Pollard Banknote Limited (PBL) Earnings Call Transcript & Summary

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 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, 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. A reminder, you can access our news release as well as the complete financial statements and MD&A on our website at pollardbanknote.com and on SEDAR+. Today, as usual, we'll start with some prepared remarks from me, providing an overall business update, and then John will follow up with a 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 reflects 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 in the second -- 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 that will allow us to develop an efficient cost base for our instant ticket production. In fact, all of this success is reflected in our overall gross margin exceeding 18% in the second quarter. Undoubtedly, one of the highlights of the second quarter for our digital business was the announcement of the Colorado Lottery's intent to award their digital solutions contract. Remind you that we won this contract in a formal competitive RFP process, which included not just iLottery, but also a loyalty program where we bid our PlayOn 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 contract 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 6 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 NeoPollard 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 2 years, our Catalyst technology has confirmed as a preeminent state-of-the-art solution through winning these 3 contracts, including 2 greenfield opportunities and 1 replacement of an existing vendor. Now to understand our strategy, you should know that we see digital solutions as critical not just for lottery 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 gaming 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 issuer bid or NCIB, to purchase 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 and 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 3 months ended June 30, 2026, Pollard achieved revenue of $154.8 million compared to $142.7 million in the 3 months ended June 30, 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 was 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 volumes 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 eTabs 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 compared to $118.8 million in the second quarter of '25. 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 Belgium 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 increase in gross profit percentage were primarily the result of 3 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 million 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 eInstants 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. And 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 the Canadian dollar relative to the 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, 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 adjusted EBITDA were the decrease in our equity investment income from our NPi 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 of 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 depreciation -- sorry, the 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 net income were the decrease in equity investment income of $0.7 million (sic) [ $2.7 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 to $0.32 and $0.32 per share, respectively, in the second quarter of 2026 from $0.30 and $0.30 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.

[Operator Instructions] We now have our first question, and this comes from Stephen Boland from Raymond James.

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

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

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

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

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

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

And the next question comes from Robert Young from Canaccord Genuity.

I wanted to dig a little deeper on the gross margins. You gave 3 reasons why gross margins are better. Great to see that. Looking specifically at the instant ticket margins, what I'm guessing is the biggest factor. It would be nice to know if that assumption is correct. But you're highlighting volumes. And so that would mean that the ASP improvement this quarter and the recovery of the efficiencies in manufacturing, that would be lower -- those would be lower impact factors than just the higher volumes. Is that the correct way to think about it? And then as you go forward here, should we expect those gross margins to continue to improve? And maybe the efficiencies spilled over into Q2 a bit? Or is there -- maybe if you can just talk about where you expect that to go?

It's Rob here. Sort of respective to your question, the answer is sort of a broad agreement. So it was certainly driven by the instant ticket improvement, certainly sequentially. That was the big driver. And it's really a combination of all 3 of those things. I wouldn't necessarily pull them out and separate them. It's a combination of certainly additional volume, gives you leverage on your fixed costs, which works positively for your margin. Our ASP was certainly up as well, depending on what comparison you're using last year or the sequential year. So those are all very important. Probably maybe the lesser of the 3 right now are the efficiency improvements. That's a bit more of a longer-term process. We've certainly made some improvements, and we talked about the momentum that we've gained as opposed to the absolute dollar improvements. But certainly, longer term, that efficiencies will be just as important. So it's really a combination of all 3 of those factors, Rob. It's hard to pull them apart. And we don't give guidance, as you know, in terms of where we expect the gross margin to be. 18.1%, of course, is the highest we've had in a couple of years on a quarterly number. So that's very positive. But we expect, you know, there's more improvement in that. So we're still absorbing sort of the start-up operations and some of our iLottery and digital spend. So that's not positive into our gross margins. So over time, that will improve. And we think we can continue on our instant tickets, particularly as we have higher volume in California, continuing to focus on the new innovations and driving up that ASP. So all those factors will give us more positive momentum, not necessarily immediately, but over the next number of quarters. And if you look back historically, you've seen us a few years ago in that low 20% range. And again, our company has changed quite a bit, but there's certainly no reason why we can't move towards that going ahead.

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

Rob, it's John Pollard answering this one. So look, the -- well, let me be clear, it's positive for margins, although just the nature and the size of the California contract means that the price we had to bid is going to be lower than our average price in some of our other contracts. But it's -- because of the volume, it's still definitely positive in margins. And so we've actually seen 2 benefits on California that are, when we say exceeding expectations, the volumes themselves have been slightly higher than we expected. And also, we've been more successful in raising the projected average selling price on that account from what we expected going in just due to success in selling them on some of our value-added innovations that are options of the contract. So we've achieved a slightly higher ASP than we thought. So it's sort of an interesting dynamic there because it's a lower overall margin for sure than some of our other higher-margin accounts, but it is overall positive.

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

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