Lottery solutions provider Pollard Banknote said while higher production costs for instant tickets continued to put “significant negative pressure” on margins during the third quarter, it was able to keep net loss low.
Pollard first noted inflationary increases in prices of materials such as paper, ink and freight in the later part of 2021, with these having impacted the business throughout 2022. Further rises came into effect in Q3, and while another increase is due in Q4, Pollard said this will be smaller.
As its instant ticket contracts average around four years in length, with primarily fixed prices for the entirety of the term, Pollard said it is difficult to pass on input cost increases in the short term.
However, co-chief executive John Pollard said that despite these issues, the business was able to reach a quarterly production volume record for instant tickets in Q3 and that the business has in place a number of strategies to help offset price increases.
“Our instant ticket business attained a quarterly production volume record; this was a nice return to more efficient production following some challenges in the second quarter, which negatively impacted production,” Pollard said. “Fewer mechanical issues and, while still a challenge, our ability to staff and maintain full operations throughout our production facilities improved in the third quarter.
“One of our key strategies to offset these significant inflationary input cost increases is through raising our selling prices during contract extensions and RFP’s as they come up for bid.
“While still early in the process, we have had a number of successes retaining work at higher pricing in new bid situations, reflective of the input cost increases we have to absorb. Indications within the marketplace so far appear to confirm the industry recognizes the need to adjust pricing and we believe this will continue.”
“Most new contracts are awarded in advance of the end of the existing contract’s term and come into effect sometime in the future. Therefore, most of the price changes we have already negotiated will be implemented throughout 2023.
“However, ultimately, these higher prices will allow us to improve our margins on our instant ticket business. We also continue to diligently review our customer profiles to identify opportunities to focus our efforts on more profitable clients, which may result in lower volumes as we reduce sales to lower margin clients.”
Looking at Pollard’s financial results for the third quarter, revenue was up 7.4% year-on-year to $125.5m (£110.1m/€126.2m), helped by an increase in revenue across both its igaming and charitable gaming segments.
Combined ilottery revenue from its online gambling deal with the Michigan Lottery and its share in the NeoPollard Interactive joint venture with NeoGames amounted to $20.2m, a new quarterly record for the business.
Cost of sales for the quarter were 11.4% higher at $104.9m, while administration expenses also increased 3.3% to $12.5m. Selling costs were level at $4.5m and other expenses were down, but Pollard did note a negative $6.0m impact from equity investment activity.
Foreign exchange loss amounted to $4.7m and interest expense $2.0m, which mean that pre-tax profit was a flat zero. Pollard accounted for $2.9m in tax but benefitted from a deferred reduction of $2.7m, meaning it ended the quarter with a net loss of $200,000, compared to $600,000 last year.
In addition, earnings before interest, tax, depreciation and amortisation fell from $12.3m to $12.1m in the quarter.
“The fundamentals of all of our business lines remain very strong and we are confident that our higher pricing strategy for instant tickets will, over time, allow us to increase our margins back to historic levels,” Pollard said.
“We believe our charitable gaming operations will continue their market leadership and generate excellent results, and the large investments we are making in the digital areas are laying the foundation for further growth, in partnership with our lottery and charitable gaming customers.”