WINNIPEG, MB, Aug. 11, 2021 /CNW/ - Pollard Banknote
Limited (TSX: PBL) ("Pollard") today released its
financial results for the three and six months ended June 30, 2021, reporting strong quarterly
results.
Results and Highlights for the Second Quarter ended
June 30, 2021
- Sales reached $113.4 million, up
24% from $91.5 million achieved in
the 2nd quarter last year, despite an $11.1 million reduction due to exchange rates.
Combined sales(1) in the quarter, including our share of
our NeoPollard Interactive ("NPi") joint venture's sales, attained
$123.3 million, up 32% from
$93.7 million in 2020
- Income from operations attained $12.1
million, compared to $11.6
million the 2nd quarter last year and Adjusted
EBITDA(1) reached $22.6
million, compared to $19.8
million in the same quarter in 2020. Last year's Adjusted
EBITDA included significantly higher Canada Employee Wage Subsidy
("CEWS") of $5.5 million compared to
$3.2 million in 2021
- Core instant ticket business remained strong, driven by
continuing high sales of instant tickets at retail, particularly in
North America, generating higher
volume orders for Pollard
- Production volumes of instant tickets during the quarter
achieved a near record level
- Combined iLottery sales(1) from our share of
iLottery operations for Q2 increased to $16.7 million from $12.5
million in Q2 2020
- Robust charitable gaming revenue reflected strong consumer
demand, exceeding pre-COVID-19 levels during the second
quarter
- Diamond Game revenue in
Ontario, its largest market, was
negatively impacted by the closure of retail outlets that hosted
our machines throughout the entirety of the second quarter.
Subsequent to quarter end, COVID-19 restrictions were eased and the
bingo halls containing our machines were reopened
(1) See Non-GAAP measures for explanation
"Pollard Banknote's second quarter results reflect the ongoing
investment and growth in a number of our business lines and we are
very pleased with the results," stated John
Pollard, Co-Chief Executive Officer. "The lottery
market continues to see very high levels of retail sales of instant
tickets, particularly in the United
States, maintaining the levels achieved during 2020 and
early 2021 during the pandemic. In some jurisdictions retail sales
are continuing to grow from the record levels achieved in
2020."
"This growth has helped us reach a near record quarterly level
of instant ticket production volumes during the second quarter and
although the timing of the recognition of some of the sales of this
production can be delayed based on delivery timing and other
factors, this strong trend underlies the strength of our key
market. Indeed, we see this robust retail environment
continuing going forward."
"iLottery attained a combined level of revenue among all of our
iLottery operations of $16.7 million,
up over 30% from the same period last year. Our margin
contribution from the second quarter was lower than the first
quarter in 2021 and the second quarter of 2020 due to the fall off
of play after the unusual double draw-based game jackpot runs in
the first quarter for POWERBALL® and Mega
Millions® and a shift to lower margin gaming
verticals. In addition, there were higher player acquisition costs
in some of our newer markets. However, this aspect of our business
continues to be a very exciting opportunity for our lottery
customers and Pollard."
"Towards the end of the first quarter most jurisdictions where
our charitable gaming products are sold were fully reopened from
COVID-19 restrictions and we saw very high consumer demand for our
products. That trend continued throughout the second quarter
with record order demand and revenue levels exceeding pre-pandemic
levels, so much so that capacity limitations in production
facilities have limited our ability to meet this increased
demand. We are addressing these constraints by hiring
additional staff and improving productivity, as we do not see any
lowering in this demand level in the near future."
"Our Diamond Game business
generated positive results as most jurisdictions where our machines
are hosted were fully open as well, with limited negative impacts
from COVID-19. The one major exception was the province of
Ontario, which remained under
COVID-19 restrictions requiring bingo halls to remain closed during
the entire second quarter. Subsequent to quarter end,
restrictions were eased and toward the end of July bingo and
entertainment centers were allowed to open, allowing our machines
to start generating revenue. Early signs of consumer play in
Ontario are positive and we are
hopeful of returning to levels of revenue experienced prior to
COVID-19."
"Growing our portfolio of product lines to service lotteries in
all areas is a cornerstone of our strategy," commented Doug Pollard, Co-Chief Executive Officer, "and
has provided us with many opportunities to deepen our partnerships
with key customers. Our Schafer and Fastrak retail
merchandising operations continue to generate increased revenue as
lotteries once again begin investing in their retail footprints
coming out of the COVID-19 restrictions. Our ancillary product
offerings including important products and services such as digital
games, lottery management systems and loyalty systems continue to
make important inroads in providing lotteries with the tools to
expand, and connect with, their retail customers."
"Our most recent acquisitions continue to perform well. Our
Compliant electronic pull-tab operation is exceeding our
performance expectations and is now fully integrated with our
Diamond Game and charitable
operations. Next Generation Lotteries continues to work with
our lottery operations to integrate our business resources and
invest in the product and services that will allow us to expand our
support of lotteries around the world."
"One of our business strengths is our high conversion rate of
earnings into cashflow, which provides significant flexibility and
opportunity to finance our investments from internally generated
funds, and this trend continued during the second quarter of
2021. Our significant unused debt capacity and cash resources
provides us the opportunity to continue to invest in our business,
whether through acquisitions or investing in additional projects to
expand capacity or develop additional products and services."
"We are very pleased with the results of our second quarter and
continue to be very excited about the great opportunities for our
organization going forward," concluded John
Pollard. "We are extremely gratified by our team's
work as we expand our relationships with lotteries and charities
around the world and invest in resources to help them succeed. The
lottery and charitable gaming market is extremely healthy, and we
believe this will allow our strategy of being their partner of
choice to continue to be the foundation of our success."
Use of Non-GAAP Financial Measures
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 severance costs, acquisition costs,
litigation settlement costs and contingent consideration fair value
adjustments. 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
NeoPollard Interactive LLC's ("NPi") 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 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. 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 December 30, 2020, Pollard
signed and closed a definitive agreement to purchase 100% of the
equity of Compliant Gaming, LLC ("Compliant") for a purchase price
of $19.0 million U.S. dollars
($24.3 million) prior to standard
working capital adjustments and potential future earn-out payments
based on certain EBITDA targets. Compliant is a leading provider of
electronic pull-tab gaming systems and products to the charitable
gaming 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 €32.0 million
($50.2 million) was paid at the time
of closing and the remaining €4.0 million ($6.3 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
our existing senior credit facilities for approximately €27.4
million ($43.0 million) and the
issuance of treasury shares of Pollard for approximately €4.6
million ($7.2 million).
On February 9, 2021, Pollard
announced that it had entered into an agreement with a syndicate of
underwriters to purchase, on a bought deal basis, 812,000 common
shares of Pollard at a price of $36.95 per share. Pollard also granted the
underwriters an over-allotment option exercisable at any time up to
30 days following the closing of the offering, to purchase up to an
additional 121,800 common shares. The offering, including the full
over-allotment, closed on March 2,
2021. The total gross proceeds, prior to any commissions and
offering expenses, from the sale of 933,800 common shares was
approximately $34.5 million. Pollard
used the net proceeds to repay indebtedness under Pollard's credit
facility incurred in the recent acquisitions of Compliant and
NGL.
The selected financial and operating information has been
derived from, and should be read in conjunction with, the unaudited
condensed consolidated interim financial statements of Pollard as
at and for the three and six months ended June 30, 2021. These financial statements
have been prepared in accordance with the International Financial
Accounting Standards ("IFRS" or "GAAP").
HIGHLIGHTS
|
Three months
ended June 30, 2021
|
Three months
ended June 30, 2020
|
|
|
|
|
|
Sales
|
$
|
113.4
million
|
$
|
91.5
million
|
Gross
Profit
|
$
|
22.6
million
|
$
|
18.8
million
|
Gross Profit %
of sales
|
|
19.9%
|
|
20.5%
|
|
|
|
|
|
Administration
expenses
|
$
|
11.1
million
|
$
|
9.5
million
|
Selling
expenses
|
$
|
3.9
million
|
$
|
3.4
million
|
|
|
|
|
|
(Gain) loss on NPi
equity investment
|
($
|
2.5
million)
|
$
|
0.3
million
|
Other
income
|
($
|
2.0
million)
|
($
|
6.0
million)
|
Unrealized foreign
exchange gain
|
($
|
1.6
million)
|
($
|
1.8
million)
|
|
|
|
|
|
Net
income
|
$
|
7.7
million
|
$
|
9.2
million
|
|
|
|
|
|
Net income per
share (basic and diluted)
|
$
|
0.29
|
$
|
0.36
|
|
|
|
|
|
Adjusted
EBITDA:
|
|
|
|
|
|
|
|
|
|
Lotteries
and charitable gaming
|
$
|
18.5
million
|
$
|
20.2
million
|
Diamond
Game and Compliant
|
|
4.1
million
|
|
(0.4
million)
|
|
|
|
|
|
Total adjusted
EBITDA
|
$
|
22.6
million
|
$
|
19.8
million
|
|
|
|
|
|
|
Six months
ended
June 30,
2021
|
Six months
ended
June 30,
2020
|
|
|
|
|
|
Sales
|
$
|
225.6
million
|
$
|
193.8
million
|
Gross
Profit
|
$
|
47.1
million
|
$
|
40.5
million
|
Gross Profit %
of sales
|
|
20.9
%
|
|
20.9%
|
|
|
|
|
|
Administration
expenses
|
$
|
23.1
million
|
$
|
19.7
million
|
Selling
expenses
|
$
|
7.5
million
|
$
|
7.1
million
|
|
|
|
|
|
(Gain) loss on NPi
equity investment
|
($
|
6.5
million)
|
$
|
0.8
million
|
Other
income
|
($
|
1.4
million)
|
($
|
6.4
million)
|
Unrealized foreign
exchange loss (gain)
|
($
|
2.5
million)
|
$
|
4.4
million
|
|
|
|
|
|
Net
income
|
$
|
15.1
million
|
$
|
8.0
million
|
|
|
|
|
|
Net income per
share (basic and diluted)
|
$
|
0.56
|
$
|
0.31
|
|
|
|
|
|
Adjusted
EBITDA:
|
|
|
|
|
|
|
|
|
|
Lotteries
and charitable gaming
|
$
|
38.3
million
|
$
|
34.1
million
|
Diamond
Game and Compliant
|
|
7.6
million
|
|
1.7
million
|
|
|
|
|
|
Total adjusted
EBITDA
|
$
|
45.9
million
|
$
|
35.8
million
|
SELECTED FINANCIAL
INFORMATION
|
|
|
|
(millions of
dollars)
|
|
Three
months
|
Three
months
|
Six months
|
Six months
|
|
|
|
ended
|
ended
|
ended
|
ended
|
|
|
|
June 30,
2021
|
June 30,
2020
|
June 30,
2021
|
June 30,
2020
|
|
|
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
Sales
|
|
$113.4
|
$91.5
|
$225.6
|
$193.8
|
Cost of
sales
|
|
90.8
|
72.7
|
178.5
|
153.3
|
Gross
profit
|
|
22.6
|
18.8
|
47.1
|
40.5
|
|
|
|
|
|
|
|
Administration
expenses
|
|
11.1
|
9.5
|
23.1
|
19.7
|
|
Selling
expenses
|
|
3.9
|
3.4
|
7.5
|
7.1
|
|
(Gain) loss on NPi
equity investment
|
|
(2.5)
|
0.3
|
(6.5)
|
0.8
|
|
Other
income
|
|
(2.0)
|
(6.0)
|
(1.4)
|
(6.4)
|
Income from
operations
|
|
12.1
|
11.6
|
24.4
|
19.3
|
|
|
|
|
|
|
|
|
Foreign exchange
(gain) loss
|
|
(0.7)
|
(2.0)
|
(0.2)
|
4.1
|
|
Interest
expense
|
|
1.1
|
1.2
|
2.2
|
2.9
|
Income before income
taxes
|
|
11.7
|
12.4
|
22.4
|
12.3
|
|
|
|
|
|
|
Income
taxes:
|
|
|
|
|
|
|
Current
|
|
4.8
|
1.9
|
9.1
|
4.0
|
|
Deferred
(reduction)
|
|
(0.8)
|
1.3
|
(1.8)
|
0.3
|
|
|
4.0
|
3.2
|
7.3
|
4.3
|
Net income
|
|
$7.7
|
$9.2
|
$15.1
|
$8.0
|
Adjustments:
|
|
|
|
|
|
|
Amortization and
depreciation
|
|
9.9
|
7.8
|
19.2
|
15.4
|
|
Interest
|
|
1.1
|
1.2
|
2.2
|
2.9
|
|
Income
taxes
|
|
4.0
|
3.2
|
7.3
|
4.3
|
EBITDA
|
|
$22.7
|
$21.4
|
$43.8
|
$30.6
|
|
|
|
|
|
|
|
|
Unrealized foreign
exchange (gain) loss
|
|
(1.6)
|
(1.8)
|
(2.5)
|
4.4
|
|
Acquisition
costs
|
|
0.4
|
0.2
|
1.0
|
0.8
|
|
Contingent
consideration adjustment
|
|
1.1
|
0.0
|
1.1
|
0.0
|
|
Litigation settlement
cost
|
|
0.0
|
0.0
|
2.5
|
0.0
|
|
|
|
|
|
|
Adjusted
EBITDA
|
|
$22.6
|
$19.8
|
$45.9
|
$35.8
|
|
June 30,
|
December
31,
|
|
2021
|
2020
|
|
|
|
Total
Assets
|
$459.5
|
$404.6
|
Total Non-Current
Liabilities
|
$171.2
|
$191.3
|
Results of Operations – Three months ended June 30, 2021
During the three months ended June 30,
2021, Pollard achieved sales of $113.4 million, compared to $91.5 million in the three months ended
June 30, 2020. Factors impacting the
$21.9 million sales increase
were:
- Since the end of the first quarter of 2021, most retail
establishments where our charitable gaming products are sold and
Diamond Game eGaming machines are
placed have remained open, and sales of pull-tab tickets have
reached record highs. The increase in charitable gaming volumes
increased sales by $11.4 million in
the second quarter of 2021, as compared to the second quarter of
2020 when most retail establishments were closed for periods of
time in response to the onset of COVID-19. Diamond Game revenue increased $8.0 million as compared to 2020 as a result of
the acquisition of Compliant and having significantly more retail
establishments open in 2021 compared to the retail shutdowns
experienced in 2020. In addition, the higher average selling price
of charitable games in 2021 further increased sales by $0.2 million.
- Higher sales of ancillary lottery products and services
increased revenue in the second quarter of 2021 by $12.5 million. This increase was primarily from
increased sales of licensed products, as well as an increase in
retail merchandising product sales. The addition of NGL and
increased sales of digital and loyalty products further increased
ancillary lottery sales in the quarter. As well, higher instant
ticket sales volumes increased sales by a further $6.3 million in the second quarter of 2021.
Partially offsetting these increases was a lower instant ticket
average selling price, due primarily to the customer sales mix and
slightly lower proprietary product sales in the quarter, which
reduced sales by $2.6 million as
compared to the second quarter of 2020.
- Lower sales from Michigan
iLottery decreased revenue in the second quarter of 2021 by
$2.7 million as compared to 2020,
when Michigan iLottery sales
reached record quarterly levels at the start of the pandemic.
- During the three months ended June 30,
2021, Pollard generated approximately 69.3% (2020 – 72.5%)
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 2021 the actual U.S. dollar value was converted to
Canadian dollars at $1.226, compared
to a rate of $1.393 during the second
quarter of 2020. This 12.0% decrease in the U.S. dollar value
resulted in an approximate decrease of $10.7
million in revenue relative to the second quarter of
2020. During the quarter the value of the Canadian dollar
strengthened against the Euro resulting in an approximate decrease
of $0.5 million in revenue relative
to the second quarter of 2020.
Cost of sales was $90.8 million in
the second quarter of 2021 compared to $72.7
million in the second quarter of 2020. The increase of
$18.1 million was primarily a result
of the substantial increase in charitable gaming sales volumes as
compared to the second quarter of 2020, and the addition of NGL and
Compliant. Higher sales of ancillary lottery products and services
further added to the increase in cost of sales in 2021.
Partially offsetting these increases were lower exchange rates on
U.S. dollar denominated expenses in the second quarter of 2021
which decreased cost of sales.
Gross profit was $22.6 million
(19.9% of sales) in the second quarter of 2021 compared to
$18.8 million (20.5% of sales) in the
second quarter of 2020. This increase in gross profit of
$3.8 million was primarily the result
of the significant increase in the quarter in charitable and
Diamond Game sales, including the
addition of Compliant. These increases were partially offset by the
decrease in gross profit from lower Michigan iLottery sales. The lower gross
profit percentage was due to the reduction in Michigan iLottery sales and the inclusion of
NGL having a negative impact on our overall margin percentage.
Administration expenses increased to $11.1 million in the second quarter of 2021 from
$9.5 million in the second quarter of
2020. The increase of $1.6
million was primarily a result of the additions of NGL and
Compliant, in addition to increased compensation expenses to
support Pollard's growth strategies and higher acquisition costs.
Partially offsetting these increases was a reduction in
professional fees in 2021.
Selling expenses increased to $3.9
million in the second quarter of 2021 from $3.4 million in the second quarter of 2020
primarily due to increased compensation costs and the addition of
NGL.
Pollard's share of income from its 50% owned iLottery joint
venture, NeoPollard Interactive LLC ("NPi"), increased to
$2.5 million in the second quarter of
2021 from a loss of $0.3 in the
second quarter of 2020. This $2.8
million increase was primarily due to the increase in
revenue in 2021, as compared to 2020. Contracts held by NPi
experienced significant organic growth, in addition to the added
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 select product launch on September 30, 2020.
Other income decreased to $2.0
million in the second quarter of 2021 compared to
$6.0 million in the second quarter of
2020. This decrease of $4.0 million
was primarily due to the reduction in Canada emergency wage subsidy ("CEWS")
recognized in the second quarter of 2021 as compared to 2020, of
$2.3 million. In addition, the
contingent consideration accrual adjustment, as part of our
Compliant acquisition, further decreased other income by
$1.1 million. Also, the elimination
of the EBITDA support agreement, which expired on June 30, 2020, further decreased other income by
$0.5 million in 2021.
The net foreign exchange gain was $0.7
million in the second quarter of 2021 compared to a net gain
of $2.0 million in the second quarter
of 2020. 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.
The 2020 net foreign exchange gain of $2.0 million resulted in part from a $1.8 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. In addition, a $0.2 million realized foreign exchange gain as a
result of foreign currency denominated accounts receivable
collected being converted into Canadian dollars at favorable
foreign exchange rates increased the net foreign exchange
gain.
Adjusted EBITDA increased to $22.6
million in the second quarter of 2021 compared to
$19.8 million in the second quarter
of 2020. The primary reasons for the $2.8
million increase were the increase in gross profit (net of
amortization and depreciation) of $5.9
million, primarily from increased charitable gaming and
Diamond Game sales, and the increase
in our share of income from our joint venture, NPi, of $2.8 million in the second quarter of 2021.
Partially offsetting these increases were the decrease in other
income (net of contingent consideration) of $2.9 million, higher administration expenses (net
of acquisition costs) of $1.4
million, an increase in realized foreign exchange loss of
$1.1 million and an increase in
selling expenses of $0.5 million.
Interest expense decreased to $1.1
million in the second quarter of 2021 from $1.2 million in the second quarter of 2020
primarily as a result of lower interest rates and a decrease in
long-term debt.
Amortization and depreciation, including amortization of
intangible assets and depreciation of property and equipment,
totaled $9.9 million during the
second quarter of 2021 which increased from $7.8 million during the second quarter of
2020. The increase of $2.1
million was primarily as a result of the addition of
Compliant and NGL, including the amortization and depreciation
relating to the identifiable assets acquired, including intangible
assets and property, plant and equipment.
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.
Income tax expense was $3.2
million in the second quarter of 2020, an effective rate of
25.4%, lower than our domestic rate of 27.0% due primarily to the
effect of foreign exchange and lower tax rates in foreign
jurisdictions.
Net income decreased to $7.7
million in the second quarter of 2021 from $9.2 million earned in the second quarter of
2020. The primary reasons for the decrease in net income of
$1.5 million were the decrease in
other income of $4.0 million, higher
administration expenses of $1.6
million, an increase in selling expenses of $0.5 million, a decrease in the net foreign
exchange gain of $1.3 million and an
increase in income taxes of $0.8
million. These decreases to net income were partially offset
by the increase in gross profit of $3.8
million and the increase in our share of income from our
joint venture, NPi, of $2.8
million.
Net income per share (basic and diluted) decreased to
$0.29 per share in the second quarter
of 2021 from $0.36 per share in the
second quarter of 2020.
Results of Operations – Six months ended June 30, 2021
During the six months ended June 30,
2021, Pollard achieved sales of $225.6 million, compared to $193.8 million in the six months ended
June 30, 2020. Factors
impacting the $31.8 million sales
increase were:
- For the majority of the first half of 2021, most retail
establishments where our charitable gaming products are sold and
Diamond Game eGaming machines are
placed have remained open, and sales of pull-tab tickets have
reached record highs. The increase in charitable gaming volumes
increased sales by $13.3 million in
the first half of 2021, as compared to 2020 when many retail
establishments were closed for periods of time in response to the
onset of COVID-19. Diamond Game
revenue increased $9.8 million as
compared to 2020 as a result of the acquisition of Compliant and
having more retail establishments open in 2021. In addition, the
higher average selling price of charitable games in 2021 further
increased sales by $0.6 million.
- Higher sales of ancillary lottery products and services
increased revenue by $9.4 million in
the first half of 2021. This increase was primarily as a result of
the addition of NGL and increased sales of digital and loyalty
products in 2021. In addition, an increase in retail merchandising
product sales also contributed to the increase in ancillary lottery
product sales. Higher instant ticket sales volumes increased sales
by $7.2 million in 2021 and an
increase in the instant ticket average selling further increased
sales by $3.6 million as compared to
the first half of 2020, primarily due to a positive customer sales
mix.
- Higher sales from Michigan
iLottery increased revenue in the first half of 2021 by
$1.0 million, excluding the negative
impact of foreign exchange rates of $1.3
million, as compared to 2020, when Michigan iLottery sales were lower in the
first quarter of 2020 prior to the dramatic increase at the start
of the pandemic in the second quarter 2020.
- During the six months ended June 30,
2021, Pollard generated approximately 69.7% (2020 – 70.4%)
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 2021 the actual U.S. dollar value was converted to Canadian
dollars at $1.249, compared to a rate
of $1.353 the first six months of
2020. This 7.7% decrease in the U.S. dollar value resulted in an
approximate decrease of $13.1 million
in revenue relative to the first six months of 2020.
Cost of sales was $178.5 million
in the six months ended June 30,
2021, compared to $153.3
million in the six months ended June
30, 2020. This increase of $25.2 million was primarily a result of the
substantial increase in charitable gaming sales volumes, as
compared to the second quarter of 2020, and the addition NGL and
Compliant. In addition, the higher sales of instant tickets and
ancillary lottery products and services further added to the
increase in cost of sales in 2021. Partially offsetting these
increases were lower exchange rates on U.S. dollar denominated
expenses in 2021 which decreased cost of sales.
Gross profit increased to $47.1
million (20.9% of sales) in the six months ended
June 30, 2021, from $40.5 million (20.9% of sales) in the six months
ended June 30, 2020. This
increase in gross profit of $6.6
million was primarily the result of the significant increase
in charitable and Diamond Game
sales, including the addition of Compliant, in the first half of
2021. In addition, the favourable increases in instant ticket
volumes and pricing further added to the increase in gross profit
in 2021. These increases were partially offset by the decrease in
Michigan iLottery gross profit,
lower margin from license product sales and the addition of NGL.
The gross profit percentage achieved in 2021 was consistent with
the gross profit percentage in 2020.
Administration expenses increased to $23.1 million in the first six months of 2021
from $19.7 million in the first six
months of 2020. The increase of $3.4
million was primarily a result of the additions of NGL and
Compliant, in addition to increased compensation, including higher
incentive costs, to support Pollard's growth strategies. Partially
offsetting these increases was a reduction in professional fees in
2021.
Selling expenses increased to $7.5
million in the first six months of 2021 from $7.1 million in the first six months of 2020
primarily due to the increased compensation costs and the addition
of NGL. These increases were partially offset by the reduction in
travel related costs due to COVID-19.
Pollard's share of income from NPi increased to $6.5 million in the first six months of 2021 from
a loss of $0.8 million in 2020. This
$7.3 million increase was primarily
due to the increase in revenue in 2021. Contracts held by NPi
experienced significant organic growth, in addition to the added
sales increase from the Virginia Lottery operation which added
e-Instants on July 1, 2020. As well,
NPi's contract with AGLC went live with a select product launch on
September 30, 2020. Additionally, the
unusual simultaneous significant jackpot runs for
POWERBALL® and Mega Millions® which
were won in the latter half of January
2021, further added significantly to the increase in sales
in the first half of 2021 as compared to 2020.
Other income decreased to $1.4
million in the first six months of 2021 compared to
$6.4 million in 2020. This decrease
of $5.0 million was due, in part, to
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. Further reducing other income in 2021
were the elimination of the EBITDA support agreement of
$1.0 million, which expired on
June 30, 2020, the contingent
consideration accrual adjustment, as part of our Compliant
acquisition, which decreased other income by $1.1 million and the $0.3
million reduction in CEWS recognized in the first half of
2021 as compared to 2020.
The net foreign exchange gain was $0.2
million in the first six months of 2021 compared to a net
foreign exchange loss of $4.1 million
in the first six months of 2020. 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.
The 2020 net foreign exchange loss of $4.1 million resulted from a net unrealized
foreign exchange loss of $4.4
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. Partially offsetting
the unrealized loss was a $0.3
million realized foreign exchange gain as a result of
foreign currency denominated accounts receivable collected being
converted into Canadian dollars at favorable foreign exchange
rates.
Adjusted EBITDA increased to $45.9
million in the first six months of 2021 compared to
$35.8 million in the first six months
of 2020. The primary reasons for the increase of $10.1 million were the increase in gross profit
(net of amortization and depreciation) of $10.4 million, primarily from increased
charitable gaming and Diamond Game
sales, and the increase in our share of income from our joint
venture, NPi, of $7.3 million in the
first half of 2021. Partially offsetting these increases were the
higher administration expenses (net of acquisition costs) of
$3.2 million, an increase in realized
foreign exchange loss of $2.6
million, the decrease in other income (net of contingent
consideration and legal settlement) of $1.4
million and an increase in selling expenses of $0.4 million.
Interest expense decreased to $2.2
million in the first six months of 2021 from $2.9 million in the first six months of 2020
primarily as a result lower interest rates and a decrease in
long-term debt.
Amortization and depreciation, including amortization of
intangible assets and depreciation of property and equipment,
totaled $19.2 million during the
first six months of 2021 which increased from $15.4 million during the first six months of
2020. The increase of $3.8
million was primarily as a result of the addition of
Compliant and NGL, including the amortization and depreciation
relating to the identifiable assets acquired, including intangible
assets and property, plant and equipment.
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.
Income tax expense was $4.3
million in the first six months of 2020, an effective rate
of 35.5%, which was higher than our domestic rate of 27.0% due
primarily to the effect of foreign exchange and non-deductible
expenses.
Net income increased to $15.1
million in the first six months of 2021 from $8.0 million in the first six months of 2020. The
primary reasons for the increase of $7.1
million were the increase in gross profit of $6.6 million, the increase in our share of income
from our joint venture, NPi, of $7.3
million, the increase in net foreign exchange gain of
$4.3 million and the decrease in
interest expense of $0.7 million.
Partially offsetting these increases were the decrease in other
income of $5.0 million, the higher
administration expenses of $3.4
million, an increase in selling expenses of $0.4 million and an increase in income tax
expense of $3.0 million.
Net income per share (basic and diluted) increased to
$0.56 per share in the six months
ending June 30, 2021, as compared to
$0.31 per share in the six months
ending June 30, 2020.
iLottery
Pollard and its iLottery partner, Neogames S.A. ("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 sales 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 (gain) loss on
equity investment.
SELECT iLOTTERY
RELATED
FINANCIAL INFORMATION
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(millions of
dollars)
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Q2
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Q1
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Q4
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Q3
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Q2
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Q1
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2021
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2021
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2020
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2020
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2020
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2020
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Sales – Pollard's
share
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Michigan
iLottery
|
$6.8
|
$8.4
|
$8.6
|
$9.5
|
$10.3
|
$5.1
|
|
NPi
|
9.9
|
9.9
|
6.1
|
3.1
|
2.2
|
1.2
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Combined iLottery
sales
|
$16.7
|
$18.3
|
$14.7
|
$12.6
|
$12.5
|
$6.3
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Income (loss)
before income taxes – Pollard's share
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|
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Michigan
iLottery
|
$2.8
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$4.0
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$4.5
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$5.4
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$6.5
|
$2.1
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|
NPi
|
2.5
|
4.0
|
1.6
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0.8
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(0.3)
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(0.5)
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Combined income
before income taxes – Pollard's share
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$5.3
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$8.0
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$6.1
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$6.2
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$6.2
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$1.6
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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. 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 declined in the second quarter of 2021, in our combined
iLottery operations, due to the reduction in draw-based games sales
after the jackpot runs that significantly impacted the previous two
quarters. Also, the lower exchange rate on U.S. dollar denominated
sales, further significantly reduced sales in the second quarter of
2021. Income before income taxes from Michigan iLottery declined in the second
quarter 2021, directly as a result of the decrease in sales, while
income in NPi decreased as a result of revenue moving to other new
lower margin gaming verticals and the added player acquisition and
development costs in these new verticals.
Outlook
Robust retail sales of instant tickets in the United States continued throughout the
second quarter and we anticipate no change in this trend in the
immediate future. During 2020 many U.S. based lotteries
experienced significant growth at the retail sales level on average
in the 20-30% range relative to the same periods in
2019. During the first six months of this year
lotteries have been able to maintain these high sales levels
achieved in 2020, and in some jurisdictions even generate single
digit growth in addition to the high growth realized last
year. Sales growth outside of North
America has continued to be mixed, and we anticipate
continuing to produce higher levels of North American based work
while strategically monitoring our international customer
portfolio. As discussed previously, some of the lotteries'
retail growth is generated from higher price points and other
factors which don't necessarily translate into the same growth rate
at the manufacturing level. However, this does allow us to
offer greater value-added products like our Scratch
FX® and other options which provide opportunities
to generate higher average selling prices and margins for
Pollard.
Traditionally the third quarter tends to be slightly busier for
our instant ticket production and involves more high-value
option-based products in preparation for the holiday retail selling
season in the fall, and we anticipate that to still be the case in
2021.
iLottery is an important opportunity for lotteries to expand
their revenue and increase their player base, and we continue to
see significant interest throughout the market, particularly
involving lotteries in the United States. As noted, the
development of iLottery in new jurisdictions is a slow process
involving many stakeholders and requiring government authorization
which varies extensively from state to state and country to
country. Our joint venture, NeoPollard Interactive, continues
to be the market leader in the United
States and we are working with a number of potential
customers to expand the iLottery footprint. Second quarter
results within our iLottery operations reflect a number of factors
including the reduction in sales from the high levels achieved in
the first quarter due to the draw-based games jackpot runs and
additional acquisition and development costs associated with
introducing new gaming verticals. We remain very confident that
this product line will continue to grow significantly over the long
term.
As we have seen very recently, COVID-19 continues to be an issue
in our world and something that businesses, including Pollard, must
always factor in our risk management process. Our second
quarter financial results were still impacted negatively in some
areas by the pandemic. While the start of the third quarter
environment appears to show most of the direct issues associated
with COVID-19 being mitigated in our business, we remain very wary
of setbacks resulting in additional negative repercussions through
further retail shutdowns, problems in our supply chains or other
impacts that may negatively affect our financial results. We
continue to focus on a healthy and safe environment for our team
including a number of programs offering encouragement for all
employees to be vaccinated.
Our charitable gaming markets have shown record levels of demand
during the past number of months and this shows no sign of
lessening in the immediate future. Despite a challenging
environment for hiring, we will continue to focus on expanding our
production capabilities and investing in both the people and
technological resources to efficiently meet this opportunity.
With the gradual reopening of the bingo and entertainment centers
in Ontario in late July, our only
remaining closed jurisdiction hosting Diamond Game machines is now open, and we have
so far seen strong initial consumer uptake in that market, similar
to what we have seen with our other customers. We are hopeful
this trend will continue.
Our cashflow and available liquidity remains very strong and
provides us with available resources to invest in our existing
businesses organically as well as continue to review strategic
opportunities to grow through acquisitions.
We remain extremely positive in the many opportunities in the
medium and long term across the broad spectrum of our
customers. Both the lottery and charitable sectors are
showing significant strength from the ultimate consumer demand for
our products and services, and in many areas we are seeing orders
levels and related revenue well above what was being achieved prior
to COVID-19. iLottery continues to be an exciting growth
opportunity for lotteries in the future and we will remain actively
engaged with the development of this market. Our strategy of
being the partner of choice by addressing as many of the critical
needs as possible for lotteries and charities around the world has
been the foundation of our success and will continue to drive our
growth in the future.
SOURCE Pollard Banknote Limited