Pollard Banknote Limited (PBL) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Shareholders of Pollard Banknote Limited. Please note that today's meeting is being recorded. It is now my pleasure to turn today's meeting over to Gordon Pollard, the Chair of the Board.

Good morning, ladies and gentlemen. My name is Gordon Pollard. I am the Executive Chair of the Board of Directors of Pollard Banknote Limited. On behalf of the Board of Directors, I am pleased to welcome each of you to the Annual Meeting of Shareholders. We have the following matters of business to conduct today: The presentation of the financial statements, the election of six directors, and the reappointment of KPMG LLP as the corporation's auditors. Immediately following the formal business of this meeting, John Pollard and Doug Pollard, Co-Chief Executive Officers of Pollard Banknote, will provide a report on operations and respond to any questions that you may have. Questions may be posed to our co-CEOs by accessing the Q&A tab, typing your name and your question into the box appearing on your screen, and pressing the send button. As this meeting is being held virtually via live audio webcast, voting on all matters will be conducted by electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on each business item after the presentation of all business items. When you're asked to vote, you will receive a message on the virtual interface requesting you to register your votes. You will only have a certain amount of time to cast your votes once the polls are open. As a reminder, only registered shareholders or their proxies are entitled to take part in and vote at this meeting. All participants, however, are welcome to post questions to our co-CEOs at the end of the meeting. On behalf of the Board, I wish to express thanks to those shareholders who have submitted their proxies in advance. To make the best use of our time, certain shareholders have been asked to move and second the proposals which are called for in the Notice of the Meeting. Having dealt with those procedural matters, we will now proceed with the formal portion of today's meeting. The meeting will now come to order. And with your approval, I will ask Riva Richard, General Counsel and Corporate Secretary of Pollard Banknote, to act as Secretary of the meeting; and Compushare Investor Services, Inc, through its representatives, to act as scrutineers at the meeting. The notice calling the annual meeting and the accompanying form of proxy and Management Information Circular were mailed to all shareholders on April 12, 2024. This was confirmed by an affidavit from the corporation's transfer agent. I direct that a copy of the notice and the affidavit be kept with the records of the meeting, and therefore, it will not be necessary to read the notice of the meeting. In accordance with applicable law and as described in the Management Information Circular, the directors determine that, to be valid, proxies were to be deposited with the transfer agent not later than 11:00 a.m. at Winnipeg time on May 07, 2024. As of that date, the transfer agent recorded proxies representing 87.04% of the voting shares. The shares of those present or represented by proxy and who are entitled to vote at this meeting are therefore in excess of quorum requirements. That being so, I now declare that the meeting is regularly called and properly constituted for the transaction of business. Before we start the formal business of this meeting, I would like to say a few words about Jim Burt. Jim died in March of this year, and that meant the end of his almost 40-year relationship with Pollard Banknote. Jim was a longtime friend of our father. And in 1986, when Lawrie Pollard was preparing to expand the company and set up a factory in Kamloops, BC, Jim agreed to provide the investment necessary to make that expansion possible. And this was at a time when the company's banker was not prepared to provide that capital to the company. Jim remained a significant shareholder in Pollard Banknote from 1986 right through to 2024. Jim was a great partner in the business and a great friend. As the first item of business on the agenda for today's meeting, I will ask the secretary to table the audited financial statements of Pollard Banknote Limited together with the auditor's report thereon and the Report to the Shareholders contained in the Annual Report previously sent to you. Copies of such documents are available on our corporate website and through SEDAR. Accordingly, I don't consider it necessary to read the report to the meeting. We now have a few resolutions to present, beginning with the election of directors. The number of directors to be elected at this meeting and to hold office until the next Annual Meeting of Shareholders has been fixed at six. Just before opening the meeting for nominations, I would like to note how much John, Doug and I appreciate the valuable contributions that our independent directors make to Pollard Banknote. Dave Brown, Lee Meagher and Carmele Peter brings a wealth of business, accounting and legal knowledge to our company and provide us with really valuable advice. We are grateful that they have agreed to be nominated to serve on the Board of Directors of Pollard Banknote. And with that, I declare the meeting open for nominations.

Mr. Chair, I nominate the following persons for election as directors of Pollard Banknote Limited: Dave Brown, Lee Meagher, Carmele Peter, Gordon Pollard, John Pollard, Douglas Pollard. And move that they be elected directors to hold office until the next annual election of directors or until their successors are duly elected or appointed.

Are there any further nominations? As there are no further nominations, I will ask Riva Richard to move that nominations be closed.

I move that the nominations be closed.

I second the motion.

Thank you very much. The next item of business is the reappointment of auditors and the authorization of the directors to fix their remuneration. The Audit Committee of the Board of Directors has approved, subject to shareholder confirmation, the appointment of KPMG LLP as the auditors of the company. I believe Dave Brown has a motion in this regard.

Thank you, Mr. Chairman. I move that the accounting firm of KPMG LLP be appointed auditors of Pollard Banknote Limited to hold office until the next Annual General Meeting of Shareholders or until their successors are appointed, and that the directors be authorized to fix their remuneration.

I second the motion.

Thank you both very much. As indicated, voting today will be conducted by electronic ballot. I will now ask that Computershare, please open the balloting to registered shareholders and appointed proxy holders. All registered holders and proxy holders who have properly logged in with their control numbers or access code are asked to please register their votes by selecting for or against next to the name of each director and for or withhold next to the resolution appointing KPMG LLP as the company's auditors. Once the electronic balloting closes, the voting page will disappear, your votes will be automatically submitted and the scrutineers will compile an interim report. While we wait for the results of the votes, I would like to call upon John Pollard and Doug Pollard, Co-Chief Executive Officers of Pollard Banknote, to briefly report on the operations and current activity of the company. Following their presentation, if there are any general questions regarding the presentation or any other questions regarding Pollard Banknote which you would like to raise, we would be happy to address them for you. Go ahead.

Okay. Thank you very much, Mr. Chair. It's Doug Pollard speaking here. I'll begin and my brother John will follow up. Just a reminder, some of these statements are -- may constitute forward-looking statements. There is more detail here in the presentation. I would encourage you to read the rest of that in this document which will be posted to our website. For our agenda, just a reminder, we'll be covering off some financial highlights, some business updates from 2023, look at the financial results, and little peak at 2024 first quarter financial results. Hang on. There are a few technical difficulties here. There we go. So looking at the financial highlights for the last year, you'll see that the sales are up. As we say, that reflects the strong demand in all of our products. Went from $538 million in 2022 to $600 million. EBITDA didn't grow quite as fast as sales. That's largely due to the margin pressure in our instant tickets, which I'll speak to in a moment. Of course, supporting that at the same time is the strong organic growth that we've seen in iLottery, charitable gaming and digital gaming overall. Net debt, you can see is slightly down. I would say that notwithstanding the very significant investments we've made over the past year in our iLottery platform and in our instant games studio, it's nice to see that, that is fully funded and in fact debt is going down. There's a little more detail you'll see in this which will be on the website. I will spare you that. A reminder for our strategy. We are the -- our strategy is to be the partner of choice to help our lottery customers raise more money for the good causes that they support. And we do that still through these primary 3 areas: Outstanding games, retail excellence and digital innovation. Just kick forward, business update. And let's jump forward, retail lottery. One more. So a little reminder here, if you can see that now. Outstanding games, as we talked about, in that shamrock as we refer to it. That starts with instant tickets. And it's still, you can see here, we believe, a very good business to be in based on the retail sales growth. You can see that, 2023, we returned to sales growth at retail, i.e., at the 7-Eleven stores, et cetera. You can definitely see the COVID spike we had in 2021, and so that made '22 a little bit of a tougher comparison. But long term, there's definitely a very nice, strong growth trend that we see. When it comes to instant tickets specifically, it's still our core business. The story for 2023, and it will be into 2024 as well, is one of margin recovery. Through both 2022 and 2023, we saw very significant inflation in paper, ink and other costs which really squeezed our margins. The good news, however, is that the market has been accepting the price increases that we've been putting through to account for these cost increases, which is beginning to restore our margins back to historical levels. And so we are now at the point where, you can see in those bullets, the majority of our contracts are now repriced. But I would just remind you, there is a considerable lag between the time of higher prices agreed to in a contract renewal or extension and the time it leads to orders, to deliveries, and ultimately to payment. But other bit of good news on the last bullet is that those restored margins are holding as our cost of our inputs have been flat and maybe even slightly down. So it's -- we're expecting that recovery to continue. Retail excellence is the second part of that Shamrock. And it's not enough for us just to bring outstanding games to our customers, we're also helping to merchandise these games better in order to drive the sales growth. And that's both with traditional dispensers in C-stores and others that you see on either side of that. Schafer Retail Solutions is our main company that provides that, but also through new technologies like easyVEND, which you can see here, which is a technology that helps make managing lottery tickets easier for grocery stores and is helping to open up in-lane of instant tickets and ultimately self-service sales of instant tickets. Let's jump forward now to Digital Solutions, iLottery. As lotteries move from anonymous to known play, our playON loyalty solution has been a great tool for lotteries to do so. One of the biggest stories in the lottery world over the last few months has been the successful launch of eInstants games by the North Carolina Education Lottery, and they would acknowledge the significant role that our playON loyalty solution has played in that by helping to get players registered and known and making it easier to promote down the road. We've had similar results with the other lottery customers we've had in Arizona and Kansas. And soon, we'll be adding West Virginia later this year. When it comes to digital gaming, iLottery is really the ultimate goal. And I want to note here, again, our NPi joint venture continues to be the market leader. 66% of all U.S. wagers are via NPi. And that's driven by two things. Number one is our market share. NPi just has more lotteries that are using us. But second part of that is the outperformance that NPi customers are seeing. You can see in this chart here that per capita sales of NPi customers is dramatically higher than those of our competitors. There is one outlier here. If you look down, you see North Carolina. Just a reminder, North Carolina only launched eInstants on November 15, 2023. So -- and this is reflecting fiscal 2023, very little of that was picked up in North Carolina. But sales in North Carolina are picking up significantly. And I would soon expect them to be at a similar level to the leaders there, Virginia and New Hampshire. The market success that you saw there for NPi is also reflected in our financials. 2023 combined revenue grew from $81.6 million to $108 million, and that positive trend continued through Q1 of 2024 for revenue. And of course, combined income also had similar growth, from $31.8 million to $49.1 million, and that growth trend continues nicely in Q1 2024. Our NPi joint venture, a reminder to you, is focused on North America. And in the last couple of years, we've begun to significantly invest in our own Pollard iLottery platform distinct from the joint venture. So we've been targeting that both at global lotteries outside of North America. And increasingly, there may be lotteries in North America where Pollard and NeoGames -- there will be some markets where Pollard and NeoGames cooperate. As I say, we'll go live in West Virginia in the next few months or later this year. But there may be other opportunities where we choose to pursue those independently, and we have the technology to do so. As we've been out sharing that technology with the marketplace, it's been very impressive, the feedback we've got, both based on the technology we bring as well as the team that we can bring that can help to deploy that. So really nice to see that market feedback. iLottery, of course, is more than just a platform. It's also about game content, and our Pollard Game Studio is gaining more traction as we develop our own games, which we'll be launching more and more of in the next year. And I would also highlight the importance of expertise in the user experience. And our subsidiary, mkodo, drives this, and in fact had a very strong year in 2023, with lottery customers like these noted in this page in addition to some casino customers where we can help get a sense for where the gaming market is going. And they are also doing some very encouraging new product development. We're very excited about our GeoLocs product, which can do the geolocation service which is inherent to all iLottery transactions. So a nice strong year in mkodo as well. I'm going to turn it now to charitable gaming, and I'm going to ask my -- John Pollard to give us a little highlight on that.

Thank you, Doug. So I mean, the overall theme for charitable gaming again for this year, much as it has been since coming out of the pandemic, was just strong demand for all the products. So it's been a great spot for us. We've done some acquisitions in the last couple of years in charitable gaming that are working well for us. And we continue to see good results there. If you look at the sales trend, of course, you see that strong growth in our own sales there that we see in charitable gaming side. Notwithstanding, we have had a few struggles on the paper ticket side of charitable gaming with some production sort of efficiency issues and mechanical issues that have held back our production of paper printed tickets a little bit. We're starting to work through some of those. It's carried on a little bit into Q1. We're starting to work through those. And we'll see even greater improved results, we believe, going forward in charitable gaming as we work through some of those paper printing issues. So the real bright side for us and the increased results we've had have been in the eGaming side, where our devices out there are performing really well. They're on a rev share basis, and we're seeing strong demand and great performance. If we just drill down a little bit into the Minnesota market, which is our -- one of our biggest charitable gaming markets, one of the biggest charitable gaming markets in the United States, you see an interesting -- some interesting trends there. We've been showing this chart for a few years. The big story, of course, is the overall, that top dark blue line just showing the overall growth in charitable gaming. Look at how strong the growth has been in the last few years. Super impressive. I mean, a 5-year CAGR of 15%, it's kind of unbelievable. And the theme we've been showing there is, yes, sure, the electronic pull tab side has been the big growth story there. But we see the paper, sort of what I'll call old fashioned, if I can call it that, paper pull tabs have still been growing nicely. Now you saw it flatten out a little bit, slight shrinkage in 2023, but that was after some really strong years the couple of years before. So the overall trend still for paper tabs is that, notwithstanding the huge growth in the electronic side, the demand for paper tabs is still hanging on nicely, growing modestly. And those two markets are sort of coexisting for what an overall result is really pretty impressive. And that's basically what we're seeing across the United States. So lots of good more stuff to come in charitable gaming going forward. If we flip out of charitable gaming and now go more into the -- into sort of the numbers for 2023 of the company. Doug talked about some of those earlier, so I don't have to get into too much detail on it. But obviously, still strong sales growth again that you see, even though we were held back somewhat in our paper ticket side in both charitable gaming and scratch tickets with some unique issues there, still overall really strong sales growth. Of course, last year, we saw that margin compression. So we saw our gross margin actually decline because of that huge inflation in our input costs on instant tickets. So we still -- that was a big issue in 2023, but you see a little bit of that gross margin coming back and increasing a little bit in 2023, starting to see the recovery there. Significant increase in selling and admin because overall we got so many exciting projects going in our business, that we are adding to our sort of selling and admin overhead to support all those exciting things that are going on. And so there's admittedly a big number there, but that's relatively intentional for all the stuff that we've got going on. You see the big increase in the NeoPollard joint venture net income, which was obviously the big story from the net income and EBITDA for the year. So looking at the adjusted EBITDA line, sure, we're up almost $11 million, which is really nice growth. But in some ways, that was still a little disappointing, obviously, because our iLottery did so well as you can just see on that line above. And our instant ticket division was still really hobbled by that -- the real full impact of the inflationary cost of those inputs, which, as Doug mentioned, we're starting to see turnaround really nicely, and we should see some real improvement in those results coming through in the next year or two. But that's kind of the overall 2023 highlights. If we just flip into, again, just looking at our combined sales chart. We've been showing this chart for a long time. Keep in mind, this chart is foreign exchange-adjusted. So it's not -- this is not the actual numbers for prior years that you would see on the financials because we adjusted to take the foreign exchange impact out. We feel that's just a truer representation, notwithstanding that foreign exchange was a positive to sales this year. But -- so it is exciting to see what we have achieved in the last 5 or 10 years with that growth. And we just expect to see that growth continue. We had more growth in Q1, and you'll see continued strong sales growth from us, I think. If we drill down into that just in a little more detail for the entire year fiscal 2023 now, and we show the difference between our $538 million going to $600 million, it's pretty nice to see pretty much all green on that chart. Obviously, again, higher iLottery sales is the biggest story by itself for sure, up $25 million and growing again in 2024. A little bit of a sleeper story we haven't talked that much about is those ancillary product sales. So positive $11 million in the year, which are the things like some of our back office and marketing systems, Doug alluded to some of them. But it's our loyalty programs that we continue to roll out in more jurisdictions and continue to get great traction. Our lottery management services, that's also an important product that we see growth and rollout in more jurisdictions. And things like our mkodo products and others in that category. Our easyVEND systems that are rolling out. There's all kinds of other lottery products besides iLottery and scratch tickets that we've got in our arsenal, and we're seeing really nice growth there and expect to continue seeing that. Obviously, the eGaming revenue up $6 million. Unfortunately, we did not see the growth in the paper tickets there that we hope to get back to. But eGaming revenue growth, and that's very profitable growth because it's rev share with a relatively sticky cost base. So that was really profitable growth for us. Interestingly, we did see actually a slight increase in dollar sales on scratch tickets notwithstanding the challenges that we saw on inflation and the fact, as we've talked about on our quarterly results, that we've actually been declining and backing away from some orders from our old prices where those orders were not profitable. But because of the higher selling price coming through, we still generated a slight positive in the overall dollar sales, notwithstanding that our volumes were down. And then, of course, we had the foreign exchange positive impact in the year. So nice to see all those green boxes on the 2023 sales. If we flip over to adjusted EBITDA. Again, the big story there, it was nice to see that return to growth after the squeeze on our EBITDA from -- entirely coming from that inflation on input costs we had in instant tickets. But nice strong growth of $11 million fundamentally mostly due to iLottery, but still a nice overall trend that we see going higher obviously in 2024 as we look out. If we drill into -- drill down into that EBITDA number a little bit. The big driver, of course iLottery revenue. Again, kind of like our eGaming systems, very incrementally profitable as sales go up because of the rev share nature of the sales and the sticky cost base. So that iLottery sales growth delivered a huge number to our bottom line EBITDA, really impressive. And then the $6.4 million next green number is higher gross margins at instant tickets and charitable gaming. Now that's mostly charitable gaming, frankly. Really, our instant tickets were still had a struggle. But charitable gaming delivered some -- and particularly, really in there, that's eGaming systems, but the eGaming system delivered some really nice growth as well. You see the negative red on the selling and admin increase. And that is a significant number, but again, it is intentional. We've got a number of projects going on. They're going to continue to bear fruit over the next couple of years. Huge investment, again, as Doug talked about in our own iLottery systems that's going on. And we're excited about all those products. And so there's a bit of a pre-investment in some of the overhead to take that on, but it will definitely bear fruit. So excited to see growth in EBITDA again and looking for more of that in 2024. And so that's kind of the 2023 story of EBITDA. Doug alluded to the strong cash flow. I won't get into that too much, but just nice to see, again, another year of strong cash flow. And that's allowed us to pay off a huge amount of acquisition expenses and investment in our company and still lower our debt along the way last year. It leaves us in a really good position to pursue future acquisitions. We've got a number of acquisition areas that we're looking at hard and some that we're working on. We expect to continue to see some more acquisitions being part of our growth strategy going forward, and we can easily finance those out of the strong balance sheet and cash flow that we've got. Okay. Flipping to 2024 first quarter results. Overall, we had a good first quarter. We of course just released those results last night. But it was a little disappointing on the scratch ticket side. So we've seen a really good trend on scratch tickets over the last number of quarters as our repricing that we've talked about so much, and Doug talked about, kicks in to deliver higher selling prices to offset those inflationary costs. That is continuing, but we had a little bit of a setback on volumes in Q1 on instant tickets. Our volumes were a bit lower than we expected them to be. Our costs came in sort of fine and normal, and that average selling price continues to roll in, but just our pure volumes were down a little bit, and that hurt our margins on instant tickets in Q1. So notwithstanding that we delivered really nice growth, obviously, overall, if you -- when you look at the EBITDA number, up from 18.6% in Q1 last year to 23.7% this year, that's really nice. But sequentially, we were down a hair from Q4 because that -- those volumes of instant tickets. That is a temporary situation. Our order book for instant tickets is much stronger going out into Q2 and Q3, but it was a little disappointing in Q1. Overall in Q1, of course, we still delivered sales growth, which is great, which is nice overall, driven by iLottery and eGaming, again, the usual suspects. NPi JV net income was up from 8% to 12%, really strong growth. And adjusted EBITDA had that nice growth. And so it was overall a strong quarter, it could have been a little better. We won't spend too much time here. But drilling into that on the waterfall chart there, we see the sales being positive for iLottery. And again, that same story on the ancillary products, again, where we see the loyalty and our easyVEND retailing solutions and LMS systems continuing to deliver that growth just like they did in 2023, coming again in 2024. Overall volumes in charitable and eGaming were sort of flat because we struggled a little bit with our printed tickets again in Q1, but that's turning around. And that lower instant ticket volumes that we see, the negative $5 million was the sort of disappointing spot in our Q1, obviously, that I just talked about. So we expect that to be better going forward, but it was a disappointing spot in Q1. Still overall sales growth though, and that's the trend we expect to see continuing. If we're drilling into some EBITDA numbers. Again, nice to see the growth there coming through the iLottery, again, continuing theme, and the growth in margins in instant tickets and charitable gaming that's delivering that. Again, a similar trend to what we saw in 2023, the higher SG&A is still drawing that number back just a little bit. But again, that is planned and intentional. And so just a good overall trend in EBITDA from Q1, and we expect to see those strong trends continuing as we go on into 2024. And so that's, I think, the end of our presentation, We've got lots of investments that we've been making over the last few years in various areas of our business, whether that's the iLottery side; whether that's the eGaming systems and the charitable expansion, the acquisitions we've done there; whether that's all those ancillary products and loyalty and retailing systems. So many exciting projects going on that we're looking forward to continued growth. And really that overall recovery of our Instant ticket margins should continue, and that's going to be exciting as well. So thanks for your -- shareholders, your support for the last year.

And with that, we'll transition back to you, Gord, Mr. Chair.

Thank you very much, Doug and John, for that excellent presentation. The meeting is now open for questions. As a reminder, questions may be posed to our co-CEOs by accessing the Q&A tab, typing your name and your question into the box appearing on your screen, and pressing the send button. We'll take a few minutes and see what questions show up. It appears there are no questions. And I will now return to the formal business of the meeting. I am advised by the scrutineers that the ballots and proxies deposited for the meeting have been voted in favor of the resolutions. I hereby confirm that each of the 6 nominees have been elected as directors of the company to serve until the next annual meeting of the shareholders or until their successors are duly elected or appointed. The appointment of KPMG LLP as the auditors of the company has been approved and the Board of Directors of the company has been authorized to fix their remuneration. I direct that the results of the poll be included with the minutes of this meeting and the results of the voting be filed on SEDAR. That concludes the formal business of the meeting. As there is no further business to come before the meeting, I shall ask Riva Richard for a motion to terminate.

I move that the meeting terminate.

I second the motion.

Thank you. I now declare the meeting terminated. Thank you very much for your attendance.

This concludes the meeting. You may now disconnect. Thank you.