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Pollard Banknote Ltd
Symbol C : PBL
Shares Issued 25,613,158
Close 2018-08-08 C$ 20.10
Recent Sedar Documents

Pollard Banknote earns $5-million in Q2

2018-08-08 20:40 ET - News Release

Mr. John Pollard reports

POLLARD BANKNOTE ANNOUNCES 2ND QUARTER RESULTS

Pollard Banknote Ltd. has released its financial results for the three and six months ended June 30, 2018, achieving strong levels of revenue, net income and adjusted EBITDA (see non-GAAP (generally accepted accounting principles) measures section in the news release for a definition).

"Our second quarter results reflected the success we are achieving in pursuing our strategic plan," stated John Pollard, co-chief executive officer, "as both our core instant lottery ticket business and recent acquisitions are performing very well. Our instant ticket production volumes remained very strong, surpassing the high levels achieved in the second quarter of 2017 and driving revenue levels to almost $87-million for the three months ended June 30, 2018. We achieved a solid gross margin percentage consistent with what was attained in the first quarter of the year and continued to generate significant levels of operating cash flow.

"As noted last year and in previous communications, the stand-alone second quarter results of 2017 were positively impacted by a significant amount of product in transit to international customers at the end of the first quarter. This had the effect of considerably boosting the revenue and earnings of the second quarter while negatively impacting the first quarter. A more appropriate benchmark for 2018 is to look at the first six months of 2017 compared with the first six months of 2018 to normalize for the quarterly impact of that unusual in transit activity.

"Revenue for the first half of 2018 is up over 23 per cent, reflecting the impact of our two acquisitions as well as approximately 5-per-cent growth in our underlying instant ticket volumes. Our gross margin percentage during the first half of 2018 reached 23.9 per cent, up over 170 basis points from the prior year because of improved efficiencies and the impact of our acquired companies. Adjusted EBITDA has increased from $19.4-million to $27.1-million in the same six-month period of 2018, a noteworthy achievement combining organic growth of our existing instant ticket business with the additional incremental earnings generated from Diamond Game and International Gamco.

"The integrations of both Diamond Game and International Gamco are proceeding smoothly, and we remain very excited about the long-term prospects of expanding our charitable electronic gaming machine product line and building upon our new leadership position in the charitable gaming market. We continue to look at further expanding our organization through the use of selective, accretive acquisitions as a key part of our strategic plan. During the second quarter, we renewed our bank facility for a three-year term, including increasing the amount of capital available to fund our future business needs and providing additional flexibility to grow through acquisitions. We also repaid the remaining principal of the subordinated debt during the quarter."

"In addition to growing instant ticket volumes, we continue to invest in additional products to support our lottery partners as they expand and grow their businesses," commented Doug Pollard, co-CEO. "Particularly in areas of digital engagement, we remain focused on developing tools and expertise to help guide lotteries along a successful digital road map, through the use of effective loyalty programs, appealing digital game apps and, of course, fully developed iLottery solutions. We are excited to be launching our third state jurisdiction iLottery offering later this fall in New Hampshire and are responding to increased lottery interest across the broad spectrum of Internet-based gaming."

"We are very pleased with our operational and financial results for the first half of 2018," summarized John Pollard, "and we expect these trends will continue going forward for the remainder of 2018 and beyond. We believe the foundation we are building through organic growth and strategic acquisitions will support our vision to be the partner of choice for the lottery and charitable gaming markets."

About Pollard Banknote Ltd.

Pollard is one of the leading providers of products and services 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. With the acquisition of International Gamco Inc. on Feb. 1, 2018, management believes Pollard has also become the second-largest bingo paper and pull-tab supplier to the charitable gaming industry in North America.

The selected financial and operating information has been derived from, and should be read in conjunction with, the condensed consolidated unaudited interim financial statements of Pollard as at and for the three and six months ended June 30, 2018. These financial statements have been prepared in accordance with the international financial accounting standards (IFRS (international financial reporting standards) or GAAP).

On Feb. 1, 2018, Pollard acquired International Gamco. Therefore, Gamco's financial results have been included in Pollard's consolidated financial statements since acquisition. Also included in the consolidated financial statements are the results from INNOVA Gaming Group Inc. (INNOVA) (Diamond Game), which Pollard acquired on Aug. 3, 2017.

                                   HIGHLIGHTS

               Three months ended June 30, 2018  Three months ended June 30, 2017
                                                                                          
Sales                             $86.8-million                     $77.9-million          
Gross profit                      $20.5-million                     $18.6-million          
Gross profit per cent 
of sales                                  23.6%                             23.9%                 
Administration expenses            $7.4-million                      $6.6-million          
Selling expenses                   $3.4-million                      $2.1-million          
Net income                         $5.0-million                      $6.0-million          
Adjusted EBITDA
Pollard Banknote                  $11.2-million                     $13.1-million          
Diamond Game                       $2.9-million                                 -                     
Adjusted EBITDA                   $14.1-million                     $13.1-million          
                                                                                          
                 Six months ended June 30, 2018    Six months ended June 30, 2017  
                                                                                          
Sales                            $167.2-million                    $135.3-million         
Gross profit                      $39.9-million                     $30.0-million          
Gross profit per cent
of sales                                  23.9%                             22.2%                 
Administration expenses           $15.4-million                     $12.0-million          
Selling expenses                   $6.2-million                      $4.1-million           
Net income                         $9.6-million                      $7.8-million           
Adjusted EBITDA    
Pollard Banknote                  $21.9-million                     $19.4-million          
Diamond Game                       $5.2-million                                 -                     
Adjusted EBITDA                   $27.1-million                     $19.4-million          

                           SELECTED FINANCIAL INFORMATION
                               (in millions of dollars)       

                          Three months   Three months     Six months     Six months   
                                 ended          ended          ended          ended        
                         June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017

Sales                           $ 86.8         $ 77.9         $167.2         $135.3       
Cost of sales                     66.3           59.3          127.3          105.3        
Gross profit                      20.5           18.6           39.9           30.0         
Administration expenses            7.4            6.6           15.4           12.0         
Selling expenses                   3.4            2.1            6.2            4.1          
Other expenses                     0.1            0.6            0.1            0.9          
Income from operations             9.6            9.3           18.2           13.0         
Finance costs                      2.4            0.8            4.7            1.7          
Finance income                       -           (0.1)             -           (0.1)        
Income before income taxes         7.2            8.6           13.5           11.4         
Income taxes
Current                            0.4            2.8            3.5            4.1          
Deferred (reduction)               1.8           (0.2)           0.4           (0.5)        
                                   2.2            2.6            3.9            3.6          
Net income                         5.0            6.0            9.6            7.8         
Adjustments
Amortization and depreciation      4.3            2.5            8.4            5.1          
Interest                           1.0            0.8            2.2            1.6          
Severance costs                      -              -            0.4              -            
Acquisition costs                  0.1            0.7            0.2            1.0          
Unrealized foreign exchange
loss                               1.5            0.5            2.4            0.3          
Income taxes                       2.2            2.6            3.9            3.6          
Adjusted EBITDA                   14.1           13.1           27.1           19.4        
Pollard Banknote                  11.2           13.1           21.9           19.4        
Diamond Game                       2.9              -            5.2              -            
Total adjusted EBITDA             14.1           13.1           27.1           19.4        

Results of operations -- three months ended June 30, 2018

During the three months ended June 30, 2018, Pollard achieved sales of $86.8-million, compared with $77.9-million in the three months ended June 30, 2017. Factors impacting the $8.9-million sales increase were as follows:

  • Instant ticket sales volumes in the quarter decreased slightly when compared with the prior year, reducing sales by $300,000. The second quarter of 2017 saw record sales volume achieved partially as a result of a significant amount of goods in transit to international customers at March 31, 2017, being recognized in sales in the second quarter of 2017. However, while sales volumes were slightly lower in comparison in 2018, the second quarter of 2018 instant tickets sales volume was the second highest in Pollard's history. A decrease in the instant ticket average selling price in the second quarter of 2018 compared with the second quarter of 2017 decreased sales by $400,000. Sales of ancillary instant ticket products and services decreased in 2018, due primarily to lower sales of licensed products, reducing sales by $2.9-million.
  • The addition of Diamond Game added $6.7-million in sales when compared with 2017. In addition, the increase in charitable gaming volumes, primarily as a result of the addition of Gamco, increased sales by $7.4-million from 2017. A higher average selling price for charitable games in 2018 further increased sales by $500,000.
  • During the three months ended June 30, 2018, Pollard generated approximately 67.7 per cent (2017 -- 75.0 per cent) 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 2018, the actual U.S.-dollar value was converted to Canadian dollars at $1.288, compared with a rate of $1.347 during the second quarter of 2017. This 4.4-per-cent decrease in the U.S.-dollar value resulted in an approximate decrease of $2.4-million in revenue relative to the second quarter of 2017. In addition, during the quarter the value of the Canadian-dollar weakened against the euro resulting in an approximate increase of $300,000 in revenue relative to the second quarter of 2017.

Cost of sales was $66.3-million in the second quarter of 2018 compared with $59.3-million in the second quarter of 2017. Cost of sales were higher in the quarter relative to 2017 as a result of the inclusion of Diamond Game financial results, which amounted to $4.6-million, as well as the inclusion of Gamco. Partially offsetting these increases were decreased costs related to lower ancillary instant ticket products and services sales and the impact of lower exchange rates on U.S.-dollar transactions reducing cost of sales in the second quarter of 2018.

Gross profit was $20.5-million (23.6 per cent of sales) in the second quarter of 2018 compared with $18.6-million (23.9 per cent of sales) in the second quarter of 2017. This increase in gross profit was primarily the result of the additions of Diamond Game and Gamco, partially offset by lower ancillary instant ticket products and services sales and lower exchange rates on net U.S.-dollar transactions. The lower gross profit percentage was due to lower sales of ancillary instant ticket products and services and the effect of the weakening of the U.S. dollar, which were partially offset by improved manufacturing efficiencies.

Administration expenses increased to $7.4-million in the second quarter of 2018 from $6.6-million in the second quarter of 2017. The increase was primarily a result of the inclusion of Diamond Game and Gamco of $1.3-million. This increase was partially offset by a $500,000 reduction in acquisition costs as compared with the second quarter of 2017.

Selling expenses increased to $3.4-million in the second quarter of 2018 from $2.1-million in the second quarter of 2017 due to the addition of Diamond Game and Gamco.

Interest expense increased to $1.0-million in the second quarter of 2018 from $800,000 in the second quarter of 2017, primarily as a result of the additional interest expense related to increased long-term and subordinated debt incurred with the acquisitions of Diamond Game and Gamco.

The net foreign exchange loss was $1.4-million in the second quarter of 2018 compared with a net gain was $100,000 in the second quarter of 2017. The 2018 net foreign exchange loss of $1.4-million resulted from a $1.5-million unrealized foreign exchange loss, consisted predominately of an unrealized loss on U.S.-dollar-denominated liabilities, due to the weakening of the Canadian dollar at the end of the quarter. This loss was partially offset by an unrealized gain on U.S.-dollar-denominated cash and receivables. Partially offsetting the unrealized loss was a $100,000 realized foreign exchange gain relating to the increased value on the collections of U.S.-dollar-denominated receivables.

The 2017 net foreign exchange gain of $100,000 resulted from a $600,000 realized foreign exchange gain relating to the increased value on the collections of U.S.-dollar-denominated receivables. Partially offsetting the realized gain was the unrealized foreign exchange loss of $500,000, consisted predominately of an unrealized loss on U.S.-dollar-denominated receivables, partially offset by an unrealized gain on U.S.-dollar-denominated liabilities.

Adjusted EBITDA increased to $14.1-million in the second quarter of 2018 compared with $13.1-million in the second quarter of 2017, primarily as a result of the acquisitions of Diamond Game and Gamco. The reasons for the increase in adjusted EBITDA of $1.0-million include the increase in gross profit (net of amortization and depreciation) of $3.7-million and a decrease in other expenses of $500,000. These increases in adjusted EBITDA were partially offset by the increase in administration costs (net of acquisition costs) of $1.4-million, the increase in selling costs of $1.3-million and the decrease in the realized foreign exchange gain of $500,000.

Income tax expense was $2.2-million in the second quarter of 2018, an effective rate of 30.7 per cent, higher than the company's expected effective rate of 27.0 per cent, due primarily to the impact of the effect of foreign exchange and non-deductible amounts.

Income tax expense was $2.6-million in the second quarter of 2017, an effective rate of 30.1 per cent, higher than the company's expected effective rate of 27.0 per cent, due primarily effect of higher tax rates in the United States, partially offset by the effect of foreign exchange.

Amortization and depreciation, including amortization of intangible assets and depreciation of property and equipment, totalled $4.3-million during the second quarter of 2018, which increased from $2.5-million during the second quarter of 2017. The increase was a result of the addition of Diamond Game and Gamco, including the amortization and depreciation relating to the purchase price allocations to intangible assets and property, plant and equipment.

Net income decreased to $5.0-million in the second quarter of 2018 from $6.0-million in the second quarter of 2017. The primary reasons for the decrease of $1.0-million in net income were the increase in administration expenses of $800,000, the increase in selling costs of $1.3-million, the increase in interest expense of $200,000 and the increase in foreign exchange loss of $1.5-million. These decreases in net income were partially offset by the increase in gross profit of $1.9-million, the decrease in other expenses of $500,000 and the decrease in income tax expense of $400,000.

Net income per share (basic and diluted) decreased to 20 cents per share in the second quarter of 2018 from 25 cents per share in the second quarter of 2017 primarily due to the higher unrealized foreign exchange loss and the lower instant ticket sales volume in 2018, partially offset by the addition of Diamond Game's and Gamco's net income.

Results of operations -- six months ended June 30, 2018

During the six months ended June 30, 2018, Pollard achieved sales of $167.2-million, compared with $135.3-million in the six months ended June 30, 2017. Factors impacting the $31.9-million sales increase were:

  • Higher instant ticket sales volumes increased sales by $13.1-million in the first six months of 2018 compared with the first six months of 2017, due to a record amount of production, based on increased orders from existing customers. Partially offsetting this increase, the lower instant ticket average selling price in the first half of 2018 decreased sales by $300,000 when compared with 2017. Lower sales of ancillary instant ticket products and services decreased sales by $1.6-million from the first half of 2017. The decrease in ancillary sales was due primarily to lower sales of licensed products, partially offset by greater revenues from iLottery.
  • The addition of Diamond Game added $13.1-million in sales to the first six months of 2018 when compared with 2017. An increase in charitable gaming volumes, primarily as a result of the addition of Gamco, increased sales by $11.4-million from 2017. A higher average selling price for charitable games in 2018 further increased sales by $800,000.
  • During the six months ended June 30, 2018, Pollard generated approximately 67.5 per cent (2017 -- 72.1 per cent) 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 2018, the actual U.S.-dollar value was converted to Canadian dollars at $1.272, compared with a rate of $1.339 the first six months of 2017. This 5.0-per-cent decrease in the U.S.-dollar value resulted in an approximate decrease of $5.3-million in revenue relative to the first six months of 2017. Also during the first half of 2018, the value of the Canadian dollar weakened against the euro, resulting in an approximate increase of $700,000 in revenue relative to the first half of 2017.

Cost of sales was $127.3-million in the six months ended June 30, 2018, compared with $105.3-million in the six months ended June 30, 2017. In addition to the increase in instant ticket sales volumes, the inclusion of Diamond Game, which amounted to $8.9-million, and Gamco were the primary reasons for the increase in cost of goods sold. These increases were partially offset by lower exchange rates on U.S.-dollar transactions in 2018.

Gross profit increased to $39.9-million (23.9 per cent of sales) in the six months ended June 30, 2018, from $30.0-million (22.2 per cent of sales) in the six months ended June 30, 2017. This increase in gross profit was primarily the result of the increase in instant ticket volumes and the additions of Diamond Game and Gamco. The higher gross profit percentage was primarily due to the larger volumes of instant tickets and improved manufacturing efficiencies, partially offset by the effect of the weakening of the U.S. dollar.

Administration expenses increased to $15.4-million in the first six months of 2018 from $12.0-million in the first six months of 2017. The increase was partly a result of the inclusion of Diamond Game and Gamco of $3.2-million (which included $400,000 in severance costs related to the departure of two former Diamond Game executives). Additional reasons for the increase were higher compensation expenses (which primarily related to expansion of Pollard's ancillary lottery product and services sales) compared with 2017 and increased professional fees and IT (information technology) infrastructure related expenses. This increase was partially offset by an $800,000 reduction in acquisition costs as compared with the first six months of 2017.

Selling expenses increased to $6.2-million in the first six months of 2018 from $4.1-million in the first six months of 2017, due to the addition of Diamond Game and Gamco.

Interest expense increased to $2.2-million in the first six months of 2018 from $1.6-million in the first six months of 2017 primarily as a result of the additional interest expense related to increased long-term and subordinated debt incurred with the acquisitions of Diamond Game and Gamco.

The net foreign exchange loss was $2.5-million in the first six months of 2018 compared with nil in the first six months of 2017. The 2018 net foreign exchange loss resulted in part from a net unrealized foreign exchange loss of $2.4-million, consisted predominately of an unrealized loss on U.S.-dollar-denominated liabilities, due to the weakening of the Canadian dollar at the end of the quarter. This loss was partially offset by an unrealized gain on U.S.-dollar-denominated receivables.

The 2017 nil foreign exchange impact resulted from a net unrealized foreign exchange loss of $300,000, consisted predominately of an unrealized loss on U.S.-dollar-denominated receivables, partially offset by an unrealized gain on U.S.-dollar-denominated liabilities. The unrealized loss was fully offset by a realized gain of $300,000, relating to the increased value on the collections of U.S.-dollar-denominated receivables.

Adjusted EBITDA increased to $27.1-million in the first six months of 2018, compared with $19.4-million in the first six months of 2017 primarily as a result of the acquisitions of Diamond Game and Gamco, as well as increased instant ticket volumes. The reasons for the increase in adjusted EBITDA of $7.7-million include the increase in gross profit (net of amortization and depreciation) of $13.2-million and a decrease in other expenses of $800,000. These increases in adjusted EBIDTA were partially offset by the increase in administration costs (net of acquisition and severance costs) of $3.8-million, the increase in selling costs of $2.1-million and the decrease in realized foreign exchange gain of $400,000.

Income tax expense was $3.9-million in the first six months of 2018, an effective rate of 29.1 per cent, which was higher than Pollard's expected effective rate of 27.0 per cent, due primarily to the impact of the effect of foreign exchange.

Income tax expense was $3.6-million in the first six months of 2017, an effective rate of 31.6 per cent, which was higher than the company's expected effective rate of 27.0 per cent, due primarily to the effect of higher tax rates in the United States and non-deductible amounts primarily relating to expenses incurred in the acquisition of INNOVA, partially offset by the effect of foreign exchange.

Amortization and depreciation, including amortization of intangible assets and depreciation of property and equipment, totalled $8.4-million during the first six months of 2018, which increased from $5.1-million during the first six months of 2017. The increase was a result of the addition of Diamond Game and Gamco, including the amortization and depreciation relating to the purchase price allocations to intangible assets and property, plant and equipment.

Net income increased to $9.6-million in the first six months of 2018 from $7.8-million in the first six months of 2017, primarily as a result of the acquisitions of Diamond Game and Gamco, as well as increased instant ticket volumes. The reasons for the increase in net income of $1.8-million include the increase in gross profit of $9.9-million and the decrease in other expenses of $800,000. These increases in net income were partially offset by the increase in administration expenses of $3.4-million, the increase in selling costs of $2.1-million, the increase in interest expense of $600,000, the increase in foreign exchange loss of $2.5-million and the increase in income tax expense of $300,000.

Net income per share (basic and diluted) increased to 38 cents per share in the six months ending June 30, 2018, as compared with 33 cents per share in the six months ending June 30, 2017.

Use of non-GAAP financial measures

Reference to adjusted EBITDA is to earnings before interest, income taxes, depreciation and amortization, unrealized foreign exchange gains and losses, and certain non-recurring items, including severance costs and acquisition costs. 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.

Adjusted EBITDA is a measure not recognized under GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, this measure may not be comparable with similar measures presented by other entities. Investors are cautioned that adjusted EBITDA should not be construed as an alternative to net income 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.

Outlook

Consumer demand for lottery products continues to be strong, and, in particular, demand for instant tickets and related support products remains high and supportive of increased order levels compared with recent history. Greater variety of play formats, increased retail price points, higher prize payouts, improved designs and a number of other factors have allowed lotteries to generate these high levels of consumer demand, and Pollard expects these trends to continue. All of the company's significant contract renewals have been exercised, and Pollard's existing contract portfolio supports its current levels of higher volumes.

At the end of the first quarter, Pollard recommissioned its existing original press in Ypsilanti to expand capacity and improve schedulling efficiencies. During the second quarter, it initiated additional upgrades to this press to further expand and add incremental capacity, which the company expected to come on stream during the first quarter of 2019.

Pollard is devoting significant resources to develop and expand the range of its digital offerings, including game related apps, lottery infrastructure support products, such as lottery management systems and sales force management tools, and loyalty programs. iLottery opportunities are increasing as jurisdictions continue to explore additional platforms to grow their gaming operations. Pollard's newest iLottery operation for the New Hampshire Lottery will be operational later this fall, and the company will continue to actively respond to new prospects.

Pollard is also seeing a positive market in the charitable gaming sector, with a stabilization in sales of pull-tabs and bingo products at the retail level and, in some jurisdictions, small positive growth after years of slightly declining sales due to demographic factors and competition from regional casinos.

The financial results of Diamond Game and International Gamco have met the company's expectations. Pollard's integration of these recent acquisitions is proceeding as anticipated, with co-ordination of resources, procurement and support services being the company's focus in the short term. Long-term opportunities, such as combined product research and development, are also being investigated.

As previously disclosed, the development of the Diamond Game machine market is a long sales cycle due to the unique nature of this gaming product, and Pollard continues to focus its resources on future expansion opportunities. The company anticipates some existing customers of its Diamond Game machines increasing the number of machines in their markets over the next few quarters.

North Dakota has recently allowed the introduction of electronic charitable gaming machines in the state, and, while a small market, it is an important incremental opportunity to expand Pollard's machine footprint. These machines are expected to be deployed in the fall of 2018. Pollard is utilizing the combined resources of both Diamond Game and the Oasis division of Gamco to address this new market, uniting the Oasis machine platform with leading-edge software development and project management from its Diamond Game personnel, to provide a market-leading solution in North Dakota.

Pollard's capital structure is in strong shape, capable of providing the necessary resources to support the company's strategic initiatives. In the first quarter of 2018, Pollard's successful equity raise provided an important equity component to its capital base, which, combined with the company's recently renewed, larger bank facility, in addition to its continuing strong operational cash flow, provides ample funds to finance both Pollard's organic growth and future acquisitions.

Pollard's acquisition strategy is an important component of its growth plan, and the company continues to actively identify and review opportunities to augment and grow its position as partner of choice in the lottery and charitable gaming markets.

We seek Safe Harbor.

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