Pollard Banknote Ltd

TSX:PBL

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, everyone. Welcome to the Pollard Banknote Limited Third Quarter 2024 Results Conference Call. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could 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 actual results may differ materially from those expressed or implied in such statements. The risk factors that may affect the results are detailed in Pollard's annual information form and other periodic filings and registration statements, and you can access these documents at SEDAR+ database found at sedarplus.ca. I'd like to remind everyone that this conference call is being recorded today, Thursday, November 14, 2024. And I would now like to introduce Mr. Doug Pollard, Co-Chief Executive Officer of Pollard Banknote Limited. Please go ahead, sir.

[Douglas Pollard, executive]

Okay. Thank you very much, operator, and thank you, everyone, for joining us today on this conference call. With us on the call is John Pollard, Co-Chief Executive Officer; and Rob Rose, our Chief Financial Officer. We released our 2024 third quarter results yesterday after the markets closed. You can access our news releases as well as our complete financial information and MD&A on our website at pollardbanknote.com and also on SEDAR+. So today, we'll start out with prepared remarks from John and me highlighting the third quarter results and providing an overall business update and review of our strategy. This will be followed by a review of some of the underlying financial numbers for the third quarter by Rob, and then we'll open it up to questions.



Let me start up by saying we are extremely pleased with our third quarter results, which have continued the very positive trends that we've seen throughout 2024. Not only did we set a number of new financial records, we also attained a number of milestone moments from an operational and business development perspective. And these successes are a result of our singular focus on our vision, which drives our strategic plan. And that vision is we're going to be the partner of choice to help our lottery and charitable gaming customers responsibly grow revenue for good causes through outstanding games, retail excellence and digital innovation. Let's do a review of each of our major business operations and highlight the major accomplishments and successes over the last quarter.



Starting with instant tickets. The sales and production of instant tickets for lotteries remains a critical core product line for us and generates approximately 50% of our revenue. Over the last few years, our gross margins have been negatively impacted in a significant way due to the large inflationary cost increases on our key inputs like paper ink. Till 2022, we have been very successful in repricing our long-term contracts as they come up for renewal and rebid, and we have repriced the majority of our instant ticket contract portfolio and one of the significant positive factors in our improved results was these higher selling prices flowing through to our revenue. By the end of 2024, all of the contracts that we have repriced will be live and affecting our financial statements.



In addition, we are also experiencing some minor reductions in the cost of our instant ticket inputs, which also help to improve our gross margins. So we will continue to focus on the instant contracts that have not yet come due to identify additional repricing opportunities. At the same time, when we look at the broader lottery market, instant market, we are seeing data indicating the retail dollar sales of instant tickets is growing compared to last year in the low single-digit range after being stable over the previous year. You may recall that retail sales dollars jumped very significantly, like 25% coming out of the pandemic and essentially remained at those high levels for a few years and now appear to be back in a more typical historic growth mode.



The charitable gaming market, including paper products such as pull-tab and bingo paper and the eGaming solutions via kiosks and tablets, that remains a very important market for Pollard Banknote as well and consumer demand for these products remains very strong with many jurisdictions looking at expanding eGaming opportunities. Charitable gaming products generate significant positive cash flow for Pollard Banknote.



An important and evolving market in the lottery world is the ongoing development of iLottery. Pollard Banknote is committed to being a leader in the provision of iLottery solutions through provision of a state-of-the-art platform technology and innovative eInstant game content. And to achieve this, Pollard has established 2 parallel approaches to capitalizing on this opportunity. First, we have our NeoPollard Interactive joint venture, which operates 6 iLottery installations in North America, with the latest being the iLottery of West Virginia, which just went live on October 31, 2024. And so NeoPollard continues to be the market leader with a number of long-term contracts ensuring strong cash flow for many years as those contracts run forward.



Secondly, we are also extremely excited with our own in-house developed iLottery technology. It is our Pollard technology we call Catalyst, a leading edge omni-channel modular platform that has the capability to seamlessly operate lottery's existing brick-and-mortar gaming systems in addition to running their iLottery. So one system to operate all gaming systems. And complementing the development of our own platform technology is the growing internal development of our own exciting game content through an expanding eInstant game portfolio.



The exciting news this past quarter was that our strong belief in our Catalyst solution was confirmed during that third quarter with an exclusive award to Pollard Banknote of the Kansas Lottery iLottery contract. This is our first direct contract for iLottery in North America, utilizing our Pollard Banknote technology, the Catalyst technology. This milestone reflects the results of the enormous investment in people and dollars over the last 3.5 years, which continues today with the ongoing implementation. And we are very excited, we have a go-live date expected in very early 2025. When it comes to the iLottery market, Pollard Banknote brings unique expertise, very successful experience in large complex project management, years of successful iLottery operational management and history of seamless on-time implementations through our experience with iLottery as well as with our PlayOn loyalty club installations and multifaceted app and user interfaces focused on the gaming market.



We also achieved our first North American installation of our own in-house developed eInstant for iLottery, installing games and going live in Alberta. We've had success in Europe now for a number of years providing eInstant games, and this expansion into North America with its very unique regulatory requirements is another critical success in establishing our in-house iLottery technology offerings as a leader within the industry. During the quarter, we also acquired the business of Clarene J Venne LLC, we call them Ven, a leading manufacturer of bingo markers utilized primarily in the charitable gaming bingo market. That acquisition was approximately $17.4 million. For over 60 years, Ven has manufactured the world's finest and most innovative line of bingo markers, also known as Daubers or Dabbers. Ven's products are sold in every bingo market throughout North America as well as in 23 foreign countries.



This follows on our purchase for $5.4 million in the second quarter of certain assets used in the operation of electronic charitable games with licensed charitable gaming organizations. These acquisitions are a clear illustration of our strategy in both the lottery and the charitable gaming markets of ensuring we have a complete portfolio offering all solutions to ensure that we can be partner of choice. Our mergers and acquisition approach has been integral to our success and will continue to be used to expand our offerings. Now I'll turn it over to John to highlight some of the major financial numbers.

[John Pollard, executive]

Thank you, Doug. So starting off with looking at the third quarter of this year. Well, we achieved record quarterly sales of $153.3 million and also record adjusted EBITDA of $33.3 million and a strong net income of $18.2 million. In addition, our combined sales, which includes our share of the NeoPollard joint venture revenue was also another quarterly record $180.6 million. So pretty good news on the sales and earnings front this quarter for sure. So compared to our third quarter in 2023, our sales increased $24 million or 18%, and our adjusted EBITDA increased by $8.5 million or 34%. The sales growth was driven across a number of different product lines. But for sure, the biggest one was the instant ticket product line.



So higher volumes on our instant ticket product line, combined with the important thing that Doug talked about, the higher average selling prices that we've achieved increased our revenue by $17.7 million compared to last year in the same quarter. And those higher average selling prices is a direct role of our strategy that Doug talked about of repricing that we've been underway for a couple of years now and we're really starting to see the positive financial impact of that in our results. And in addition, as often typical in the third quarter, we had also a lot of higher-value proprietary products, including our Signature Scratch FX games, which has been a big player for us for years, our laminated fusion games and one of our newest innovations called EasyPack, which is a unique pouch ticket specifically designed to be vendable through ITVMs in the U.S. market, great new product we launched.



So had good overall sales from those proprietary products as well in the quarter. Charitable Gaming also continues to generate strong results. Our revenue grew by $3.6 million in the quarter versus last year, partly the acquisition of Ven that Doug just referred to and also driven by a higher number of machine placements in our e-gaming portion of the charitable side. And lastly, a weaker Canadian dollar also contributed to an increase in sales by $2.9 million in this quarter compared to last quarter. So that sales growth that we just talked about, of course, continues to drive our gross margin higher, which is a big factor we've been focusing on. We got to 20.2% in Q3, which is 250 basis points higher than the same quarter of last year. And we would hope to see that the full impact of our repriced instant tickets come into effect in the year 2025 and see further improvement in those.



Of course, we saw the impact of those higher selling prices for craft tickets gradually come into play and a greater effect as we've got through the quarters in 2024, but we should see those things more fully in 2025. Our administration expenses were up from $17 million in this quarter compared to $14.8 million last quarter, just as a result of growth in our business. This is due to increased compensation expenses and consulting costs, software licensing costs going up and acquisition costs as well. Partly offsetting these, we had an increase in the professional fees in the quarter. Same-store and selling expenses up a little bit to $5.9 million from $5.2 million in the same quarter last year. Again, just due to the growth in the business, mostly driven by higher compensation expenses and expansion of our charitable gaming division and the acquisition of CJ Venne.



The joint venture, our NeoPollard joint venture continues to do well, of course. So our share of income from that increased to $13.6 million in the third quarter, up from $11.1 million in the third quarter of last year. That $2.5 million increase was largely just due to organic growth on our stable contracts there, but particularly, we should give a shout out to North Carolina, which is one of our newest launches that continues to drive really, really strong sales. As I referred to a minute ago, record adjusted EBITDA in the quarter, $33.3 million compared to $24.8 million in the third quarter of last year. That $8.5 million increase was largely driven by the gross profit increase from the expansion of the instant ticket prices and margins that we talked about just a second ago. And of course, our share of the increase in our joint venture, NeoPollard joint venture income and slightly offset by the higher administration and selling expenses that I just talked about as well.





If we just quickly mention net income increased to $18.2 million in the quarter from $7.7 million last year. Same story there, the increase largely due to the increase in gross profits of $8 million flowing from our instant ticket margins. Also a net foreign exchange gain increase of $5.4 million and the increased share of our joint venture income in our NeoPollard joint venture of $2.5. Partly offsetting those increases, we had higher income tax expense of $2.5 million and then our administration and selling expense increases of $2.2 million and $0.7 million that we talked about before and a little slight increase in interest expense of just $0.3 million.



So that was Q3. If we flip now to the 9-month year-to-date numbers for 2024, sales were up to $416.8 million, which is an increase of $31.8 million or 8%. Same story there, the higher average selling prices from the repricing of our instant ticket contracts drove that up, a little bit offset by slightly lower volumes for the year on instant tickets. But we also had some increased sales of about $12 million from a better mix of product, again, those higher-value proprietary things and also strong growth in our loyalty solutions and digital products and also our merchandise products through Schafer systems as well. And so good growth in those areas.



In charitable gaming, our volumes were up as well, both in paper products and e-gaming. So we had an increase of $6.6 million year-to-date in charitable gaming. Our gross margin percentage improved to 19.6% in the quarter from 15.9% last year, a really nice increase of 370 basis points, again, largely reflecting those improved instant ticket margins due to the higher selling prices on our repricing. Just like in the Q3, our selling and admin expenses were up somewhat. We increased by $8 million to $65.9 million from $57.7 million. Again, higher compensation costs and the acquisition of VEND and some higher software licensing costs, just driven by the growth in our business. Of course, our NeoPollard joint venture also produced some really strong results year-to-date.



Our share of profit was up to $39.9 million, which is up $11.9 million or 42% from the year-to-date number last year. Just grown driven by organic growth in sales. But again, North Carolina is the particular star this year in that portfolio. So just looking at adjusted EBITDA for the year now, we are up to $89.3 million for the first 9 months of 2024, really nice increase from $65.6 million in the first 9 months of last year, 36% increase. Again, primary reasons for this growth were the gross profit increase from our instant ticket margins and licensed products and also growth in some retail merchandising products and e-gaming systems sales that we talked about. And of course, strong contribution from our share of our joint venture in the Neopollard joint venture, where we had $11.9 million increase there.



Partially offsetting that was increases in selling and administration expenses of $7.9 million that we referred to. And then lastly, just looking at net income, our net income increased year-to-date up to $37 million. $16.9 million increase or 84% compared to the same period last year. Again, the increase in gross margin is due to our improved instant ticket margins. And of course, our share of the joint venture NeoPollard income were the major contributors there, offset again by the selling and admin increase of $8 million and income tax expense increase of $5 million and a small increase in foreign exchange loss of $2 million. A lot of numbers to throw at you all there, but obviously, a lot of records and really strong improvements that we're pretty excited about. So I think I will now turn it back to Rob Rose for a few further comments before we get ready for questions.

[Robert Rose, executive]

Thanks, John. I'll just highlight a couple of other key numbers relative to the balance sheet and cash flows. Our capital allocation strategy is the beneficiary of the significant cash flow generated by our operations, one of the hallmarks of our company. It allows us to finance a significant portion of our ongoing investments with internally generated funds. We believe it's important to allocate capital across the spectrum of requirements for all of our stakeholders. First and foremost is the need to continually reinvest in our capital and intangible assets. During the third quarter, we continued to fund growth in our property, plant and equipment, including additional e-gaming machines for placement in new sites for our charitable gaming group and important technological upgrades for our instant ticket press line.



In terms of intangibles, we continue to make significant investments in our in-house Catalyst iLottery technology, as mentioned by Doug, including expanding our e-instant game content, which is a critical component of successful iLottery. These investments occur for both ongoing feature enhancement of our main solution as well as contract-specific specialized development to meet each client's needs. In the 9 months ended September 30, 2024, we have invested $20.4 million in property, plant and equipment and $19.7 million in intangibles. This compares with the $12 million and $16.9 million, respectively, in the same period in 2023, and it reflects the increase in investments mentioned previously.



Our disciplined approach to capital is underlined with our conservative debt management policy. We retain an extremely low level of leverage with significant available dry powder providing us with both the resources and the ability to react quickly in deploying capital when needed. Debt repayment will always remain a key plank in our capital management policy. Also in the 9 months ended September 30, 2024, we invested $20.7 million in additional working capital. That's a large investment. And the primary reasons include a significant increase in the related working capital, particularly accounts receivable and inventory, supporting the significant increase in sales we experienced in the third quarter.



In addition, the mix of our customers during a particular period affects the timing of cash inflows, which can vary significantly quarter-to-quarter. And the nature of our business can generate large swings in our working capital as we experienced during the third quarter. Returning capital to shareholders has also been a consistent principle of Pollard as we've always maintained a regular dividend throughout the history as a public company. And of course, as mentioned previously, a very important use of our capital is funding our acquisitions, which included the purchase of Clarence J.Venne during this quarter for CAD 17.4 million. That's the end of the prepared part of our discussions. Operator, we'd be happy to entertain any questions at this time.

[Operator]

[Operator Instructions] Your first question is from Jim Byrne from Acumen Capital.

[Jim Byrne, analyst]

Congrats on a great quarter. Just a few questions for me. Maybe if you could give us a few more details on the iLottery growth through NTI. We know North Carolina had a very fast launch. Maybe just give us an idea of how quickly that has grown relative to previous launches? And then are you still seeing growth in Virginia as well?

[Douglas Pollard, executive]

Thank you very much for your question. It's Doug Pollard speaking. You're correct. North Carolina has been an exceptional success and has seen tremendous growth. Now remember, we had operated draw games in North Carolina for several years, and they had just added eInstants into their game portfolio in the last year. And it's in that time sort of in that last year that they've really seen that growth. And what we've learned and observed in the iLottery market is each subsequent launch learns a lot from the previous ones before it. And we brought a lot of that knowledge, and we've acquired a lot of that knowledge through our involvement in NeoPollard and so yes, North Carolina was most successful, but the most successful one before that was Virginia, which was its predecessor.



And so yes, it's had fast growth, and it's rapidly going up. And as they get a little more mature as Virginia is, some of that growth starts to slow down a bit, but they are still very much growing. What you should be aware of when looking at the iLottery market is there's still quite a bit of noise that comes into it from the draw games. And what you saw was about a year ago, really a statistical anomaly with the number of billion-dollar large jackpots for Mega Millions and Powerball. And over the last year, I'd say we've returned to more of a historical statistical pattern of when those jackpots fall. So you got to discern some of the revenue growth within that context.

[John Pollard, executive]

It's John speaking. I would just say we -- some of the other accounts within the NeoPollard portfolio have obviously seen a little less growth than North Carolina, maybe a lot less and some flattening there. But as Doug just mentioned, it's in context of those lack of draw games. So the fact that we continue to get growth in the last few months in iLottery and some of the really mature accounts that have been out for years in the face of those lack of jackpots just, I think, shows the resilience of that product line.

[Jim Byrne, analyst]

Okay. That's helpful. And then just looking forward to Kansas, I know the state lottery and the instant ticket is quite small there, but they do seem to have a very large sportsbook, certainly relative on a per capita basis. So I'm just wondering where do you think Kansas kind of falls out on the iLottery growth and the launch there? What are your expectations?

[Douglas Pollard, executive]

That's a good question, and I don't think we'll speculate on exactly where they'll fall down in terms of a specific number, but we are very optimistic about it. We think we understand how to drive revenue in jurisdictions. And so even though Kansas' brick-and-mortar lottery sales on a per capita basis aren't as high as other lotteries, we think they can be very successful from an iLottery standpoint. And one of the really important foundations to understand there is we've worked with them for a number of years and developed a really outstanding player loyalty program. And from that, in fact, that's part of the contract basis for this. It was part of the experience of us running that well, launching it on time when we did some major technology changes there about a year ago, and that gave the lottery confidence. But it also means that we know they've got a player database of a few hundred thousand players whom we can access right out of the gate. So that gives us a lot of confidence between that and our knowledge of how to operate this that we can be very successful in Kansas.

[John Pollard, executive]

It's John again. I'll try not to jump in on everything that Doug says, but the other -- when you look at these different states, you mentioned sports betting and Kansas does have online sports betting. We're not seeing -- and it's early days because there's only really 9 or 10 iLottery platforms out there, but we're not seeing much competition, if you will, between online sports betting and the results of iLottery. We are seeing impact when there's iCasino gaming. And so you saw that in Michigan when they launched the iCasino type gaming a few years ago that it impacted the growth of Michigan sales. So the other nice thing in Kansas is although they have online sports betting, they do not have online iCasino product in that state yet. So that's a nice factor in favor of what we'll hopefully see is some good results in the Kansas launch.

[Jim Byrne, analyst]

Okay. That's helpful. Maybe just on the instant tickets a couple. I know volumes were up considerably in the quarter. I know some of that is seasonality. Maybe just give us an idea on your production volumes. I know you've had some issues around production constraints in the past few quarters. Give us an idea where you are on capacity and if you've kind of resolved any of those production issues on volumes?

[John Pollard, executive]

We had production issues on our charitable gaming product line last year or so in terms of just a whole range of things that kept down our production volumes on the charitable gaming side, which is unfortunate because there was strong demand that we weren't able to quite meet. We've pretty much resolved all those issues on the charitable gaming product line and are -- have had record production levels in the last few months in charitable gaming. On instant tickets, we didn't have any production problems or issues exactly the last year or so. I mean, going way back to the pandemic area, there was some issues, obviously. But the last year or so, we haven't had production problems. The issue on instant tickets last year, so as our overall volumes, our physical volumes and tickets are down a little bit because as we talked about in previous quarters, we've been a little selective the last year or so in work that sometimes, when we have secondary contracts, when you're primary, you must take the orders that you're contractually obligated. And even sometimes when you're a secondary, but sometimes when you're a secondary supplier, you don't have to take orders from customers.



We've been a little more selective because of that huge increase in our input costs that we talked about in the last couple of years, made some of our products or some of our customer products unprofitable. And so we've been trying to avoid some of those orders when we can in the last year or 2, which is an odd thing for us. It's the first time in decades in this business that we would not have said we just want to take every order we can possibly get. So we've tried to avoid some orders, and that's kept our volumes down. And so our volumes going forward, as we look out now, will likely be a little bit lower because we are still selectively avoiding some of those ones that we haven't been able to reprice to our satisfaction. It's primarily one customer product line that we haven't been successful on because we really have been very successful on every other customer pretty much. And just last comment. Overall instant ticket volumes are still holding up strong and stable, as Doug referred to in his comments, seeing a little bit of evidence in the last few months of a return to some growth in that overall product line as well.

[Jim Byrne, analyst]

Okay. And that's -- maybe I'll just squeeze one more in. I know you mentioned that the repricing is largely done for 2024 and should impact 2025. In 2025 or '26, how much more repricing is left to be done? I know there's still some long-term contracts that are up for renewal in the next number of years.

[John Pollard, executive]

Yes. I mean, we've repriced the vast majority of our work. There's some room to go, but there's -- when we look at the customers that we haven't repriced, some of them have got 2, 3 years left on their contracts because, in some cases, our contracts with renewals can run 7, 8 years. We were actually quite fortunate really in that repricing as we only started a little over 2 years ago, really, 2.5 years ago. And as we talk about in this business of ours, the strength of our long-term contracts, well, of course is the one time that we were fighting our tongue a little about the strength of it, but we had sort of good fortune on the timing of some of those renewals that we had a fair bit of our stuff come for renewal in the last 2.5 years. And so we're up over 75% or so of repricing. And it might be slow to get the last parts, but there will still be significant lift in our revenues for the full year of 2025 because we only had partial results on those price increases in 2024. Even in the third quarter, we're still not seeing the full impact of the ones we've repriced that won't all hit. Some of those contracts are just hitting in the fourth quarter that they're actually -- the new prices are coming into play.

[Operator]

Your next question is from Robert Young from Canaccord Genuity.

[Robert Young, analyst]

It's great to join you on the call this morning. The first question would be a continuation of the last one. Could you just be a little more precise on that? I understand that when you renegotiate, there's a lag between the agreement and when that comes into force. And then there's also a consideration on the number of contracts that have been repriced. Maybe we could just use baseball innings or what inning are we in? If you could just give us a sense of where we are in that repricing, that would be helpful. And then on the other side of that, I think you noted that you're seeing some benefit in input pricing. Maybe you could just give a little more context around that. Is that just freight at this point? Or are you seeing better input pricing on card stock and paper and ink and that sort of thing? Give us sort of a rundown on where that is and where you expect that to trend over the next year?

[John Pollard, executive]

I mean, it's John. On the -- I'll quickly deal with the cost input side. We have seen reductions in our freight cost -- significant reductions in our freight cost, getting close to back to pre-pandemic levels in many cases. Of course, as an aside, I'll just throw in my cranky old comment about the port strikes and the lockouts in Vancouver and Montreal are really bad for our business, frankly. I shouldn't be negative on this call, but it's upsetting to our customers to see that. So it's great to see that Vancouver is reopening today. But that's our bug really on freight. But -- so the costs on freight are coming back to normal. But most of our other inputs, we haven't seen -- so what we've seen is a complete stop in any further increases for the last year or two. We haven't seen anything on the increases further, which is terrific.



On paper, where we had like on average on different grades, about probably in the range of 35% increase in paper costs on average. We have seen some reductions maybe in the 5% to 10% range that will be coming through -- started to come through a little bit in the last few months and more fully in 2025. So that's not insignificant. Not much else has rolled back tiny little bits in ink, some of our suppliers, maybe a couple of percent here and there. Ink also was up 35% or so as well. So look, the 5% or 10% on paper and the freight reductions are not insignificant. That's definitely a help. So that's going to give us a little more of a lift in 2025.



God willing, if it all stays there compared to 2024. But coming back to more precision on our selling price stuff, I just mentioned a number of 75% that we repriced, which I won't give any more precision than that on the overall thing. And we'll just say that, look, we gradually saw that stuff that we've repriced basically has come in somewhat gradually quarter-by-quarter through 2024, starting a very small amount in the first quarter and growing sort of incrementally in a relatively even way through the other quarters, which we'll again see more growth in Q4. And as we've said, that will all be reflected by January 1, 2025, of the contracts that we have repriced. So I think that's as much precision as we're probably going to give.

[Robert Rose, executive]

I'll just add, Rob, that it's also difficult to put numbers to it because it really varies on what we produce, and that can vary between quarters. So you can have some customers, you have a standard portfolio, but you won't produce all that same. So when those particular customers actually get printed, will vary it over time, but they'll all be part of the revenue going forward at the beginning of 2025 that we repriced so far.

[Robert Young, analyst]

The Michigan was a little bit weaker this quarter. Maybe you could just go over the puts and takes there, iLottery in Michigan specifically.

[Douglas Pollard, executive]

Yes. In Michigan, there's really a couple of factors, probably I'd say, three factors. Part of is the same effect that I mentioned for every iLottery and frankly, every lottery selling draw games was the lack of big jackpots for Powerball and Mega Millions. The second issue in Michigan is they have a lot of competition. When Michigan first launched iLottery back in about 2014, it was the only online game in town. There are now about a dozen online casinos that you can play. And if you spend any time in the state of Michigan, the only thing you hear -- well, not more than political advertising, but close to as much as political advertising, perhaps is the online casinos, and it's very hard for the lotteries to keep up with that on an ad and promo basis. So that hurts them. And we had some kind of onetime processing charges there in Michigan that is -- that's largely now worked through and worked out, but that did affect the numbers in Michigan, which we break out separately.

[Robert Young, analyst]

Okay. Great. I'm very happy to see the Kansas iLottery win. Congrats on that. If you could get a little more -- into a little more detail around why they chose Catalyst. I understand they took an option in the play on contract rather than doing a full RFP. But did they do a full due diligence across all the different platforms? Why did they choose Catalyst over the different options there? Any other context that would give us a sense of your competitiveness in the North American market with Catalyst?

[Douglas Pollard, executive]

Yes. So the first thing I would say is -- I'll reiterate that we have operated their loyalty platform, including their mobile app and other things for that for a while. And we just in Kansas, about a year ago, did a very significant upgrade to that platform, which we delivered on time. And that sort of showed the skill set that we're developing in an industry for large technical project management done really well where the lottery still feels in control, but it gets delivered on time. And that gave them great comfort with us to start with. They then -- they have multiple contracts with multiple vendors and the tactic that we employ of putting in things like iLottery is options, our competitors do as well. And they had options with other competitors, and they assess those. And one of the things that they looked at was timing. So when lotteries have the ability to do this, it's usually -- all lotteries want to sell online in the U.S. There's usually some kind of legislative prohibition or a pushback from the governor or whatever the case may be.



When that door opens, they want to go through it as fast as possible. And when they assessed our competitors and us, they thought that -- and I think correctly so, that Pollard Banknote was going to be the partner that could launch them the fastest and quite honestly, the most effectively. And I think they've now seen that, that's worked really well, and it's been a really positive process so that when we're out at conferences with multiple lotteries there, the campus lottery speaks very highly of the process they're going through.



And that reference in what is still a pretty small business is important. And I guess the last thing I'd say on it, Rob, is underlying all of that is we have really well-designed technology in an industry where some of the technology is kind of dated. And that allows you to be more responsive. And that doesn't mean just getting launched faster, although it does mean that. It also means when lotteries want to respond because they need to introduce new game plays, new payment mechanisms, new bonus mechanisms, whatever the case may be, that new technology will make you more efficient, and we are seeing the benefit of that. So I'll acknowledge it was a bit of a risk for Kansas. But when they surveyed the landscape, they assessed it was the right thing to do. And I think that, that is being borne out, and they're going to be a terrific reference point for us.

[John Pollard, executive]

Sorry, it's John. I got to say one more thing on this. I feel bad, always jumping in here. But it's an interesting time in the sort of the landscape of our competitive industry here. So we were just a month or 2 ago at the North American State and Provincial Lottery Annual Conference. So there's obviously 2 big players in the lottery business that we've been competing with for a long time, Scientific Games and IGT, formerly GTEC. Those folks are much bigger than us. And you would think they would have the inside track on a lot of these things. Look, Scientific Games is in an interesting position because they have been sort of spun back out of the combined entity that had a whole bunch of things that were cobbled together, then the other entity is now called Light & Wonder that kept all the sort of the casino side assets.



But when Scientific Games was spun out of that as kind of the lottery division, they did not keep most of the digital assets that have been cobbled together in that Light & Wonder Scientific Games business over the last number of years. So you have Scientific Games standing up at the North American conference saying, "Please don't put experience requirements very strongly in your RFP bids for iLottery, you need to be open to new solutions," because Scientific Games essentially doesn't have a solution because they lost them all in the way that the company was spun out. So they are coming from behind trying to develop a solution. And in some ways, talking similarly to us where we're saying to people also, "Don't be too prescriptive in your experience requirements." We have, with our solution, good experience in the European market with when we acquired NGL, they've been active there for decades, but we didn't have North American experience directly ourselves.



But look, our -- one of our big competitors, Scientific Games is not in particularly good shape that way. And I'll lastly just comment on IGT also should be the 800-pound gorilla there, but their technology is old, and they haven't kept it up to date and customers are recognizing that when they look at it, and they're not that excited about it.

[Robert Young, analyst]

I think one of the things you noted was that Kansas wanted to move quickly. I know earlier this year, DraftKings did a fairly large acquisition in the lottery space. And is that a competitive concern for you? Or is it the lotteries wondering whether they need to move more quickly, I know iLottery before the iGaming space or companies like DraftKings take it away from those. Is there any sense that there's a faster-moving intent here in iLottery?

[Douglas Pollard, executive]

Well, let me address that specifically. So DraftKings bought a company called Jackpocket, and they did so for a fairly sizable amount of money, even though it's our understanding that, that company did not have significant profits. And in their earnings -- in their investor calls and other things, what they've explicitly said is that Jackpocket has a pretty low cost of acquisition for players for DraftKings, maybe as low as I think they said 10% to 15% of the cost of what DraftKings has to pay. And that's because what Jackpocket is, it is a courier company. where they will go into markets. They are most active in markets that don't have iLottery. So take a market like Texas, and they run a courier model, which is -- which sounds on its face kind of -- well, if it sounds euphemistic, it is, they're really selling an online play of Powerball and Mega Millions where you buy it via your phone. That order gets received at a physical store location in Texas.



I might add, they do geolocate. So they take the order from someone in Texas, a player in Texas. They take the order, it goes to a retail store. They print out an actual ticket on a regular lottery terminal and they scan it and they send a copy back to the player. If the player wins, they can cast their prices right into the bank account. So the player never sets foot in a retail store, but they're considering the wager to be placed in that store. And lotteries are kind of looking the other way on it. And so it's a way for them to get -- it's a way for lotteries to get a bit of revenue from kind of iLottery like. I don't think it works as well for eInstance, although they are trying there. And -- but the real drawback for lotteries is they don't know who those players are. And I think lotteries should be very concerned that when DraftKings and Jackpocket acquire those players, they're using the lotteries great assets.



Lotteries, Powerball and Mega Millions assets are really, really powerful. And they're using those to bring players in. They keep them in their ecosystem, and now they can message them and sell them certainly online casino if and when it's available and maybe even other products. And I think in the long term, those players could be lost to the lottery ecosystem. And I think that's a big mistake. And many lotteries are waking up that that's a big mistake. So it's -- that's the context to it. So in effect, they are a partial competitor for the draw games. And it's not really something -- a competitor for us specifically, it's for the lotteries, and we're kind of working with lotteries to help them understand that and try not to take that short-term benefit from the couriers because I think in the long term, it's worse off for them.

[Operator]

[Operator Instructions]. Your next question is from David McFadgen from Cormark Securities.

[David McFadgen, analyst]

Yes, a couple of questions. So when I just look at the Q3 results, I'm just wondering if you benefited from a particularly strong quarter from pulling some business from the fourth quarter into the third quarter. Was that a factor in the results?

[John Pollard, executive]

No. So it's John talking. No, not at all. We're still -- we don't actually have a lot of flexibility to do that on our instant ticket printing for sure because everything we get is made-to-order orders when the customer places the order. So we can't really get ahead. We can't build for inventory. And so we just typically don't have much ability to do that even if we would like to sometimes because when you have big customers like California and Texas that drop in lumpy orders, you'd like to smooth them out a little bit. We just typically can't.



So I know that we're basically producing like normal in Q3 where the product ships out the door almost right away after we produce it. There's a little bit of ability to do that in charitable gaming side with our printed pull tabs because you can produce sort of stock games. We do -- in charitable, we do a mix of custom games and stock games, and so you can do a bit in charitable. But -- and we have been rebuilding our inventory a little bit in charitable because it got down to nothing when demand was strong and our production was weak. But that's not a factor at all in the instant ticket side results in Q3.

[David McFadgen, analyst]

Okay. So when we look at the EBITDA margin, excluding iLottery or your core instant ticket business, clearly, it's improving. You're benefiting from the pricing that you passed on. I was just wondering, is most of the improvement in the EBITDA margin this quarter driven primarily by that? Or is there also product mix that had a significant impact?

[John Pollard, executive]

It's John. I mean Q3 always has a little bit better product mix because it's that we're producing for the holiday season and the holiday season tickets that get sold in November, December, the lotteries typically like to jazz them up a little bit with sort of fancier options, if you will, more of the scratch effects and things that we have. So Q3 has always got historically at our results, got a little better mix. So there was a normal amount, some of that, but the much bigger vast majority of the growth in gross margin was the repricing of our instant ticket contracts.

[David McFadgen, analyst]

Okay. So I'm just wondering, I don't know if you can comment on the fourth quarter, but I was just wondering, do you think the margin on the core business, excluding the iLottery, do you think it will be the same as what you've experienced in Q3? Or we could see some more sequential improvement there?

[Robert Rose, executive]

Just Rob here, David. So we'll still get the benefit, as John and Doug mentioned, is we still have a full-year impact to roll out of what we've gotten in repricings during this year that came in incrementally quarter-to-quarter. So we'll have most of that now on the books and operating in contracts that were live by the end of the year. So we'll get that full benefit over the year. So we'll still have room to grow that margin. And of course, we're talking mostly of the instant ticket margin. There's also our charitable gaming and our ancillary products in there as well that we're always looking to increase the margin. So there's still room for growth. We don't give guidance, but just alone on that, the increase in a full-year impact of repricing will have a positive impact on our gross margin.

[David McFadgen, analyst]

Okay. And then just looking at the NPI business. So in the past, you've called out benefit from having large jackpots at Powerball and Mega Millions. In Q3, they were down quite a bit, but NPI really put up a pretty good quarter despite that. So should we take it that the business has evolved to a certain maturity that it's not so dependent upon these large jackpots going forward?

[Douglas Pollard, executive]

I don't think I would interpret it that way. I think what you're seeing is some of the growth in markets like North Carolina and then regular markets, just general growth in iLottery. Big jackpots are still very important for the business. I mean it's not the only factor, but they're a very important way for acquiring first-time depositors. And so when you don't have those, your player funnel suffers. Now of course, what we do in between big jackpots and frankly, all the time is manage the player base that we have to try to keep people responsibly playing with some degree of frequency. So we do that to kind of smooth out those valleys. But there's definitely a replenishment that comes in during those big jackpot runs. And it just wasn't as strong over the last year, although again, I'd reiterate that a year ago, that was an abnormal statistical set of factors with the frequency of those big billion-dollar jackpots. We should not count on that.

[David McFadgen, analyst]

Okay. And then can you give us an update on the status of the Belgium RFP and the Massachusetts RFP?

[Douglas Pollard, executive]

Yes. I mean there's not too much to say there. Massachusetts has released an RFI, and we've been engaged in that. They are going through a process to hire a firm and help them draft the RFP, and they're expecting that to come out at some point in the next, I don't know, I shouldn't even say, but probably 2025. But I don't know exactly when that will come out. Belgium is a process that has been underway, and we've been participating in that, and it's on their timeline, and we don't know exactly when they will finalize that, but we're in the midst of it, and it's ongoing today.

[John Pollard, executive]

I mean -- sorry, John. I mean, on Belgium, we expect to be filing in the next few months, but it's been delayed from what they originally would have thought. But next few months. And we know they're really impressed with our solution there. So we know we're in the mix on that, but that's as much as we're going to be able to say for now on that one.

[David McFadgen, analyst]

Okay. And then what's the status of the Ohio RFP is going on a while? And are you still in the running on that one?

[Douglas Pollard, executive]

Well, I don't sure there's anything specific. I presume you're talking about iLottery and because Ohio had a separate contract they've just awarded for their retail central system contract, which we did not participate in. Ohio was a state that in the past had gotten close to doing iLottery and went through a process. There was some question at that time that the governor and the lottery director thought that they could do so without legislative change. I might say that there were some in the Ohio legislature that felt differently that felt there should have been legislative change. And that sort of bogged down that process, I think, started in 2018, and it kind of bogged down, and I'm not aware of anything going forward, although they are certainly in discussions and contemplating what their actions are, and we're engaged in that process. But I don't think there's anything specific happening there.

[Operator]

[Operator Instructions] And your next question is from Jim Byrne from Acumen Capital.

[Jim Byrne, analyst]

Just a follow-up on Walmart made some headlines a few months ago. And I know you guys have had some kind of big box initiatives about streamlining retail sales. Maybe just give us an update on kind of where that process is and how you see Walmart fitting in all of this.

[Douglas Pollard, executive]

I don't know that we can comment on that. That's certainly an ongoing process. Let me just give you 2 bits of context for Walmart. They've become an important part of the lottery landscape. They typically sell at their customer service counter and through vending machines. And they were quite demanding even with their vending machines. They wanted them to be a specific height, for example. So there's a whole new style of lottery ticket vending machines that were developed for the Walmart market. Along the way, Walmart has been engaged with another party to potentially have more of a specific Walmart lottery system for draw games, potentially well, draw games at retail and I suppose, potentially draw games online. But that's an ongoing process. I can't comment on it, and it's not clear where that's going.

[John Pollard, executive]

I mean we do have our Easy Vend solution that we've just started rolling out in 2024, which is a solution to get into multi-chain -- sorry, multilane checkout situations like the big box people in Walmart and had lots of interest in it. The rollout has been a little slower. We don't have too many units out in the field yet, but lots of interest. We just unveiled a brand-new version of it at the World Lottery Association Trade Show in Paris just 2 or 3 weeks ago that people are pretty excited about. So we have this solution ready to go in the market that's deployed in some venues in Texas where the hardware goes right in the multilane checkout spot.



And if the person is going through the checkout, they can select their scratch ticket and it gets dispensed right there at the checkout and they take it away with them. and you sort of integrate directly with the retailer's POS system. So it's a fairly technically complex installation because you're integrating directly with the retailer's POS. But lots of interest in it. We think it's going to be a great product. It's been a little slower rollout in the last few months than we thought, largely due to the technical complexity of the integrations.

[Operator]

There are no further questions at this time. I will now hand the call back to Doug for the closing remarks.

[Douglas Pollard, executive]

Okay. Thank you very much, operator. In closing, we are extremely pleased with the achievements attained in the third quarter. And indeed, with the results of our strategic initiatives that have driven our growth and progress over the last few years, the substantive changes we have made in repricing our instant ticket pricing models, our commitment to developing innovative product and solutions, our significant investment and successful deployment of what we believe is the industry-leading iLottery technology and instant game content and our growing portfolio of charitable gaming products. All that has laid the foundation for the continued future success that we expect, and we look forward to discussing further these strategies and updating our results in March after the release of our fourth quarter and annual 2024 results. So on behalf of John and Rob and me, thank you very much for joining us, and please enjoy the rest of your day.

[Operator]

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.