Mr. John Pollard reports

POLLARD BANKNOTE REPORTS 2ND QUARTER FINANCIAL RESULTS

Pollard Banknote Ltd. has released its financial results for the three and six months ended June 30, 2023.

Results and highlights for the second quarter ended June 30, 2023:

• Record quarterly revenue reached $130.3-million, up 12.4 per cent from the $115.9-million achieved in the same period last year.
• Combined sales (1) in the quarter, including its share of its NeoPollard Interactive LLC joint venture sales, reached $148.8-million, up 16.0 per cent from the $128.3-million in 2022.
• Income from operations was $9.9-million, compared with $8.7-million in the second quarter of 2022.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) (1) was $22.1-million, compared with $18.9-million in the second quarter of 2022.
• Income before income taxes in the second quarter was $8.8-million, up from $4.0-million attained in the second quarter of 2022.
• Its iLottery operations generated combined income before income taxes of $11.0-million, similar to the results achieved in the first quarter of 2023 and up significantly from the $7.5-million earned in the same period of last year.
• A greater mix of higher value instant ticket sales improved earnings in its lottery operations as compared with the first quarter of 2023.
• Its charitable gaming and eGaming system businesses continued to see strong demand for their products, achieving solid revenue and earnings.

(1) A non-generally accepted accounting principle measure.

"We are very pleased with the financial results of our second quarter and more importantly excited that our strategy to profitably grow all of our business lines is generating positive results," declared John Pollard, co-chief executive officer. "Over all, the strong demand experienced in all of our markets provides the foundation for continued growth throughout 2023 and beyond. In charitable gaming, eGaming systems and iLottery, we achieved solid earnings and remain confident these results will continue as we move through 2023. While high-input costs remain in our instant ticket business, a better mix of higher-margin work and slowly increasing selling prices generated improved results within this important business line.

"In addition to attaining our record quarterly revenue in the second quarter, our gross margin percentage improved over 170 basis points versus the first quarter of 2023. This is an important positive overall trend driven primarily by improvements in our instant ticket business.

"We continue to experience high costs on our main inputs in our instant ticket production (including paper, ink, packaging and freight); however, we have incurred no new cost increases during 2023. Our supply chain reflects improved availability, which we hope will ultimately result in future cost decreases.

"As noted last quarter, one of the factors impacting our results in the first quarter of 2023 was a mix of lower-margin instant ticket sales. The timing of different customer work can impact the overall profitability on a quarterly basis. In the second quarter, our sales mix of instant tickets consisted of higher-margin work, including increased specialty work such as our Scratch FXTM offering, which generated higher margins and had a positive impact on our overall financial results when compared to the first quarter.

"In addition to the improved mix, our strategy of repricing instant ticket contracts to offset the impact of the high inflation on our input costs continued, and in the second quarter, we saw a slightly higher positive impact from increased selling prices. There is a lag between the timing of higher revenue being recognized from when these contracts are rebid, and we are seeing the beginning of the higher prices impacting our financial results in the first two quarters of 2023. The larger impact of the reset pricing to date will be felt moving forward during the rest of 2023 and throughout 2024. We have been successful in repricing a significant portion of our contract portfolio and will continue to work at resetting our selling prices on the remainder of our contracts as they expire."

"Retail dollar sales of instant tickets during the first half of 2023 continued to show positive growth, which ultimately leads to increased demand for more tickets and additional ancillary products such as refreshed retail display products and services," stated Doug Pollard, co-chief executive officer. "Strong demand continues for charitable gaming, which includes pull-tabs, bingo paper and related vending machines, and eGaming systems. Charitable gaming and eGaming systems combined revenue was 8 per cent higher compared to the same period last year, which further benefited charities as they look at new initiatives to generate funding for their good causes.

"iLottery results were significantly higher than last year, attaining combined income before income tax of $11.0-million, a 47-per-cent increase over the same period last year. Strong organic growth particularly in our Virginia and Alberta contracts and once again large jackpot runs in draw-based games, including Powerball and Mega Millions, towards the end of June, drove higher traffic and revenue on our [United States]-based sites. Total combined iLottery sales remained strong at $25.0-million.

"Our state-of-the-art iLottery platform and game library are now being demonstrated to potential customers. We are committed to continuing to invest the necessary resources to ensure it meets the high demands of lotteries around the world. We believe that iLottery will be an increasingly important part of the future success of the lottery world, and we are confident our solutions will play a major role in that success."

"We are very pleased with our second quarter results and remain confident our expanded portfolio of products and services are uniquely situated to support lotteries and charities in reaching their objectives of raising funds for their good causes," concluded John Pollard. "Demand remains high from our customer base. Our strategy of resetting our instant ticket selling prices to offset the inflationary cost increases has laid the groundwork for improved margins, and we are just starting to see the impact on our financial results in the last two quarters. Going forward, we expect a greater positive impact from our instant ticket margins while at the same time maintaining robust results in our other businesses."

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 iLottery solutions to the U.S. lottery market.

Outlook

Demand for its lottery and charitable gaming products and services continues to be strong. Retail dollar sales of instant tickets continue to generate positive growth relative to 2022, which followed very strong retail growth over the 2020/2021 period. Consumer purchases of instant tickets at retail have historically been very resilient through different economic cycles so it anticipates growth to continue.

Strong demand continues for its charitable gaming and eGaming system solutions. It is investing resources in additional equipment capacity and increased personnel to produce additional printed products like pull-tabs and bingo paper to meet the demand. Additional investment in game content is a critical success factor in eGaming systems, and the company is focused on developing unique content.

Existing iLottery contracts continue to produce strong results, through both organic growth as contracts mature and large draw-based games jackpots driving new players to the sites. The company is engaging with a number of lotteries around the world interested in adding iLottery or upgrading their existing system. The sales cycle for iLottery is extremely long; however, it believes, in the long term, this solution will be an important part of a successful lottery and presents significant opportunities for its recently redeveloped iLottery platform and library of game content.

The company has not experienced any additional significant cost increases in its product inputs during 2023. Although it has seen a few specific instances of small cost decreases, it has yet to see any evidence of significant cost reductions.

It will continue to follow its strategy of repricing its instant ticket contracts when the contracts allow, and it will use discretion in accepting work where the margins are low due to a mismatch of low pricing and higher costs. As a result, its instant ticket production volumes for the rest of the year are expected to be lower than its historical volumes.

Its conversion of earnings to cash remains high, allowing it to invest in capital expenditures, including continuing investments in its iLottery technology and game content, as well as support its dividend policy while ensuring its debt levels remain conservative. Significant funds remain available for other opportunities that develop, including investments in working capital and financing any future acquisitions.

The company remains confident in its positive expectations for Pollard for the rest of 2023 and future years given the strong demand for its products and services. Focusing singularly on the lottery and charitable gaming industries has allowed it to develop the relationships and excellence required to be successful in these highly regulated and competitive markets. Its repricing strategy for the instant ticket segment of its product portfolio continues to be successful and is expected to provide improving financial results over the next 12 to 18 months as the new pricing terms come into effect.

We seek Safe Harbor.