Pollard Banknote Limited

Okay. Thank you, operator, and thank you, everyone, for joining us on this very late call.

Unfortunately, travel time zones and business commitments left us no other viable option to being able to reach out to you after our release. But this will not be the usual or regular time for future quarterly calls.

With us on the call today is John Pollard, Co-CEO; and Rob Rose, Chief Financial Officer. We released our 2024 fourth quarter and annual results earlier today.

You can access our news releases as well as our complete financial statements and MD&A on our website at pollardbanknote.com and also on SEDAR+. Today, we will start out with prepared remarks for me, highlighting our 2024 accomplishments and an overall business update and John will then follow up discussing our third -- sorry, our fourth quarter results.

Then we'll open it up to questions. 2024 has been an extraordinary year for Pollard Banknote on a number of fronts across our many business units, attaining many milestone achievements.

Record financial results and our KPIs were achieved this past year, including record sales of $557.1 million and combined sales, including our share of our iLottery joint venture sales of $665.9 million. Higher average selling prices of our instant tickets due to the success of our repricing strategy, higher sales of ancillary lottery products and solutions such as licensed products and loyalty programs and higher sales in charitable games products, including both printed products and eTabs, all drove the record sales.

Our strategy of offering a complete line of products and solutions within the focused lottery and charitable gaming markets is underpinning this success. Adjusted EBITDA attained a record of $114.5 million in 2024, up $23.2 million from 2023, primarily due to higher gross margins in instant tickets propelled by our successful repricing strategy on our instant ticket contracts and we have now repriced the majority of our contract portfolio with the full impact expected in 2025.

Income from operations increased by 51% to a new record $69.8 million, driven by improved financial performance across our business lines. We love our business for many reasons and one of these is the strong operating cash flow that we generate, reaching record levels this year with $73.9 million produced, giving us ample resources to fund our investments and acquisitions while maintaining a very conservative debt level.

Now of significant importance, in August of 2024, we were formally awarded the Kansas iLottery contract, which successfully went live on February 13, 2025, in what was the fastest iLottery implementation ever in North America. And not only did it go very fast, I would also add that from the customer perspective, it went very well.

I'm very confident that we have a very positive reference from the Kansas Lottery. And although it is early days, we're very early into this process, it is delivering results in line with expectations, which is very important for securing that reference and the word of mouth that, that can generate in this lottery business.

Regarding Kansas, the award and implication of our state-of-the-art Catalyst gaming platform and e-instant game portfolio, it's a recognition of the value of our long-standing relationship with the Kansas Lottery, our extensive experience with implementing long-term complex technology solutions and providing the most advanced iLottery platform on the market today, including complete central gaming capabilities covering both Internet and retail business in an omnichannel approach, modern modular design in a cloud-based environment. Equally as important has been the success of our internal eInstant Games Studio, which continues to expand and went live in a number of important jurisdictions, including Ireland and Alberta.

We are currently in the process of implementing our eInstant in other jurisdictions as these popular games will be implemented both in partnership with our Catalyst gaming platform as well as independently with other third-party iLottery platform providers. The early feedback on our games is very positive and reflects the history of what Pollard has done for decades.

Pollard has always created outstanding games. Whether these games are printed on instant tickets or pull tabs, produced as eInstant as in lottery or in eTab electronic gaming machines, creating fun and exciting game experiences is one of Pollard's greatest strengths.

In addition to the successful deployment or development, sorry, of our in-house proprietary iLottery gaming platform and eInstant game content, our NeoPollard Interactive joint venture continues to produce important successes with its extension of its contract with Virginia Lottery, taking that contract until October 2028, with remaining extensions still available after this latest extension concludes. The West Virginia iLottery contract also went live in 2024, and these 2 important milestones illustrate the strength and the longevity of our joint venture.

We are confident the iLottery opportunities will increase in both North America and internationally and we are very confident that Pollard will continue to be a leading player in this exciting growth area. Important investments were made in CapEx and intangibles with more than $54 million invested during the year, including important press upgrades, increases in key digital game content for eTabs, expanding our inventory of our state-of-the-art ICON eTab machines and primarily significant development of our Catalyst gaming platform and expanded eInstant game content financed through our internal organic cash flow.

This level of -- this substantial level of investment will continue in 2025 as we address the opportunities that exist in our markets. In addition, in the fourth quarter, we renewed and expanded our debt facility, providing stability and long-term access to significant capital with this new 4-year agreement.

In 2024, we closed on 2 important acquisitions, adding a leading bingo marker manufacturer in Clarence J. Venne to our family and we added a very popular linked electronic bingo game in those assets to our eTab game content assets, both helping to fill out our charitable gaming group and generating strong financial results.

And our overall markets are still good positive environments for our company to succeed in. Instant and charity remain strong and as discussed, digital areas for both charity and lottery is -- sorry, lottery through iLottery is very robust.

Retail sales of instant tickets remained relatively steady in 2024 relative to the prior year, while still remaining at the high levels attained with significant growth during 2020 and 2021. Instant tickets are a significant part of our business, representing nearly 50% of our sales.

And with our improving margins and cash flow, the old adage of never fall out of love with your core business has never been truer. And consumer demand for charitable products remains strong with particularly high interest among jurisdictions looking at expanding e-gaming opportunities.

Now, I'll turn it over to John to highlight the fourth quarter results.

Thank you, Doug. During our fourth quarter, we achieved sales of $140.3 million compared to $135.5 million in the 3 months ended December 31, 2023.

And in addition, looking at our combined sales, which includes our proportionate share of our NeoPollard joint venture revenue, our revenue was $180.6 million, another quarterly record and up almost 15% from the $157.3 million combined sales that we had last year. Our higher average ticket selling prices in the fourth quarter of 2024 increased sales by $2.7 million compared to 2023, primarily due to the impact of the repriced contracts that we've been talking about all year and a change in customer mix, partly offset by a decrease in proprietary products.

However, the increase in average selling price in this revenue was partly offset by a decrease in instant ticket volumes of $7.9 million as compared to 2023. Our fourth quarter is traditionally a time of lower volumes after the higher volumes we produce in the lead up to the holiday season.

We also are still seeing the impact of lower orders due to not pursuing aggressively incremental sales work where profit margin targets don't meet our requirements due to those contracts having not yet been repriced. In addition, we also just did have an unusual circumstance in the fourth quarter with a timing of orders that were lower than normal that pushed our volumes down.

However, when we look ahead to 2025, we see our instant ticket volumes coming in very similar to the level that we had overall in 2024. Also, higher sales of our ancillary lottery products and services increased revenue by $3.8 million.

This growth was largely due to increased sales of licensed products, digital loyalty products and distribution services compared to the fourth quarter of 2023 and our higher charitable gaming volumes increased sales by $5.4 million in the fourth quarter of 2024, primarily as the result of the acquisition of CJ Venne in the third quarter of 2024. Our cost of sales were $117.9 million in the fourth quarter of 2024 compared to $110.7 million in the fourth quarter of '23.

This increase of $7.2 million was primarily due to higher charitable gaming volumes, increased sales of ancillary lottery products and unfortunately, some instant ticket production inefficiencies in the quarter. Also increasing cost of goods sold was the increase in Pollard iLottery operational costs, including Kansas start-up expenditures as we were getting ready to go live with our Kansas iLottery contract.

Partially offsetting those increases in cost of sales was lower expenses related to those reduced instant ticket sales volumes. During the quarter, we had some manufacturing issues on certain instant ticket games that increased our costs, which does occasionally occur due to the nature and complexity of our production process, but these were unusually large and not expected to be recurring.

Gross profit was $22.4 million or 16.0% of sales in the fourth quarter of 2024 compared to $24.8 million or 18.3% in the fourth quarter of '23. This decrease of $2.4 million in gross profit and the decrease in gross profit percentage was primarily the result of lower instant ticket sales margins, largely as a result of the lower instant ticket volumes and impact of the higher costs due to the aforementioned production inefficiencies that we had in the quarter.

Additionally, the reduction in Michigan iLottery gross profit and the increased Pollard iLottery operational costs again in the ramp-up to the Kansas launch reduced our gross profit. Partially offsetting those decreases in gross profit were increased charitable gaming product sales, including eTabs and also improvements in digital and loyalty margins.

Administration expenses increased to $16.1 million in the fourth quarter of 2024 compared to $15.6 million in the fourth quarter of last year 2023. This increase of $0.5 million was largely the result of increased compensation expenses and software licensing costs as we continue to invest in resources to expand our digital and iLottery footprint.

Our selling expenses actually decreased slightly to $5.3 million in the fourth quarter of 2024 compared to $5.6 million in the fourth quarter of 2023. That decrease was primarily due to lower compensation costs, including some lower incentive accruals, partly offset by the increase in selling expenses from the acquisition of CJ Venne.

Pollard share of income from our NPi joint venture increased to $12.6 million in the fourth quarter of 2024 compared to $11.0 million in the fourth quarter of 2023. That $1.6 million increase primarily due to continued strong eInstants sales in our North Carolina contract, which followed their eInstants launch in the fourth quarter of 2023.

Our net foreign exchange loss was $4.4 million in the fourth quarter of '24 compared to a net foreign exchange gain of $2.9 million in the fourth quarter of '23. The 2024 net foreign exchange loss of $4.4 million resulted from a net unrealized foreign exchange loss of $4.2 million, primarily due to the increased Canadian equivalent value of our U.S.

dollar-denominated accounts payable and long-term debt that was due to the significant weakening of the Canadian dollar relative to the U.S. dollar in the quarter.

Adjusted EBITDA decreased slightly to $25.2 million in the fourth quarter of 2024 compared to $25.7 million in the fourth quarter of '23. The primary reasons for the decrease was the decrease in gross profit that we discussed above of $2.3 million, partly offset by the increase in our equity investment joint venture income of $1.6 million.

Income tax expense was unusual in the quarter with an $8.8 million expense, an effective tax rate of 125.2%, obviously higher than our normal domestic rate of 27.0%, which was due to the effect of one-time withholding taxes that were associated with certain intercompany dividends. The magnitude of these expenses are not expected to recur going forward.

The net loss of $1.8 Illion in the fourth quarter of 2024 compared to net income of $11.3 million in the fourth quarter of 2023, and the main reasons for that were non-operational included the increase in unrealized foreign exchange loss of $7.3 million and the increased income tax expense of $5.8 million. Partially offsetting those increases to the net loss were the increase in our joint venture equity investment income of $1.6 million.

So, net loss per share basic and diluted was $0.07 and $0.06 per share, respectively, in the fourth quarter of '24 compared to net income of $0.42 and $0.41 per share, respectively, again, basic and diluted in the fourth quarter of '23 due to the aforementioned higher unrealized foreign exchange loss and higher income tax expense primarily. And so before I wrap up and we get to questions, we do want to just address the whole tariff and trade protection environment that, of course, everyone has been so aware of that we've been living in the last number of days.

There's obviously uncertainty regarding the nature, extent and duration of various protectionist trade measures, including tariffs that may have been and may be enacted within North America. However, we believe that the current structure of our business model, which includes extensive manufacturing facilities located both within Canada and the U.S.

will significantly help mitigate any negative impact that we may have as we have the ability to produce almost all of our products that we sell to our U.S. customers in our U.S.

manufacturing facilities. And the same would go the other way from the Canadian side that we could produce all of our products required in the Canadian market from our Canadian facilities.

But there's 2 sides, of course, to the tariff thing. You have to look at your finished goods flow and you also have to look at your flow of inputs.

Also on the input side, the good news is that in our U.S. manufacturing facilities, we will be able to source virtually all of our inputs required for producing those U.S.

goods in our U.S. facilities.

And therefore, there won't be any tariff issues with that. And likewise, even in Canada, we should be able to source most of our inputs in Canada, although we have a little bit of exposure there because there are a few items that we have to source from the United States.

However, it isn't certain even yet that there will be Canadian retaliatory tariffs on all those input items that we do have to source from the U.S., but there may be some. So in summary, we feel we're very well positioned to withstand these tariffs with very modest impact.

But of course, we'll continue to monitor these developments and assess any short-term and long-term measures that we need to take to continue to manage any potential negative effects we might have there. That is the end of our prepared part of our discussions, operator, and we'd be happy to now entertain any questions that people may have at this time.

Maybe just a couple on the manufacturing issues you cited. Could you -- would you care to quantify that, whether it's a dollar amount or maybe impact on gross margins in the quarter?

Jim, it's John Pollard speaking. I think we're not going to quantify that.

I mean it was -- we always have a little bit of spoilage and things every quarter, of course. This was order of magnitude, very much larger than normal.

And so enough to be a significant impact on our quarterly results. But I'm sorry, I think that's probably all we're going to say.

It was just reflective that, look, notwithstanding we've been producing these scrap tickets for 38 years, it is a challenging business, and that's why there's high barriers to entry and difficult to be in it because the recipes and the production processes are complicated. And we essentially had a recipe that got just a little bit out of alignment and we had some significant product we had to throw away.

No impact in the market. There was no impact to customers, but caused a very high spoilage amount in the quarter.

I think that's all we want to say for now, sorry.

Okay. Just looking at your commentary around flat volumes or flattish volumes for 2025, is that kind of that $12.5 billion ticket number?

Is that what we should be thinking about? And if that is the case, then assuming all the repricing and the higher prices for your in tickets, should that be actually a positive effect on revenue and gross margins for next year?

Yes. Those volumes that you just cited look pretty accurate to us for the physical volumes.

And of course, we couple that with the higher average selling price that we'll have to the repricing in the quarter. And there's continued to be some contracts we're walking away from because of the low margins.

But certainly, overall, we continue to be very confident that we're going to have higher margins on our instant ticket products in '25 for the whole year versus 2024 for the whole year.

Okay. That's helpful.

And then obviously, early days for Kansas. Any commentary?

I know you said it was performing in line with expectations, but you've had experience in other jurisdictions. Anything from month 1 that you could share with us relative to some of those other areas?

Yes. I think it's very early days.

What I would say, like I'll reiterate that it's been a -- it started super fast. It's been a great experience.

And they had a real advantage, too, in Kansas that we've been working with them for a number of years and have built up a very significant loyalty club. So that gives them a great market to start advertising and promoting the games too.

So, so far, although, again, it is early days, I would say that it is -- it has been very consistent with what we have seen in other markets and we think it's going to be a terrific reference point when we go and solicit new states.

I know you don't want to give out numbers on spoilage, but was it in Canada? Or was it in the U.S.

facility? And when you talk about the spoilage, like was it days that the line was down?

Or is there -- like I'm just -- like how do we get satisfaction that this may not happen again to this degree, I guess?

Yes. I mean there's no -- it's John Pollard speaking, by the way.

There's no guarantees in life of any of this stuff, of course, but it occurred in our Ypsilanti Facility. It was particularly expensive because we were producing a high-value product.

You've heard us talk a lot about our Scratch FX tickets that have the holographic foil laminated on. And we essentially had sort of a recipe problem there, I guess, that required us to throw out a lot of product.

And the -- when you're dealing with that high-value product that you've got that holographic foil laminated on to, you don't have to have a heck of a lot of product for it to be a big dollar. So, it was production that would have occurred over a period of really only a small number of days, 2 or 3 days, but very high-value stuff.

And we -- it's -- we print Scratch FX tickets in both our Canadian plant and our Ypsilanti plant every week all year long. And we've produced since then a whole bunch more Scratch FX tickets.

We've figured out what our problem that sort of got out of control, have dealt with it and we're fine going forward. But it's just -- it just reminds you of how sensitive the nature of our products are that it's not hard to get out of control on the recipes.

So...

Okay. I appreciate the color on that.

And just secondly, just is there any developments that you've seen with iLotteries in other jurisdictions or new jurisdictions? I know it's a slow process, but I'm just wondering if you've seen anything out in the market.

Yes. Thank you for the question.

Sorry, it's Doug Pollard answering this, by the way. Yes, we're seeing lots of interest and lots of expressions of lotteries who are reaching out.

In fact, it's part of the reason why I really like our team and the experience we've got. We've got a team of people that we've been involved in all of the NPi implementations and now we've got experience on our own with our own technology.

And having gone so well in Kansas, lotteries that are contemplating going down this road really want to hear from us and get advice on what they're going to be coming up against. So, we do get those kinds of inquiries that tell me that there are lotteries that are interested in this.

And I suspect that as we go forward and you're seeing more, particularly in the U.S. more state budgets with budgetary pressure, there is more pressure on lotteries to grow their sales in this space.

We do have a couple of specifics where the Massachusetts Lottery has gone with an RFI, and we expect that, that will lead soon to an RFP. I know that they are working on it.

And we're also in the midst of a process of an RFP with the Belgian National Lottery, which is also quite an interesting one because that would really be an omnichannel opportunity, which would use the capabilities of our Catalyst platform, not just for iLottery, although it definitely would there, but it would also power their retail transactions for broad games like Eurojackpot, EuroMillions, et cetera.

Maybe on the Kansas ramp, given it was margin -- had an impact on your margin. I'm trying to understand where that came from.

Is that because it's a revenue share and you're responsible for the initial cost of the ramp-up? Or was there some other factor to think about on why it would be an impact to margins?

And then maybe a second part to the Kansas ramp. Why is it that you're confident on using that as a reference customer?

You said that a couple of times in the disclosures and you just noted Massachusetts and Belgium. Is this a factor here in those RFI?

Robert, it's Doug Pollard calling. Maybe I'll answer the first part -- the second part first and then we're going to turn it over to John.

I get very excited why it's a reference point because, look, in the U.S., it is a very small industry and there is definitely word of mouth. And so I think we've been an important part of expanding the iLottery market through our NeoPollard joint venture and we continue to see lots of opportunities there for those accounts and perhaps more.

But there was some question about our own technology and we have explained that before that there was an experience hurdle established in some other lotteries. But now that we're live in Kansas, we demonstrated not only that our technology works, but we demonstrated that with modern, modular, agile technology, you can move really fast.

And in digital, you've got to move fast. And so that's an important reference point because when people are now contemplating the space, they've liked talking to us for a while, but they had that uncertainty.

I would say that uncertainty is very, very significantly reduced, and they can now confidently go forward with us. Now your second part of your question -- sorry, I jumped in -- really the first part.

I'm going to let my brother, John answer in terms of the ramp-up cost there and the impact on margins.

Yes. Just so Kansas is a rev share contract, exactly the same kind of structure as our NeoPollard contracts typically are.

And by the way, it's a decent rev share percentage. We didn't have to buy that contract or anything like that to get it.

It's a decent rev share percentage, quite decent, actually right in market. The nature of those costs are -- we had -- so we've had our development folks, of course, for years working on the development side of the software that hasn't changed much in the last few years in terms of the level of expenditures and then we capitalized some of that as intangibles.

But the difference as we've got into the latter part of 2024 is we then had to start hiring up the operational folks. So of course, in these U.S.

lotteries in particular, would be a little bit different in Belgium, for instance, but U.S. lottery in particular, you operate the whole lottery, iLottery for them as well.

So, you have to have all the call center people that are on the help desk. You've got to have the money laundering folks.

You've got to have all the know your customer people. You've got to have the draw room people, you've got the marketing folks who are planning the customer campaigns.

And I've gone -- it's a pretty good little team there that has to run that whole thing. Those folks, we had to start all hiring up in the latter half of 2024, even though we knew we weren't launching until February because you got to get them trained and going.

And those expenses, we -- the accounting rules don't ask me exactly why that is, but we're not allowed to capitalize or defer those in any way. We simply have to expense those as they come.

So, they started to grow relatively significant in the fourth quarter because we're getting just a few days away from launch. And so it's those -- all those operational folks that we're just expensing those costs.

So, those were ramped up in full by the end of 2024, don't get any higher in 2025. But then, of course, the revenue starts coming in after February 13 on our rev share to start gradually offsetting those costs.

Was there -- sorry if I missed this earlier, I joined a bit late, but is there any indication on when that might turn to positive margins based on your past experience?

Kansas did come up with a relatively soft launch at start, but we are, as Doug said, seeing good uptake with the marketing efforts to the loyalty club that we have. And so I don't want to put -- I don't want to be too precise in guidance, but we would certainly expect that we'd be at a run rate that would be profitable for the Kansas contract itself by the sort of end of 2025 calendar year.

Okay. And then there's lots of puts and takes on the call so far around margins.

And I wanted to maybe put a little bit of a finer point on it for modeling going forward. If I think of the positive factors the contract repricing ongoing and then the growing mix of iLottery, growing mix of charitable.

But then on the negative side, there was the timing of orders. I think that's mix in this quarter.

The manufacturing issue you already talked about, potentially ASP being weaker in Q4 quarter-over-quarter because of just seasonality and then the Kansas ramp-up. Am I missing any factor?

And going forward, the ongoing factor would be the contract repricing, I would think, and the growing mix of iLottery. The other pieces will be temporary.

Is that a good way to understand it?

Rob, it's Rob Rose. I'll try to answer that.

You had a lot of things packed in there. I was trying to keep track of that.

You made a reference to ASP. ASP will continue to be a positive, the average selling price as we go forward through 2025.

We've repriced a substantial amount of our work by the end of 2024, but we'll have the full impact of that over the year. So, the ASP will still be a positive.

And certainly, from a short-term perspective, our volume will be sort of a positive if you're just looking into Q4 because it was so unusually low. And as I say, we should be looking at similar levels to 2024 throughout 2025.

So that will be -- depending on where your base is, that would be a pickup from Q4. And then I think most of the other ones you talked about were accurate.

You mentioned the Kansas iLottery. That will be starting off in a sort of a negative impact initially, but we'll see that grow, as John mentioned, we'll see the revenue grow as we go through the year and expect to be at the profitability level by the end of the year.

So sorry, I think those are...

Rob, it's John. Just Rob, Young had mentioned about a weaker ASP in Q4.

So, our problem in Q4 was not related to a weaker average selling price. It was due fundamentally to 3 things; the lower volumes, which we believe are temporary, the spoilage problem that we talked about and the ramp-up cost for Kansas.

We sort of had 3 things essentially hitting us in Q4. I mean, obviously, the Kansas was planned.

The other ones were not. So, it was disappointing in that regard.

But the first 2, which was the lower volume and the spoilage does not spill over into 2025.

Thank you, operator. So, we are immensely proud of our achievements attained during 2024, and we're very confident this success will continue in 2025 and beyond.

Not only did we set a number of significant new financial records during the past year, we also attained a number of critically important business milestones that provide the foundation for our future. And at the core of the success are the 2,500 dedicated employees who work creatively and tirelessly to sustain our vision of being the partner of choice to help our lottery and charitable gaming customers responsibly grow their proceeds for good causes through outstanding games, retail excellence and digital innovation.

So, thank you very much for joining us. We appreciate you staying on late, particularly those of you on the East Coast.

Now please enjoy the rest of your evening.