Mr. John Pollard reports

POLLARD BANKNOTE REPORTS 1ST QUARTER FINANCIAL RESULTS

Pollard Banknote Ltd. today released its financial results for the three months ended March 31, 2023.

Results and highlights for the first quarter ended March 31, 2023

• Revenue reached $124.6-million, up 9.4 per cent from the $113.9-million achieved in the same period last year.
• Combined sales in the quarter, including our share of the company's NeoPollard Interactive LLC (NPi) joint venture sales, reached $143.1-million, up 14.3 per cent from the $125.2-million in 2022.
• Income from operations was $7.6-million, compared with $9.3-million in the first quarter of 2022.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $18.6-million, compared with $19.0-million in the first quarter of 2022.
• The company's i-lottery operations showed significant growth in the first quarter, attaining near-record combined income before income taxes of $11.5-million, similar to the record results achieved in the fourth quarter of 2022 and nearly double the $5.9-million earned in the same period of last year.
• The company's charitable gaming and e-gaming systems businesses continued to see exceptional demand for their products, achieving strong revenue and earnings.
• The company's instant ticket margins remain negatively impacted by the accumulated effect of large inflationary cost increases incurred throughout 2022 on all of the company's major ticket inputs including paper, ink, packaging and freight.
• The company continues to see success in its strategy of repricing its instant ticket customer contracts when up for rebid to offset the inflationary input cost increases. The new pricing has not yet had a material effect on the first quarter, however the beneficial impact will gradually increase instant ticket margins through 2023 and future years.

"Our over all financial results for the first quarter of 2023 reflected the underlying strong demand experienced for all of our products and solutions for the lottery and charitable gaming markets and, notwithstanding the inflationary head winds impacting our instant ticket segment, provide a foundation for continued growth throughout 2023 and beyond," stated John Pollard, co-chief executive officer. "In a number of markets including charitable gaming, e-gaming systems and i-lottery, we recorded solid earnings and remain confident these results will continue as we move through 2023. As previously noted, major challenges in our instant ticket business continued, as the accumulated effect of significant cost increases on our major inputs (paper, ink, packaging, freight) during 2022 fully impacted our margins this quarter. Despite these factors, our consolidated adjusted EBITDA was only slightly lower than the same period in 2022. The growth in our first quarter combined sales of over 14 per cent is an indicator of the strong demand for our offerings.

"Consumer demand remained very strong in all of our lines of business throughout the first quarter. Charitable gaming witnessed robust demand for all its products, including pull-tabs and bingo paper, with revenue increasing almost 15 per cent when compared with 2022 for paper products, and e-gaming systems which experienced a 25-per-cent year-over-year growth in sales. The market continues to absorb increased selling prices to offset inflationary cost increases in our manufacturing inputs for charitable gaming, allowing our gross margins in these areas to remain strong."

"i-lottery sales again reached record levels, driven by significant organic growth in our Virginia and Alberta contracts, and once again a number of large jackpot runs in draw-based games including Powerball and Mega Millions, which drive higher traffic and revenue on our U.S.-based sites. Total combined sales reached a new record level in the first quarter, $25.8-million, and these operations contributed $11.5-million to our income before income taxes in 2023, up significantly from the same period in 2022.

"In addition to the challenges of inflationary cost increases, our sales mix for instant tickets in the first quarter of 2023 consisted of more lower-margin work. This mix issue was strictly related to timing of orders during the quarter, and we expect it to return to more historic levels in subsequent quarters. However, this further reduced margins in the first quarter of 2023.

"Our strategy to offset higher input costs and return to historical margins continues to focus on repricing our customer contracts with selling prices reflective of this new cost structure with every rebid or new RFP opportunity. We have been successful in repricing a number of very important contracts in 2022 and we expect to see the positive impact on our instant ticket profit margins gradually increase during 2023 and future years. Additional repricing is expected to continue to occur through 2023 on new rebid opportunities as they arise."

"We have not experienced any new cost increases since the start of 2023 and have seen some indications of small cost decreases as suppliers adjust to the current economic environment. While still very early, and these decreases are not yet material, it is a positive sign that perhaps in the future our current higher costs may start to trend lower.

"Retail dollar sales of instant tickets during the first quarter returned to positive growth after being slightly lower in 2022 when compared with the record levels achieved in 2020 and 2021," stated Doug Pollard, co-chief executive officer. "Despite the overall softening retail environment, instant tickets remain a very popular offering and we anticipate its growth will continue.

"During the first quarter of 2023, a number of jurisdictions have increased their interest in, and active review of, i-lottery and we are hopeful these will develop into bid opportunities. We remain very confident in the future of i-lottery, both in the United States and internationally.

"Over the past two years we have invested significant resources into the development of our own state-of-the-art i-lottery platform and expanded i-lottery game content library, and we are very excited to provide this solution to the lottery world when future opportunities present themselves. We believe our extensive experience, flexible approach and unique technology will prove itself a leading solution for new and existing i-lottery operations and we are actively engaged now in opportunities in the European market.

"We remain confident our repricing strategy will allow us to ultimately return to our historic margins," concluded John Pollard. "All of our product and solution offerings remain in high demand by our customers, and ultimately the end consumers. We are very optimistic this demand will continue and believe our strong partnership with our lottery and charitable gaming customers will allow us to help them continue to grow and generate significant funds for their good causes."

Outlook

Retail dollar sales of instant tickets grew by low single digits during the first quarter of 2023 compared with 2022, a return to positive growth after a slight decline in 2022. This follows overall growth of approximately 25 per cent over the 2020 to 2021 period. Pollard believes solid consumer demand will continue to generate positive demand from lotteries for instant tickets from manufacturers such as Pollard.

Charitable gaming and e-gaming businesses remain strong with high levels of consumer demand, continuing the positive trend since the pandemic. Selling prices have remained strong as the company has been able to pass along the impact of inflationary cost increases on inputs. Current demand for Pollard's charitable gaming products continues to outpace its ability to produce, particularly in its pull-tab product line, and Pollard is in the process of increasing capacity to address this demand, which requires additional personnel as well as expanded equipment capabilities.

The i-lottery market continues to generate significant results, fuelled by both organic growth with existing current contracts and the impact of high Powerball and Mega Millions jackpots during 2022 and 2023. Both of these draw-based games have had an unusual number of large jackpots recently.

It is difficult to project the timing of new i-lottery opportunities, particularly in the United States. The last new i-lottery startup was in 2020, and the overall expansion of jurisdictions in this market has been slow. Pollard believes in the longer term there will be a number of additional U.S. lotteries initiating new i-lottery operations. With the recent significant investments in Pollard's state-of-the-art i-lottery platform and game content library, the company is confident Pollard is well positioned to take advantage of these opportunities.

Within Pollard's instant ticket business the company has not seen any new significant inflationary cost increases on its major instant ticket manufacturing inputs such as paper, ink, packaging or freight during the first quarter of 2023, and do not anticipate any major new cost increases through the rest of the year. The large cost increases incurred during 2022 were done in stages throughout the year, with most of the higher costs being absorbed by the end of 2022. On a year-over-year basis, Pollard's 2023 manufacturing costs will be higher than in 2022, reflecting these higher cost levels being in place for the entirety of the year. Pollard has seen some small cost decreases in a couple of its inputs recently and while small in number and amount, the trend of moving from a period of significant cost increases to one with small cost decreases in such a short period of time leaves the company hopeful that it is seeing the beginning of a reduction in input costs.

Pollard's strategy for addressing the significant inflationary cost increases remains aggressively resetting the company's selling prices at every rebid or renewal of the company's long-term contracts. The company has been successful in raising its prices in a number of key contracts that were renewed in 2022, which confirmed the market's acceptance of the new pricing levels, and the company believes this will continue in 2023. Contract terms are generally negotiated well in advance of their start date, so the 2022 repricing has not yet materially impacted Pollard's financial results. The company expects to see the impact during 2023 and future years.

Pollard remains selective in accepting instant ticket orders where the current terms would require it to produce the work at unacceptable margins due to its input cost increases. Some of Pollard's contracts allow it discretion relative to accepting work. As a result, Pollard's instant ticket production volume is anticipated to be slightly lower than 2022 in the first half of 2023.

The company remains excited about the prospects for Pollard in 2023 as demand for its products and solutions remains high. Pollard's strategy of developing a broad product portfolio to address all areas of its customers' needs has successfully allowed it to substantially offset the significant negative pressure on its instant ticket business due to the unprecedented inflationary input cost increases. The company expects strong demand to continue in its various product lines and believe its repricing strategy for instant ticket contracts will allow Pollard over time to return to historic instant ticket margins and therefore improved financial results overall.

About Pollard Banknote Ltd.

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-per-cent joint venture, the largest supplier of i-lottery solutions to the United States lottery market.

We seek Safe Harbor.