WINNIPEG, MB, March 9, 2022 /CNW/ - Pollard Banknote
Limited (TSX: PBL) ("Pollard") today released its
financial results for the three months and year ended December 31, 2021.
Results and Highlights for the Fourth Quarter ended
December 31, 2021
- Revenue reached a new 4th quarter record,
$116.5 million, up 12.3% from the
previous record last year
- Combined sales(1) in the quarter, including our
share of our NeoPollard Interactive LLC ("NPi") joint venture
sales, reached $127.0 million, up
15.7% from the $109.8 million in
2020
- Income from operations was $4.7
million, compared to $14.1
million in the 4th quarter of 2020 primarily due
to a number of specific non-operational factors:
-
- Included in the Q4 2021 results is a higher negative impact of
$5.6 million due to the increase in
expected contingent consideration relating to the earnout for our
acquisition of Compliant Gaming due to continued success of that
operation
- The impact of lower Canadian Emergency Wage Subsidy ("CEWS") in
the 4th quarter of 2021 compared to 2020 reduced other
income by $1.6 million
- Adjusted EBITDA(1) of $18.7
million decreased from $20.3
million in the 4th quarter of 2020
- Our NPi iLottery joint venture continued to show solid growth
when compared to the 3rd quarter of 2021 and significant
growth when compared to the same period in 2020. Our Michigan iLottery operations generated similar
results to Q3 of 2021
- Retail sales of our core instant ticket products remained very
strong in the United States
- Our instant ticket margins were impacted negatively by a lower
value mix of customer products and some manufacturing
inefficiencies
- During the 4th quarter, we were also faced with
inflationary price increases on all of our major ticket inputs
including paper and ink, causing pressure on our instant ticket
margins
- Our charitable gaming and eGaming systems continued to see
unprecedented demand for their products, achieving record revenue
and earnings
Results and Highlights for 2021
- Established a new record for revenue at $459.0 million, up 10.8% from last year
- Combined sales(1) in the year, including our share
of NPi's joint venture sales, attained $499.2 million, up 17.0% from the $426.7 million in 2020
- Net income was $19.7 million, a
decrease of $13.6 million from
$33.3 million or 59% compared to
2020, due in large part to certain non-operational items including
a $11.7 million negative impact due
to higher contingent consideration expensed in 2021 due to the
success of our Compliant Gaming LLC purchase and a $3.6 million net reduction of CEWS support
compared to 2020
- Adjusted EBITDA(1) achieved a new record at
$84.0 million, $3.4 million or 4.2% higher than the previous
year
- Strong cash flow from operating activities generated
$56.5 million during the year,
similar to the record setting cash flow achieved in 2020
- Retail lottery sales including instant tickets remained strong
throughout 2021
- Charitable gaming, including our eGaming operations, attained
record revenue levels and very strong profitability due to
extremely high customer demand, rebounding sharply from the
negative COVID-19 pandemic impact in 2020
- Acquired Next Generation Lotteries AS on January 14, 2021
- Success with many key contract awards including an extension of
the instant ticket contract with the Ontario Lottery and Gaming
Corporation until 2032
- Raised approximately $34.5
million in a successful bought deal offering of common
shares on March 2, 2021
- Continued with foundational investments in the development of
our digital and ancillary lottery offerings
(1) See
Non-GAAP measures for explanation
|
"2021 was a very successful year for Pollard Banknote on a
number of critical fronts," declared John Pollard,
Co-Chief Executive Officer, "and in light of the extreme challenges
over the last two years with COVID-19, we could not be prouder of
our employees. We remained singularly focused on the health
and safety of our workplaces and team members through 2021."
"Our financial results reflect the achievements of 2021, with
record sales, by a dramatic margin, and Adjusted EBITDA reaching
new heights. After exceeding $400
million in revenue for the first time in 2020, our 2021
Combined Revenue was $499 million,
just short of the milestone one-half billion benchmark, a strong
measure of how we continue to help our lottery and charitable
gaming partners grow and generate money for good causes".
"Our Adjusted EBITDA reached a record level at $84 million, with a number of individual business
operations reaching record levels. Our focus on lottery and
charitable gaming is the cornerstone of our success."
"Pollard generated very strong cash flow again this year, a
hallmark of the strength of our business model. Pollard has
now generated over $110 million from
operating activities over the past two years, allowing us to
complete a number of acquisitions and investments while maintaining
a very low debt leverage capital structure, providing us with
significant available resources going forward."
"We saw unprecedented consumer demand in all of our main lines
of business through 2021:
- Retail sales of instant tickets continued to grow in 2021, with
mid to high single digit retail sales growth experienced throughout
most of the U.S. This comes on top of a 2020 year which saw large
increases over 2019 in the range of 20-30%. Higher retail sales
achieved in 2020 have not fallen back and indeed continue to
grow.
- Charitable gaming including eGaming has seen extraordinary
demand since recovering from COVID-19 related shutdowns in late
2020 into early 2021.
- iLottery and other digital products and solutions also continue
to grow as lotteries worldwide continue to look to expand."
"Despite the increased demand for our instant tickets, our
results in this area, particularly in the last half of 2021, have
fallen short of our expectations.
- Due to timing differences, our mix of products produced and
sold over the last six months of 2021 included a larger proportion
of lower value work.
- We have suffered some inefficiencies in our manufacturing
operations leading to lower volumes and higher costs.
- As a result of stresses placed on our supply chains, delayed
shipments and delayed access to the required inputs, as well as
increased challenges of staffing to meet the increased demand in
our manufacturing operations, our manufacturing operations had
lower volumes and higher costs.
- During the last two quarters, and particularly Q4 of 2021, we
have experienced significant inflationary price increases in our
key inputs into instant ticket production, including higher costs
on paper, ink and other supplies. The direct impact on our 2021
financial results was partly mitigated due to lower price inventory
already on hand, but these higher input costs have placed
significant pressure on our instant ticket margins. The expectation
is that these higher priced inputs will continue through 2022 and
are difficult to pass through to customers, in the short term,
given the fixed price nature of many of our customer
contracts."
A number of initiatives are underway to help mitigate the
financial impact of the inflationary price increases including
increasing capacity and volume of instant tickets, internal cost
reviews and continued focus on improving our average selling prices
through focus on innovation and selling proprietary products at
higher margins."
"Our ability to increase volumes in ticket production is a
critical factor in offsetting these cost increases. In addition,
the very strong growth in the charitable gaming and eGaming product
lines will also provide a significant offset to the margin
pressures on the instant ticket business. Our strategy of having a
very broad product portfolio to help balance our operating results
has proven to be very beneficial as we move into 2022."
"Our fourth quarter results reflected a number of the themes
impacting our 2021 full year results", noted Doug Pollard, Co-Chief Executive Officer, "with
record 4th quarter revenue of $116.5 million, up 12.3%, driven by higher
charitable gaming and eGaming sales. Demand for our
charitable products and solutions remain extremely high."
"The iLottery market continues to be a very exciting opportunity
for both Pollard and the lottery world. The results of the
Michigan iLottery contract have
stabilized in the last few quarters despite a number of headwinds,
including increased iGaming competition from the casino sector and
coming off of earlier peak sales during very strong jackpot runs in
late 2020 and early 2021. Our 4 other iLottery contracts we
share with our NPi joint venture partner have shown significant
growth over 2021, with quarterly sales growing 72% from the start
of the year and contribution doubling. This growth came
despite similar headwinds experienced to that of our Michigan operation of declining jackpot runs
and increased entertainment competition."
"The combined results of our Michigan joint operation, whose results are
proportionately consolidated into the overall Pollard results on a
line by line basis, and our NPi joint venture contributed
$22.8 million to our income before
income taxes in 2021, up from $20.1
million in 2020."
"Although no new iLottery opportunities were opened in the U.S.
in 2021, we remain highly engaged with lotteries throughout the
U.S. with a number of near term opportunities and we are confident
that lotteries will continue to expand into iLottery, both in the
U.S. as well as other non-U.S. lotteries."
"COVID-19 did have a negative impact on our operations
during 2021, but to a much lower extent than in 2020. Some of our
ancillary businesses like merchandising saw revenue at levels still
below pre-pandemic levels. Some retail shutdowns did occur in
key jurisdictions, like the province of Ontario, which impacted eGaming revenue and
profitability. But despite these ongoing challenges, we are
very pleased that our ultimate consumer demand always remained
strong."
"We completed two acquisitions at the start of the year,
Compliant Gaming LLC ("Compliant") and Next Generation Lotteries AS
("NGL")."
"On December 30, 2020, we
completed the acquisition of Compliant, a provider of electronic
tablet games in the charitable gaming market, and it has seen
phenomenal success through all of 2021. With more engaging
games developed by our internal teams and expanded sites throughout
the market of Minnesota, we have
experienced significant increases in revenue and profits in this
operation, and we look forward to continuing growth in 2022."
"In January of 2021 we completed the acquisition of NGL, a
leading-edge lottery solution organization with a retail lotto
system and iLottery platform. We are now investing the
necessary resources into their technology to ensure a
state-of-the-art offering for lotteries around the world.
This investment will continue in 2022 and we are very excited about
the opportunities to support our current and future lottery
customers with these products."
"On March 2, 2021, we closed an
offering for 933,800 common shares raising approximately
$34.5 million in capital, before
expenses, to further invest in our growth. The great success
of the offering is a reflection of our success in recent years and
we appreciate the support shown by our existing and new
shareholders."
"2021 has been a very successful year for Pollard Banknote,"
concluded John Pollard. "All
of our main business lines continue to see exceptional demand from
our customers and we expect that to continue throughout 2022.
Our investments in both our traditional areas, like instant
tickets, as well as some of our new growth areas, like charitable
gaming and digital, will continue and we believe there is great
opportunity to increase both our topline and our profitability
during next year, despite facing some headwinds in 2022. The
inflationary price increases of our inputs will have a negative
impact on our earnings, however we have a number of strategies to
help reduce the impact, as well, charitable gaming growth is
expected to be strong throughout 2022. Our strategy of expanding
our product portfolio is a key tool to ensure our overall financial
results continue to grow."
Use of GAAP and Non-GAAP Financial Measures
The selected financial and operating information has been
derived from, and should be read in conjunction with, the audited
consolidated financial statements of Pollard as at and for the year
ended December 31, 2021. These
financial statements have been prepared in accordance with the
International Financial Accounting Standards ("IFRS" or
"GAAP").
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 acquisition costs, litigation
settlement costs, contingent consideration fair value adjustments
and insurance proceeds (net). 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
NPi' s 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
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% 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 €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 the existing credit facilities, and the issuance
of treasury shares of Pollard for approximately €4.6 million
($8.0 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 acquisitions of Compliant and NGL.
HIGHLIGHTS
|
Three months
ended
December 31,
2021
|
Three months
ended
December 31,
2020
|
|
|
|
|
|
Sales
|
$
|
116.5
million
|
$
|
103.7
million
|
Gross
profit
|
$
|
20.7
million
|
|
23.0
million
|
Gross profit %
of sales
|
|
17.8%
|
$
|
22.2
%
|
|
|
|
|
|
Administration
expenses
|
$
|
11.9
million
|
$
|
10.4
million
|
Selling
expenses
|
|
5.0
million
|
$
|
3.8 million
|
|
$
|
|
|
|
NPi equity
investment income
|
($
|
3.2
million)
|
($
|
1.6
million)
|
Other (income)
expense
|
$
|
2.3
million
|
($
|
3.7
million)
|
Unrealized foreign
exchange (gain) loss
|
$
|
0.6
million
|
($
|
3.5
million)
|
|
|
|
|
|
Net
income
|
$
|
5.2
million
|
|
12.2
million
|
|
|
|
$
|
|
Net income per
share (basic and diluted)
|
$
|
0.19
|
$
|
0.47
|
|
|
|
|
|
Adjusted
EBITDA:
|
|
|
|
|
|
|
|
|
|
Lotteries
and charitable gaming
|
$
|
12.3
million
|
$
|
18.2
million
|
eGaming
systems
|
$
|
6.4
million
|
$
|
2.1
million
|
|
|
|
|
|
Total adjusted
EBITDA
|
$
|
18.7
million
|
$
|
20.3
million
|
|
|
|
|
|
|
Year ended
December 31,
2021
|
Year ended
December 31,
2020
|
|
|
|
|
|
Sales
|
$
|
459.0
million
|
$
|
414.1
million
|
Gross
profit
|
$
|
91.1
million
|
$
|
91.0
million
|
Gross profit %
of sales
|
|
19.8
%
|
|
22.0
%
|
|
|
|
|
|
Administration
expenses
|
$
|
47.2
million
|
$
|
40.3
million
|
Selling
expenses
|
$
|
17.5
million
|
$
|
14.6
million
|
|
|
|
|
|
NPi equity
investment income
|
($
|
12.3
million)
|
($
|
1.6
million)
|
Other (income)
expenses
|
$
|
5.2
million
|
($
|
12.3
million)
|
Unrealized foreign
exchange (gain) loss
|
$
|
0.3
million
|
($
|
1.9
million)
|
|
|
|
|
|
Net
income
|
$
|
19.7
million
|
$
|
33.3
million
|
|
|
|
|
|
Net income per
share (basic)
|
$
|
0.74
|
$
|
1.30
|
Net income per
share (diluted)
|
$
|
0.73
|
$
|
1.28
|
|
|
|
|
|
Adjusted
EBITDA:
|
|
|
|
|
|
|
|
|
|
Lotteries
and charitable gaming
|
$
|
64.3
million
|
$
|
74.2
million
|
eGaming
systems
|
$
|
19.7
million
|
$
|
6.4
million
|
|
|
|
|
|
Total adjusted
EBITDA
|
$
|
84.0
million
|
$
|
80.6
million
|
Results of Operations – Year ended December 31, 2021
SELECTED FINANCIAL
INFORMATION
|
(millions of
dollars)
|
Year
ended
|
Year
ended
|
|
|
December 31,
2021
|
December 31,
2020
(Restated)
|
|
|
|
|
|
|
|
|
Sales
|
$459.0
|
$414.1
|
Cost of
sales
|
367.9
|
323.1
|
Gross
profit
|
91.1
|
91.0
|
|
|
|
|
Administration
expenses
|
47.2
|
40.3
|
|
Selling
expenses
|
17.5
|
14.6
|
|
Equity investment
income
|
(12.3)
|
(1.6)
|
|
Other (income)
expenses
|
5.2
|
(12.3)
|
Income from
operations
|
33.5
|
50.0
|
|
|
|
|
|
Foreign exchange
(gain) loss
|
1.4
|
(0.9)
|
|
Interest
expense
|
5.0
|
4.8
|
Income before income
taxes
|
27.1
|
46.1
|
|
|
|
Income
taxes:
|
|
|
|
Current
|
14.2
|
10.9
|
|
Deferred
(reduction)
|
(6.8)
|
1.9
|
|
7.4
|
12.8
|
Net income
|
$19.7
|
$33.3
|
Adjustments:
In
|
|
|
|
Amortization and
depreciation
|
39.5
|
31.5
|
|
Interest
|
5.0
|
4.8
|
|
Income
taxes
|
7.4
|
12.8
|
EBITDA
In
|
$71.6
|
$82.4
|
|
|
|
|
|
Unrealized foreign
exchange (gain) loss
|
0.3
|
(1.9)
|
|
Acquisition
costs
|
1.0
|
2.2
|
|
Contingent
consideration fair value adjustment
|
9.6
|
(2.1)
|
|
Litigation settlement
cost
|
2.5
|
0.0
|
|
Insurance proceeds
(net)
|
(1.0)
|
0.0
|
|
|
|
Total Adjusted
EBITDA
|
$84.0
|
$80.6
|
|
|
|
|
|
December
31,
|
December
31,
|
|
|
2021
|
2020
|
|
|
|
|
Total
Assets
|
$461.4
|
$404.6
|
Total Non-Current
Liabilities
|
$163.5
|
$191.3
|
|
|
|
|
Results of Operations – Year ended December 31, 2021
Sales
During the year ended December 31,
2021 ("Fiscal 2021" or "2021"), Pollard achieved sales of
$459.0 million, compared to
$414.1 million in the year ended
December 31, 2020 ("Fiscal 2020" or
"2020"). Factors impacting the $44.9
million sales increase were:
For the majority of 2021, most retail establishments where our
charitable gaming products are sold were open, and Pollard's sales
of pull-tab tickets and related products reached record highs. The
growth in charitable gaming volumes increased sales by $17.6 million in 2021, as compared to 2020 when
many retail establishments were closed for periods of time in
response to the onset of COVID-19. eGaming systems revenue
increased $17.6 million as compared
to 2020 as a result of the acquisition of Compliant and having more
retail establishments open in 2021, including the re-opening of
bingo halls in Ontario in the
third quarter of 2021. In addition, the higher average selling
price of charitable games in 2021 further increased sales by
$2.5 million.
Higher sales of ancillary lottery products and services
increased revenue by $21.6 million in
2021. This growth was largely as a result of the addition of NGL in
2021. In addition, increases in sales of digital and loyalty
products, and retail merchandising products, also contributed to
the higher sales. Higher instant ticket sales volumes increased
sales by $10.4 million in 2021. Also,
an increase in the instant ticket average selling price increased
sales by $2.6 million as compared to
2020.
Lower sales from Michigan
iLottery decreased revenue in 2021 by $5.1
million, excluding the negative impact of foreign exchange
rates of $1.8 million, as compared to
2020, when Michigan iLottery sales
were at record quarterly highs in the second and third quarters,
during the first quarters of the pandemic.
During Fiscal 2021, Pollard generated approximately 68.3% (2020
– 71.3%) of its revenue in U.S. dollars including a portion of
international sales which are priced in U.S. dollars. During
Fiscal 2021 the actual U.S. dollar value was converted to Canadian
dollars at an average rate of $1.254
compared to an average rate of $1.338
during Fiscal 2020. This 6.3% decrease in the U.S. dollar
value resulted in an approximate decrease of $21.0 million in revenue relative to Fiscal
2020. During 2021 the value of the Canadian dollar
strengthened against the Euro resulting in an approximate decrease
of $1.3 million in revenue relative
to 2020.
Cost of sales and gross profit
Cost of sales was $367.9 million
in Fiscal 2021 compared to $323.1
million in Fiscal 2020. The increase of $44.8 million was primarily a result of the
increase in charitable gaming sales volumes, as compared to 2020,
and the addition of NGL and Compliant. In addition, higher instant
ticket sales volumes and certain instant ticket production
inefficiencies increased cost of sales in 2021. Also adding to cost
of sales in 2021 were increases in raw material costs in the second
half of the year, some higher manufacturing overhead costs and
increased amortization and depreciation expenses. Also
increased sales of ancillary lottery products and services further
added to cost of sales. Partially offsetting these increases was
the impact of lower exchange rates on U.S. dollar denominated
expenses in 2021, of approximately $15.5
million, which decreased cost of sales.
Gross profit increased to $91.1
million (19.8% of sales) in Fiscal 2021 from $91.0 million (22.0% of sales) in Fiscal
2020. Gross profit increased in 2021 as a result of the
significant increase in charitable and eGaming sales, including the
addition of Compliant. In addition, an increase in merchandising
product sales further increased gross profit in 2021. These
increases were offset by a number of factors including lower
instant ticket sales margin as a result of a less profitable
customer mix, particularly in the second half of 2021, and
increased manufacturing costs. In addition, the decrease in
Michigan iLottery gross profit,
lower margin from licensed product sales and the addition of NGL
further decreased gross profit in 2021. The lower gross profit
percentage was due to the reduction in higher margin Michigan iLottery sales, lower margin from
licensed product sales and the change in the mix of instant ticket
sales to lower margin customers. As well, the inclusion of NGL had
a negative impact on our overall margin percentage.
Administration expenses
Administration expenses increased to $47.2 million in Fiscal 2021 from $40.3 million in Fiscal 2020. The increase of
$6.9 million was primarily a result
of the addition of NGL, of $5.2
million, in addition to increased compensation expenses,
including higher incentive costs, to support Pollard's growth
strategies, particularly our investments in digital products and
solutions development. Partially offsetting these increases was a
reduction in professional fees, including acquisition costs, in
2021.
Selling expenses
Selling expenses increased to $17.5
million in Fiscal 2021 from $14.6
million in Fiscal 2020 primarily due to the addition of NGL,
as well as higher compensation costs. These increases were
partially offset by the reduction in travel related costs due to
the ongoing impact of COVID-19.
Equity investment income
Pollard's share of income from its 50% owned iLottery joint
venture, NPi, increased to $12.3
million in Fiscal 2021 from $1.6
million in Fiscal 2020. This $10.7
million increase was primarily due to the increase in
revenue in 2021, as compared to 2020. Contracts held by NPi
experienced organic growth, in addition to the added sales increase
from the additional offering of eInstants in Virginia starting in the second half of 2020.
Also increasing sales was the launch of the Alberta Gaming, Liquor
& Cannabis ("AGLC") iLottery platform, which went live with a
select product launch on September 30,
2020 and added additional gaming verticals throughout
2021.
Other (income) expenses
Other expenses were $5.2 million
in 2021 compared to $12.3 million of
other income in 2020. The change of $17.5
million was due, in part, to the contingent consideration
accrual adjustments, as part of our Compliant and mkodo
acquisitions, which decreased other income by $11.7 million as compared to 2020. Further
reducing other income in 2021, Pollard entered 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. In addition, the $3.6
million reduction in CEWS recognized in 2021 as compared to
2020, as well as the elimination of the EBITDA support agreement of
$1.0 million, which expired on
June 30, 2020, further reduced other
income. Partially offsetting these negative changes was insurance
proceeds, net of expenses recovered, of $1.0
million for an insurance claim resulting from damage to
ancillary production equipment.
Foreign exchange
The net foreign exchange loss was $1.4
million in Fiscal 2021 compared to a net gain of
$0.9 million in Fiscal 2020.
The 2021 net foreign exchange loss consisted of a realized foreign
exchange loss of $1.1 million as a
result of foreign currency denominated accounts receivable
collected being converted into Canadian dollars at unfavorable
foreign exchange rates, partially offset by gains on repayment of
U.S. dollar denominated long-term debt, and a $0.3 million unrealized loss.
The 2020 net foreign exchange gain consisted of a $1.9 million unrealized gain primarily a result
of the decreased Canadian equivalent value of U.S. dollar
denominated accounts payable and long-term debt with the
strengthening of the Canadian dollar relative to the U.S. dollar.
Partially offsetting the unrealized foreign exchange gain, Pollard
incurred a realized foreign exchange loss of $1.0 million as a result of foreign currency
denominated accounts receivable collected being converted into
Canadian dollars at unfavorable foreign exchange rates.
Adjusted EBITDA
Adjusted EBITDA increased to $84.0
million in Fiscal 2021 compared to $80.6 million in Fiscal 2020. The primary
reasons for the increase of $3.4
million were the increase in our share of income from our
joint venture, NPi, of $10.7 million
in 2021 and the increase in gross profit (net of amortization and
depreciation) of $8.1 million. Gross
profit (net of amortization and depreciation) increased with the
rebound in sales of charitable gaming and eGaming, including the
addition of Compliant, in 2021. These increases in net gross profit
were partially offset by lower Michigan iLottery revenues and decreased
instant ticket margins.
Partially offsetting these increases in Adjusted EBITDA were the
higher administration expenses (net of acquisition costs) of
$8.1 million, the decrease in other
income (net of contingent consideration, legal settlement and
insurance proceeds (net)) of $4.3
million, primarily due to the reduction in CEWS support in
2021, and an increase in selling expenses of $2.9 million.
Interest expense
Interest expense increased to $5.0
million in Fiscal 2021 from $4.8
million in Fiscal 2020 primarily as a result of the interest
accretion on the discounted contingent consideration liability of
$1.5 million, related to the
Compliant purchase, and an increase in average long-term debt in
2021. These increases were almost completely offset by lower
interest rates.
Amortization and depreciation
Amortization and depreciation, including amortization of
intangible assets and depreciation of property and equipment,
totaled $39.5 million during Fiscal
2021 which increased from $31.5
million during Fiscal 2020. The increase of
$8.0 million was primarily as a
result of the additions of Compliant and NGL, including the
amortization and depreciation relating to the identifiable assets
acquired, including intangible assets and property, plant and
equipment and an increase in depreciation related to leased
properties.
Income taxes
Income tax expense was $7.4
million in Fiscal 2021, an effective rate of 27.4%, which
was higher than our domestic rate of 27.0% due primarily to
non-deductible amounts. Partially offsetting these increases in
effective rate were the lower federal income tax rates in
the United States.
Income tax expense was $12.8
million in Fiscal 2020, an effective rate of 27.8%, which
was higher than our domestic rate of 27.0% due primarily to
non-deductible expenses. Partially offsetting these increases in
effective rate were the lower federal income tax rates in
the United States and the
non-taxable income related to the reversal of contingent
consideration, related to the acquisition of mkodo.
Net income
Net income was $19.7 million in
Fiscal 2021 compared to net income of $33.3
million in Fiscal 2020. The reason for the decrease in net
income of $13.6 million was the
increase in other expenses of $17.5
million, including the contingent consideration accrual
adjustments of $11.7 million and the
reduction of CEWS support of $3.6
million. Also decreasing net income were the increase in
administration expenses of $6.9
million, higher selling costs of $2.9
million and the increase in the net foreign exchange loss of
$2.3 million. These decreases in net
income were partially offset by the increased share of income from
our 50% owned iLottery joint venture, NPi, of $10.7 million and the decrease in income tax
expense of $5.4 million.
Net income per share (basic and diluted) decreased to
$0.74 and $0.73 per share, respectively, in Fiscal 2021
from $1.30 and $1.28 per share, respectively, in Fiscal
2020.
iLottery
Pollard and its iLottery partner, Neogames U.S. LLP
("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 revenue 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 equity investment
income.
SELECT iLOTTERY
RELATED FINANCIAL INFORMATION
|
(millions of
dollars)
|
|
|
|
|
|
|
|
|
|
Q4
|
Q3
|
Q2
|
Q1
|
Q4
|
Q3
|
Q2
|
Q1
|
|
2021
|
2021
|
2021
|
2021
|
2020
|
2020
|
2020
|
2020
|
|
|
|
|
|
|
|
|
|
Sales – Pollard's
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michigan
iLottery
|
$5.6
|
$5.9
|
$6.8
|
$8.4
|
$8.6
|
$9.5
|
$10.3
|
$5.1
|
NPi
|
10.5
|
9.8
|
9.9
|
9.9
|
6.1
|
3.1
|
2.2
|
1.2
|
|
|
|
|
|
|
|
|
|
Combined iLottery
sales
|
$16.1
|
$15.7
|
$16.7
|
$18.3
|
$14.7
|
$12.6
|
$12.5
|
$6.3
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income taxes – Pollard's share
|
|
|
|
|
|
|
|
|
|
Michigan
iLottery
|
$1.8
|
$2.0
|
$2.8
|
$4.0
|
$4.5
|
$5.4
|
$6.5
|
$2.1
|
NPi
|
3.2
|
2.6
|
2.5
|
4.0
|
1.6
|
0.8
|
(0.3)
|
(0.5)
|
|
|
|
|
|
|
|
|
|
Combined income
before income taxes – Pollard's share
|
$5.0
|
$4.6
|
$5.3
|
$8.0
|
$6.1
|
$6.2
|
$6.2
|
$1.6
|
|
|
|
|
|
|
|
|
|
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, with additional gaming
verticals launching throughout 2021. 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 and income before income taxes from our Michigan iLottery operation declined starting
in the second quarter of 2021 due to increased online gaming
competition, the lower exchange rate on U.S. dollar denominated
sales and new pricing coming into effect with our four-year
contract extension, starting at the beginning of 2021.
Results of Operations – Three months ended December 31, 2021
SELECTED FINANCIAL
INFORMATION
|
|
|
(millions of dollars,
except per share amounts)
|
Three
months
|
Three
months
|
|
|
ended
|
Ended
|
|
|
December 31,
2021
|
December 31,
2020
|
|
|
(unaudited)
|
(unaudited)
|
Sales
|
$116.5
|
$103.7
|
Cost of
sales
|
95.8
|
80.7
|
Gross
profit
|
20.7
|
23.0
|
|
|
|
|
Administration
expenses
|
11.9
|
10.4
|
|
Selling
expenses
|
5.0
|
3.8
|
|
Equity investment
income
|
(3.2)
|
(1.6)
|
|
Other (income)
expense
|
2.3
|
(3.7)
|
Income from
operations
|
4.7
|
14.1
|
|
|
|
|
|
Foreign exchange
gain
|
(0.1)
|
(3.2)
|
|
Interest
expense
|
1.6
|
0.9
|
Income before income
taxes
|
3.2
|
16.4
|
|
|
|
Income
taxes:
|
|
|
|
Current
|
1.0
|
3.0
|
|
Deferred
(reduction)
|
(3.0)
|
1.2
|
|
(2.0)
|
4.2
|
Net income
|
$5.2
|
$12.2
|
Adjustments:
|
|
|
|
Amortization and
depreciation
|
10.8
|
7.7
|
|
Interest
|
1.6
|
0.9
|
|
Income
taxes
|
(2.0)
|
4.2
|
|
|
|
|
EBITDA
|
$15.6
|
$25.0
|
|
|
|
|
|
Unrealized foreign
exchange (gain) loss
|
0.6
|
(3.5)
|
|
Acquisition
costs
|
0.0
|
0.9
|
|
Contingent
consideration fair value adjustment
|
3.5
|
(2.1)
|
|
Insurance proceeds
(net)
|
(1.0)
|
0.0
|
|
|
|
Adjusted
EBITDA
|
$18.7
|
$20.3
|
|
|
|
Net income per share
(basic and diluted)
|
$0.19
|
$0.47
|
|
|
|
Results of Operations – Three months ended December 31, 2021
During the three months ended December
31, 2021, Pollard achieved sales of $116.5 million, compared to $103.7 million in the three months ended
December 31, 2020. Factors
impacting the $12.8 million sales
increase were:
Higher sales of ancillary lottery products and services
increased revenue in the fourth quarter of 2021, as compared to the
fourth quarter of 2020, by $8.1
million. This increase was primarily from the addition of
NGL, as well as increased sales of digital and retail merchandising
products. A higher instant ticket average selling price increased
sales by a further $3.4 million in
the quarter, including certain freight recoveries. Partially
offsetting these increases was slightly lower instant ticket sales
volume decreased sales by $0.5
million in the quarter.
eGaming systems revenue increased $4.9
million, as compared to 2020, predominately as a result of
the acquisition of Compliant and the impact of the Ontario market re-opening bingo halls. Higher
charitable gaming volumes increased sales by $2.1 million in the fourth quarter of 2021 as
Pollard's sales of pull-tab tickets and related products remained
high, due to strong customer demand. In addition, the higher
average selling price of charitable games in 2021 further increased
sales by $1.6 million.
Lower sales from Michigan
iLottery decreased revenue in the fourth quarter of 2021 by
$2.8 million excluding the negative
impact of foreign exchange rates of $0.2
million, as compared to 2020.
During the three months ended December
31, 2021, Pollard generated approximately 65.6% (2020 –
70.1%) of its revenue in U.S. dollars including a portion of
international sales which were priced in U.S. dollars. During
the fourth quarter of 2021 the actual U.S. dollar value was
converted to Canadian dollars at an average rate of $1.263, compared to an average rate of
$1.319 during the fourth quarter of
2020. This 4.2% decrease in the value of the U.S. dollar
resulted in an approximate decrease of $3.4
million in revenue relative to 2020. During the fourth
quarter of 2021 the value of the Canadian dollar strengthened
against the Euro resulting in an approximate decrease of
$0.6 million in revenue relative to
2020.
Cost of sales was $95.8 million in
the fourth quarter of 2021 compared to $80.7
million in the fourth quarter of 2020. The increase of
$15.1 million was primarily a result
of the instant ticket sales mix and certain instant ticket
production inefficiencies in 2021. Also contributing to the higher
cost of sales were increases in raw material costs in the quarter,
higher manufacturing overhead expenses, the increase in
amortization and depreciation expenses and increased freight costs.
In addition, higher sales of charitable gaming products, and the
addition of NGL, further added to the increase in cost of sales in
2021. Partially offsetting these increases was the impact of lower
exchange rates on U.S. dollar denominated expenses in the fourth
quarter of 2021 which decreased cost of sales.
Gross profit was $20.7 million
(17.8% of sales) in the fourth quarter of 2021 compared to
$23.0 million (22.2% of sales) in the
fourth quarter of 2020. This decrease in gross profit was primarily
the result of lower instant ticket sales margin because of a less
profitable customer mix in the fourth quarter of 2021 and increased
costs. In addition, the decrease in Michigan iLottery sales in comparison to the
fourth quarter of 2020, also reduced gross profit in 2021. These
decreases were partially offset by the increases in gross profit
from higher eGaming systems and charitable sales. The lower gross
profit percentage was due, in part, to the reduction in higher
margin Michigan iLottery sales and
the mix of instant ticket sales having a negative impact on our
overall margin percentage, partially offset by the increase in
eGaming sales. In addition, the inflationary impact of higher costs
for our instant ticket direct material inputs further reduced our
gross margin percentage.
Administration expenses increased to $11.9 million in the fourth quarter of 2021
compared to $10.4 million in the
fourth quarter of 2020. The increase of $1.5 million was primarily a result of the
additions of NGL, in addition to increased compensation costs,
including incentive accruals, to support Pollard's growth
strategies, particularly in our digital solutions areas. Partially
offsetting these increases was a reduction in professional fees,
including acquisition costs, in 2021.
Selling expenses increased to $5.0
million in the fourth quarter of 2021 from $3.8 million in the fourth quarter of 2020. The
increase was primarily due to the addition of NGL and higher
compensation costs, including incentive accruals.
Pollard's share of income from its 50% owned iLottery joint
venture, NPi, increased to $3.2
million in the fourth quarter of 2021 from $1.6 in the fourth quarter of 2020. This
$1.6 million increase was primarily
due to the increase in revenue, as a result of significant organic
growth, plus higher sales from additional gaming verticals going
live in 2021 with AGLC's content offering.
Other expenses were $2.3 million
in the fourth quarter of 2021 compared to other income of
$3.7 million in the fourth quarter of
2020. This change of $6.0 million was
primarily due to the contingent consideration accrual adjustments,
as part of our Compliant and mkodo acquisitions, which increased
other expenses by $5.6 million, as
well as the reduction in CEWS recognized in the fourth quarter of
2021, as compared to 2020, of $1.6
million. Partially offsetting these negative changes was
insurance proceeds, net of expenses recovered, of $1.0 million for a claim resulting from damage to
ancillary production equipment.
The net foreign exchange gain was $0.1
million in the fourth quarter of 2021 compared to a net gain
of $3.2 million in the fourth quarter
of 2020. The 2021 net foreign exchange gain consisted of a
realized foreign exchange gain of $0.7
million, as a result of foreign currency denominated
accounts payable being settled at favorable foreign exchanges
rates. The realized foreign exchange gain was partially offset by
the $0.6 million unrealized loss
primarily as a result of the reversal of prior unrealized gains on
U.S. dollar denominated accounts payable and long-term debt
recognized previously.
The 2020 net foreign exchange gain consisted of a $3.5 million unrealized gain primarily as a
result of the decreased Canadian equivalent value of U.S. dollar
denominated accounts payable and long-term debt due to the
strengthening of the Canadian dollar relative to the U.S. dollar.
The unrealized foreign exchange gain was partially offset by the
realized foreign exchange loss of $0.3
million, as a result of foreign currency denominated
accounts receivable collected being converted into Canadian dollars
at unfavorable foreign exchanges rates.
Adjusted EBITDA decreased to $18.7
million in the fourth quarter of 2021 compared to
$20.3 million in the fourth quarter
of 2020. The primary reasons for the $1.6
million decrease in Adjusted EBITDA were the higher
administration expenses (net of acquisition costs) of $2.4 million, an increase in selling expenses of
$1.2 million and a decrease in other
income (net of contingent consideration, legal settlement and
insurance proceeds (net)) of $1.4
million, primarily as a result of lower CEWS support of
$1.6 million in 2021. These decreases
were partially offset by the increase in our share of income from
our 50% owned iLottery joint venture, NPi, of $1.6 million, the increase in the realized
foreign exchange gain of $1.0 million
and the increase in gross profit (net of amortization and
depreciation) of $0.8 million, net of
the inflationary impact of higher instant ticket direct material
input costs.
Interest expense increased to $1.6
million in the fourth quarter of 2021 from $0.9 million in the fourth quarter of 2020
primarily as a result of the interest accretion on the discounted
contingent consideration liability of $0.8
million, related to the Compliant purchase, and an increase
in average long-term debt in 2021. These increases were partially
offset by lower interest rates.
Amortization and depreciation, including amortization of
intangible assets and depreciation of property and equipment,
totaled $10.8 million during the
fourth quarter of 2021 which increased from $7.7 million during the fourth quarter of
2020. The increase of $3.1
million was primarily a result of the additions 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 recovery was $2.0
million in the fourth quarter of 2021, an effective rate of
(60.6%) which differed from our domestic rate of 27.0% due
primarily due to the recognition of tax losses not previously
valued.
Income tax expense was $4.2
million in the fourth quarter of 2020, an effective rate of
25.5% which was lower than our domestic rate of 27.0% due primarily
to the non-taxable income related to the reversal of contingent
consideration, related to the acquisition of mkodo, the effect of
foreign exchange and lower federal income tax rates in the United States. Partially offsetting these
reductions in effective rate was the non-deductible expenses.
Net income was $5.2 million in the
fourth quarter of 2021 compared to $12.2
million in the fourth quarter of 2020. The primary
reason for the decrease in net income of $7.0 million was the increase in other expenses
of $6.0 million. This increase in
other expenses includes the change in contingent consideration
accrual adjustments of $5.6 million
and the reduction of CEWS support of $1.6
million, partially offset by insurance proceeds, net of
expenses recovered, of $1.0 million.
Also decreasing net income were the decrease in the net foreign
exchange gain of $3.1 million, the
decrease in gross profit of $2.3
million (including the inflationary impact of higher instant
ticket direct material input costs), the increase in administration
expenses of $1.5 million and the
increase in selling expense of $1.2
million. These decreases in net income were partially offset
by the increase in our share of income from our joint venture, NPi,
of $1.6 million and a decrease in
income taxes of $6.2 million.
Net income per share (basic and diluted) decreased to
$0.19 per share in the fourth quarter
of 2021 from $0.47 per share in the
fourth quarter of 2020.
Outlook
Retail sales of instant tickets are continuing at the high level
we witnessed in 2021, particularly in the U.S., and we believe this
level of consumer demand will continue. Higher retail sales do not
directly translate necessarily into proportionate growth at the
manufacturing level, however we are seeing strong demand from our
customers for more product. Our production schedule through
the remainder of the first quarter and through the second quarter
is very busy, with volumes at levels higher than our average
production in 2021.
In the short term, production capacity is somewhat fixed and can
fluctuate based on the run size of games and other factors.
We are currently expanding our instant ticket productive capacity
by staffing two additional shifts on our second press in our
Ypsilanti Michigan facility and
expect to have additional capacity available. Higher capacity
is expected to help ease some of the inefficiencies of producing
close to capacity and help us meet some of this additional
demand.
In the latter half of 2021 our production and sales mix was
skewed to a greater mix of lower value product relative to
traditional expectations for that time period. Looking
forward at our current scheduling, later in the first quarter and
into the second quarter, we are expecting that mix of work to
return to more historic levels of higher valued work including
higher use of proprietary products such as Scratch FX®.
Timing of shipments can impact the timing of the revenue
recognition.
Inflation will be a challenge, particularly in our instant
ticket product line, with higher costs already starting in the
second half of 2021. Additional cost increases have been
identified already for 2022 and there can be no guarantee there
won't be further cost headwinds. The specific technical nature of
our raw material inputs makes it more difficult to switch out to
alternative inputs. Although the long-term nature of our instant
ticket contracts is beneficial, these contracts do not allow for
explicit price increases to recover higher costs.
A number of initiatives are underway to help mitigate the
financial impact of the inflationary price increases including
increasing capacity and volume of instant tickets, internal cost
reviews and continued focus on improving our average selling prices
through focus on innovation and selling proprietary products at
higher margins.
Our NGL operation remains in its development stage as we
continue to invest resources to improve its suite of
solutions. The facility management side of the operations
traditionally has much higher sales in the fourth quarter and as
such, we expect more normalized operating results for the next
three quarters relative to the fourth quarter.
Our charitable gaming and eGaming businesses remain very strong
with continued levels of high consumer demand. We have been
able to increase our selling prices to offset inflationary costs
increases within our charitable gaming product lines. The current
demand for our products outstrips our ability to produce,
particularly in our pull-tab product line. In the short term
it is challenging to increase capacity, primarily because it is
reliant on additional staffing which is difficult to recruit in the
current environment, however we continue to pursue all avenues to
help increase our production capabilities. Our tablet based
eGaming business also continues to grow as new and improved game
content, and expanded sites, are expected to continue through
2022. We expect charitable gaming, including eGaming, to be
an important contributor to our financial success in 2022.
We continue to expect some challenges in the supply chain
relating to transportation, both in terms of shipping our goods to
customers and receipt of supplier inputs. This may impact the
timing of revenue recognition as well as driving some
inefficiencies in our manufacturing, however we don't expect this
to cause material impacts in the short term.
We continue to invest in and be an active thought leader in the
iLottery space. Our existing operations through our NPi joint
venture, including our Michigan
contract, are the market leaders in the U.S. Growth is
expected in the NPi operation based on the ongoing development of
our newer contracts in Alberta and
Virginia. While it is difficult to estimate when the next
formal opportunity for a new iLottery operation in the U.S. or
internationally will occur, we are confident that more lotteries
will avail themselves of this opportunity and provide a critical
growth opportunity for Pollard.
While many of the restrictions related to COVID-19 have been or
are being lifted throughout the world, changes to these trends
could still have a negative impact on our business, including but
not limited to facility closures and retail shutdowns. We
remain focused on monitoring the external issues potentially
impacting our business and ensure we are providing a healthy and
safe environment for our team members, including a number of
programs offering encouragement for all employees to be
vaccinated.
We generate strong cash flow and have a high conversion ratio of
converting EBITDA to cash and we expect this to continue.
With our renewed bank facility in place as of December 31, 2021, available liquidity is very
significant and combined with our strong operating cashflow, we are
confident we will have the internal resources to invest in the
growth of our current business, devote capital to new
opportunities, including acquisition prospects, as well as
maintaining our very conservative debt management policy.
Going into 2022, most of our key business units are experiencing
very strong demand for their products. We believe this demand
will translate into ongoing growth opportunities for Pollard.
There do exist some headwinds in 2022, particularly in the instant
ticket market due to inflationary price increases in our key
inputs. Our ability to increase volumes in ticket production
is a critical factor in offsetting these cost increases. In
addition, the very strong growth in the charitable gaming and
eGaming product lines will also provide a significant offset to the
margin pressures on the instant ticket business. Our strategy
of having a very broad product portfolio to help balance our
operating results has proven to be very beneficial as we move into
2022.
SEDAR: 00029950
(PBL)
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SOURCE Pollard Banknote Limited