Pollard Banknote Limited Third Quarter 2026 Results Conference Call - DEFI TECHNOLOGIES INC

Explicit Guidance:

• Q4 2026: Revenue and margin expected to improve; not expecting the typical Q4 drop in instant ticket volumes due to strong demand and carry-over orders from Q3.
• FY 2027: Outlook remains positive with robust instant ticket production schedules and growing demand for charitable products.
• Margins: Management expects a return to a "more normal product and customer mix" from a margin perspective in 2027; anticipates significant margin improvement over the "next few quarters" as digital contracts ramp and manufacturing efficiencies improve, though notes the path to 20%+ gross margins is gradual.
• Kansas iLottery: Anticipates profitability improvements starting to materialize by "early part of 2027," up from previous expectations of end-of-year profitability, due to a slower ramp in player recruitment and marketing leverage.
• Cash Flow/Working Capital: Expect working capital investment (driven by Belgium and California contracts) to flatten out by end of 2026; net cash flow impact expected to reverse and normalize "towards the end of 2027."
• Share Buybacks: Will continue utilizing the Normal Course Issuer Bid (NCIB) to support undervaluation; purchased 64,200 shares for cancellation in Q3 2026 with no specified dollar limit.

Business-Segment Outlook:

• Digital (iLottery):
  • Belgium: Revenue recognition anticipated to increase each quarter over the next couple of quarters; full ramp-up expected to drive growth through 2027.
  • Kansas: New five-year contract starting late 2026 (with one two-year extension) to late 2028 (transcript says "late 2023" but context implies extension of 2026 start date, likely a speech-to-text error for 2028); focus on aggressive player recruitment and paid social media to drive top-line growth and economies of scale.
  • Colorado: "Go Live" anticipated in the "later part of 2027"; initial planning and scoping underway.
  • Oklahoma: Launch of "PlayOn" player engagement solution completed September 2, 2026; expected to contribute to digital revenue growth.
  • North Carolina: Existing contract extended to June 2029; expected to go to RFP in 2027; company is preserving capacity/dry powder for this opportunity.
  • Virginia: Will not bid on new iLottery RFP (begins 2028) to preserve capacity; will continue receiving 50% share of earnings from NPI joint venture through October 2028.
• Charitable/ETAB:
  • Minnesota: ETAB market reaching record-setting levels; demand remains very strong.
  • New Markets: Expecting potential new ETAB market openings in 2027. Specific targets:
    • New York: Expected to open "early in 2027" (limited to fraternal organizations/legions); company is "gearing up in a big way" to launch.
    • Virginia: Pilot program underway; expects RFP later in 2027 if pilot is successful; potential to be market-sized comparable to Minnesota.
    • Alaska: Hopeful for legislative approval in 2027 for full rollout.
  • Other Charitable Products: Bingo daubers, handheld bingo devices, and pull tab vending machines continue to generate positive sales growth; production capacities and capabilities are being expanded to support increased pull-tab sales.
• Instant Tickets:
  • Norsk Tipping (Norway): New instant ticket contract (3-year term + 1-year extension) started December 2026; won with significant price increases over old contract levels.
  • Manufacturing: Production volumes weighted towards lower-valued international work; aiming to return to normal margin mix in 2027.

Market and Competitive Outlook:

• Pricing Power: Instant ticket pricing environment described as "holding relatively stable" and "supportive." Norsk Tipping win secured a "significant price increase," suggesting competitors (e.g., Scientific Games) are also facing pressure; lotteries in the U.S. are prioritizing vendor reputation and delivery capability over lowest price for digital contracts.
• Demand: Strong demand for charitable products (ETAB, pull-tabs) continues; instant ticket volumes slightly higher in Q3 2026 vs. Q2 and YoY, though ASP is lower due to customer mix.
• Competition: Industry noted to have only three global manufacturers outside China; Pollard views its reputation for on-time delivery and complex project management as a key competitive moat in digital spaces.

Macro / Industry Outlook:

• Tariffs/Trade: Management is pre-buying paper and ink to build a buffer against tariff and trade uncertainties; no material cost impact seen yet, but proactive supply chain management (expanding backup suppliers) is in place.
• Currency: Exposure to USD and EUR fluctuations noted; USD strength and EUR strengthening positively impacted revenue in Q3 2026.
• Regulatory: ETAB regulatory approvals in NY and VA are time-sensitive 2027 events; Alaska approval remains a legislative risk for 2027.

Strategic Initiatives:

• Digital Expansion: Aggressive investment in "Catalyst" iLottery gaming platforms and PlayOn loyalty solutions; ramping up resources for Belgium and Colorado implementations.
• Manufacturing Overhaul: Implementation of new plant management in Winnipeg and Ypsilanti; new manufacturing management leadership focused on reducing waste and inefficiency over a 2-3 year horizon; targeting systemic efficiency improvements each quarter.
• Capacity Expansion: Adding production capacity and capabilities to support increased charitable product sales.
• Leadership Change: Verica Simic appointed CFO (replacing retiring Rob Rose at end of 2026); Simic brings experience in similar manufacturing and digital transitions.

Risks and Headwinds to Outlook:

• Manufacturing Execution: Production inefficiencies, higher spoilage, and rework (particularly with new innovation products) negatively impacted Q3 gross margin; risk of continued delays if new management fails to execute.
• Contract Ramp-up Timing: Revenue from major digital wins (Belgium, Colorado, Kansas) will take "several quarters" to fully materialize and impact profitability; potential for delays in player acquisition for Kansas.
• Customer Mix: Shift to lower-value international instant ticket work in Q3 lowered margins; potential for mix shifts to continue impacting short-term profitability.
• Regulatory/Legislative Uncertainty: ETAB rollouts in Alaska and Virginia dependent on legislative approval and pilot outcomes; delays possible.
• Working Capital: Continued pressure on operating cash flow through 2026 due to billing cycles on new development contracts (Belgium) and retail-level payment structures (California).

Management Tone on the Future:

• Confidence: "Highly confident" in long-term strategy despite Q3 misses; positive outlook for Q4 and 2027.
• Reassurance: Repeatedly emphasizes that manufacturing issues are being addressed with "new people" and "defined plans," expecting "systemic improvement" and "significant margin improvement" over the next few quarters.
• Strategic Discipline: Willing to pass on immediate opportunities (Virginia) to preserve capacity for higher-impact, longer-term strategic wins (North Carolina, Colorado).
• Resilience: Acknowledges current headwinds but frames them as temporary "growing pains" associated with scaling significant new contracts.

Miscellaneous:

• Michigan iLottery: Contract expired Q3 2026 (revenue down $5.5M YoY); this represents a permanent reduction in revenue but also associated costs; will no longer appear in Pollard's sales but NPI joint venture continues to generate income until Oct 2028.
• Financial Reporting: Adjusted EBITDA in Q3 2026 was $28.3M (down from $32.3M YoY); Net Income $8.1M (down from $10.3M YoY).
• Share Count: 64,200 shares cancelled in Q3 2026; policy of acquisition for cancellation to be maintained.