Pollard Banknote Limited (PBL) Earnings Call Transcript

Good morning, everyone. Welcome to the Pollard Banknote Limited Third 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 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 may access these documents at SEDAR+ database found at sedarplus.ca. I would like to remind everyone that this conference call is being recorded today, November, Nov 9, 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, 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, 3rd quarter results last Friday, you can access our news release as well as our complete financial statements and MD&A on our website at polerbanknot.com and on SEDAR. Today, we'll start with prepared remarks from me. Providing an overall business update, and John will then follow up with a discussion of our third quarter results, then we'll open it up to questions. Although our third quarter operating results are lower than we expected, a significant number of positive developments occurred during the third quarter, helping to grow and position our print and digital business for greater future success which validates our ongoing strategic investments in both the digital and retail parts of our business. The Kansas Lottery has advised that Pollard is the apparent winner of a new 5-year contract starting late 2026 with 1, 2-year tension together that will take the contract out to late 2023. The Ilottery contract was awarded through a competitive proposal process or an RFP process and our win reflects the great results we have achieved with the successful Kansas iLottery start-up last year. We are looking forward to building revenue growth and generating more funds for good causes throughout Kansas. Our Neopolared Interactive LLC business was awarded the final 1-year extension to continue to provide the iLottery solution for the North Carolina lottery. The award of this final extension expands our existing contract to June of 2029. And on June 15, 2026, the Colorado Lottery published a notice of intent to award at their lottery digital solution contract. Initial planning and scoping are well underway, while contract details are being finalized. We look forward to implementing our lottery-specific play on player engagement and catalyst high lottery gaming platforms to enhance the significant lottery's ability to meet its fundraising goals. We anticipate go-live to occur in the later part of 2027. Work is increasing on our Belgium lottery gaming platform contract as more development resources are dedicated to the multiple deliverables under this long-term contract. Revenue recognition increased in the third quarter compared to the previous quarters of 2026, and we anticipate this trend will continue. The customer is pleased with our progress as we continue to build a reputation in the lottery industry for effective and timely management of complex digital projects. On September 2, 2026, we successfully launched our play on player engagement solution a lottery-specific loyalty offering with the Oklahoma Lottery, a very important expansion of our digital offerings. In October 8, 2026, Norsk Tipping, the National Lottery of Norway, announced its intent to award Pollard its new instant ticket contract following a competitive request for proposal process. Contract starts in December '26, with a 3-year term plus a 1-year extension. Pollard providing or tipping instant tickets since 2004, and this win reaffirms our long-term partnership with an important customer. Now during the third quarter, instant ticket volumes were slightly higher than last year's comparative numbers and also slightly higher compared to the second quarter of 2026. Our average selling price was slightly lower than the comparative period last year due primarily to the customer mix. Our production volume this quarter was more weighted towards lower valued international work compared to the historical third quarter levels, which did lower our margin. In addition, manufacturing challenges resulted in lower production volumes than expected and also caused higher direct materials spoilage and greater rework compared to last year and the second quarter of this year. These factors negatively impacted our gross margin during the quarter. We continue to focus considerable resources, including new management -- sorry, including new manufacturing management in our print operations, on mitigating these issues and improving our manufacturing processes going forward. Our charitable business continued to experience strong demand, which translated to near-record volumes of pull tab tickets vending machine and ETAB sales. Historically, our fourth quarter sees a drop in instant ticket volumes after the traditionally busier third quarter we are not expecting that due to a combination of strong demand and some orders carried over from our third quarter. In addition, for both the fourth quarter and our outlook for 2027, we expect to return to a more normal product and customer mix from a margin perspective. Customer demand for both our E Tabs and paper-based products in the charitable sector remain very strong. To support our additional pull-tab ticket sales, we are expanding our production capacities and capabilities to both increase our capacity and improve our efficiency. Sales in the Minnesota ETAB market continue at record-setting levels and a number of jurisdictions are investigating the opportunity to add this product offering within their markets. Pilot programs are underway, and we are hopeful that new ETAB markets will open in 2027. Our other charitable products such as Ingo Dobber, handheld bingo devices and Pultevenue machines continue to generate positive sales growth and we expect this to continue. As a reminder, our Michigan iLottery contract ended at the beginning of the third quarter this year, accounting for a significant portion of the lower results when compared to 2026. Now recently, the Virginia Lottery issued in an RFP, or request for proposals to provide its iLottery solution beginning in 2028 after the completion of the current contract supplied by NPI. Hollard reviewed this opportunity thoroughly and after assessing the timing of Virginia compared to the digital opportunities we have already won as well as additional opportunities in our sales pipeline -- it was determined that Pollard would not respond to the bid. We will continue to receive our 50% share of the earnings of the Virginia iLottery contract through our NPI joint venture through October of 2028. We remain extremely committed to growing our iLottery business and look forward to bidding on other future opportunities in both North America and international. Focusing our resources on our current implementation pipeline, will ensure that we are able to bid on opportunities -- I'm sorry, bid on future opportunities, most notably the North Carolina high lottery contract currently expiring in 2029, but expected to go to RFP in 2027. We reminder that we continue to acquire our common shares for cancellation under our previously approved normal course issuer bid. During the third quarter, we purchased 64,200 shares for cancellation and we will continue to utilize the NCIB to support what we believe is a significant undervaluation of our company. Our outlook for the fourth quarter and 2027 is positive with a robust instant ticket production schedule growing demand for our charitable products and solutions. In addition, we anticipate increasing revenue from our portfolio of digital contracts, including the new contracts with Oklahoma and Colorado, the renewal of Kansas, the extension of the iLottery contract for the North Carolina Lottery and expanding work for our Belgium lottery digital solution contract. All of these investments are laying the foundation for significant future growth in our retail, charitable and digital businesses. Now I'll turn it over to John to discuss in detail the second quarter results.

Thanks, Doug. During the 3 months ended September 30, 2026, Pollard achieved revenue of $158.9 million compared to $156.3 million in the 3 months ending September 30 of last year. Factors impacting that $2.6 million revenue increase were Higher sales of ancillary lottery products and services increased our revenue by $3.4 million compared to 2025. This growth was primarily due to increased digital sales, including Pollard's iLottery contracts with Belgium and Kansas. Higher retail solutions sales and increased game studio sales also contributed to the revenue increase. Partially offsetting these increases in ancillary lottery sales was a decrease in sales of licensed products. Also, higher average selling price of our charitable games increased revenue by $1.6 million in the third quarter of 2026 compared to the third quarter of 2025. And in addition, higher charitable gaming print volumes to further increase revenue by $0.6 million. Charitable eGaming, or ETAB revenue further increased revenue by $1.5 million compared to 2025. with revenue generated in Minnesota reaching new records. New game content and the greater number of sites have driven revenue higher in Minnesota than the pre-regulatory change levels from 2024. A lower instant ticket average selling price in 2026 decreased revenue by $3.5 million compared to 2025, mainly as a result of customer mix. It should be noted that part of that decrease was expected due to the California work ramping up this year. Partially offsetting this decrease was higher instant ticket sales volumes which increased sales by $1.9 million in the third quarter of 2026. Michigan ILottery revenue decreased in the third quarter by $5.5 million as compared to 2025 due to the expiry of the contract in July of '26. During the 3 months ended September 30, 2026, Pollard generated approximately 68.5% of our revenue in U.S. dollars compared to 69.0% last year, and that includes a portion of international sales, which are priced in U.S. dollars. During the third quarter of 2026, the actual U.S. dollar value was converted to Canadian dollars at $1.403 compared to a rate of $1.372 during third quarter of last year. This 2.2% increase in the U.S. dollar value resulted in an approximate increase of $2.4 million in revenue relative to the third quarter of last year. And in addition, during the quarter, the value of the euro strengthened slightly against the Canadian dollar, resulting in an approximate increase of $0.2 million in revenue relative to last year. Cost of sales was $134.6 million in the third quarter of 2026 compared to $128.2 million in the third quarter of 2025. The increase of $6.4 million in cost of sales was primarily the result of increasing Pollard iLottery operational costs, including ramping up of resources in preparation for the Belgian lottery contract as well as additional costs associated with higher instant ticket volumes and the production efficiencies that we incurred during the quarter. As well, higher exchange rates on U.S. dollar-denominated expenses further increased cost of sales compared to 2025. Those increases to cost of goods sold were partially offset by lower Michigan iLottery costs with the expiry of the contract occurring in the quarter and decreased costs as a result of lower license product sales. Gross profit decreased to $24.3 million or 15.3% of sales in the third quarter of this year compared to $28.1 million or 18.0% in the third quarter of last year. This decrease of $3.8 million in gross profit and the decrease in gross profit percentage were primarily as a result of firstly, decreased instant ticket sales margins from the lower average instant ticket selling prices due to that shift in customer mix and as well to our production efficiencies in the quarter. Also lower Michigan I Lottery gross profit of $2.1 million due to the expiry of the contract. And lastly, lower license product sales and higher distribution costs also reduced our gross profit in this quarter. Partially offsetting those decreases in gross profit and gross profit percentage were our increased revenue from our iLottery contracts of Belgium and Kansas. Higher Retail Solutions sales also increased our gross profit and higher gross margin from our ETAB charitable sales as well was positive in the quarter. Administration expenses were $18.9 million in the third quarter of 2026 compared to $19.2 million in the third quarter of last year. The decrease of $0.3 million was largely a result of lower ERP implementation costs Partially offsetting those decreases in administration expenses were increased compensation costs as well as higher professional fees, software licensing fees and consulting fees. Selling expenses decreased to $6.1 million in the third quarter of 2026 from $6.5 million in the third quarter of 2025. This decrease of $0.4 million was primarily due to lower compensation costs. Followed share of income from our iLottery joint venture was $15.3 million in the third quarter of '26, very similar to the $15.3 million that we also had in the third quarter of 2025. And Note that, that difference or does not include the Mission iLottery revenue, which flows through our sales of cost of goods sold, as we just discussed. Adjusted EBITDA decreased to $28.3 million in the third quarter of 2026 compared to $32.3 million in the third quarter of 2025. The primary reasons for the $4 million decrease in adjusted EBITDA was a decrease in gross profit, net of amortization and depreciation of $3.1 million substantially the result of the lower instant ticket margins and the impact from the expiry of the Michigan iLottery contract of $2.1 million. Further reducing adjusted EBITDA was the increase in administration expenses, net of ERP implementation costs of $1.1 million and higher realized foreign exchange loss of $0.6 million. Partially offsetting those decreases to adjusted EBITDA were lower selling costs of $0.4 million and lower other expenses of $0.2 million. Interest expense decreased to $2.6 million in the third quarter of this year compared to $2.9 million in the third quarter of last year, primarily a result of lower interest rates in the third quarter of '26 compared to the third quarter of '25. Amortization and depreciation, including amortization and depreciation of our equity investment totaled $13.5 million during the third quarter of 2026, an increase from $12.6 million during the third quarter of 2025 the increase of $0.7 million was a result of the additions to our property, plant and equipment and intangible assets. Income tax expense was $3.7 million in the third quarter '26, an effective rate of 31.6% and which was higher than our domestic rate of 27% due primarily to the effect of withholding and other taxes, partially offset by lower income tax rates in foreign jurisdictions. Net income was $8.1 million in the third quarter of '26 million compared to $10.3 million in the third quarter of 2025. The primary reasons for the $2.2 million decrease was a decrease in gross profit of $3.8 million substantially resulted lower -- sorry, the lower instant ticket margins and the impact of the expiry of the Michigan high lottery contract of $2.1 million, as we discussed above and the increase in the foreign exchange loss of $0.7 million. Partially offsetting those decreases to net income were a decrease in income tax expense of $1.1 million. The decrease in excelling expenses of $0.4 million, the decrease in admin costs of $0.3 million and a decrease in interest expense of $0.3 million. Net income per share decreased to $0.30 per share basic and diluted in the third quarter of 2026 from $0.38 per share basic and diluted in the third quarter of 2025. Now before I just end my comments, I do have to just note that we've announced in the previous few days that we have a new Chief Financial Officer starting with us shortly. We're thrilled to have announced that VericaSimik will be joining us in the next few days replacing, of course, our long-standing and fabulous Chief Financial Officer, Rob Rose, who has previously announced is retiring at the end of this year. Barrick has got a fantastic resume and work experience that she's bringing to us at Pollard. She's worked at some Canadian public companies that have been through some amazingly similar things to what we're going through in both the manufacturing side of our business and the digital parts. And I know she's going to hit the ground running and be really valuable for us. And we're really looking forward to having her joining with us. And of course, Mr. Rose, who's sitting in the room with me this morning is going to be our retiring as we announced at the end of this year. It's hard to know what to say about Rob leaving us. He has been just a tremendous asset and a huge part of Pollard Banknote in over 30 years, and he's been with us most of that time as Chief Financial Officer. When Rob started the west, we were this small private fledging little lottery ticket printing company with about $40 million in revenue. And over that time, of course, we've grown to over $600 million in revenue become a public company, sales and operations all over the world and seen tremendous growth and success. And Rob has just been an integral and invaluable part of that whole process. In addition, just a fantastic person to work with an important part of the culture that we create here at Polar Banknote from just the way he operates and he's going to be tremendously missed. So our final meetings with Rob just wrapping up, and we wish him all the best in his retirement and thank him profusely for everything he's done for us. So with that, that is the end of the prepared part of our discussions. And operator, we'd be happy to entertain any questions at this time.

[Operator Instructions] Your first question is from Stephen Boland from Raymond James.

First question, I guess, would be, John, how do you get confidence that manufacturing issues are behind you because this is -- is it a year ago, 1.5 years ago, there were some other manufacturing issues. So what steps would be done to kind of really make sure this doesn't continue to happen and just say another 12 months?

Yes. Look, it's no doubt that this past quarter was very disappointing from that perspective of the manufacturing issues we had in our instant ticket operations during the quarter. We've had previous quarters with those troubles as you note, things did get better in the second quarter and -- we had a couple of issues arise in the third quarter that increased those costs again. We -- look, we've made a number of changes in our manufacturing team, partly due to retirements, partly not over the last year or so. Jeff Foster has been in leading that group for over a year now, and we are making, we believe, with Jeff, some really good progress on the underlying fundamentals of how things have to get better. We've also got new plant management in our main printing facilities in Winnipeg and Ypsilanti, Michigan, where we print most of our scratch-off lottery tickets. Those 2 folks have just joined us in the last few months and are really adding to our strength. So we do see over the last year or so, the right kind of long-term sort of trajectory part of our issues in the last year have been ramping up our volumes for the higher California contract. And as we noted briefly in our quarterly results, the California onboarding has gone extraordinarily well. We produced great product for them. The customer is thrilled. Everything is meeting or exceeding expectations there. But that did cause us to have to ramp up our volumes fairly significantly this year. And there have been a few growing pains from part of that, but we are kind of rips of those. The long-term trajectory is getting better. We're confident that those issues that we've seen are going to be addressed -- and so I appreciate that that's getting to be a little bit of a broken record over the last few quarters, but we are actually confident that things are going to get better and the new people we've got in place are making a significant difference.

Okay. The second question is about the margin, and it's obviously just tied to what you just said, but you're expecting continence and improvement in processes but you've also got a lot of initial lead work going on, which I believe it's expense first and revenue recognition over time. So I'm just thinking about the margin and the outlook and when do you think you can get back to that 20% even higher before some of these major initiatives offset by some of the challenges that you have had in the manufacturing.

There's a number of things that play in the margin changes this last quarter. The way we report the Michigan iLottery contract, obviously, which is different from the other Neopolar contracts where all those show up in our sort of 1 line joint venture income. Obviously, as we talked about in the comments here, there was a 2.1% reduction in gross profit coming out of the quarter from the Michigan contract expiring and that's not a timing issue per se, of course. So that will be a little bit of a permanent drag as we bring our other digital revenues back up. So that was the 1 factor this quarter that will be a gradual process. But secondly, of course, yes, it is important 1 of the key things, as we all know, for our company is ramping up our own digital catalyst and loyalty revenues. As you've just said, we have invested a large amount of money in that product we have significant operating expenses that we're incurring now that, in fact, have been increasing a little bit over even the last quarter or 2 because as we ramp up further with Belgium and getting ready for Colorado, so the key is bringing those revenues on. That's going to take a few quarters, unfortunately, for that to really ramp in Colorado will start to kick in, in Q4 of next year. Belgium is going to increase each quarter over the next couple of quarters as we noted and Kansas revenue will grow -- continue to grow as we ramp up the player base. So those things are going to take a few quarters to really materialize. Unfortunately, it's not a 1-quarter fix. But over the next few quarters, we should see significant improvement. Lastly, the other thing that has impacted our margins this year, as we briefly alluded to, was the mix of instant ticket work we have unfortunately seen in 2026, not in California. That contract has gone better than we expected from both a margin and volume perspective. But on some of our other larger and higher-margin instant ticket accounts, we've just seen due to various reasons and lower volumes in 2026 from those accounts, largely due to timing reasons fortunately. And in -- when we look out to 2027, and even some improvement in the fourth quarter of this year. We should see increased volumes and margins from some of those key instant ticket accounts coming back into play in Q4 and next year, and that will also improve our margins. And of course, lastly, those manufacturing efficiencies and the rework. We do expect that to improve in the very short run, we're seeing in Q4 already signs from our initial results that those efficients are getting better part of those issues with is rework where we have games that can occasionally have -- and we had 1 in Q3. We had a larger game that required some significant rework. It was a new innovation product, 1 of our new innovation products. I think we talked about this before, where we haven't produced so a huge number of times before that we had some challenges getting right. We don't expect anything like that to incur in Q4. So we do expect those inefficiencies to rapidly improve as well. So a number of moving parts in there. some quicker things and some that will take a little bit longer to see the results from -- sorry for the long answer on that one.

No, that's helpful. And I'll just say lastly for Rob, congratulations on your retirement, and thank you for all the calls and helpful over the years. It's been invaluable. So good luck in the future.

Thank you, Steve.

Your next question is from Jim Burn from Acumen Capital.

Yes, I'd like to reiterate that as well. Congrats to Rob, good luck in the future. Maybe a couple of things. Maybe a question for you, Rob. Just on the cash flows. Obviously, operating cash flow this year has been depressed a little bit, quite a bit of investment in working capital and -- maybe just touch on what you expect for Q4 and what should 2027 kind of normalize?

Sure. Sure. There's a couple of things that have impacted our changes in working capital, as noted when you look at the statement of changes, but within the 9-month year-to-date numbers and even the last quarter, -- 2 of our large new contracts or the Belgium contract and the California contract have different milestones and billing processes relative to what we've seen in the past. So on the Belgium contract, as is typical in a development contract, we put out a bunch of work developing the various parts that go into the new digital contract and solutions and the timing of the billing and collection of the cash as at the end of the delivery of each of those modules. So we're doing a significant amount of work that we're recognizing on a percentage of completion basis, but they don't get billed for quite some time. And you'll notice in the financial statement, the growth in what we call our contract assets, and that's the work performed, but not yet built. And similarly, on the California contract, we -- they're paid on -- at the retail level. So when the tickets get sold at retail, that's when we get paid, where traditionally, you'll see getting paid when you ship the product to the lottery. So those are 2 contracts that came on right at the same time, which, of course, are terrific contracts for ultimate profitability. But the timing of that cash comes in a little bit later, particularly as we're ramping up and building the 2 contracts. So that was a major part probably about I want to say about at least 50% of the growth in our net working capital was due to those 2 contracts. Over time, of course, still flatten out. So California will start to flatten out. Our investment will sort of get to sort of a steady state by the end of this year. Belgium will continue to grow as we continue to put out development work into next year and then it will flatten out and start to reverse itself with net cash flow at the end -- towards the end of 2027. So those are the bigger parts of the working capital investment. So it will continue a bit, but it will start to flatten out and then reverse as we go through 2027 smaller things as well impacted us. We've increased our investment a little bit in raw materials of paper and ink to sort of provide some buffer with all these interesting tariff and trade environment issues going on. So we've built in a little bit more buffer for protection purposes. And as well with the elimination of the Michigan i lottery or the end of the Michigan I lottery contract, there was some working capital that we paid out some float that we had with them. So those are sort of onetime things, but we should see that start to flatten out and then turn around in 2027, just based on the logistics of these 2 new contracts.

Okay. That's really helpful. And then maybe if you could, Doug or John, just comments on Virginia and the decision is not to bid there.

Yes. Thanks. I can address that, Jim. We've been very successful with adding digital contracts. And the work that we've had ongoing with Colorado now, with Belgium, with Oklahoma, and 1 of the real challenges in this business is how do you allocate the capacity and how do you wrap that up. But in the meantime, it's very important to us that we maintain that reputation for being a really good partner to deliver on-time delivery in this world. And so given that, that's a challenge overall in our industry, we're really excited about the reputation we're bringing but it means we've got to be careful about how we allocate that, as you guys would call it dry powder. So particularly with things like North Carolina on the horizon, we just gave the conclusion that we needed to preserve some capacity or some of those other opportunities.

Okay. So yes, you mentioned North Carolina. Is that -- you're kind of saving some dry powder for that process? Can we assume that.

Yes. Well, that and others, but that's an important one, too.

Okay. And then maybe just quickly, Kansas looking at kind of the gross gaming revenue. It's been relatively consistent for the last few months, growing a little bit here and there. Do you anticipate further growth? Or is that going to be required, I guess, to reach that having point into profitability? Or are we there at these types of levels?

Well, I can address some of the growth in the revenue, which is ultimately going to affect the margin, but perhaps, Rob, you can clarify some of that. One of the things that we're really hopeful for is that now with the new contract, we can get a little more aggressive with the lottery and how we go about recruiting players. One of the big things that we do that is through some of our efforts with paid social and paid media and those kinds of things to grow that player base especially during big jackpot runs. We almost had $1 billion run in Powerwall, which would have been nice, but didn't -- that was hit, unfortunately, last week. And with the certainty of the new contract, we think there are some opportunities for us to continue to partner with the lottery, but to really show them how to do that more effectively. And if we can add more players into the mix, it really affects the economies of scale in that operation, which is going to benefit the margins. I don't know, Rob, sorry. Rose, if there's anything you want to add to that, please do.

Sure, I can add a little bit. We did improve a little bit in the last couple of quarters, but not as quickly as we thought we're going to. So we're still in a negative position, but it is slowly improving. And as Doug said, it was a little interesting during the RFP process and even the election process there are certain things it's hard to do in terms of really starting to build businesses. People are just on the sidelines in terms of what the lottery wants us to do in terms of getting aggressive, et cetera. And as Doug points out, the winning of the new contract, the long-term contract, we now have the opportunity to put in place the levers that we wanted to do that we haven't had a chance to do working with the lottery to improve that top line. So certainly see improvements going forward. It may take a little bit longer than we suggested some time ago that we're moving towards profitability at the end of the year. that might take into the early part of 2027. But certainly, the trend line is improving a little bit. And as Doug mentioned, there are a number of levers now we get to implement that will help that.

Your next question is from Rob Young from Canaccord Genuity.

I'll echo my thanks to Rob for all the help over the years. It's been great working with you. Happy for you in your retirement. Thanks for all the detail on the margins earlier. I was hoping maybe one other detail. You noted that you're doing a little bit of pre-buying on some of the inputs. And I'm curious if you just give us a sense of -- is there any pressure on margins coming from higher costs on inputs given all of the trade issues? And then maybe second, Dario that would be around just pricing pressure in general, given the competitive dynamic? Are you seeing a higher level of pricing pressure? Or should I think of that as something that's well defined within the contracts and not something that really moves in the short run.