Pollard Banknote Limited

Good morning, everyone. Welcome to the Pollard Banknote Limited First Quarter 2026 Results Conference Call. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions as 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 factor 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 CEDARS Plus database found at cedarsplus.ca. And I'd like to remind everyone that this conference call is being recorded today, Thursday, May 14th, 2026. And now I would like to introduce Mr. Doug Pollard, Co-Chief Executive Officer of Pollard Banknote Limited. Please go ahead, sir.

Okay. Thank you very much, operator. And thank you, everyone, for joining us this morning. As the operator said, my name is Doug Pollard. With me on the call today is John Pollard, Co-Chief Executive Officer. and Rob Rose, Chief Financial Officer. We released our 2026 first quarter results yesterday. You can access our news release as well as our complete financial statements and MD&A on our website at coloredbanknote.com and on Cedar Plus. Today we'll start with a few prepared remarks from me providing an overall business update and John will then follow up with the discussion of our first quarter results and then we'll open it up for questions. Our first quarter was a challenging quarter. It was impacted by negative factors, particularly in our instant ticket product line. These challenges were temporary issues related to the timing of customer orders. Nothing has systemically changed with our instant ticket business. There have been no changes in our client portfolio and no changes in our pricing. In addition, the onboarding of California is going well. In parallel, our digital contracts are performing well, led by Kansas and Belgium, and our charitable gaming business outperformed our expectations, driven by a rebound in Minnesota ETAB sales. Now, instant tickets remain a significant part of our business. They represent roughly half of our overall sales. A temporary mix change resulted in a significantly lower overall average selling price in Q1 compared to last year. In addition, the timing of orders from a couple of our larger customers shifted from late in the first quarter to the second quarter, which reduced our volumes. Now, timing of orders and the timing of revenue recognition can vary significantly quarter to quarter and even within the quarter itself. Particularly through the later part of the first quarter, a number of higher-valued Q1 games were shifted in the second quarter. The delay of these games, combined with some related production inefficiencies, reduced sales in the quarter, and negatively impacted our instant ticket margins. Looking forward, however, our confirmed order volumes for the second and third quarters have increased compared to Q1 2026 and from the comparable quarters last year by the amount of the additional volumes added under our new California primary supply contract. As well as our customer mix of games, including specialty work and game type, has returned to the historical level seen in 2025, which will generate higher average selling prices than the first quarter. Now, based on the recovery of our instant tickets, we expect that our consolidated adjusted EBITDA for the second quarter of 2026 will exceed the comparable quarter of 2025. In our digital division, Work ramped up on our new Belgium National Lottery omnichannel gaming platform contract during the first quarter. Recall, this is a 12-year, $289 million Canadian contract. Now, that number includes VAT. That was awarded last fall for us to provide their technology solution, including an omnichannel central gaming system, which will seamlessly sell lottery products across both retail and digital channels. It also includes a player account management system solution to securely manage the player information, their wallets and their preferences, and of course, an integrated marketing engagement platform to deliver personalized data-driven experiences at every player touchpoint. Now, during the first quarter, we added additional staff resources to our current complement to work on scoping and planning this large Belgium engagement. As our staff began working directly on the contract deliverables, our resultant revenue recognition will increase through the second quarter and through 2026. Work in Q1 began to be rolled out in our Oklahoma loyalty solution, and it is proceeding well. While relatively small in terms of financial impact, this is an important opportunity to showcase our technology implementation ability. This contract joins our portfolio of five other current lotteries, utilizing our lottery-specific loyalty program, and also provides us with a platform for expanding our suite of other services to the Oklahoma Lottery. Our Kansas iLottery operation continues to operate well, as we completed one year of successful operation in Q1. We continue to exceed all operational expectations and expect to reduce our startup losses going forward in 2026. Additional investments in expanding our iLottery infrastructure in support of future contracts will continue. Our Kansas iLottery contract was awarded under an existing loyalty solution contract two years ago, which had a pre-existing 10-year contract term with an end date of October 26 and no remaining extensions. Consistent with the lottery's procurement policies, the lottery is required to issue a new request for proposal for the operations of the iLottery and loyalty solution. This RFP was recently released with responses due in early summer of this year. and we are confident we will be providing a very compelling proposition for the lottery. Interest in iLottery operations from lotteries remains high, including the current request for proposal underway for the Colorado Lottery. Our Neapolitan iLottery joint venture grew through strong eInstance and other game-style sales compared to the first quarter of last year. This includes strong growth in eInstance and other game content. despite the absence of any large draw-based game jackpot runs this quarter. Also as anticipated, the Virginia Lottery has recently issued an RFP for their iLottery operation. NPI's current Virginia contract does not end, however, until October 30, 2028. Our Board of Directors also announced today they have authorized the launch of a Normal Course Issuer Bid, or NCIB. to purchase up to approximately 976,000 of our common shares, representing approximately 10% of our outstanding common shares in our current public float. The NCIB is subject to the approval of the Toronto Stock Exchange. We're undertaking the NCIB because we believe that currently, and from time to time, the market price of our common shares may not reflect the underlying value of our company's business and prospects. We believe that at such times, the purchase of common shares for cancellations would be in the best interest of the company's shareholders, an appropriate use of its capital, and clearly illustrates our belief that our current strategy is the correct one. Terrible gaming and ETABS generated strong results in the first quarter after ETABS had been negatively impacted by Minnesota market regulatory changes in 2025 that reduced all supplier sales and margins, including ours. Updated game content, increased frequency of new game introductions, and expanded sites have all contributed to higher gross margin in Minnesota, exceeding levels achieved in 2024 under the old regulations. And demand for consumable charitable products such as pull tabs, vending machines, and bingo supplies remain strong in the first quarter and is expected to continue through 2026. So despite the temporary challenges of the first quarter, Our confidence in our future results remains very high based on the new contract implementations, our strong order level for infant tickets, and our growing results in our charitable group. Now I'll turn it over to John to discuss in detail the first quarter results. Thanks, Ted. During the three months ended March 31, 2026, Pollard achieved gap revenue of $141.7 million compared to $146.2 million in the three months ended March 31 of 2025. The factors impacted in the $4.5 million revenue decrease were a lower instant ticket average selling price. In the first quarter of this year, that decreased revenue by $11.7 million as compared to 2025, primarily due to the change in customer mix. and the decrease in proprietary product sales, partly offsetting this decrease in revenue with the increase in instant ticket sales volumes of 4.4 million compared to last year. Higher sales of ancillary lottery products and services increased revenue in the first quarter of 26 by 3.4 million as compared to the first quarter of 2025. This growth was primarily due to increased digital sales, including Polar's iLottery contracts, with the Belgium and Kansas lotteries and higher distribution-related sales compared to 2025, partially offsetting those increases in ancillary lottery sales with the decrease in sales of licensed products. Turning to the charitable side of our business, higher charitable gaming volumes in our printed and consumables part of that division increased revenue by $2.4 million in the first quarter of 2026 compared to the first quarter of 2025. This is predominantly as a result of the acquisition of Pacific Gaming in the second quarter of 2025. And in addition, higher average selling price of charitable printed games further increased sales by $0.4 million. Charitable e-gaming, or e-tabs, further increased sales by $1.8 million compared to 2025, with revenue generated in Minnesota reaching new records. New game content, increased frequency of new game launches, and a greater number of sites have driven revenue higher than the pre-regulatory change levels in 2024. During the three-month end of March 31, 2026, Pollard generated approximately 74.5% compared to 68.3% last year of its revenue in U.S. dollars. During the first quarter of 2026, the actual U.S. dollar value compared to Canadian dollars weakened by 5.8%, resulting in an approximate decrease of $6.5 million in revenue relative to the first quarter of 2025. Cost of sales was $125.1 million in the first quarter of 2026 compared to $120.8 million in the first quarter of 2025. The increase, the $4.3 million in cost of sales, was primarily the result of the higher costs associated with increased Pollard I lottery operations, including ramping up resources in preparation for the Belgium lottery contract development efforts and higher instant ticket production inefficiencies. Further increasing cost of sales in the Forest Corp in 2026 was the addition of Pacific Gaming, Now, these increases to cost of goods sold were partially offset by the impact of lower exchange rates on U.S. dollar denominated expenses. Our gross profit was $16.6 million, or only 11.7% of sales in the first quarter of 2026, compared to $25.4 million, or 17.4% of sales in the first quarter of 2025. The decrease of $8.8 million in gross profit and the decrease in gross profit percentage were primarily the result of our decreased instant ticket sales margins, which were largely the result of, as we talked about today, the lower average instant ticket selling prices due to that significant shift in customer mix and also related to some production inefficiencies in the quarter. In addition, revenue related to the Belgian lottery contract is recognized based on a percentage of completion to date basis over the anticipated entire delivery timeframe. In the first quarter of 2026, we developed the needed talent to advance the implementation of the development stage to ensure immediate deployment once planning and scoping with the customer is complete. Although this resulted in some costs being incurred without related revenue recognition, but it also ensured a successful start to the contract. Additionally, lower licensed product sales also contributed to the decrease in gross profit in the quarter. Factors that partially offset those decreases in gross profit and gross profit percentage factors were, as we discussed previously, the higher printed and ETAB charitable sales positively impacted our gross profits. And also the acquisition of Pacific Gaming positively impacted gross profit. Administration expenses were $19.2 million in the first quarter of 2026 compared to $17.3 million in the first quarter of 2025. The increase of $1.9 million from the first quarter of last year was largely as a result of the ERP implementation costs of $1.3 million and also the addition of Pacific Gaming's administration costs. Selling expenses were $6 million in the first quarter of 26, similar to the $6 million in the first quarter of 2025. Pollard's share of income from its iLottery joint venture increased to $16.6 million in the first quarter of 26 from $16.2 million in the first quarter of 25. This $0.4 million increase was primarily due to the continued strong Jensen sales in North Carolina and Virginia and higher iGaming sales in Alberta. These increases were partially offset by the expiry of a customer contract at the end of the second quarter of 2025. Adjusted EBITDA decreased to $21.2 million in the first quarter of 2026 compared to $30.6 million in the first quarter of 2025. The primary reasons for the $9.1 million decrease in adjusted EBITDA were the decrease in gross profit of $7.6 million, that's net of amortization and depreciation, which was primarily due to the lower instant ticket sales margins and increased digital development resource costs, partially offset by the approved charitable gaming margins. Further reducing adjusted EBITDA with the increase in administrative expenses, net of ERE implementation costs of $0.2 million, and the increase in realized foreign exchange loss of $0.5 million. And then partially offsetting those decreases was the increase in our share of our Neopollard joint venture iLottery business of $0.4 million. Interest expense decreased to $2.3 million in the first quarter of 2026 from $2.8 million in the first quarter of 2025, primarily as a result of lower interest rates in the first quarter of 2026. as well as a reduction in average long-term debt outstanding as compared to the prior year. Amortization of depreciation totaled 12.6 million during the first quarter of 2026, which increased from 11.6 million in the first quarter of 2025. The increase of 1 million was equally a result of increased depreciation of property, plant, and equipment, and the increase in amortization of intangible assets. Income tax expense was $1.3 million in the first quarter of 2026, an effective rate of 26.5%, which was lower than our domestic rate of 27.0%, due primarily to the effect of lower income tax rates in foreign jurisdictions and the effect of non-taxable items partially offset by the impact of withholding and other taxes. Net income decreased to $3.5 million in the first quarter of 2016 compared to $11.7 million in the first quarter of 2025. The primary reasons for the $8.2 million decrease were due to the decrease in gross profit of $8.8 million, which were principally as a result of lower instant ticket sales margins, primarily due, again, to that lower average selling price. Also reducing gross profit in the quarter was the impact of increased digital development resource costs. Further reducing net income was the increase in administration expenses of $1.9 million, again primarily a result of our increased ERP implementation costs, the increase in net foreign exchange loss of $0.8 million, and the increase in other expenses of $0.4 million. Partially offsetting these decreases to net income were the decrease to the income tax expense of $2.8 million, the decrease in interest expense of $0.5 million, and the increase in our NTIA the share of income of 0.4 million. Net income per share, basic and diluted, decreased to 11 cents and 11 cents per share respectively in the first quarter of 2026 from 43 cents and 43 cents per share, basic and diluted, in the first quarter of 2025. To close, I would just like to underline again what Doug mentioned earlier in his remarks. While the first Quarter financial results were very disappointing. These were due to temporary factors related to the quarter and nothing has changed with respect to our business plans and our plans for growth and continued expansion and improvements in profitability. We remain very confident in both our short and long-term future. As Doug stated earlier, we expect our consolidated adjusted EBITDA in the second quarter of 2026 will exceed the second quarter of 2025. That is the end of our prepared part of the discussion. Operator, we'd be happy to entertain any questions at this time.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone, and you will hear a prompt that your hand has been raised. And if you wish to decline from the polling process, please press start followed by the number two. And your first question comes from the line of Robert Young of Khan Academy. Please go ahead.