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.