Pollard Banknote Limited (PBL) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of the 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 Executive 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 6 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 the 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 are 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 pose 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 these 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 the Secretary of the meeting and Computershare Investor Services, Inc. through its representatives to act as the 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 21, 2025. 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 the 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. Winnipeg time on May 6, 2025. As of that date and time, the transfer agent recorded proxies representing 83.87% 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. 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, and 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 6. 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.

Thank you, Mr. Rose. 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. 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 that Dave Brown has a motion in this regard.

I move that the accounting firm of KPMG LLP, be appointed auditors of Pollard Banknote Limited to hold office until the next Annual 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, Mr. Brown and Mr. Richard. As indicated, voting today will be conducted by electronic ballot. I will now ask that Computershare please open the balloting to registered holders and appointed proxy holders. As 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 brief presentation, if there are any general questions regarding the brief presentation or any other questions regarding Pollard Banknote, which you would like to raise, we'd be happy to address them for you. John, Doug?

Okay. Thanks, Gordon. This is John speaking now. So today's agenda -- sorry, yes. I have to remind you about the disclosure regarding forward-looking statements and the use of non-GAAP financial measures. So that should be reviewed in conjunction with this information. Today's agenda is a little bit different from last year in that this year, we did a conference call this morning to review the Q1 2025 results. 7:30 Winnipeg time, we did that. For those of you who missed or wanted to see that information, it will be posted shortly on our Pollard Banknote website. But because we did that this morning, we will be reviewing today only the full year 2024 results and not the Q1 2025 results. So just kicking off, looking at those results, we have the highlights of the year page. And certainly, look, overall, 2024 was a very good year for Pollard Banknote. You can see on this page how our combined sales, which includes our share of our NeoPollard joint venture revenue, grew by over 10% to $665.9 million. So nice significant growth again, and perhaps more importantly, you can see on this page how our adjusted EBITDA number grew by 25% from $91 million last year to over $114 million this year. What we're seeing in those results is the benefits of our repricing of our instant tickets that we've been heavily engaged in the last 2 or 3 years to combat the effects of the COVID era input cost inflation that were very significant. And when you look at the numbers on this page, you can see how it held back our EBITDA for a couple of years there, while we grappled with those very significant input cost increases. But we've worked very hard to reprice our instant ticket contracts. We have repriced the majority of them now. We're starting to see the benefit of that in 2024 in a more significant way and it will be more fully reflected even in 2025. So for sure, that is a big influence on the year's results. We're also happy to report that input cost inflation, there's been no new spike up in that. And in fact, on the converse, we did see some modest reductions in some of our paper, ink, freight and those sorts of inputs in 2024. So that was a helpful factor as well. Certainly, on the sales and demand side, we'll get into that in more detail later, but we continue to see steady and resilient demand for all of our printed products, whether that be our lottery scratch tickets or our charitable gaming pull tab tickets. And really the strong growth in our company, of course, has been on the digital side, more of the last years where we continue to see really strong growth in our iLottery products and also our other digital offerings, including eTab or electronic pull-tab tickets in the charitable gaming side. The other highlight, obviously, for the year, the significant investments that we've continued to make in our new Catalyst iLottery platform that we were so thrilled to successfully launch just after the year-end and our eInstants game studio as well. So that's really the highlights for the year. I'm going to turn it over to Doug to get into some more business updates and I'll come back with some more financial details later.

Thank you, John. So just a reminder, the strategy for our company is to be the partner of choice to help our customers raise more money for the good causes that they support. We do that by focusing on these 3 elements here: outstanding games, retail excellence and digital innovation. When it comes to outstanding games, that really starts with scratch off instant tickets. And you can see the growth in this chart over a long period of time. It's why we felt for a long time, this is a good business to be in. You see there 2024 actually saw a slight decline in those sales. But I think you have to see that in context as our customers do that we've still been able to retain most of that very significant growth that you saw between 2020 and 2023. And so really a very steady long-term growth trend, we think, is still there. The other thing I would point out to people is a reminder that in the past, instant ticket sales have proven to be highly resilient in periods of uncertainty -- economic uncertainty. And we're seeing that again in 2025. So we think that also bodes well for that portion of our business going forward. John mentioned it, so I'll try not to be too redundant, but the story for 2024, particularly with instant tickets, was very much about margin recovery. As a reminder, we did see very significant cost spikes in 2022 and '23, which really squeezed our margins. And it was nice to see in 2024, again, the market continued to accept the price increases that we were putting forward as contracts came up for bid and were won or renewed with extensions. And that did restore our margin back to what I'd call historical levels. And as John did note, it was good to see the cost inputs actually went down slightly, not back to the level they were but down. And so that allowed us to really restore that margin. There is still a lag time between when those pricing increases are negotiated and when they actually come into play. But for all those contracts -- for the majority of our contracts, which we have now repriced, they will all be in full effect in 2025. I always like to remind people that we are not just providing lotteries with games. We are not just a provider of products, but we are a partner to help them grow, and we do that with retail excellence, and so what you're seeing here is some of the ways we do that through our Schafer Retail Solutions plus subsidiary, that group of ours that provides merchandising solutions that help drive sales. So that could be traditional dispensers like you see in the center of that, but it could also be innovations like digital menu boards, which we provided many of, where for a relatively modest investment, lotteries can see double-digit sales growth in their instant category. So that's important. And also newer innovations like easyVEND which is a solution we've developed to help open up in lane, then secure vending of instant tickets as well as potentially self-service locations. So those are some things we're doing to help the industry continue and grow. The third aspect of that, what we call our [ Shamrock ], our strategic [ Shamrock ] is digital innovation. And that's -- there's really many elements to digital innovation, but I would say it starts with helping lotteries move from what is typically an anonymous purchase to known play. And our play on loyalty tool is really the best-in-class solution to establish known retail play. And we've seen in markets like Arizona and Kansas that play on loyalty can drive retail sales. And it's nice to see as well in places like North Carolina and now Kansas online that our play on loyalty solution can also drive iLottery sales, and it leads in well to iLottery. And there's no question that our most significant strategically important investment in the last few years has been in our proprietary iLottery and omnichannel gaming platform, which we call Catalyst. And I would say that in an industry, in the lottery industry, particularly, which has often been burdened by legacy systems, Catalyst gives us a competitive advantage. It is an agile, modular cloud-first solution. And if I flip forward one, what was exciting to see was that we deployed that in Kansas. And what we demonstrated was not only that our Catalyst platform worked really well, but that if you bring great modern technology, you can shorten that implementation cycle. And that's important. It allows lotteries to get to revenue faster. And so we're thrilled with the Catalyst -- sorry, the Kansas launch of our Catalyst solution, not only do we demonstrate our technology chops, but also, we did it in a way and have a great partnership. Kudos to the Kansas Lottery. They were a great partner to work with and coming out of that. I think we have a very positive reference from Kansas not only for our platform, but to our team that really delivered on that. And so I would also just say thank you to everyone on our team who is involved in that. A reminder that when it comes to iLottery, the revenue usually as a percentage of gross gaming revenue is split between platform revenue and also instant game content. And so Powerball and Mega Millions get all the headlines, but 80% of the revenue comes through eInstants. And our game studio is -- our Pollard Banknote game studio is building outstanding games in this eInstants space. We've deployed those in Europe for a while, but now we have them live in several North American jurisdictions and getting lots of traction elsewhere for the variety that we're bringing as well as the ability to drive sales to those eInstants games. While we talk a lot about lottery, charitable gaming is an important focus for our company as well. And John Pollard, you are going to give us a bit of perspective on what's happening in the world of charitable games.

Yes. Thanks, Doug. So it was another great year in our charitable gaming group as well. We set off on a quite deliberate strategy about 8 years ago now to somewhat transform our charitable gaming group that we wanted to be. We were primarily a printer of pull tab tickets at that time, which is an important part of the charitable gaming landscape, but far from the whole thing. And we really set off in a very conscious path to expand our product offerings such that we offer the full range of products that our charitable venue operators would require. We did that constantly because we want to be able to compete better against our primary competitor in that space, which is Arrow International. And really, what we saw is in the last year, getting near the complete build-out of that range of solutions. And so we acquired a company named CJ Venne, which is the leading supplier of ink dabbers or daubers, however you want to pronounce them, based just outside of Philadelphia, a great addition to our company. And then just after year end as well, we acquired Pacific Gaming, which is leading purveyor of handheld electronic bingo devices, which is also an important product in that market. So we're really pleased with how over those last 8 years, we've been able to expand from being primarily a pull tab ticket printer to having the full range of products through our Diamond Game Group. We've got the electronic pull tab devices and bingo paper as well, dispensing machines and now the ink supplies and the electronic bingo products. And -- so really pleased with how that's been built out. We had another strong year. The focus really as well. The bigger growth area has been eTabs in that market. We're thrilled to have recently just launched our brand-new ICON cabinet, which is pictured here in the eTab market, which is, we think going to elevate sales further and focusing on even strengthening further the quality of our game content. And so we're launching some exciting games coming up in 2025. So lots of good stuff going on in that group. You can see on the next slide, just the growth in sales in our charitable gaming group where prior to this strategic shift, it was a relatively small part of our overall business, but it's certainly growing as a share of overall what Pollard Banknote does. And we're seeing lots of synergies in those groups back and forth at the lottery group as well, where we codevelop things like our easyVEND, and we share game content between our eInstants studio and our e-Tabs. And there's a very nice relationship there. Doug, I'll turn it back to you just to talk a bit more about iLottery.

Yes. Still a very significant part of Pollard Banknote's financial picture is NeoPollard Interactive or NPI, and 2024 was another good year for NPI. We had a new launch in West Virginia. We had a significant extension in Virginia. And of course, reminder, we have several more years of both contract term and extensions available in North Carolina and Alberta. NPI is still very much the market leader. You can see that 68% of all the wagers being done in iLottery in the U.S. are through NPI. And really, I would say the Pollard Banknote is a key part of driving that success in many areas. And as well, that's part of the experience that Pollard Banknote is gleaning, which is serving us well in markets like Kansas and elsewhere. You can see the financial impact of that is the significant growth in 2024 from that joint venture. I'd focus in on the combined income line down at the bottom where we went from $49 million to $59 million, so very significant, driven largely by the eInstants growth in North Carolina and Virginia. I might point out, if you're really zooming in, you can't see Michigan there, which is -- had a tougher year. That really reflects the fact, Michigan is a much smaller component of NPI now, but it's -- that reflects the very significant competition, both from [ iCasino ] and sports betting that's there in the state of Michigan. So that's a tough trend to reverse. That's portion of the business part. We're going to look at our annual results, which, John, I'm going to turn this back over to you to update on.

Thanks, Doug. So on this 2024 highlight slide, I don't have to repeat too much, we talked about this at the beginning of this presentation. Again, strong growth in sales and EBITDA for sure in 2024. One of the thing that I'll highlight here is our gross margin. Our gross margin percentage improved significantly in 2024 from 2023, not quite back to the level that it was if you go back to 2019 and earlier years, we were typically over 20% in our gross margin percentage. And that took a real hit due to the input cost inflation that we started seeing in '21, '22 and '23. But we can see the recovery in that gross margin percentage coming through in 2024, and that will improve further in 2025 as we've repriced those contracts and input costs have stabilized or maybe even reduced a little bit. So we got up close to 19% for our gross margin percentage in 2024, and we expect to see that continuing to recover further. You can see the increase in our selling and admin expenses which kind of on the face of it looks significant. But I'll just say that as a percentage of our combined sales, they've actually been flat to declining over the period of years that's on this slide. So although they are growing, it's just a reflection of the fast growth in our overall business and the selling and admin, of course, is growing to support and create that in a lot of cases. And just to highlight again, 25% growth in adjusted EBITDA to a really quite amazing number of $114 million. We're pretty proud of that result for 2024. We always like to show this combined sales slide just because it I think reminds us and reminds people of the real transformation that we have been going through in the last 8 or 9 years since we really set off on a whole new strategic direction back in about 2016 where we really made this really conscious effort to grow into the digital space, which started with things like loyalty and second chance draws, but obviously, the culmination of all that is the full iLottery programs that we're involved in. So that and combined with our strategic direction and charitable games to build out the entire range of products has seen pretty remarkable growth in those years. When we set out on this journey, we were in around $250 million in annual sales, and it's really impressive to see that grow to over $665 million this year, and that will be higher in 2025. So as Doug mentioned earlier, we do need to give a shout out to our whole team here at Pollard Banknote for really helping us on this pretty significant journey that we're really proud of our results on. If I just drill a little bit down into the -- what happened with the sales for 2024, more specifically, we saw the strong growth in that combined sales from $600 million to $665 million. And it was kind of spread around the board. The star of the show was iLottery again this year. So we see $26 million in growth in revenue from iLottery. But not to forget about the other parts of our business, the second bar, which is higher sales of what we call our ancillary products. These are a whole range of products that we've spent a lot of time in the last number of years developing. These are mostly innovations that we've organically developed ourselves. And they are a little bit -- get a little bit less headline news than some of our big instant ticket lines or our iLottery programs. But almost $16 million of the growth in those product lines. And those are things like our loyalty programs, where we continue to roll out more loyalty programs across the world, our lottery management systems and distribution contracts that we have, Arizona is our flagship one, but we've got our [ SureTrack ] software rolling out in a number of other jurisdictions around the world. So sales are growing there. Innovations in vending, like our easyVEND product that Doug talked about earlier, we've rolled it out in Texas. And last but not least, in fact, one of the bigger generator of growth in that category is our licensed games portfolio. Popular properties like our Frogger that continues to produce for us. We've just -- one of our more recent ones that we just press released was we've got the rights for the Jaws movie franchise that's going to be popular. So licensed games also continues to be an important part. So we had good growth in all of those areas of our business. Lastly, we talked about the charitable side of our business continuing to grow. So we've got almost $13 million of the growth in the charitable side. Some of that was growth that was acquired from CJ Venne. It's not all organic growth in there. And lastly, on our instant ticket side, we've combined the price and volume into 1 number here of a positive $7 million. That was more significant growth than that due to higher average selling price, largely due to that repricing that we've already talked about. But we did have a small decrease in volumes that offset that a little bit in the year where we've talked about this in other calls, where we're consciously being more selective about the work that we're able to. And in some cases, we are essentially turning away low-margin work that we have not been able to reprice efficiently yet to offset those input costs and a modest impact from foreign exchange in the year. So that's the story on the combined sales growth, another strong year there. Adjusted EBITDA, of course, this is an interesting slide to look at because, as I talked about earlier, you can see how that was a bit flat there for a couple of years in sort of '21, '22 and starting to recover in 2023. But again, entirely due to the very significant input cost inflation we had where we had input costs going up in the range of 30% on all of our printed products, and that was a super expensive bite out of our EBITDA. But really proud of that recovery to $114 million as a smaller side, notwithstanding that, as some of you know, we weren't thrilled with our Q4 results in 2024. We finished the year on a little bit less strong than we'd like to. But overall, for the year, that $114 million EBITDA was a really great number for us. Just drilling into that just a little bit more. The main story there really was the recovery in gross margins on instant tickets and not repricing and a little bit in charitable gaming as well. So really strong contribution from the repricing and being able to improve our selling prices in instant tickets. Of course, that iLottery sales growth that we talked about, which was the biggest contributor to sales growth contributed strongly to our profit number as well. So $10 million contribution coming from iLottery was also very significant. Offsetting some of that is that higher selling and admin that I talked about earlier, which is not a bad thing. We're keeping that in line with sales, and it's just what we need to do to keep supporting and growing the business. But you can see the combination of those things give us that 25% lift in EBITDA that was a terrific result. A quick last comment just on cash flow. Another good cash flow year. Strong net cash from operations before CapEx of $73 million. We did have a heavier CapEx number in 2024 because we're really getting into the home stretch on our Catalyst iLottery build-out and some of the things that we're doing in the charitable gaming side to refresh and improve our offerings there as well. So we had a little heavier CapEx in 2024 than the prior years. And that may be somewhat heavy-ish again in 2025 and start to settle back down after that when we finished the real big build-out of the catalyst. Nevertheless, still net positive cash for the company that leaves our balance sheet in really excellent condition. That is the end of my comments on the 2024 annual information.

Thank you very much, John and Doug 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. I'll wait a minute to see if we have any questions and if we can provide any answers. Well, there don't appear to be any questions today. So I will get back to the formal business. If there -- I will now get back to the formal business, I'm 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 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 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.

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

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