WINNIPEG, MB, Aug. 10,
2022 /PRNewswire/ - Pollard Banknote
Limited (TSX: PBL) ("Pollard") today released its
financial results for the three and six months ended June 30, 2022 and announced the reappointment of
Dr. Jerry Gray to the Board of
Directors.
Results and Highlights for the Second Quarter ended
June 30, 2022
- Sales reached $115.9 million, up
2.2% from the second quarter of 2021
- Combined sales(1) in the quarter, including our
share of our NeoPollard Interactive LLC ("NPi") joint venture's
sales, reached $128.3 million, up
4.1% from the $123.3 million achieved
in 2021
- Income from operations was $8.7
million, compared to $12.1
million in the second quarter of 2021. A significant factor
impacting the decline was the receipt of $3.2 million in Canada Emergency Wage Subsidy ("CEWS") in
2021, recorded as other income, compared to $nil received in
2022
- Adjusted EBITDA(1) achieved in the second quarter of
2022 of $18.9 million decreased from
$22.6 million in the second quarter
of 2021, also reflecting the reduction in CEWS received relative to
2021 of $3.2 million
- NPi continued to demonstrate strong organic growth when
compared to the second quarter of 2021, and both NPi and the
Michigan iLottery operation have
grown sequentially over the past year, achieving our second highest
quarterly margin of $7.5 million
- Charitable gaming and eGaming systems businesses continue to
experience unprecedented demand, achieving strong revenues and
earnings
- Our instant ticket production and sales volumes were negatively
impacted due to a number of factors including staffing and
production challenges
- Retail sales of instant ticket products remain at strong
levels
- Ongoing inflationary cost increases on our key instant ticket
inputs (paper, ink and freight) continue to negatively impact
margins
- Our strategy of increased selling prices on contract extensions
and RFP's is seeing success in its early roll out and will help
mitigate our current margin pressures in the quarters to come
- Effective immediately, our former Director Dr. Jerry Gray has been reappointed to serve as a
Director until the May 2023 Annual
General Meeting
(1) See Non-GAAP
measures for explanation
|
"Our second quarter results are comparable with our first
quarter of 2022, reflecting the strong demand in our main product
categories," declared John Pollard,
Co-Chief Executive Officer. "In particular our charitable gaming
businesses, including eGaming systems, and our iLottery operations
generated very strong results again, combining strong revenue with
effective cost management to produce very positive margins."
"Our largest business remains instant tickets, and we continued
to see challenges in this area, notwithstanding the ongoing
significant demand from our lottery customers. Increases in
the prices of key inputs such as paper, ink and freight began in
the later part of 2021 and continued with greater effect in the
second quarter, with some further increases expected in the third
and fourth quarters of 2022. The nature of our instant ticket
contracts includes longer terms (averaging around four years) with
primarily fixed prices for the entirety of the term and, as such,
it is very difficult to pass on large input cost increases
immediately."
"However, one of our key strategies to offset these input cost
increases is to raise our selling prices during contract extensions
and RFP's as they come up for bid. Although our average
length of contract is in the four year range, a number of
significant contracts are up for extension or rebid in 2022.
While still early in the process, we have had a number of
successes and indications from the lottery market of higher selling
prices being accepted. Often these new contracts don't start
until a few months into the future so while we may not see
significant immediate positive impact to our margins, the
foundation is being set for improved margins over time. In the
immediate term, we continue to execute other strategies to help
mitigate the significant input cost increases as well."
"Our second quarter instant ticket production volume fell short
of our budget by approximately 8-10% and was lower than our record
production volume achieved in the first quarter of this year. A
number of factors negatively impacted our production volume
including: continuing challenges recruiting and retaining entry
level staff, increased staffing challenges with a higher number of
call-outs and absences impacting efficiency, a higher number of
unexpected mechanical and production issues, and greater complexity
of work as we start into our specialty season. Our sales
volumes were also lower than budget reflecting the lower production
volume, further negatively impacting our margins."
"We are focused on increasing our production volumes going
forward as this is one of our best levers to help mitigate the
higher input costs associated with our instant tickets. We
believe a number of initiatives we have implemented will address
the issues experienced in the second quarter and expect our
production numbers to be higher in the third quarter and
beyond."
"Demand for all of our main products remains very strong,"
remarked Doug Pollard, Co-Chief
Executive Officer. "Instant ticket sales at retail remain at the
high levels experienced in the first quarter of 2022, and as a
result our lottery orders also remain very strong. Charitable
gaming, including our eGaming systems solutions, are also seeing
very strong consumer demand and our iLottery financial results
achieved its second highest quarterly results ever. Lotteries are
increasingly looking at new and innovative methods to provide
exciting gaming opportunities to their customers, such as in-lane
purchasing solutions and new game content, and Pollard is well
positioned to take advantage of these new opportunities."
"Charitable gaming and eGaming systems results continue to be
very strong as consumer demand remains very robust. Our pull-tab
and bingo paper business generated significant positive results
again in the second quarter as sales demand allows us to sell
everything we produce and we continue to focus on increasing our
production capacity. Strong margins reflect the strength of
the current demand and our ability to pass on cost increases in
this particular area."
"eGaming systems (including our Diamond
Game and Compliant Gaming brands) continue to achieve record
results through the use of expanded game content on our devices,
including the use of progressive jackpots in certain jurisdictions,
improved game content and increased installation of machines,
including additional sites. As charities look to expand their
involvement in eGaming, we believe Pollard is uniquely situated to
capitalize on these opportunities."
"Our iLottery operations achieved significant growth when
compared to the second quarter of 2021 and sequentially over the
last few quarters. The $7.5 million
margin earned from all of our iLottery contracts is second only to
the first quarter of 2021, which experienced a very large double
jackpot run. Strong gross gaming revenue growth was attained in
Virginia and Alberta. And Michigan continues its steady recent growth,
with margins the highest in the last four quarters, along with good
cost control also contributing positively."
"We remain very excited about our business and the
opportunities before us," concluded John
Pollard. "While it will take time to absorb our
unprecedented key input cost increases and return our instant
ticket margins to their historic levels through higher selling
prices, we have already seen the market accepting higher pricing
during contract extensions and RFP's and we believe this will
continue. And our remaining businesses including charitable
gaming, eGaming systems and iLottery remain extremely strong with
expectations this will continue to provide growth in the
future."
Dr. Jerry Gray reappointed
Independent Director
Pollard is pleased to announce today the reappointment of Dr.
Jerry Gray as an Independent
Director of Pollard effective immediately.
Dr. Gray had previously served as a Director of Pollard and its
preceding businesses from the time of the initial IPO in 2005 until
his retirement in 2021. During that time, he was an integral
part of the leadership team and provided significant counsel to
Pollard's senior management.
He has agreed to be reappointed to the Board of Directors on an
interim basis until a permanent Director will be elected, which is
anticipated to occur at the May 2023
annual general meeting.
Dr. Gray's extensive experience and knowledge of Pollard will be
extremely helpful in moving the business forward and he will also
be joining the Audit, Compensation and Governance and Nominating
Committees immediately.
In addition to his 16 years serving on the Board of Pollard,
Jerry is Dean Emeritus of the I. H. Asper School of Business at the
University of Manitoba where he also
held the CA Manitoba Endowed Chair in Business Leadership. He is
Past Chair of the Winnipeg Regional Health Authority and a former
director and Chairman of the Board of Directors of Gendis, Inc. He
has consulted with many major corporations in the United States and Canada in the areas of motivation,
organizational design, manpower planning, managing change,
management development, incentive system design, customer service
and strategic planning.
Gordon Pollard, Chairman of
Pollard, stated, "Jerry is a tremendous resource and possesses a
wealth of knowledge from his sixteen years of previous service to
our business and we are very pleased he has agreed to join the
board on an interim basis. We will continue to invest the
time and resources to identify the right high-quality candidate for
election to our Board of Directors and anticipate we will put
forward for election a permanent independent director at the annual
general meeting in May 2023. Until that time, Jerry will
provide his keen insight to help Pollard continue to excel in a
seamless manner from both a business and a corporate governance
perspective."
Jerry Gray commented, "I am
thrilled to be able to assist Pollard again through my
participation as a Director on the Board and I look forward to
helping the leadership team continue its successful growth,
particularly given the exciting opportunities that exist at this
time in both the lottery and charitable gaming markets."
Use of GAAP and Non-GAAP Financial Measures
The selected financial and operating information has been
derived from, and should be read in conjunction with, the unaudited
condensed consolidated financial statements of Pollard as at and
for the three and six months ended June
30, 2022. These financial statements have been
prepared in accordance with the International Financial Accounting
Standards ("IFRS" or "GAAP").
Reference to "EBITDA" is to earnings before interest, income
taxes, depreciation, amortization and purchase accounting
amortization. Reference to "Adjusted EBITDA" is to EBITDA before
unrealized foreign exchange gains and losses, and certain
non-recurring items including acquisition costs, litigation
settlement costs, contingent consideration fair value adjustments
and insurance proceeds (net). Adjusted EBITDA is an important
metric used by many investors to compare issuers on the basis of
the ability to generate cash from operations and management
believes that, in addition to net income, Adjusted EBITDA is a
useful supplementary measure.
Reference to "Combined sales" is to sales recognized under GAAP
plus Pollard's 50% proportionate share of NeoPollard Interactive
LLC's ("NPi") sales, its iLottery joint venture operation.
Reference to "Combined iLottery sales" is to sales recognized under
GAAP for Pollard's 50% proportionate share of its Michigan Lottery
joint iLottery operation plus Pollard's 50% proportionate share of
NPi' s sales, its iLottery joint venture operation.
EBITDA, Adjusted EBITDA, Combined sales and Combined iLottery
sales are measures not recognized under GAAP and do not have a
standardized meaning prescribed by GAAP. Therefore, these
measures may not be comparable to similar measures presented by
other entities. Investors are cautioned that EBITDA, Adjusted
EBITDA, Combined sales and Combined iLottery sales should not be
construed as alternatives to net income or sales as determined in
accordance with GAAP as an indicator of Pollard's performance or to
cash flows from operating, investing and financing activities as
measures of liquidity and cash flows.
Forward-Looking Statements
Certain statements in this report may constitute
"forward-looking" statements which involve known and unknown risks,
uncertainties and other factors which may cause actual results,
performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by
such forward looking statements. When used in this document,
such statements include such words as "may," "will," "expect,"
"believe," "plan" and other similar terminology. These
statements reflect management's current expectations regarding
future events and operating performance and speak only as of the
date of this document. There should not be an expectation
that such information will in all circumstances be updated,
supplemented or revised whether as a result of new information,
changing circumstances, future events or otherwise.
POLLARD BANKNOTE LIMITED
Pollard is one of the leading providers of products and
solutions to lottery and charitable gaming industries throughout
the world. Management believes Pollard is the largest
provider of instant tickets based in Canada and the second largest producer of
instant tickets in the world. In addition, management believes
Pollard is also the second largest bingo paper and pull-tab
supplier to the charitable gaming industry in North America and, through its 50% joint
venture, the largest supplier of iLottery solutions to the U.S.
lottery market.
On January 14, 2021, Pollard
completed the acquisition of Next Generation Lotteries AS ("NGL").
On December 31, 2020, Pollard signed
a definitive agreement to acquire 100% of the equity of NGL for a
purchase price of €36.0 million ($56.5
million), prior to standard working capital adjustments and
certain deferred cash considerations, of which €4.0 million
($5.9 million) will be paid upon the
achievement of certain gross margin targets in 2021. The purchase
price was funded from existing Pollard cash resources and
availability under the existing credit facilities, and the issuance
of treasury shares of Pollard for approximately €5.2 million
($8.0 million).
HIGHLIGHTS
|
Three months
ended
June 30,
2022
|
Three months
ended
June 30,
2021(1)
|
|
|
|
Sales
|
$
|
115.9
million
|
$
|
113.4
million
|
Gross
profit
|
$
|
21.2 million
|
$
|
22.9 million
|
Gross profit % of
sales
|
18.3 %
|
20.2 %
|
|
|
|
Administration
expenses
|
$
|
12.3 million
|
$
|
11.1 million
|
Selling
expenses
|
$
|
4.5 million
|
$
|
4.2 million
|
|
|
|
NPi equity
investment income
|
($
|
5.1 million)
|
|
2.5
million)
|
Other (income)
expenses
|
$
|
0.8 million
|
($
|
2.0
million)
|
Unrealized foreign
exchange (gain) loss
|
$
|
2.4 million
|
|
1.6 million)
|
|
|
|
Net
income
|
$
|
2.5 million
|
$
|
7.7 million
|
|
|
|
Net income per
share – basic and diluted
|
$
|
0.09
|
$
|
0.29
|
|
|
|
Adjusted
EBITDA:
|
|
|
|
|
|
Lotteries and
charitable gaming
|
$
|
11.4 million
|
$
|
18.5 million
|
eGaming
systems
|
|
7.5
million
|
|
4.1 million
|
|
|
|
Total adjusted
EBITDA
|
$
|
18.9 million
|
$
|
22.6 million
|
|
(1) Certain comparative
figures have been reclassified to conform to the presentation
adopted in the current period.
|
|
Six months
ended
June 30,
2022
|
Six months
ended
June 30,
2021(1)
|
|
|
|
Sales
|
$
|
229.8
million
|
$
|
225.6
million
|
Gross
Profit
|
$
|
43.2 million
|
$
|
47.7 million
|
Gross Profit % of
sales
|
18.8 %
|
21.1 %
|
|
|
|
Administration
expenses
|
$
|
24.3 million
|
$
|
23.2 million
|
Selling
expenses
|
$
|
9.0 million
|
$
|
8.1 million
|
|
|
|
NPi equity
investment income
|
($
|
9.0 million)
|
($
|
6.5 million)
|
Other (income)
expenses
|
$
|
0.8 million
|
($
|
1.5 million)
|
Unrealized foreign
exchange (gain) loss
|
$
|
1.7 million
|
($
|
2.5 million)
|
|
|
|
Net
income
|
$
|
8.9 million
|
$
|
15.1 million
|
|
|
|
Net income per
share – basic and diluted
|
$
|
0.33
|
$
|
0.56
|
|
|
|
Adjusted
EBITDA:
|
|
|
|
|
|
Lotteries and
charitable gaming
|
$
|
24.0 million
|
$
|
38.3 million
|
eGaming
systems
|
|
13.9 million
|
7.6 million
|
|
|
|
Total adjusted
EBITDA
|
$
|
37.9 million
|
$
|
45.9 million
|
|
(1) Certain comparative
figures have been reclassified to conform to the presentation
adopted in the current period.
|
SELECTED FINANCIAL
INFORMATION
|
|
(millions of
dollars)
|
Three months
|
Three months
|
Six months
|
Six months
|
|
|
ended
|
ended
|
ended
|
ended
|
|
|
June 30,
2022
|
June 30,
2021(1)
|
June 30,
2022
|
June 30,
2021(1)
|
|
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
Sales
|
$115.9
|
$113.4
|
$229.8
|
$225.6
|
Cost of
sales
|
94.7
|
90.5
|
186.6
|
177.9
|
Gross profit
|
21.2
|
22.9
|
43.2
|
47.7
|
|
|
|
|
|
|
Administration
expenses
|
12.3
|
11.1
|
24.3
|
23.2
|
|
Selling
expenses
|
4.5
|
4.2
|
9.0
|
8.1
|
|
Equity investment
income
|
(5.1)
|
(2.5)
|
(9.0)
|
(6.5)
|
|
Other (income)
expenses
|
0.8
|
(2.0)
|
0.8
|
(1.5)
|
Income from
operations
|
8.7
|
12.1
|
18.1
|
24.4
|
|
|
|
|
|
|
|
Foreign exchange (gain)
loss
|
2.6
|
(0.7)
|
2.2
|
(0.2)
|
|
Interest
expense
|
2.1
|
1.1
|
3.9
|
2.2
|
Income before income
taxes
|
4.0
|
11.7
|
12.0
|
22.4
|
|
|
|
|
|
Income
taxes:
|
|
|
|
|
|
Current
|
2.8
|
4.8
|
5.5
|
9.1
|
|
Deferred
reduction
|
(1.3)
|
(0.8)
|
(2.4)
|
(1.8)
|
|
1.5
|
4.0
|
3.1
|
7.3
|
Net income
|
$2.5
|
$7.7
|
$8.9
|
$15.1
|
Adjustments:
In
|
|
|
|
|
|
Amortization and
depreciation
|
9.7
|
9.9
|
19.4
|
19.2
|
|
Interest
|
2.1
|
1.1
|
3.9
|
2.2
|
|
Income taxes
|
1.5
|
4.0
|
3.1
|
7.3
|
EBITDA
|
$15.8
|
$22.7
|
$35.3
|
$43.8
|
|
|
|
|
|
|
|
Unrealized foreign
exchange (gain) loss
|
2.4
|
(1.6)
|
1.7
|
(2.5)
|
|
Acquisition
costs
|
0.0
|
0.4
|
0.0
|
1.0
|
|
Contingent
consideration fair value adjustment
|
0.7
|
1.1
|
0.9
|
1.1
|
|
Litigation settlement
cost
|
0.0
|
0.0
|
0.0
|
2.5
|
|
|
|
|
|
Total Adjusted
EBITDA
|
$18.9
|
$22.6
|
$37.9
|
$45.9
|
|
|
|
|
|
(1) Certain comparative
figures have been reclassified to conform to the presentation
adopted in the current period.
|
|
June 30,
|
December 31,
|
|
2022
|
2021
|
|
|
|
Total Assets
|
$471.4
|
$461.4
|
Total Non-Current
Liabilities
|
$156.1
|
$163.5
|
Results of Operations – Three months ended June 30, 2022
During the three months ended June 30,
2022, Pollard achieved sales of $115.9 million, compared to $113.4 million in the three months ended
June 30, 2021. Factors
impacting the $2.5 million sales
increase were:
- eGaming systems revenue increased sales by $3.0 million, largely due to a higher number of
eGaming machines placed at charitable establishments as compared to
2021.
- The higher average selling price of charitable games in 2022
also increased sales by $2.7 million,
as we have been able to pass along inflationary cost increases to
our charitable gaming customers.
- Charitable gaming sales volumes were lower in the second
quarter of 2022 when compared to the record high pull-tab sales
volumes achieved in the second quarter of 2021, decreasing sales by
$1.7 million. Despite ongoing similar
strong demand in 2022, 2021 sales volumes were boosted by
additional sales from pre-existing inventory.
- A higher instant ticket average selling price increased sales
by $2.1 million as compared to 2021
due to increased proprietary product sales. This increase was
partially offset by a decrease in instant ticket sales volumes in
2022, which decreased sales by $1.3
million.
- Lower sales of ancillary lottery products and services
decreased revenue by $3.8 million as
compared to 2021. This decline was largely due to decreased sales
of licensed products, partially offset by increased sales of
digital products.
- Lower sales from Michigan
iLottery also decreased revenue in 2022 by $0.7 million as compared to 2021.
- During the three months ended June 30,
2022, Pollard generated approximately 72.4% (2021 – 69.3%)
of its revenue in U.S. dollars including a portion of international
sales which are priced in U.S. dollars. During the second
quarter of 2022, the actual U.S. dollar value was converted to
Canadian dollars at $1.269, compared
to a rate of $1.226 during the second
quarter of 2021. This 3.5% increase in the U.S. dollar value
resulted in an approximate increase of $2.8
million in revenue relative to the second quarter of
2021. In addition, during the quarter the value of the
Canadian dollar strengthened against the Euro resulting in an
approximate decrease of $0.6 million
in revenue relative to the second quarter of 2021.
Cost of sales was $94.7 million in
the second quarter of 2022 compared to $90.5
million in the second quarter of 2021. The increase of
$4.2 million in cost of sales was
primarily the result of inflationary pressures on raw material
costs, increases in certain manufacturing overhead costs and higher
exchange rates on U.S. dollar denominated expenses in 2022.
Partially offsetting these increases were decreases in instant
ticket and licensed product sales volumes as compared to the second
quarter of 2021.
Gross profit was $21.2 million
(18.3% of sales) in the second quarter of 2022 compared to
$22.9 million (20.2% of sales) in the
second quarter of 2021. This decrease of $1.7 million in gross profit was primarily a
result of lower instant ticket production volumes, lower instant
ticket sales margins, due to a less profitable customer mix and
increased manufacturing costs, including the impact of inflation,
and lower Michigan iLottery sales
as compared to 2021. These decreases were partially offset by the
increases in eGaming systems, charitable gaming, and digital
product sales as compared to 2021. The lower gross margin
percentage was largely due to the impact of inflationary cost
increases of instant ticket inputs and lower Michigan iLottery sales, partially offset by
increases in eGaming systems, charitable gaming and digital product
sales.
Administration expenses were $12.3
million in the second quarter of 2022 and $11.1 million in the second quarter of 2021.
Increased compensation and travel related costs incurred in the
second quarter of 2022 were partially offset by a reduction in
acquisition costs.
Selling expenses increased to $4.5
million in the second quarter of 2022 from $4.2 million in the second quarter of 2021. The
increase was primarily due to increased customer contract costs
incurred in the second quarter of 2022.
Pollard's share of income from its 50% owned iLottery joint
venture, NPi, increased to $5.1
million in the second quarter of 2022 from the $2.5 million achieved in the second quarter of
2021. Contracts held by NPi continued to experience organic growth
throughout the second quarter of 2022, increasing NPi's revenue as
compared to 2021.
Other expenses were $0.8 million
in the second quarter of 2022 compared to $2.0 million of other income achieved in the
second quarter of 2021. This change of $2.8
million was primarily due to the reduction in CEWS, as
Pollard received $nil in the second quarter of 2022 as compared to
$3.2 million received in the second
quarter of 2021. Partially offsetting this reduction in other
income was the decrease in the contingent consideration fair value
adjustment expense, as part of our Compliant acquisition, of
$0.4 million as compared to 2021.
The net foreign exchange loss was $2.6
million in the second quarter of 2022 compared to a net
foreign exchange gain of $0.7 million
in the second quarter of 2021. The 2022 net foreign exchange loss
of $2.6 million consisted of an
unrealized foreign exchange loss of $2.4
million, primarily a result of 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. In addition, Pollard incurred a realized
foreign exchange loss of $0.2
million, primarily due to foreign currency denominated
accounts receivable collected being converted into Canadian dollars
at unfavorable foreign exchanges rates.
The 2021 net foreign exchange gain of $0.7 million resulted in part from a $1.6 million unrealized foreign exchange gain,
comprised predominately of an unrealized gain on U.S. dollar
denominated accounts payable and long-term debt due to the
strengthening of the Canadian dollar. This unrealized gain
was partially offset by an unrealized loss on U.S. dollar
denominated accounts receivable. Partially offsetting this
unrealized gain was a $0.9 million
realized foreign exchange loss as a result of foreign currency
denominated accounts receivable collected being converted into
Canadian dollars at unfavorable foreign exchange rates.
Adjusted EBITDA decreased to $18.9
million in the second quarter of 2022 compared to
$22.6 million in the second quarter
of 2021. The primary reasons for the $3.7
million decrease in Adjusted EBITDA include the reduction in
other income (net of contingent consideration) of $3.2 million, largely due to the reduction in
CEWS proceeds received as compared to 2021. Also contributing to
this decrease is the reduction in gross profit of $1.9 million (net of amortization and
depreciation), primarily due to lower instant ticket production
volumes, lower instant ticket sales margins, including the impact
of inflation, and lower Michigan
iLottery sales, partially offset by the increases in eGaming
systems, charitable gaming and digital product sales as compared to
2021. The increase in administration costs (net of acquisition
costs) of $1.6 million and the
increase in selling costs of $0.3
million also decreased Adjusted EBITDA in comparison to
2021. Partially offsetting these decreases to Adjusted EBITDA were
an increase in equity investment income of $2.6 million and the lower realized foreign
exchange loss of $0.7 million.
Interest expense increased to $2.1
million in the second quarter of 2022 from $1.1 million in the second quarter of 2021,
primarily due to the increase in interest accretion on the
discounted contingent consideration liability relating to the
Compliant purchase of $0.5 million
and an increase in interest rates, partially offset by a decrease
in average long-term debt outstanding as compared to 2021.
Amortization and depreciation, including depreciation of
property and equipment and the amortization of intangible assets,
totaled $9.7 million during the
second quarter of 2022 which decreased from $9.9 million during the second quarter of 2021.
This decrease of $0.2 million was
largely due to certain intangibles becoming fully amortized during
2021, which was partially offset by depreciation and amortization
taken on newly acquired property, plant and equipment, and
intangible assets.
Income tax expense was $1.5
million in the second quarter of 2022, an effective rate of
38.2%, which was higher than our domestic rate of 27.0% due
primarily to the changes enacted with regards to the United Kingdom's corporation tax rates and the
effect of non-taxable items related to foreign exchange, partially
offset by the effect of the lower federal income tax rates in
the United States.
Income tax expense was $4.0
million in the second quarter of 2021, an effective rate of
34.2%, higher than our domestic rate of 27.0% due primarily to the
tax effect of unrecognized non-capital losses and non-deductible
expenses. Partially offsetting these increases in effective rate
were the lower federal income tax rates in the United States.
Net income was $2.5 million in the
second quarter of 2022 compared to $7.7
million in the second quarter of 2021. The decrease in net
income of $5.2 million was due
primarily to the increase in other expenses of $2.8 million, largely due to the reduction in
CEWS proceeds received as compared to 2021 of $3.2 million, and the increase in net foreign
exchange loss of $3.3 million. The
decrease in gross profit of $1.7
million also reduced net income as compared to 2021,
primarily due to lower instant ticket production volumes, lower
instant ticket sales margins, including the impact of inflation,
and lower Michigan iLottery sales,
but partially offset by the increases in eGaming systems,
charitable gaming and digital product sales. Other factors
contributing to the decrease in net income were the increase in
administration expenses of $1.2
million, the increase in interest expense of $1.0 million and the increase in selling expenses
of $0.3 million. Partially offsetting
these decreases to net income were the increase in equity
investment income of $2.6 million and
a decrease in income tax expense of $2.5
million.
Net income per share (basic and diluted) decreased to
$0.09 per share in the second quarter
of 2022 from $0.29 per share in the
second quarter of 2021.
Results of Operations – Six months ended June 30, 2022
During the six months ended June 30,
2022, Pollard achieved sales of $229.8 million, compared to $225.6 million in the six months ended
June 30, 2021. Factors
impacting the $4.2 million sales
increase were:
- Higher eGaming systems revenue increased sales by $6.0 million due primarily to more retail
establishments being open for the first two quarters of 2022 as
compared to 2021, when a number of jurisdictions had closed retail
establishments where eGaming machines are placed due to COVID-19,
particularly during the first quarter of 2021. In addition, a
higher number of eGaming machines placed at charitable
establishments as compared to 2021 further contributed to the
increase in eGaming systems sales.
- The higher average selling price of charitable games in the
first two quarters of 2022 also increased sales by $5.5 million, as we have been able to pass along
inflationary cost increases to our customers.
- Charitable gaming sales volumes were lower in the first two
quarters of 2022 when compared to the record high pull-tab sales
volumes achieved in the first half of 2021, decreasing sales by
$2.5 million. Despite ongoing similar
strong demand in 2022, 2021 sales volumes were boosted by
additional sales from pre-existing inventory.
- Michigan iLottery sales were
lower by $3.2 million as compared to
2021, when Michigan iLottery sales
were higher as a result of a double jackpot run in the first
quarter of 2021.
- A lower instant ticket average selling price decreased sales by
$1.6 million as compared to 2021 due
to lower margin customer mix, partially offset by increased
proprietary product sales. This decrease was partially offset by an
increase in instant ticket sales volumes in 2022, which increased
sales by $0.3 million. Lower sales of
ancillary lottery products and services decreased revenue by
$1.7 million, largely due to
decreased sales of licensed products, partially offset by increased
sales of digital and loyalty products.
- During the six months ended June 30,
2022, Pollard generated approximately 71.5% (2021 – 69.7%)
of its revenue in U.S. dollars including a portion of international
sales which are priced in U.S. dollars. During the first six
months of 2022 the actual U.S. dollar value was converted to
Canadian dollars at $1.269, compared
to a rate of $1.249 the first six
months of 2021. This 1.6% increase in the U.S. dollar value
resulted in an approximate increase of $2.6
million in revenue relative to the first six months of 2021.
In addition, during the first six months of 2022, the value of the
Canadian dollar strengthened against the Euro resulting in an
approximate decrease of $1.2 million
in revenue relative to the first six months of 2021.
Cost of sales was $186.6 million
in the six months ended June 30,
2022, compared to $177.9
million in the six months ended June
30, 2021. This increase of $8.7
million was primarily a result of inflationary pressures on
raw material costs, increases in certain manufacturing overhead
costs and higher exchange rates on U.S. dollar denominated expenses
in 2022. Partially offsetting these increases were decreases in
ancillary lottery products and services sales, and charitable
gaming sales volumes as compared to 2021.
Gross profit decreased to $43.2
million (18.8% of sales) in the six months ended
June 30, 2022, from $47.7 million (21.1% of sales) in the six months
ended June 30, 2021. This
decrease in gross profit of $4.5
million was primarily the result of lower instant ticket
sales margins, due to a less profitable customer mix, lower
Michigan iLottery sales and
increased manufacturing costs, including the impact of inflation,
as compared to 2021. This decrease was partially offset by
increases in eGaming systems, charitable gaming and digital product
sales, which increased gross profit as compared to 2021. The lower
gross margin percentage was largely due to the change in the mix of
instant tickets sales to lower margin customers, lower Michigan iLottery sales and the impact of
inflationary cost increases, partially offset by increases in
eGaming systems, charitable gaming and digital product gross
margins as compared to 2021.
Administration expenses increased to $24.3 million in the first six months of 2022
from $23.2 million in the first six
months of 2021. The increase of $1.1
million was primarily a result of increased compensation,
professional fees and travel related costs, partially offset by a
reduction in acquisition costs.
Selling expenses increased to $9.0
million in the first six months of 2022 from $8.1 million in the first six months of 2021. The
increase was primarily due to increased customer contract costs and
higher compensation expenses.
Pollard's share of income from NPi increased to $9.0 million in the first six months of 2022 from
$6.5 million in 2021. This
$2.5 million increase was primarily
due to increased organic growth achieved on contracts held by NPi
throughout the first two quarters of 2022, increasing NPi's revenue
as compared to 2021.
Other expenses were $0.8 million
in the first six months of 2022 compared to $1.5 million of other income in 2021. This change
of $2.3 million was partially due to
Pollard receiving $nil CEWS in 2022 compared to $5.2 million received in 2021. However, in 2021,
other income was partially offset by Pollard entering into an
agreement for a one-time payment of $2.5
million to settle all aspects of certain litigation
regarding a patent dispute relating to our instant ticket
production. In addition, contingent consideration fair value
adjustment expenses, as part of our Compliant acquisition,
decreased by $0.2 million compared to
2021.
The net foreign exchange loss was $2.2
million in the first six months of 2022 compared to a net
foreign exchange gain of $0.2 million
in the first six months of 2021. The 2022 net foreign exchange loss
of $2.2 million resulted from a net
unrealized foreign exchange loss of $1.7
million, comprised predominately of an unrealized loss on
U.S. dollar denominated accounts payable and long-term debt due to
the weakening of the Canadian dollar. In addition, Pollard
experienced a realized foreign exchange loss of $0.5 million as a result of foreign currency
denominated accounts receivable collected being converted into
Canadian dollars at unfavorable foreign exchange
rates.
The 2021 net foreign exchange gain of $0.2 million resulted from a net unrealized
foreign exchange gain of $2.5
million, comprised predominately of an unrealized gain on
U.S. dollar denominated accounts payable and long-term debt due to
the strengthening of the Canadian dollar. Partially offsetting the
unrealized gain was a $2.3 million
realized foreign exchange loss as a result of foreign currency
denominated accounts receivable collected being converted into
Canadian dollars at unfavorable foreign exchange
rates.
Adjusted EBITDA decreased to $37.9
million in the first six months of 2022 compared to
$45.9 million in the first six months
of 2021. The primary reasons for the decrease of $8.0 million include the decrease in gross profit
(net of amortization and depreciation) of $4.3 million, primarily the result of lower
instant ticket sales margins, due to a less profitable customer
mix, increased manufacturing costs, including the impact of
inflation, and lower Michigan
iLottery sales, partially offset by increases in eGaming systems,
charitable gaming and digital product sales as compared to 2021.
Other factors contributing to the decrease in Adjusted EBITDA
include the reduction in other income (net of contingent
consideration and litigation settlement) of $5.1 million, primarily due to the reduction in
CEWS received of $5.2 million, higher
administration expenses (net of acquisition costs) of $2.1 million and higher selling expenses of
$0.9 million. These decreases were
partially offset by the increase in equity investment income of
$2.5 million and the reduction in
realized foreign exchange loss of $1.9
million.
Interest expense increased to $3.9
million in the first six months of 2022 from $2.2 million in the first six months of 2021,
primarily as a result of the increase in interest accretion on the
discounted contingent consideration liability relating to the
Compliant purchase of $1.3 million.
Higher interest rates in 2022 also contributed to the increase in
interest expense, partially offset by a decrease in average
long-term debt outstanding as compared to 2021.
Amortization and depreciation, including amortization of
intangible assets and depreciation of property and equipment,
totaled $19.4 million during the
first six months of 2022 which increased from $19.2 million during the first six months of
2021. The increase of $0.2 million
was primarily as a result of amortization and depreciation taken on
newly acquired property, plant and equipment, and intangible
assets, partially offset by the reduction in amortization expense
due to certain intangibles becoming fully amortized during
2021.
Income tax expense was $3.1
million in the first six months of 2022, an effective rate
of 26.0%, which was lower than our domestic rate of 27.0% due
primarily to the effect of the lower federal income tax rates in
the United States, partially
offset by changes enacted with regards to the United Kingdom's corporation tax rates and the
effect of non-taxable items related to foreign exchange.
Income tax expense was $7.3
million in the first six months of 2021, an effective rate
of 32.4%, which was higher than our domestic rate of 27.0% due
primarily to the tax effect of unrecognized non-capital losses and
non-deductible expenses. Partially offsetting these increases in
effective rate were the lower federal income tax rates in
the United States.
Net income decreased to $8.9
million in the first six months of 2022 from $15.1 million in the first six months of 2021.
The primary reasons for the decrease of $6.2
million include the decrease in gross profit of $4.5 million, primarily the result of lower
Michigan iLottery sales and lower
instant ticket sales margins, due to a less profitable customer mix
and increased manufacturing costs, including the impact of
inflation, as compared to 2021. This decrease in gross profit was
partially offset by increases in eGaming systems, charitable gaming
and digital product sales as compared to 2021. Other factors
contributing to the decrease in net income include the increase in
administration expenses of $1.1
million, the increase in selling expenses of $0.9 million, the increase in other expenses of
$2.3 million, the increase in
interest expense of $1.7 million and
the increase in net foreign exchange loss of $2.4 million. Partially offsetting these
decreases were the increase in equity investment income of
$2.5 million and the decrease in
income tax expense of $4.2
million.
Net income per share (basic and diluted) decreased to
$0.33 per share in the six months
ending June 30, 2022, as compared to
$0.56 per share in the six months
ending June 30, 2021.
iLottery
Pollard and its iLottery partner, Neogames US LLP ("Neogames"),
provide iLottery services to the North American Lottery market. In
2013, Pollard was awarded an iLottery contract from the Michigan
Lottery. As a result, Pollard entered into a contract with Neogames
to provide its technology in return for a 50% financial interest in
the operation. Under IFRS, Pollard recognizes its 50% share in the
Michigan Lottery contract in its consolidated statements of income
in revenue and cost of sales.
In 2014 Pollard, in conjunction with Neogames, established
NeoPollard Interactive LLC ("NPi"). All iLottery related customer
contracts, excluding the Michigan Lottery iLottery contract, have
been awarded to NPi. Under IFRS, Pollard accounts for its
investment in its joint venture, NPi, as an equity investment.
Under the equity method of accounting, Pollard recognizes its share
of the income and expenses of NPi separately as equity investment
income.
SELECT iLOTTERY
RELATED FINANCIAL INFORMATION
|
(millions of
dollars)
|
|
|
|
|
|
|
|
|
|
|
|
Q2
|
Q1
|
Q4
|
Q3
|
Q2
|
Q1
|
Q4
|
Q3
|
Q2
|
Q1
|
|
|
2022
|
2022
|
2021
|
2021
|
2021
|
2021
|
2020
|
2020
|
2020
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales – Pollard's
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michigan
iLottery
|
$6.2
|
$5.9
|
$5.6
|
$5.9
|
$6.8
|
$8.4
|
$8.6
|
$9.5
|
$10.3
|
$5.1
|
|
NPi
|
12.4
|
11.3
|
10.5
|
9.8
|
9.9
|
9.9
|
6.1
|
3.1
|
2.2
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined iLottery
sales
|
$18.6
|
$17.2
|
$16.1
|
$15.7
|
$16.7
|
$18.3
|
$14.7
|
$12.6
|
$12.5
|
$6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
income taxes – Pollard's share
|
|
|
|
|
|
|
|
|
|
|
|
Michigan
iLottery
|
$2.4
|
$2.0
|
$1.8
|
$2.0
|
$2.8
|
$4.0
|
$4.5
|
$5.4
|
$6.5
|
$2.1
|
|
NPi
|
5.1
|
3.9
|
3.2
|
2.6
|
2.5
|
4.0
|
1.6
|
0.8
|
(0.3)
|
(0.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined income
before
income taxes –
Pollard's share
|
$7.5
|
$5.9
|
$5.0
|
$4.6
|
$5.3
|
$8.0
|
$6.1
|
$6.2
|
$6.2
|
$1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning in the second quarter of 2020, with the onset of
COVID-19, revenues from Pollard's contract with the Michigan
Lottery increased substantially. Contracts held by NPi also
experienced significant organic growth, in addition to the sales
increase from the Virginia Lottery operation which added e-Instants
on July 1, 2020. As well, NPi's
contract with Alberta Gaming, Liquor & Cannabis ("AGLC"), went
live with a limited product launch on September 30, 2020, with additional gaming
verticals launching throughout 2021. The substantial jackpots
for POWERBALL® and Mega
Millions® awarded in the latter half of
January 2021 further increased sales
significantly in the fourth quarter of 2020 and the first quarter
of 2021.
Sales and income before income taxes from our Michigan iLottery operation declined starting
in the second quarter of 2021 due to reduced draw-based game sales
after the double jackpots in the first quarter of 2021, increased
online gaming competition and new pricing coming into effect with
our four-year contract extension, starting at the beginning of
2021. In 2022, NPi continues to achieve strong organic growth,
adding to sales and income before taxes.
Outlook
Overall demand for our main products and solutions is strong and
we expect this to continue. Consumer demand for charitable gaming,
eGaming systems and instant ticket products sold at retail have
remained high throughout 2022. While the growth in instant ticket
retail sales volumes have steadied after significant increases
experienced during the pandemic, sales remain at the high levels
attained throughout the first quarter of 2022. This retail demand
has translated into significant orders from lotteries.
Our iLottery business is showing strong organic growth, both
sequentially and in comparison to historic quarters, and we
anticipate this will continue going forward. Michigan iLottery has demonstrated resilient
incremental growth over the last four quarters despite the
competitive environment with private iGaming operations. All of our
contracts within NPi have also shown strong organic growth and we
expect this to carry on.
Our current instant ticket production schedule reflects
significant order volumes; however, challenges in the second
quarter negatively impacted our production. We have initiated a
number of actions to mitigate these challenges. As a result, we
anticipate improved production volumes in future quarters,
capitalizing on this order volume which will lead to higher sales
volumes.
Inflationary increases, particularly as it relates to key
instant ticket inputs, will continue to be a challenge. A
significant portion of these cost increases have been implemented
already in the first and second quarters of 2022; however, their
full impact is still being absorbed in our results. We are working
diligently on a number of strategies to offset these increases,
including investigating potential alternate sources for key inputs,
increasing production output, expanding capacity and most important
among these, bidding at higher selling prices on contract
extensions and RFP's as they come available. We will continue to
pursue this higher selling price strategy and are so far very
encouraged at the acceptance by the market of this strategy in a
number of jurisdictions. Higher selling prices are a critical
component of recovering these significant cost increases and
achieving appropriate gross margins.
Helping to mitigate margin pressure, our charitable and eGaming
businesses are expected to produce strong financial results, due to
high levels of consumer demand and our ability to pass along cost
increases.
We continue to make great strides with investing in our business
through increasing our resources, expanding our product portfolio
and investing in the technological solutions our lottery and
charitable gaming customers require. We remain very excited about
the strength of demand for our products and solutions, and are
confident our strategies will allow us to improve our instant
ticket margins. This, combined with strong results in many other
areas of our business, will allow us to return to levels of
profitability reflective of the value of our company.
"We were also disappointed in oOur second quarter instant ticket
production volume, as it fell short of our budget by approximately
8-10% and was lower than our record production volume achieved in
the first quarter of this year. A number of factors negatively
impacted our production volume including: continuing challenges
recruiting and retaining entry level staff, increased staffing
challenges with a higher number of call-outs and absences impacting
efficiency, a higher number of unexpected mechanical and production
issues, and greater complexity of work as we start into our
specialty season. Our sales volumes were also lower than
budget reflecting the lower production volume, further negatively
impacting our margins."
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SOURCE Pollard Banknote Limited