expanding into e-tabs in 2026 that we're working with, and we expect to see some of those go live as well. So the outlook for charitable gaming market, in particular e-tabs, looks strong as well. So that's the end of the prepared part of our discussions, and operator, we'd be happy to entertain any questions at this time.