Full Transcript: Pollard Banknote Q2 2026 Earnings Call

Pollard Banknote (TSX:PBL) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.

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Summary

Pollard Banknote's revenue increased by $0.2 million, with significant growth in charitable gaming eTabs and Michigan iLottery revenues.

Gross profit rose to $28.0 million, driven by increased instant ticket sales, higher eTab sales, and the Belgian lottery contract development.

Administration expenses increased by $1.8 million due to higher compensation and ERP implementation costs.

Adjusted EBITDA improved to $31.1 million, supported by increased gross profit and lower foreign exchange losses.

Net income for Q2 2026 was $8.7 million, up from $8.0 million in 2025, primarily due to increased gross profit and reduced foreign exchange losses.

The company is optimistic about maintaining and expanding contracts, notably in California and Kansas, and is actively pursuing growth in game content through internal development and potential acquisitions.

Despite challenges, such as a decrease in iLottery joint venture income, the company remains positive about future growth opportunities.

Full Transcript

Rob Rose, CFO

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 $118.2 million in 2025. The increase of $8.6 million in cost of sales was primarily the result of the additional cost associated with higher instant ticket volumes and increased Pollard iLottery operations, including ramping up resources for the Belgian 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. Following from that, gross profit increased to $28.0 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 the increase in gross profit percentage were primarily the result of three things: (1) increased instant ticket sales margins, largely because of the higher volumes; (2) the higher charitable eTab sales obviously positively impacted our gross profit; and (3) the increased margin recognized on the Belgian 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 this year, very similar to the $6.5 million in Q2 of last year.

Our share of income from our iLottery joint venture decreased to $15.0 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 e-instant 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 $5.0 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 was 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 am 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 additions of property, plant and equipment, and intangible assets. Income tax expense is $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, the increase in administration expenses of $1.8 million, and the increase in other expenses of $1.5 million, and lastly, the 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 (Operator)

Yes, sir. Thank you. We will now begin the question-and-answer session, and if you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. Once again, star 1 if you wish to ask a question. Please stand by while we compile the Q&A roster. Thank you for waiting. We now have our first question, and this comes from Stephen Bolen from Graham and James. Your line is now open. Please go ahead.

Stephen Bolen, Analyst at Graham and James

Morning, everyone. Can you remind me the Belgian revenue recognition? It's not, I guess, the lottery and the iLottery. I'm just trying to get an idea of, you know, 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. You know, is it a little bit difficult to do that?

Rob Rose, CFO

Morning, 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 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 then we'll 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 of delivery of the services.

Stephen Bolen, Analyst at Graham and James

Okay, just on the—you said, you know, more spoilage, manufacturing efficiency. Like, could you explain what you had to do to, you know, get that, you know, the manufacturing efficiencies to improve? You know, we don't need—just—I'm just curious, like, you know, what was the spend? What was—what had to happen to improve that?

John Pollard, Co-CEO

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 we're—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, 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 slightly more unexpected difficulties in the manufacturing of those than we thought.

So to some extent, the problems in the first quarter were just ironing out the initial times that we produced that particular iteration of—it was part of our Scratch FX family of games that we were constantly evolving with new innovations there. And so it was ironing out those problems on implementing that new product type. But 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 EVP of Operations, Jeff Bristaire, 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.

Stephen Bolen, Analyst at Graham and James

Okay, and I'll just do one more—mentioned in the 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 have 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.

Doug Pollard, Co-CEO

Good morning, 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, Baking Me Crazy, was developed for an iLottery channel, and it's a record-breaker 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.

Stephen Bolen, Analyst at Graham and James

Okay, thanks very much.

OPERATOR (Operator)

Thank you. And the next question comes from Robert Young from Canaccord Genuity. Your line is now open. Please go ahead.

Robert Young, Analyst at Canaccord Genuity

Hi, good morning. Thanks for taking the question. I wanted to dig a little deeper on the gross margins. You gave three 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. 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—those would be lower-impact factors than just the higher volumes.

Is that the correct way to think about it? And then, you know, as we go forward here, should we expect those gross margins to continue to improve and maybe the efficiencies spill over into Q2 of it? Or is there—maybe if you can just talk about where they expect that to go?

Rob Rose, CFO

It's Rob here. Good morning. 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 three 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 three right now are the efficiency improvements. That's a bit more of a longer-term process. We 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 the efficiencies will be just as important.

So it's really a combination of all three 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 and know there's more improvement in that. So we're still absorbing sort of the startup 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 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's changed quite a bit.

But there's certainly no reason why we can't move toward that going ahead.

Robert Young, Analyst at Canaccord Genuity

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

John Pollard, Co-CEO

Hey, Rob, it's John Pollard answering this one. So look—let me be clear. It's positive for margins, although, you know, just the nature and the size of the California contract means that, you know, the price we had to bid is going to be lower than our average price in some of our other contracts. But because of the volume, it's still definitely positive in margins. And so we've actually seen two 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 optioned to the contract. So we've achieved a slightly higher ASP than we thought. So it is—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.

Robert Young, Analyst at Canaccord Genuity

Yeah, 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 already had some ramp startup 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 impact be, given you've already absorbed a bunch of ramp costs?

And then what's your confidence on, you know, extending that, given, you know, how the performance has gone thus far? And I'll pass the line.

Doug Pollard, Co-CEO

Hi, 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. You know, 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.

Robert Young, Analyst at Canaccord Genuity

Thanks for taking the questions.

OPERATOR (Operator)

Thank you, Rob. Thank you. And the next question comes from David McFagin from ATB Cormark. Your line is now open. Please go ahead.