Pollard Banknote (TSX:PBL) Q3 2026 Earnings Call

0:00 Good morning, everyone. Welcome to the Pollard Banknote Limited third quarter 2026 results conference call. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked that constitute forward-looking statements that are subject to risks and uncertainties related to Pollard's future financial or business performance. Certain material factors or assumptions are applied in making forward-looking statements. and active results may differ materially from those expressed or implied in such statements. The risk factors that may affect your results are detailed in Pollard's annual information form and other periodic filings and registration statements.

0:45 And you can access these documents at Cedar Plus' database found at cedarplus.ca. I would like to remind everyone that this conference call is being recorded today, Monday, November 9, 2026. and I would like to introduce Mr. Doug Pollard, Co-Chief Executive Officer of Pollard Banknote Limited. Please go ahead, sir.

1:08 Okay, thank you operator and thank you everyone for joining us this morning. With me on the call today are John Pollard, Co-CEO and Rob Rose, CFO. We released our 2026 third quarter results last Friday. You can access our news release as well as our complete financial statements and MD&A on our website at PollardBanknote.com and on CDAR+. Today we'll start with prepared remarks from me providing an overall business update and John will then follow up with the discussion of our third quarter results then we'll open it up to questions. Although our third quarter operating results are lower than we expected a significant number of positive developments occurred during the third quarter helping to grow and position our print and digital business for greater future success, which validates our ongoing strategic investments in both the digital and retail parts of our business.

2:04 The Kansas Lottery has advised that Pollard is the apparent winner of a new five-year contract starting late 2026 with one two-year extension together that will take the contract out to late 2023. This lottery contract was awarded through a competitive The award of this final extension expands our existing contract to June of 2029. and on June 15, 2026, the Colorado Lottery published a Notice of Intent to Award Pollard their Lottery Digital Solution Contract.

3:02 Initial planning and scoping are well underway while contract details are being finalized. We look forward to implementing our lottery-specific, play-on player engagement and Catalyst iLottery gaming platforms to enhance this significant lottery's ability to meet its fundraising goals. We anticipate Go Live to occur in the later part of 2027. Work is increasing on our Belgium lottery gaming platform contract as more development resources are dedicated to the multiple deliverables under this long-term contract. Revenue recognition increased in the third quarter compared to the previous quarters of 2026 and we anticipate this trend will continue. The customer is pleased with our progress as we continue to build a reputation in the lottery industry for effective and timely management of complex digital projects.

3:54 On September 2nd, 2026, we successfully launched our play-on player engagement solution, a lottery-specific loyalty offering with the Oklahoma Lottery, a very important expansion of our digital offerings. On October 8th, 2026, Norsk Tipping, the national lottery of Norway, announced its intent to award Pollard its new instant ticket contract following a competitive request for proposal process. Contract starts in December 2026 with a three-year term plus a one-year extension. Pollard is providing Norse tipping instant tickets since 2004 and this win reaffirms our long-term partnership with an important customer. Now during the third quarter, instant ticket volumes were slightly higher than last year's comparative numbers and also slightly higher compared to the second quarter of 2026.

4:48 Our average selling price was slightly lower than the comparative period last year, due primarily to the customer mix. Our production volume this quarter was more weighted towards lower valued international work compared to the historical third quarter levels, which did lower our margin. In addition, manufacturing challenges resulted in lower production volumes than expected and also caused higher direct material spoilage and greater rework compared to last year and the second quarter of this year. These factors negatively impacted our gross margin during the quarter. We continue to focus considerable resources including new manufacturing management in our print operations on mitigating these issues and improving our manufacturing processes going forward.

5:39 Our charitable business continued to experience strong demand which translated to near record volumes of pull tab tickets, vending machine and e-tab sales. Historically, our fourth quarter sees a drop in instant ticket volumes after the traditionally busier third quarter. However, this year we are not expecting that due to a combination of strong demand and some orders carrying over from our third quarter. In addition, for both the fourth quarter and our outlook for 2027, we expect a return to a more normal product and customer mix from a margin perspective. Customer demand for both our eTabs and paper-based products in the charitable sector remains very strong. To support our additional pull tab ticket sales, we are expanding our production capacities and capabilities to both increase our capacity and improve our efficiency.

6:34 Sales in the Minnesota eTab market continue at record-setting levels and a number of jurisdictions are investigating the opportunity to add this product offering within their markets. Pilot programs are underway and we are hopeful that new ETAB markets will open in 2027. Our other charitable products such as bingo daubers, handheld bingo devices, and pull tab vending machines continue to generate positive sales growth and we expect this to continue. As a reminder, our Michigan iLottery contract ended at the beginning of the third quarter this year, accounting for a significant portion of the lower results when compared to 2026. Recently, the Virginia Lottery issued an RFP, or Request for Proposals, to provide its iLottery solution beginning in 2028, after the completion of the current contract supplied by MPI.

7:28 Pollard reviewed this opportunity thoroughly, and after assessing the timing of Virginia compared to the digital opportunities we have already won, as well as additional opportunities in our sales pipeline, it was determined that Pollard would not respond to the bid. We will continue to receive our 50% share of the earnings of the Virginia iLottery contract through our NPI joint venture through October of 2028. We remain extremely committed to growing our iLottery business and look forward to bidding on other future opportunities in both North America and international. Focusing our resources on our current implementation pipeline will ensure that we are able to bid on opportunities and bid on future opportunities most notably the North Carolina iLottery contract currently expiring in 2029 but expected to go to RFP in 2027.

8:23 A reminder that we continue to acquire our common shares for cancellation under our previously approved normal course issuer bid. During the third quarter we purchased 64,200 shares for cancellation and we will continue to utilize the NCIB to support what we believe is a significant undervaluation of our company. Our outlook for the fourth quarter in 2027 is positive, with a robust instant ticket production schedule, growing demand for our charitable products and solutions. In addition, we anticipate increasing revenue from our portfolio of digital contracts, including the new contracts with Oklahoma and Colorado, the renewal of Kansas, the extension of the iLottery contract for the North Carolina lottery, and expanding work for our Bell Zoom Lottery digital solution contract.

9:12 All of these investments are laying the foundation for a significant future growth in our retail, charitable and digital businesses. Now I'll turn it over to John to discuss in detail the second quarter results.

9:26 Thanks, Doug. During the three months ended September 30th, 2026, Pollard achieved revenue of $158.9 million compared to $156.3 million in the three months ending September 30th of last year. Factors impacting that $2.6 million revenue increase were higher sales of ancillary lottery products and services increased our revenue by $3.4 million compared to 2025. This growth was primarily due to increased digital sales including Pollard's iLottery contracts with Belgium and Kansas. Higher retail solution sales and increased game studio sales also contributed to the revenue increase. Partially offsetting these increases in ancillary lottery sales was the decrease in sales of licensed products.

10:17 Also, higher average selling price of our charitable games increased revenue by $1.6 million in the third quarter of 2026 compared to the third quarter of 2025. and in addition, higher charitable gaming print volumes further increased revenue by 0.6 million. Charitable e-gaming or e-tab revenue further increased revenue by 1.5 million compared to 2025 with revenue generated in Minnesota reaching new records. New game content and a greater number of sites have driven revenue higher in Minnesota than the pre-regulatory change levels from 2024. A lower instant ticket average selling price in 2026 decreased revenue by $3.5 million compared to 2025, mainly as a result of customer mix.

11:06 It should be noted that part of that decrease was expected due to the California work ramping up this year. Partially offsetting this decrease was higher instant ticket sales volumes, which increased sales by $1.9 million in the third quarter of 2026. Michigan iLottery revenue decreased in the third quarter by $5.5 million as compared to 2025 due to the expiry of the contract in July of 26. During the three months ended September 30, 2026, Pollard generated approximately 68.5% of our revenue in US dollars compared to 69.0% last year. That includes a portion of international sales which are priced in US dollars.

11:53 During the third quarter of 2026, the actual US dollar value was converted to Canadian dollars at 1.403 compared to a rate of 1.372 during the third quarter of last year. This 2.2% increase in the US dollar value resulted in an approximate increase of $2.4 million in revenue relative to the third quarter of last year. and in addition during the quarter the value of the Euro strengthened slightly against the Canadian dollar resulting in an approximate increase of 0.2 million in revenue relative to last year. Cost of sales was 134.6 million in the third quarter of 2026 compared to 128.2 million in the third quarter of 2025. The increase of 6.4 million in cost of sales was primarily the result of increasing Pollard iLottery operational costs including ramping up of resources in preparation for the Belgium lottery contract as well as additional costs associated with higher instant ticket volumes and the production inefficiencies that we incurred during the quarter.

12:54 As well, higher exchange rates on U.S. dollar denominated expenses further increased cost of sales compared to 2025. Those increases to cost of goods sold were partially offset by lower Michigan iLottery costs with the expiry of the contract occurring in the quarter and decreased costs as a result of lower licensed product sales. Gross profit decreased to 24.3 million or 15.3% of sales in the third quarter of this year compared to 28.1 million or 18.0% in the third quarter of last year. This decrease of 3.8 million in gross profit and the decrease in gross profit percentage were primarily as a result of firstly decreased instant ticket sales margins from the lower average instant ticket selling prices due to that shift in customer mix and as well do our production efficiencies in the quarter.

13:48 Also lower Michigan iLottery gross profit of 2.1 million due to the expiry of the contract. And lastly, lower licensed product sales and higher distribution costs also reduced our gross profit in this quarter. Partially offsetting those decreases in gross profit and gross profit percentage were our increased revenue from our iLottery contracts of Belgium and Kansas Higher retail solution sales also increased our gross profit and higher gross margin from our ETAB charitable sales as well was positive in the quarter. Administration expenses were 18.9 million in the third quarter of 2026 compared to 19.2 million in the third quarter of last year. The decrease of 0.3 million was largely a result of lower ERP implementation costs, partially offsetting those decreases in administration expenses were increased compensation costs as well as higher professional fees, software licensing fees, and consulting fees.

14:53 Selling expenses decreased to $6.1 million in the third quarter of 2026 from $6.5 million in the third quarter of 2025. This decrease of $0.4 million was primarily due to lower compensation costs. Pollard's share of income from our iLottery joint venture was $15.3 million in the third quarter of 26, very similar to the $15.3 million that we also had in the third quarter of 2025. Note that that difference, of course, does not include the Michigan iLottery revenue, which flows through our sales of cost and goods sold, as we just discussed. Adjusted EBITDA decreased to $28.3 million in the third quarter of 2026 compared to $32.3 million in the third quarter of 2025. The primary reasons for the $4 million decrease in adjusted EBITDA were the decrease in gross profit, net of amortization appreciation of $3.1 million, substantially the result of the lower instant ticket margins, and the impact from the expiry of the Michigan iLottery contract of $2.1 million.

15:54 Further reducing adjusted EBITDA was the increase in administration expenses, net of ERP implementation costs of $1.1 million, and higher realized foreign exchange loss of $0.6 million. Partially offsetting those decreases to adjusted EBITDA were lower selling costs of 0.4 million and lower other expenses of 0.2 million. Interest expense decreased to 2.6 million in the third quarter of this year compared to 2.9 million in the third quarter of last year, primarily a result of lower interest rates in the third quarter of 26 compared to the third quarter of 25. Amortization and depreciation, including amortization and depreciation of our equity investment totaled $13.5 million during the third quarter of 2026, an increase from $12.6 million during the third quarter of 2025.

16:43 The increase of $0.7 million was a result of the additions to our property, plant, and equipment and intangible assets. Income tax expense was $3.7 million in the third quarter of 2026, an effective rate of 31.6%, which was higher than our domestic rate of 27% due primarily to the effect of withholding and other taxes. partially offset by lower income tax rates in foreign jurisdictions. Net income was $8.1 million in the third quarter of 26 compared to $10.3 million in the third quarter of 2025. The primary reasons for the $2.2 million decrease were the decrease in gross profit of $3.8 million, substantial result of the lower instant ticket margins, and the impact of the expiry of the Michigan iLottery contract of $2.1 million, as we discussed above.

17:31 and the increase in the foreign exchange loss of 0.7 million. Partially offsetting those decreases to net income were the decrease in income tax expense of 1.1 million, the decrease in excelling expenses of 0.4 million, the decrease in admin costs of 0.3 million and the decrease in interest expense of 0.3 million. Net income per share decreased to 30 cents per share basic and diluted in the third quarter of 2026 from 38 cents per share basic and diluted in the third quarter of 2025. Now, before I just end my comments, I do have to just note that we've announced in the previous few days that we have a new chief financial officer starting with us shortly. We're thrilled to have announced that Verica Simic will be joining us in the next few days, replacing, of course, our longstanding and fabulous chief executive financial officer, Rob Rose, who, as previously announced, is retiring at the end of this year.

18:30 Verica's got a fantastic resume and work experience that she's bringing to us at Pollard she's worked at some Canadian public companies that have been through some amazingly similar things to what we're going through in both the manufacturing side of our business and the digital parts and I know she's going to hit the ground running and be really valuable for us and we're really looking forward to having her joining with us and of course Mr. Rose who's sitting in the room with me this morning is going to be retiring as we announced at the end of this year. It's hard to know what to say about Rob leaving us. He has been just a tremendous asset and a huge part of Pollard Banknote in the over 30 years that he's been with us, most of that time as Chief Financial Officer.

19:16 When Rob started with us, we were this small private fledgling little lottery ticket printing company with about 40 million in revenue. And over that time, of course, we've grown to over 600 million in revenue become a public company sales and operations all over the world and seen tremendous growth and success and Rob has just been an integral and invaluable part of that that whole process in addition just a fantastic person to work with an important part of the culture that we create here at Pollard Banknote from just the way he operates and he's going to be tremendously missed so I Our final quarterly meetings with Rob just wrapping up and we wish him all the best in his retirement and thank him profusely for everything he's done for us.

20:10 So with that, that is the end of the prepared part of our discussions and operator, we'd be happy to entertain any questions at this time. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one in the touch-down zone. If you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star one should you wish to ask a question. And your first question is from Steven Billen from Raymond James. Your line is at Wilpin.

20:55 Morning. First question, I guess, would be, John, how do you get, you know, confidence that manufacturing issues are behind you? Because this is, I guess, is it a year ago, year and a half ago, there were some other manufacturing issues. So, you know, what steps have you done to kind of really make sure this doesn't continue to happen and just say another 12 months?

21:21 No doubt that this past quarter was very disappointing from that perspective of the manufacturing issues we had in our instant ticket operations during the quarter. We've had previous quarters with those troubles, as you note. Things did get better in the second quarter, and we had a couple of issues arise in the third quarter that increased those costs again. We've We've made a number of changes in our manufacturing team, partly due to retirements, partly not over the last year or so. Jeff Versterre has been leading that group for over a year now, and we are making, we believe with Jeff, some really good progress on the underlying fundamentals of how things have to get better.

22:06 We've also got new plant management in our main printing facilities in Winnipeg and Ypsilanti, Michigan, where we print most of our scratch-off lottery tickets. Those two folks have just joined us in the last few months and are really adding to our strength. So we do see over the last year or so the right kind of long-term sort of trajectory. Part of our issues in the last year have been ramping up our volumes for the higher California contract. And as we noted briefly in our quarterly results, the California onboarding has gone extraordinarily well. we've produced great product for them the customer is thrilled everything is meeting or exceeding expectations there but that did cause us to have to ramp up our volumes fairly significantly this year and there have been a few growing pains from part of that but we're we are coming to grips with those the long-term trajectory is getting better we're confident that those issues that we've seen are going to be addressed and so I appreciate that that's getting to be a A little bit of a broken record over the last few quarters, but we are actually confident that things are going to get better and the new people we've got in place are making a significant difference.

23:24 Okay. The second question is about the margin, and it's obviously just tied to what you just said, but you're expecting confidence and improvement in processes, but you've also got a lot of initial lead work going on, which I believe it's expense first and revenue I'm just thinking about the margin and the outlook and when do you think you can get back to that 20% even higher before some of these major initiatives offset by some of the challenges you have had in the manufacturing?

24:07 There's a number of things at play in the margin changes this last quarter. The way we report the Michigan iLottery contract, obviously, which is different from the other neopolar contracts where all those show up in our sort of one line joint venture income. Obviously, as we talked about in the comments here, there was a 2.1 reduction in gross profit coming out of the quarter from the Michigan contract expiring. and that's not a timing issue per se of course so that'll be a little bit of a permanent drag as we bring our other digital revenues back up so that was the one factor this quarter that will be a gradual process but secondly of course yes it is important one of the key things as we all know for our company is ramping up our own digital catalyst and loyalty revenues as you've just said we have invested a large amount of money in that product We have significant operating expenses that we're incurring now that, in fact, have been increasing a little bit over even the last quarter or two because as we ramp up further with Belgium and getting ready for Colorado.

25:14 So the key is bringing those revenues on. That's going to take a few quarters, unfortunately, for that to really ramp in. Colorado will start to kick in in Q4 of next year. Belgium is going to increase each quarter over the next couple of quarters, as we noted. and Kansas revenue will continue to grow as we ramp up the player base. So those things are going to take a few quarters to really materialize. Unfortunately, it's not a one quarter fix, but over the next few quarters, we should see significant improvement. Lastly, the other thing that has impacted our margins this year, as we briefly alluded to, was the mix of instant ticket work. We have unfortunately seen in 2026 not in California that contract's gone better than we expected from both the margin and volume perspective but on some of our other larger and higher margin instant ticket accounts we've just seen due to various reasons some lower volumes in 2026 from those accounts largely due to timing reasons fortunately and in when we look out to 2027 and even some improvement in the fourth quarter of this year.

26:23 We should see increased volumes and margins from some of those key instant ticket accounts coming back into play in Q4 and next year, and that will also improve our margins. And of course, lastly, those manufacturing efficiencies and the rework, we do expect that to improve in the very short run. We're seeing in Q4 already signs from our initial results that those efficiencies are getting better. Part of those issues is rework where we have games that can occasionally have, and we had one in Q3, we had a larger game that required some significant rework. It was a new innovation product, one of our new innovation products. I think we talked about this before where we haven't produced them a huge number of times before that we had some challenges getting right.

27:12 We don't expect anything like that to incur in Q4. So we do expect those inefficiencies to rapidly improve as well. So a number of moving parts in there, some quicker things and some that'll take a little bit longer to see the results from. Sorry for the long answer on that one.

27:29 No, that's helpful. And I'll just say lastly for Rob, congratulations on your retirement and thank you for all the calls and help over the years. It's been invaluable. So good luck in the future. Thanks. Thank you, Steve. Thank you. Your next question is from Jim Byrne from Acumen Capital. Your line is now open.

27:53 Yeah, good morning, guys. Yeah, I'd like to reiterate that as well. Congrats, Rob. Good luck in the future. It's been a pleasure. Maybe a couple of things. Maybe a question for you, Rob. Just on the cash flows, obviously operating cash flow this year has been depressed a little bit. Quite a bit of investment in working capital and maybe just Touch on what you expect for Q4 and what should 2027 kind of normalize?

28:21 Sure, sure. There's a couple of things that have impacted our changes in working capital, as noted when you look at the statement of changes, but within the nine month year to date numbers and even the last quarter, two of our large new contracts, the Belgium contract and the California contract have Different milestones and billing processes relative to what we've seen in the past. So on the Belgium contract, as is typical in a development contract, we put out a bunch of work developing the various parts that go into the new digital contract and solutions and the timing of the billing and collection of the cash is at the end of the delivery of each of those modules. So we're doing a significant amount of work that we're recognizing on a percentage of completion basis, but they don't get billed for quite some time, and you'll notice in the financial statement the growth in what we call our contract asset, and that's the work reform but not yet billed. And similarly on the California contract, we're paid at the retail level, so when the tickets get sold at retail, that's when we get paid, where traditionally you'll see getting paid when you ship the product to the lottery.

29:24 So those are two contracts that came on right at the same time, which of course are terrific contracts for ultimate profitability. But the timing of that cash comes in a little bit later, particularly as we're ramping up and building the two contracts. So that was a major part, probably about, I want to say about At least 50% of the growth in our net working capital was due to those two contracts. Over time, of course, they'll flatten out. So California will start to flatten out our investment. We'll sort of get to a sort of a steady state by the end of this year. Belgium will continue to grow as we continue to put out development work into next year. And then it will flatten out and start to reverse itself with net cash flow towards the end of 2027. Those are the bigger parts of the working capital investment.

30:10 So it will continue a bit, but it will start to flatten out and then reverse as we go through 2027. A couple of smaller things as well impacted us. We've increased our investment a little bit in raw materials of paper and ink to sort of provide some buffer with all these interesting tariff and trade environment issues going on. So we've built in a little bit more buffer just for protection purposes. And as well with the elimination of the Michigan High Lottery or the end of the Michigan High Lottery contract, There was some working capital that we paid out, some float that we had with them. So those are sort of one-time things, but we should see that start to flatten out and then turn around in 2027, just based on the logistics of these two new contracts.

30:54 Okay, that's really helpful. And then maybe if you could, Doug or John, just your comments on Virginia and the decisions not to bid there.

31:07 Yeah, thanks. I can address that, Jim. You know, we've been very successful with adding digital contracts, you know, and the work that we've had ongoing with Colorado now, with Belgium, with Oklahoma. And one of the real challenges in this business is how do you allocate the capacity and how do you wrap that up? But in the meantime, it's very important to us that we maintain that reputation for being a really good partner to deliver on time Deliver in this world. And so given that that's a challenge overall in our industry, we're really excited about the reputation we're bringing, but it means we've got to be careful about how we allocate that, as you guys would call it, dry powder. And so particularly with things like North Carolina on the horizon, we just came to the conclusion that we needed to preserve some capacity for some of those other opportunities.

32:03 Okay. So yeah, you mentioned North Carolina. Is that You're kind of saving some dry powder for that process. Can we assume that?

32:10 Yeah, well, that and others, but that's an important one, too.

32:14 Okay. And then maybe just quickly, you know, Kansas, looking at kind of the gross gaming revenue, it's been relatively consistent for the last few months, growing a little bit here and there. You know, do you anticipate further growth or is that going to be required, I guess, to reach that tipping point profitability or are we there at these types of levels?

32:38 Well, I can address some of the growth in the revenue, which is ultimately going to affect the margin. But perhaps, Rob, you can clarify some of that. You know, one of the things that we're really hopeful for is that now with the new contract, we can get a little more aggressive with the lottery and how we go about recruiting players. One of the big things that we do that is through some of our efforts with paid social and paid media and those kinds of things to grow that player base, especially during big jackpot runs. almost had a billion dollar run in Powerball, which would have been nice, but didn't. That was hit, unfortunately, last week. And, you know, with the certainty of the new contract, we think there's some opportunities for us to continue to partner with the lottery, but to really show them how to do that more effectively. And if we can add more players into the mix, it really affects the economies of scale in that operation, which is going to benefit the margins. I don't know, Rob Young, or sorry, Rob Rose, if there's anything you want to add to that, please do.

33:37 Sure, I can add a little bit. We did improve a little bit in the last couple of quarters but not as quickly as we thought. We're going to, so we're still in a negative position, but it is slowly improving. As Doug says, it was a little interesting during the RFP process and even the election process. There are certain things it's hard to do in terms of really starting to build businesses. People are sort of just on the sidelines in terms of what the lottery wants us to do in terms of getting aggressive, etc. As Doug points out, the winning of the new contract, the long-term contract, we now have the opportunity to put in place The levers that we wanted to do that we haven't had a chance to do working with the lottery to improve that top line. So we certainly see improvements going forward. It may take a little bit longer than we suggested some time ago that we're moving towards profitability at the end of the year. That might take into the early part of 2027. But certainly the trend line is improving a little bit.

34:23 And as Doug mentioned, you know, there are a number of levers now we get to implement that will help that. Okay, thanks, guys. Thank you. Your next question is from Rob Young from Canaccord Genuity. Your line is now open.

34:42 Hi. Good morning. I'll echo my thanks to Rob for all the help over the years. It's been great working with you. Happy for you on your retirement. Thanks for all the detail on the margins earlier. I was hoping maybe one other detail. You noted that you're doing a little bit of pre-buying on some of the inputs and I'm curious if you just give us a sense of is there any pressure on margins coming from you know higher costs on inputs given all of the trade issues and then maybe secondary to that would be around just pricing pressure in general given the competitive dynamic are you seeing a higher level of pricing pressure or should I think of that as something that's well defined within the contracts and not something that really moves in the short run?

35:31 It's Rob. Rob, I'll address the first little part. We really haven't seen a major impact yet in terms of some of the tariff costs. Of course, they have recently been changing on an hourly and daily basis. And all that we've done is really just to sort of protect ourselves working with our suppliers, both our existing suppliers and, of course, expanding our sort of backup suppliers, which is good management to do regardless. is just to make sure we've got that, you know, a little bit more runway in terms of the product that we have available just in case things change and tariffs would become a major impact on us. So there's a number of things we can do to mitigate that and one of which was just to make sure we have a little bit more extra stock on hand. You know, we run a little bit tighter historically.

36:16 but just with all the uncertainty you just want to make sure that you've got a little bit more flexibility going forward on the input so there's not really specific issues we've seen from a cost perspective impacting us a little bit here and there but nothing material at all it's more just a capacity issue to make sure that we've got the quantity and the availability of the stuff sort of in some more stable environment than what we've seen recently but hopefully the world has changed a little bit.

36:41 you know maybe it's John I might just jump in on the second part of that the in terms of instant tickets which of course is still our biggest product line in terms of the pricing environment there you know our recent win on Norse tipping or you know we had primary on that before but winning it back we were pleased there that that was one of our last remaining contracts that was priced at the old prices prior to the big input cost increases that we saw back in 2022-2023. And we were able to win back the Norse tipping contract with a significant price increase on our instant tickets. So that was a great sign. So the pricing environment for our scratch instant tickets seems to be holding relatively stable.

37:34 I think all suppliers in that market would like to see it even higher. As we just discussed today, our margins are not good enough in that product still, even though we're recovering nicely from the low points in 2022, 2023. And our main competitor, Scientific Games, has been posting some quarterly results lately, which aren't spectacular either. So We'd like them to be better, but at least we did see a price increase there on Norse tipping, and we're not seeing anything unusual happening in the pricing environment otherwise for our scratch ticket product. And in charitable as well, an important part of our business. As we know, we've got strong demand for charitable products.

38:19 We've been able to pass on some price increases there, as we alluded to in our comments as well, as the market prices rise a little bit there. They, of course, can change any time. Charitable is not long-term contracts, so suppliers are free to, for the most part, in 90% of cases, increase their prices whenever they feel is appropriate. Of course, on instant tickets, as you know, it's very different. You typically have three to five to seven-year contract cycles before you can implement price increases. So pricing environment on both instant tickets and the pull-tab tickets in the charitable environment have been different. increasing and supportive. Maybe not quite as good as we'd like still, but increasing. Doug, I don't know if there's anything you want to comment on in the pricing environment on digital. That one's a little tougher to comment on in some ways because there isn't as more one-off instances, not as much of a general market trend really.

39:17 Yeah, I would agree with that. The only thing I would add is that when it comes to the lottery's decision-making process, even though there have been bidders who are still trying to break into the space and bid lower pricing the lotteries are not deciding based on price particularly in the US market which is an important market for us to grow in we're not seeing price as a big portion of the decision-making criteria for lotteries and we think that's very encouraging for us because we've got as I say a great reputation for delivering well for being a vendor that lotteries want to work with and I think that serves us particularly well to go forth and not only grow our business but to grow the margin in that business.

40:03 Digital.

40:05 Thanks, Robert. That's a lot of color. You noted that some orders slipped into Q4. I think you said that they carried over into Q4.

40:15 Maybe give a little more detail there because like you noted in the Premier comments, the volume between Q3 and Q4 is a bit odd. and then is that a higher ASP contract perhaps that related to holiday sell-in or something that slipped or maybe give us a sense of the moving parts there?

40:35 That's just it's related to of course our ramping up for California. The California contract which basically kicked in January of this year of course was going to require us to increase our instant ticket volumes By about 15% or so from the prior year. So fairly significant step up in volumes. Not to levels we haven't seen before because as those of you who have been following us for a while know that a couple of years earlier with our French National Lottery contract, we did have those higher volumes in that range earlier. but it was about a 50% step up and we as we note in our remarks as part of the challenges of our instant manufacturing operations that ramp up has been a little bit tougher to do than we thought and so our volumes have just been a few percent below the last couple quarters what we would like them to ramp up to meaning that we're not quite as much ahead on our production schedule as we'd like to be A little meeting delivery dates a little closer to the timeline than we'd like, but we've met all of them.

41:45 That's not an issue. So it just means that literally some of those orders that we might have produced a little bit more before ship dates required didn't quite get done and slip over into the fourth quarter. But it's also partly just that we've got strong ongoing demand for scratch tickets that Q4 will be higher. So there's nothing really significant there, just the matter of slipping a few days behind in the schedule where we might normally be pushing some orders into Q4. And yeah, some of those are the sort of late deliveries of some of the higher margin Christmas kind of products that would have normally gone out maybe before September 30th.

42:35 Okay, thanks. Last question for me is just on the digital ETAB business. You said that Minnesota is now back at a higher level than pre the changes to the regulations. And so in 2027, like are some of these pilots or are you piloting? It might be the better question. Are some of these potential other markets, can they drive a significant level of growth in that business? maybe just give me a sense of your confidence there and where that business can go and then I'll pass the line.

43:12 Yeah, it's John. We're very confident about that ETAB market. We've got a great product there and it's a growing market certainly. We have a pilot project going in Virginia right now with the Virginia Lottery to test out that product. It's going really well. that we expect could involve an RFP coming out later in 2027 if that pilot proves out as we think it will. Secondly, there's a new market expected to open in New York State in early 2027 that the government has announced. The official actual start date hasn't been announced yet.

43:59 We expect it to be early in 2027. We're gearing up in a big way to be ready to hit the ground massively running there. It's limited to fraternal organizations in New York, so not quite as broad, definitely not as broad as the market would be in, say, Minnesota, where it's much broader in the bar market in addition to fraternals. So New York, it's just going to be in fraternals, legions, veterans organizations. That's still a significant market, though. So we expect New York to come on, and we're well-positioned to do well there. In Alaska, we were disappointed. We were hoping it would get approved in the legislative session that ended last year, but it didn't quite squeak through for various reasons. So we're hoping to see it back on the agenda in this year.

44:45 We've got a great offering we're ready to roll out in Alaska, and we hope it gets legislative approval sometime in 2027. Those are the two bigger markets, and there's some other things bubbling along too, but those are the three ones that We've got most of our eye on for the next few months.

45:04 If I add on to that, just to try and put context around that, those are much larger states, not Alaska, but Virginia and New York for sure, bigger than Minnesota. And so, you know, I was saying the locations, is that something that can drive a significant amount of growth in 2027? Or is that something that's just going to take several years to develop to get to something the size of Minnesota?

45:31 Well, again, so New York obviously is bigger than the market than Minnesota, but it's just in the fraternals. So the number of total locations of sale will be quite a lot less than Minnesota because it's just the fraternals. But still, even the fraternal market will be sitting, not as big as Minnesota, definitely not. It'll be much smaller than Minnesota, but still material to us. Virginia is a big state. That is a target to roll out in the bar market as well there. So if it Still not certain how that's going to play out depending on the pilot, but it could be significant more in the range of Minnesota. And Alaska is a smaller state than Minnesota, but still not tiny. It's a good gaming market, and it is a full rollout to the whole bar and fraternal market, not just fraternal.

46:20 So it could also be significant. You could compare the population of... Alaska to Minnesota and do some math on that as to what percentage but so all three of those have the potential to be certainly quite material not as big as Minnesota we don't expect any as big as Minnesota but each one could be material and hopefully roll out in various stages during 2027 some of them perhaps not till the end of 2027 but gradually over 2027 we hope some or all those will roll out. Okay thanks for taking all my questions. Thank you. Once again, that is star one, should you wish to ask a question. And your next question is from David McTaggen from ATB. Your line is now open.

47:17 Hello, David. Your line is now open. Hi, guys. Can you guys hear me now? Yes, we can. We can hear you now, yes. Okay, awesome. It's actually Zach on. Dave just had to hop on a call here. Thanks for taking my question. He's just looking for some clarity around if Virginia is half of the profit before tax or NPI. I can respond to that.

47:53 So we've got four very profitable contracts in the NPI category. A joint venture and all of them contribute to the bottom line. We obviously don't get into defining specific amounts of profit per contract, but all of the four contracts that we have contribute to the profitability in the joint venture. Okay, awesome. Thanks, guys. Thanks for taking my question. Thank you so much. And your next question is from Kelly Albert. Your line is now open. Good morning. Thanks for taking my question. It's around more on the manufacturing challenges and just wondering if you can add any further insight into what you've learned from the challenges that will help you mitigate these issues as you move forward.

48:49 In your writing, in your report, you have processes long-term. I'm just wondering if you have some more definitive timing along that process improvement, some deliverables that you want to get along the way that would move the needle a little quicker. Thank you.

49:08 John, answering that question, thank you. Obviously, it is a significant issue to our business. It's not the... Inefficiencies and rework that we've had in the last few quarters is not the biggest part of what's held back our performance from what we would have liked to have been over the last year or two, but it is significant. It is difficult to sort of define exactly a work plan to mitigate and solve the issues we've had because our manufacturing process is complex there's a reason why there's only three manufacturers of instant tickets in the entire world outside of China and the Pollard Banknote who have now been printing these scratch tickets for 40 years is basically the newest entrant in this business in those 40 years it is a complex process but look at Jeff Versterre who's head of our operations for this was in the room he'd be able to lay out for you a very defined process he has of working through these issues and over the next two or three years he has very ambitious targets for reduction of waste and inefficiency there is significant opportunity for improvement in our efficiencies and instant tickets and we expect to see systemic improvement each quarter going forward that will be material But there is no one sort of silver bullet change.

50:39 It's a number of blocking and tackling things that we have to do a little bit better. We've got some brand new manufacturing management, as we noted in both our Ypsilanti and Winnipeg operations, who are very strong, really experienced folks, engineers who've got great pedigrees in manufacturing. who are already helping us. Unfortunately, I can't give you a really definitive answer of specific things. It's a broad-ranging program, but it is very defined. It's all in writing and in the plans that our manufacturing folks have, and we'll see progress each quarter going forward. We're confident.

51:24 Thank you for that, and congrats, Mr. Rose, on your retirement. Thank you. Thank you. There are no further questions at this time. Please proceed with the closing remarks.

51:40 Okay, thank you. It's Doug Pollard speaking. Thank you operator and thank you everybody on the line. Although our Q3 results were below our expectations, we are very pleased with the recent developments of winning significant new contracts across our business lines. We remain highly confident that our long-term strategy is the correct strategy to ensure long-term profitable growth and we're very excited for the opportunities ahead of us for the rest of 26, for 27 and beyond. I thank you all for joining us and thank you for your support. We look forward to updating you next in the new year. In the meantime, have a great rest of your day. Thank you, ladies and gentlemen. The conference has now ended. Thank you all for joining. You may now disconnect your lines.