Pollard Banknote Limited

Good morning everyone and welcome to the Pollard Banknote Limited second 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 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 factor that may affect the results are detailed in Pollard's annual information form and other periodic filings and registration statements. And you may access these documents at CDERplus database found at cderplus.ca. I would like to remind everyone that this conference call is being recorded today, Thursday, August 13, 2026. 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, Operator John, and thank you everyone for joining us this morning. With us on the call today are John Pollard, Co-CEO, and Rob Rose, our CFO. We released our 2026 second quarter results yesterday. Reminder, you can access our news release as well as the complete financial statements and MDMA on our website at PollardBanknote.com and on CDAR+. Today, as usual, we'll start with some prepared marks from me, providing an overall business update, and then John will follow up with the discussion of our second quarter results, and we'll then open up to questions. We are very pleased with the financial results we achieved in the second quarter, which reflect the underlying strength across all of our business units. As discussed during our first quarter investor call, we were expecting a return to stronger revenue and profitability trends, especially in our instant ticket operations, as well as increased contributions from our expanding digital lines and then continuing strength in the charitable sector, all of which were achieved. During the second quarter, our instant ticket production volumes returned to our historic levels from 2025. plus we got the additional incremental volumes from the impact of our new primary supply position for the California Lottery. In fact, the transition to primary supplier for California has gone extremely well and exceeded our expectations. We're looking forward to continuing to support them and looking to grow their retail business. The important measure of average selling price we achieved for our instant ticket sales that also increased in the second quarter compared to both second quarter of 2025 and the first quarter in 2026, which reflects the mix of higher value-added tickets we sold during this period. And our scheduled ticket volume for the rest of 2026 remains robust for instant tickets. We remain focused on improving our manufacturing efficiencies and we've attained some positive momentum during this period with lower amounts of spoilage and improved processes Thank you very much. A loyalty program where we bid our play on solution in addition to the iLottery platform and game content solutions. We are very thankful for the opportunity with Colorado and we look forward to working with the lottery as we begin the development and implementation of this this fall and then through 2027. Work is also proceeding well on our Belgium lottery omnichannel gaming contracts. with activity and resources moving from the scoping and planning phases into the early development phase. This allows for greater revenue recognition during the second quarter compared to the first quarter of 2026. And then as you know, our Kansas Lottery iLottery contract was required to go out for bid as the existing contract to operate expires in the fall of 26 and we have responded to the bid subsequent to the end of second quarter with what we believe is a very compelling response A reminder that the ongoing operation of the Kansas Lottery iLottery is performing very well still. And then interest in iLottery operations from lotteries remains high in both the United States and internationally based lotteries. Among our valuable digital offerings, our proprietary lottery-specific loyalty solution, PlayOn, is a very effective tool for lotteries to improve their offerings and bridge into the digital channels. Implementation is proceeding well with the Oklahoma Lottery offering, which will take us to six installations in the lottery market with further opportunities to deploy on the horizon. Each of these installations showcases the strength of our technologies as well as our implementation experience and opportunities to expand our suite of other services and solutions. Our Neo-Pollard iLottery joint venture operations remain an important contributor to our profitability As previously disclosed, our 50% interest in the Michigan iLottery contract terminated at the end of the second quarter. As we reflect on the growth of our internal digital strategy, in the past two years, our catalyst technology has confirmed as a preeminent state-of-the-art solution through winning these three contracts, including two greenfield opportunities and one replacement of an existing vendor. Now to understand our strategy, you should know that we see digital solutions as critical not just for lotteries to generate sales via the iLottery and mobile platforms, but increasingly digital solutions are a critical part of driving lottery retail sales. For example, our PlayOn loyalty solution helps lotteries to know their players, which enables more effective player acquisition, and through one-to-one messaging capabilities, we can help achieve objectives for player retention and responsible gaming within that retail space. Our charitable gaming operations produced strong results with revenues and margins ahead of last year supported by robust demand for both printed and electronic products. The ETAB market in Minnesota continues to generate record revenue and contributions after facing significant negative pressure in 2025 due to regulatory changes which reduced the gain in revenue across all suppliers, including Pollard. Additional markets have expressed and are continuing to express interest in ETAB product, and we are actively pursuing these new opportunities with expanded deployments and pilot test projects. During the quarter, our Board of Directors implemented the previously announced Normal Course Issuing, or NCIB, purchased up to approximately 976,000 of our common shares representing approximately 10% of our outstanding common shares in our current public float over the next year. This mechanism got underway right at the end of June and will be an important tool in our capital allocation process. So in summary, all of our major business lines performed well in the second quarter. We expanded our digital presence. We improved our volumes in selling prices of instant tickets and we had strong results in charitable. This positive momentum generated in the second quarter is expected to continue throughout 2026. Now I'll turn it over to John Pollard to discuss in detail the second quarter results.

Thanks, Doug. During the three months ended June 30th, 2026, Pollard achieved revenue of $154.8 million compared to $142.7 million in the three months ended June 30th, 2025. The factors impacting that $12.1 million revenue increase were higher instant ticket sales volumes increased revenue by $3.3 million as compared to the prior year. In addition, higher instant ticket average selling price in the second quarter of 2026 further increased revenue by $0.8 million compared to 2025. That was primarily due to a change in customer mix. Also, higher sales of ancillary lottery products and services increased revenue in the second quarter of 2026 by 5.3 million compared to 2025. This growth is primarily due to increased digital sales, including our iLottery contracts with the Belgium and Kansas lotteries and higher distribution-related sales. Partially offsetting those increases in ancillary lottery sales were the decreases in the sales of retail solutions and licensed products. Charitable Gaming Print Bonds increased revenue by $0.7 million in the second quarter of 2026 compared to 2025, and in addition, higher average selling prices of charitable printed products further increased revenue by $0.2 million. Charitable Gaming E-Tabs generated an increase of $2.2 million in revenue compared to 2025, with revenue generated in our Minnesota market reaching new records. New game content and a greater number of sites have driven revenue higher in Minnesota than the pre-regulatory change levels in 2024. Higher Michigan iLottery revenues increased revenue in the second quarter of 2026 by $0.6 million compared to 2025. Cost of sales was $126.8 million in the second quarter of 2026, married to $118.8 million in the second quarter of 2025. The increase of $8 million in cost of sales was primarily the result of the additional costs associated with higher instant ticket volumes and increased Pollard iLottery operations, including ramping up resources for the Belgian lottery contract development efforts. These increases of cost of goods sold were partially offset by the impact of lower exchange rates on U.S. dollar-denominated expenses. So following from that, the gross profit increased to $28 million, or 18.1% of sales in the second quarter of this year, compared to $23.9 million, or 16.7% of sales in the second quarter of 2025. The increase of $4.1 million in gross profit and the increase in gross profit percentage were primarily the result of three things. One, increased instant ticket sales margins, largely because of the higher volumes. Two, The higher charitable ETAB sales obviously positively impacted our gross profit. And three, the increased margin recognized on the Belgium lottery contract as we transitioned into more development work in the second quarter of 2026. Our administration expenses were 19.4 million in the second quarter of this year compared to 17.6 in the second quarter of 2025. That increase of 1.8 million was a result of increased compensation costs. as well as higher professional fees and ERP implementation expenses. Selling expenses were $6.5 million in the second quarter of this year, very similar to the $6.5 million in the second quarter of last year. Our share of income from our iLottery joint venture decreased to $15 million in the second quarter of 2026 from $17.7 million in 2025. This $2.7 million decrease was primarily due to the expiry of a customer contract at the end of the second quarter of last year, as well as lower foreign exchange gains and higher third-party content costs in 2026. Those decreases, however, were partially offset by the increased e-instant sales in North Carolina and Virginia and higher casino content-related sales in Alberta. Other expenses were $1.6 million this year compared to $0.1 million in the second quarter of last year, That increase of $1.5 million was primarily due to the consultant transfer fee that we paid in 2026. During the quarter, Pollard entered into a transaction with an external consulting supplier to transition a dedicated team of outsourced consultants into internal direct hire employees. In connection with the termination of the prior vendor arrangement and the release of exclusivity rights, Pollard paid a lump sum transition fee to the supplier including incidental expenses of $1.8 million. The foreign exchange loss was 0.7 million in the second quarter of 2026 compared to a net foreign exchange loss of 3.5 million in the second quarter of last year. The 2026 foreign exchange loss of 0.7 million consisted of a net unrealized foreign exchange loss of 0.7 million primarily a result of an unrealized loss on the increased Canadian equivalent value of U.S. dollar denominated accounts payable and long-term debt due to the weakening of Canadian dollar relative to U.S. dollar which was partially offset by an unrealized gain on foreign currency denominated accounts receivable and net intercompany receivables. Adjusted EBITDA increased to 31.1 million in the second quarter of this year compared to 29.2 million in the second quarter of 2025 The primary reasons for this $1.9 million increase were the increase in gross profit and net of amortization and depreciation of $5 million, substantially as a result of the increased instant ticket, ETAB, and Pollard iLottery margins that we spoke about previously. Also increasing adjusted EBITDA in 2026 was the lower realized foreign exchange loss of $0.6 million. Partially offsetting these increases to adjust the FDA was the decrease in our equity investment income from our NCI joint venture of $2.7 million and the increase in administration expenses net of ERP implementation and acquisition costs of $1.4 million. I'm also very happy to note, of course, that our second quarter adjusted EBITDA of 31.1 million was also significantly higher than our adjusted EBITDA in the first quarter of this year of only 21.5 million, driven by those higher instant ticket volumes and average selling price, as well as the increased contributions from digital. Interest expense decreased to $2.4 million in the second quarter this year from $3.1 million in the second quarter of 2025, primarily the result of lower interest rates in the second quarter this year, as well as the reduction in average long-term debt outstanding compared to 2025. Amortization and depreciation, including amortization and depreciation of our equity investment, totaled $13.2 million during the second quarter of 2026, which increased from $12.3 million in the second quarter of 2025, The increase of $0.9 million was the result of increased additions of property, plant, and equipment and intangible assets. Income tax expense was $3.7 million in the second quarter of this year, an effective rate of 30.4%, which was higher than our domestic rate of 27.0% due primarily to the effect of withholding and other taxes partially offset by lower income tax in foreign jurisdictions and the effect of non-taxable items. Finally, net income was $8.7 million in the second quarter of 2026, compared to $8.0 million in the second quarter of 2025. The increase in net income of $0.7 million was primarily due to the increase in gross profit of $4.1 million, primarily a result of increased instant ticket, ETAB, and Pollard iLottery margins. Further increasing net income was the decrease in foreign exchange loss of $2.8 million and the decrease in interest expense of $0.7 million. Partially offsetting these increases to an income where the decrease in equity investment income of $0.7 million, the increase in administration expenses of $1.8 million, and the increase in other expenses of $1.5 million. Sorry, and lastly, increase in income tax expense of $0.9 million. Net income per share, basic and diluted, increased with 32 cents and 32 cents per share respectively in the second quarter of 2026 from 30 cents and 30 cents per share basic and diluted in the second quarter of 2025. That is the end of the prepared part of our discussions. Operator, we would be happy to entertain any questions at this time.

Yes sir, thank you. We will now begin the question and answer session. And if you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. Once again, star and 1 if you wish to ask a question. Please stand by while we'll compile the Q&A roster. Thank you for waiting. We now have our first question, and this comes from Steven Bolin from Raymond James. Your line is now open. Please go ahead.

Morning, everyone. Can you remind me the Belgian revenue recognition? I mean, it's not – I guess the lottery and the iLottery. I'm just trying to get an idea of, you know, where – This is not actually live yet, right? It's still in development. Like you said, you've gone from scoping to development. So I'm just trying to get an idea of how do we look at the revenue recognition quarter by quarter by quarter? Is it a little bit difficult to do that?

Morning, Steven. It's Rob Rose here. I'll take a shot at that one. So there's a number of deliverables under this contract. We're providing a number of different services and solutions and they'll be rolled out and implemented over the course of the next couple of years and then there's ongoing support and additional work as we support the contract going forward. So really the revenue recognition really is kind of like a percentage of completion contract basis for construction of a building. So the whole contract will be based on the work we provide and as we provide and do the work, we'll be recognizing a portion of that revenue that we will be able to bill related to that work. The billing is a little bit different than the actual work and recognition of it. So really think of it as a percentage of completion that gets driven by the amount of work we're doing. So it won't be lumpy. It will be somewhat smooth as we build up the work, increasing, and then we'll slide down as we change some of the work later on. But that's the revenue driver, and the billing is done separately based on milestones of delivery of the services.

Okay. Just on the, you said, you know, lower spoilage, manufacturing efficiency, like, could you explain what you had to do to, you know, get that, you know, the manufacturing efficiencies to improve? You know, we don't need just, I'm just curious, like, you know, what was the spend? What was, what had to happen to improve that?

It's John Pollard. I'll answer that question. I mean, the cause of a good portion of some of the high spoilage that we had in the first quarter was due to the fact that the nature of the products we produce is constantly evolving. We're constantly bringing in new innovations and new kinds of products for our customers. And in the first quarter, we had some brand new products that we were launching that that because they were going through some of our manufacturing for the first time there were just some sort of slightly more unexpected difficulties in the manufacturing those than we thought so to some extent the problems in the first quarter were just ironing out the initial times that we produced that particular iteration of It was part of our ScratchFX family of games that we were constantly evolving with new innovations there. And so it was ironing out those problems on implementing that new product type. But other than that, it's a constant process of continuous improvement that we're always dealing with in trying to improve our efficiencies. And we have a relatively new executive VP of operations, Jeff Versterre, working with us, just started in the last year and He's got all kinds of exciting projects going to make improvements to our process.

Okay, and I'll just do one more. You mentioned in the game content that you're always looking for more of that. Is that something you can continue to do organically? Or in the past you had talked about looking at different studios that might have some innovations. in content. So I'm just wondering if that's still on the table.

Good morning, Steven. It's Doug Pollard speaking here. The reality for game content is we're looking at both. You know, the roots of our company are in game content, right? We've been doing instant scratch off games for a long time. We understand content fairly well. So we are building up a game studio internally by adding some various resources. We keep adding customers all the time who are receiving our games, but it is an important area that's going to only become bigger through both the iLottery channel and the charitable gaming space. The games are quite similar. In fact, one of the games we developed, Bacon the Crazy, was developed for iLottery channel, and it's a record breaker in the charitable space as well. But Because this area is growing and important, we are still looking at outside acquisition opportunities to grow even faster. But this is definitely an area of emphasis for us.

Okay, thanks very much.

Thank you. And the next question comes from Robert Young from Canaccord Genuity. Your line is now open. Please go ahead.

Hi, good morning. Thanks for taking the question. I wanted to dig a little deeper on the gross margins. You gave three reasons why gross margins are better. Great to see that. Looking specifically at the instant ticket margins, what I'm guessing is the biggest factor. It would be nice to know if that assumption is correct, but you're highlighting volumes, and so that would mean that the ASP Improvement this quarter and the recovery of the efficiencies in manufacturing. Those would be lower impact factors than just the higher volumes. Is that the correct way to think about it? And then as you go forward here, should we expect those gross margins to continue to improve? Maybe the efficiency is spilled over into Q2 of it, or maybe if you just talk about where you expect that to go.

It's Rob here. Good morning. Sort of respective to your question, the answer is sort of a broad agreement. So it was certainly driven by the infant ticket improvement, certainly sequentially. That was the big driver. And it's really a combination of all three of those things. I wouldn't necessarily pull them out and separate them. It's a combination. certainly additional volume gives you leverage on your fixed costs which works positively for your margin our ASP was certainly up as well depending on what comparison you're using last year or the sequential year so those are all very important probably maybe the lesser of the three right now are the efficiency improvements that's a bit more of a longer term process we've certainly made some improvements and we talked about the momentum that we've gained as opposed to the absolute dollar improvements but certainly longer term that efficiencies will be just as important So it's really a combination of all three of those factors, Robert. It's hard to pull them apart. And, you know, we don't give guidance, as you know, in terms of where we expect the gross margin to be. 18.1%, of course, is the highest we've had in a couple of years on a quarterly number, so that's very positive. But we expect to know there's more improvement in that. So we're still absorbing sort of the startup operations and some of our iLottery and digital spend. So that's not positive into our gross margins. So over time, that will improve. And we think we can continue on our instant tickets, particularly as we have higher volume in California, continuing focus on the new innovations and driving up that ASP. So all those factors will give us more positive momentum, not necessarily immediately, but over the next number of quarters. And if you look back historically, you've seen us a few years ago in that low 20% range. And again, our company's changed quite a bit, but there's certainly no reason why we can't move towards that going ahead.

Okay, that's great, Keller. The California contract volumes, you said you're exceeding expectations. That's a large volume contract. Should we think of that as something that's good for margins, or is overperformance there dilutive to the instant ticket margins, if you could share that?

Here is John Pollard answering this one. Let me be clear, it's positive for margins, although just the nature and the size of the California contract means that the price we had to bid is going to be lower than our average price in some of our other contracts. But because of the volume, it's still definitely positive margins, and so we've actually seen We've had two benefits on California that are, when we say exceeding expectations, the volumes themselves have been slightly higher than we expected and also we've been more successful in raising the projected average selling price on that account from what we expected going in just due to success in selling them on some of our value-added innovations that are options of the contract. So we've achieved a slightly higher ASP than we thought. So it's sort of an interesting dynamic there because it's a lower overall margin for sure than some of our other higher margin accounts, but it is overall positive.

Yeah, that's great to hear. Last question from me, I think, just on the Kansas iLottery, you noted in the prepared remarks that it expires in October. I think we all knew that. You've already submitted an RFP response. I would assume that you're in a very good position given that you've already had some ramp startup costs that are absorbed into that contract and So the first part of my question would be that if you were to lose the contract, what would the financial impact be given you've already absorbed a bunch of ramp costs? And then what's your confidence on extending that given how the performance has gone thus far? And I'll pass on.

Hi, Doug Pollard here. Maybe I'll answer the second part first. I would say that we are very confident, but we are not taking the Kansas Lottery contract for granted. And so we work very hard to put in what we believe is a very compelling proposal for the Kansas Lottery, where we can continue the partnership and help grow their business. The Kansas Lottery is thrilled with what we've achieved together over the last year, frankly, and so are we. So I don't expect they're going to want to change. But that said, there's no certainty. It's a public bid process, and you just don't know what's going to come out of that. As far as what the negative financial consequences would be, I don't know that I could begin to speculate. Obviously, there are some variable costs, but mostly we're developing platforms and capabilities, and I suppose we'd have to go and deploy those elsewhere.

Thanks for taking the questions. Thank you, Robert.

Thank you. Yes, sir. Thank you. And the next question comes from David McFadden from ATB Cormark. Your line is now open. Please go ahead.

Oh, yes. Hi. Yeah, I have a few questions. So maybe I'll just start with Kansas. Are you still incurring EBITDA losses on Kansas?

That's Rob here, David Morning. You know, Canada continues to be in that build-up mode, so we're... We're not in a profitable level, but certainly that we want to be, but we're seeing some good momentum in that way, but it will take some time. We all get a little bit forgetful that, of course, with the money that we're making on mature iLottery operations, such as the NPI, you know, it took many years to get to that level. You only have to go back a couple of years. This VR joint venture wasn't even contributing anything. So, you know, it's been quite successful once it gets to the mature level. So we're still working through that with Canvas. There's lots of opportunities to improve their work. Some of these are kind of postponed or not actively done when it's an RFE process. It's sort of sad to school while they work through that process, but we're very optimistic that if and when we expect to return to that contract, we'll have more opportunities to really continue to build that base with more players and get back to a mature state as these iLottery contracts normally follow.

Okay, so in the event that let's say you don't win on this RFP, is there a cure, is there a make whole given the losses you've incurred to date and then they pull it from you?

No, there's not. and that reflects, you know, we believe that if we can get these contracts and we can be successful, we'll continue to be a provider and we believe in the long term there's money to be made in this digital lottery space but that does require taking some risks. So taking Kansas on on that short term that was remaining with our loyalty contract was a risk, no question about it. We believe it was a good one and we continue to believe it was a good one.

Okay. So then just moving to California, So they found the answer to this question. It seems like the gross margin percentage would be lower, but given the volume, it's going to be obviously accretive to just gross profit. Is that the correct way to understand this?

I mean, it's John. I suppose I've never really crunched the numbers exactly as to the exact impact on the margin percentage from California. It depends a little bit on the interplay of variable and fixed costs. I mean, the nice thing about our instant ticket operations when your bonds are going up, it's nice, is the costs are relatively fixed in a lot of ways. and so when we calculate our gross margin percentage of course that's kind of after a full burden of allocated fixed overhead cost into that number and so if I looked at a pure report you know that would say what my percentage margin was it's after an allocation of that fixed cost into California but really incrementally as we've grown we haven't had to add much to that fixed cost so the It's kind of an accounting exercise a little bit that a report might actually say a lower gross margin than average on California, but if you really backed out the fixed cost allocation, it makes it quite a bit higher. California wouldn't be driving up significantly or maybe much at all our overall gross margin percentage. It's certainly very positive that the absolute number of gross margin In terms of changing the percentage, it's probably not that material one way or the other, frankly, on the actual percentage.

Okay. And then just on Virginia, can you give us an update on the Virginia RFP?

Virginia Lottery issued an RFP. If you recall a while back, they pulled it, then they reissued it. That RFP is due, I believe, September 18th. and so that's an open RFP and it's in with our big team and really not much more we can say than that at this juncture.

Have they announced or have they given an indication as to when they'll announce the winner of the RFP and then when that winner will take over the contract?

Well, the contract, let's go from the end. The contract goes until the summer of 2028 so it'll run its full course with MPI and then we'll see what happens after that. They would announce their winner, in this case I think they have expectations to do that later in November but when lotteries indicate that as their timing, that's an indication, that's not a certainty.

Yeah, okay. And then just on MPI, that one customer that negatively impacted the MPI business in the quarter, Is that the first quarter where we experienced the impact from that? And so then we should expect another three quarters to last?

Sorry, David. It's Rob. No, last year, New Hampshire contract ended. So it was in the comparative numbers for last year, but it's not in the numbers this year.

Okay. All right.

Okay. Thank you.

Thank you. Thanks, David.

Thank you, and there are no further questions that came through. I will now turn the call over back to Mr. Doug Pollard. Please go ahead, sir.

Okay, thank you very much, John. So, we're very pleased with the results of our second quarter, and more importantly, we're very pleased that our results confirm that our underlying strategy, which we have, is the correct strategy to drive our long-term success. It was very nice to see in the quarter all of our major product lines are doing well. That is retail, including instant tickets, charitable gaming, as well as digital, and they all perform strongly, and we're very excited for the opportunities ahead of us for the rest of 2026 and beyond. So for those of you on the call, thank you for joining us. Thank you for your support, and we look forward to updating you again next quarter. Until then, have a great rest of your day.

Thank you. This concludes our conference call for today. Thank you all for participating. You may now disconnect.