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/ 36
ACUMEN CAPITAL | RESEARCH
eae IDEAS. GROWTH. OPPORTUNITY.
POLLARD BANKNOTE LIMITED (TSX:PBL) Recommendation: Buy
SPECIAL SITUATIONS RESEARCH 12-Month Target: $9.75,
Implied Total Return: 21.6%
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w, MBA | VP Reseorch & Equity Analyst | (403) 571-0303 | [email protected]
‘Mike MeMeeken [Associate Analyst| (403) 571-0530 | [email protected]
December 20, 2016
ied
Initiating Coverage on Pollard Banknote
We introduce coverage on Pollard Banknote Limited ("PBL” or “Pollard”. Pollard provides products and services to lottery
and charitable gaming industries around the world, including high-quality instant ticket products, licensed games, and
strategic marketing and management services for both traditional instant games and the emerging interactive space. PBL
enjoys a dominant market position for instant-win scratch tickets in Canado, and is the second largest producer of instant
tickets in the world
industry with High Barriers to entry... The global instant ticket industry generated USS64.7B in sales for 2015,
With the largest component (USA), growing at a compound annual growth rate of 6.9% over the last 25 years... There are
high costs to establish a manufacturing presence (facilities, printing press, etc.) and customers (.e. government's) tend to
remain loyal to key suppliers for long periods Additionally, Pollard has developed a high level of proprietary information
that isnot easily replicated
Positioned favorably with a strong suite of products... PBL is atop three provider of scratch and win instant lottery tickets
inthe world The Company maintains a focus on innovation that enables them to be a leader in manufacturing processes of
key industry products (for example: Translucent marking system, ScratchFX, EcoScratch, PlayBook, etc), which further
solidifies their presence in the marketplace.
Stable revenue growth, coupled with a strict cost focus results in strong Free Cash Flow... The lottery industry provides
‘an important source of revenues for Federal and provincial/state governments, providing a predictable source of fundingto
help forecast budgets many years in advance As a result, industry players enjoy a recurring source of revenue Free cash
flow of $16.6MM in 2015, representing a FCF margin of 7.5%, is expected to grow faster than revenues as the business
capitalizes on operational efficiencies
Increased capacity... PBL’s industry leading Tresu 22-Station printing press (operational in 0315) at their Ypsilanti facility
increases corporate capacity by 35%, and allows the company to produce a wider array of products on a quick turnaround
basis Not only will this press allow PBL to bid on incremental contracts as production capacity is in place to efficiently
produce at higher volumes, but it will enable them to bid on specialized contracts that were previously uneconomic
Expanding iLottery presence... Successful rol-out of the Michigan iLottery program should lead to increased opportunities
for future contract wins (already won Virginia eSubscription contract), as current online lottery states will see the success
of PBL’s strategy, and new states may look to implement similar policies to enable increased government payments
We initiate coverage on Pollard Banknote Limited (TSX:PBL) with a Buy recommendation and $9.75/sh target price.
"ACUMEN CAPITAL FINANCE PARTIERS LIMITED | SUITE 700~406—6* AVENUE SW | CALGARY, AB |T2P ORS
MAIN PHONE: 403.572 0300 | TOLL FREE: 1.888.422.8636 ACUMEN CAPITAL | RESEARCH
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FINANCIAL FORECASTS
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rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeshen [Asrocte Ants] (03) 571-0530 | nmemeekenBacumencaptoLcom
‘eam Capt Finance Parnes Lied #700, 4086 venue SW | Calgary AB | T2PORS| Main Phone: 40371-0200 Dee) ACUMEN CAPITAL | RESEARCH
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COMPANY OVERVIEW
Asthe largest Canadian based provider of instant-win scratch tickets and the second largest producer of instant tickets
in the world, PBL finds itself in a profitable and stable industry with high barriers to entry. PBL has been involved with
the lottery industry for over 30 years, having grown the business from 0% market share in 1985 to ~22% of the global
instant ticket sales market currently. This has occurred through a relentless effort to expand the business and provide
customers with high-quality products and services. The Company has more than 60 customers worldwide, which
Include 7 of the top 10 lotteries in the world as of 2014 (see Appendix ). Charitable gaming products are mostly sold
in the United States and Canada where permitted by gaming regulatory authorities. Pollard serves a highly diversified
customer base in the charitable gaming market of over 250 independent distributors with the majority of revenue
generated from repeat business. As of 0316, the Company generated 21% of their revenues in Canada (vs 24% at
YELS), 51% in the US (49% at YEIS), and 28% internationally (27% at YE1S) with sales predominantly coming from
Europe and Asia
PBL operates six manufacturing facilities across North America (highlighted in figure 1), which in aggregate total over
510,000 square feet of operating space. The Company employs~1,100 staff and is now capable of producing over 16
billion equivalent single size tickets annually (2°x 4”). For the year ended 2015, PBL sold ~11.8 billion instant tickets,
3.5 billion individual bingo cards, 0.8 billion pull-tab tickets, and ~500 vending machines.
FIGURE 1 | POLLARD BANKNOTE LIMITED | OPERATIONS
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The US is the largest individual market for instant tickets, representing ~51% of the world-wide market. PBL has
contracts as the primary or secondary supplier of instant tickets with 28 of the 44 US lotteries that sell instant tickets,
‘and management believes they are the second largest supplier of instant tickets to the market with ~22% of the total
market share (Scientific Games is #1 at ~70% market share). PBL is the dominant provider of instant tickets sold in
Canada, with an estimated ~85% of the market share.
As one of the only manufacturers of both lottery and charitable gaming products, PBL is in a unique position to
combine expertise across the two different markets. This overiap allows for alternative product development, and the
ability to introduce new and innovative manufacturing methods into both product lines.
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeeken /-zrocate An (03) 571.0590 | riemeskensocumencaptolcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 Dee) ACUMEN CAPITAL | RESEARCH
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Pollard is an active member of the World Lottery Association ("WLA”), the North American Association of State and
Provincial Lotteries ("NASPL"), and the Asia Pacific Lottery Association ("APLA")
POLLARD PRODUCTS AND SERVICES
PBL provides a diverse offering of instant tickets and lottery services including: licensed products, distribution, lottery
‘management system (SureTrack*), retail telephone selling, marketing, internet lottery services ("iLottery"), interactive
gaming, Social Instants®, retail management services, and instant ticket vending machines. Additionally, the
Company’ charitable gaming products includes pull-tab tickets, bingo paper, pull-tab vending machines, and pull-tab
‘counting machines. PBL also services the commercial gaming and security sectors, providing promotional scratch and
win tickets, transit tickets, and parking passes
FIGURE 2 | POLLARD BANKNOTE LIMITED | KEY PRODUCT OFFERINGS
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Primary Products:
Instant Win Scratch Lottery Tickets — Instant tickets represent the largest portion of PBL’s business, and accounts
for ~90% of sales. PBL currently services~60 lotteries around the globe, with an average contract length of more
than 4 years. PBL typically sells instant tickets for a per unit price or for a percentage of the retail value of the
instant tickets sold. Within North America, PBL supplies all of the Canadian lotteries and 28 of the 44 lotteries in
the US. Most business is awarded through requests for proposals ("RFP"), with contracts usually ranging from 3-
5 years with renewal options of 1-3 years (see Appendix Il for a breakdown of the contract process). Instant win
ticket contracts vary in terms of exclusivity, with some being exclusive, or a blend of primary and secondary
suppliers.
2. Charitable Games - Charitable games represents ~10% of PBL’s corporate sales, and are primarily sold in the US
under the American Games brand name (operated by PBL). American Games isthe single largest manufacturer of
pull tabs to lottery jurisdictions and the second largest bingo paper manufacturer in the world with products
available through a global network of distributors. We summarize the two offerings below:
(© Bingo Paper — PBL offers a wide array of bingo products, and is capable of supplying all the products and
‘equipment necessary to operate a bingo game of any size (including: bingo paper, ink dabbers, pulltab
tickets, bingo hall blowers, and flashboards).
(© Pull-tab Tickets — PBL manufactures and sells over 9,000 different pull-tab tickets to both government
lotteries and charitable gaming organizations. The company produces at least 75 new versions of pull
tabs every month
Lottery - PBL ventured into the online gaming industry, following the joint venture signed with NeoGames in 2014
(NeoPollard interactive LLC — 50% working interest). The Company's first iLottery contract was for the start-up
and operation of the internet based gaming site for the Michigan Lottery. PBL included customized solutions to
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeeken /-zrocate An (03) 571.0590 | riemeskensocumencaptolcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 ACUMEN CAPITAL | RESEARCH
Re ag aaa
grow the player base, optimize player engagement and retention, and build brands through cross promotion. To
date, results have been very strong with the JV capturing ~18% of the instant ticket category sales, in comparison
to other North American lotteries achieving between 1% and 10% of instant category sales.
The JV was awarded a second contract in 2015 to manage the Virginia Lottery's eSubscription website. This
‘website will allow customersto pre-order draw based games, and will include all the functionality of afull Lottery
site. Initially, the online presence will only contain free to play internet based instant games, but there is
opportunities to expand this into a full-service iLottery site on a successful roll-out. This contract became
operational in 04/16.
4, Lottery Management Services (LMS) or SureTrack® — As lottery-based gaming requires a high degree of
experience and security, PBL ensures that no compromises occur by working directly with lottery operators all
over the world. This enables PBL to help limit the risks of lottery gaming, while attracting a larger number of
customers for lotteries worldwide. Certain areas of expertise include: market research, strategic planning, game
development, recruitment, warehousing, inventory management, as well as administration and accounting
5. Licensed Games - PBL has utilized numerous licensed games over the years to attract harder to reach
demographics, and currently offers over twenty different licenses, including: Frogger, Tetris®, Start Trek™,
Nascar®, PacMan", et al. Additionally, PBL offers comprehensive solutions for licensed games, which includes
ticket design and manufacturing, prize consultation, promotional products, and second-chance draw
management. Demand for licensed games will likely continue as the gaming market tries to increase exposure in
non-traditional markets,
6. Interactive Games & Website Development Lotteries are trying to capitalize on the social media culture, by
incorporating value-added interactive features to further enhance the value of gaming. These features target
customers in the 18-34 year-old demographic range. PBL has been very aggressive in trying to target “the space
between’, and capitalize on this largely untapped market. Programs that PBL has implemented include
(© Second-chance draws — allow a player to enter a valid ticket into a website for a chance to play an
‘additional game for fun, or to win prizes.
© Loyalty Programs — More frequently offered by lotteries. Designed to enhance the player experience by
offering additional venues for the player and lottery to interact. It also provides the benefit of ‘getting to
know the customer’, to help target their market. For example, most lotteries are a blind exchange of
services, with no understanding of the end-use player. By providing loyalty programs the lotteries are
able to engage the customer and extract more useful information on the target market
(© Social Instants™ - A PBL product that combines traditional lottery products with the power of social
media. This product is designed to attract a younger demographic by utilizing new distribution channels
for the products.
‘THE GAMING MARKET — INDUSTRY OVERVIEW
The gaming industry includes lotteries, charitable gaming organizations, internet gaming, pari mutuel wagering (Le.
horse racing), and games typically associated with casino operations (ie. table games and slot machines). The overall
industry has experienced significant growth over the last 25 years due to global economic growth (leading to increased
consumer spending levels), improvements in the overall gaming experience (presentation, technology, payouts/
prizes), and favorable regulation changes
Lotteries
Lotteries are operated by government authorities and licensees in over 200 jurisdictions around the world. The lottery
market includes both instant ticket games and draw based games (such as Lotto 649 and Powerball), and represents
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeeken /-zrocate An (03) 571.0590 | riemeskensocumencaptolcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 ACUMEN CAPITAL | RESEARCH
Re ag aaa
a global market of USD$279.98 annually, according to the WLA Global Lottery Data Compendium 2016. Lotteries are
another means of generating revenues for government, as an alternative to imposing additional taxes. Governments
typically redirect a portion of lottery revenues to fund charitable causes, education, art, social activities, and sports.
In 2015 WLA Lottery members contributed USD$76.18 towards good causes, or~29% of the total sales (WLA members
generated $260.98 in sales).
Within North America, the US produced $70.08 in lottery sales in 2014, and the Canadian market produced $7.98,
Highlighting the importance of the lottery industry for government revenues, US lottery revenue accounted for
$20.08 in government transfers in 2014, and the Canadian lottery market transferred ~$3.08. Currently, Canada has
13 jurisdictions, through 6 separate lotteries, that sell instant tickets (all 10 provinces and 3 territories) while the US
hhas44. Traditional retailing outlets, such as gas stations and convenience stores, represent 87% of the lottery retailing
segment
Draw-based games represent the largest share of the lottery market at 56%, with instant games the second largest at
25%, and sports games (both fixed odds and par-mutuel) at 19%. Y/Y growth rates show that sports and instant games
are the fastest growing segments (up 6.9% and 5.6% y/y, respectively), while draw based games were relatively flat,
up 0.1% y/y. Conversely, the North American lottery market reports @ higher weighting towards instant games rather
‘than draw based. In 2015, instants represented 59.8% of the total lottery market, whereas draw-based only accounted
for 21.196. We summarize the top 10 lotteries globally, and category sales in figure 3.
FIGURE 3 | POLLARD BANKNOTE LIMITED | GLOBAL LOTTERIES BY SIZE AND CATEGORY
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The Canadian lottery industry is estimated to be a~$7.98 a year market that has seen steady growth of ~2.0% per
‘year for the past 10 years. Ontario and Quebec represent the largest two markets with “62% of total country sales.
This number has been decreasing over the past 10 years, falling from a high of 65.3% in 2009. Despite steady growth
from Ontario (3.4% 10 year CAGR), Quebec has seen its annual lottery revenue decrease from $1.98 in 2005, to $1.68
in 2015. This drop in Quebec is due to a mix of changing demographics leading to lower VLT sales and the required
modernization of casinos. Conversely, the western provinces (AB, SASK) have reported a 4.8% CAGR over this period,
‘as a result of favorable population trends. Highlighted by the chart in figure 4, instant ticket sales as a percentage of
the total market has remained steady around the 25-27%
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeeken /-zrocate An (03) 571.0590 | riemeskensocumencaptolcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 Dee) ACUMEN CAPITAL | RESEARCH
eed Re ag aaa
FIGURE 4 | POLLARD BANKNOTE LIMITED | CANADA LOTTERIES SALES
Canada Lotteries’ Total Sales History
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Charitable Gaming
‘The charitable gaming sector is much smaller than the lotteries segment, and represents a highly fragmented market.
Typical products include pull-tab tickets and bingo paper, and they are currently permitted in 39 US states and all
Canadian jurisdictions. This market has shown flat to negative growth rates over the past several years, as end
customers (such as bingo halls, chartered membership clubs, and veteran or fraternal clubs) have dropped in
popularity. PBL management estimates the current North American market for charitable gaming to be ~$160MM
USD a year, and represent a potentially large untapped market segment. According LaFleur’s 2015 World Almanac,
charitable gaming outlets represent < 6% of lottery retailers (or ~3% for both bingo and pull-tab outlets).
iLottery
The iLottery segment is relatively new in North America. Following a decision by the US Department of Justice in late
2011 that clarified the existing law, iLottery became a legal form of distribution and lotteries could market lottery
products over the internet (as long as the jurisdiction previously had a lottery in place with appropriate legislation).
Previously, it was interpreted that online lottery was illegal. To date, only a handful of states have started selling
online, with mixed results over the first few years. The mixed results are a function of hasty implementations and un-
refined processes. According to La Fleur’s 2016 report, the five US lotteries with iLottery services combined for
USD$75.8MM in net draw and instant sales. Within this group, the Michigan Lottery ranked first in size and growth
‘with USD$49.3MM in sales and 166% y/y growth.
Non-North American lotteries have embraced the technology for much longer. According to a study in 2015 performed
by digital lottery services provider, Lottovate, 70% of European lottery markets have a digital offering, while 8036 of
Canadian lotteries do. In contrast, only 8% of US lotteries provide a digital component.
INSTANT TICKETS — INDUSTRY PERFORMANCE
Globally, the instant ticket market has been led by strong growth across North America, Europe, and parts of Asia, and
now accounts for 25.2% of global lottery sales (up from 24.5% in 2014). Wolmstant games generated USD$64.78 in
sales for 2015. In the US, draw based and “other” games have grown at a slower rate than instant ticket sales (2.8%
CCAGR for draw-based games vs 6.9% CAGR for instant ticket sales over the last 15 years) as jackpot fatigue and fewer
large jackpots have hampered growth. Conversely, the instant ticket market has been able to sustain its lofty growth
by creating strong demand for their products through: increasing price points, improved payouts, added diversity of
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeshen [Asrocte Ants] (03) 571-0530 | nmemeekenBacumencaptoLcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 Dee) ACUMEN CAPITAL | RESEARCH
eee Re ag aaa
offerings (styles, themes, licensed products), and industry cohesiveness (sharing ideas and strategies for better
success)
United States Lotteries
The US instant ticket lottery market has shown steady growth ahead of the overall lottery market, due to appearance
and improvements in the overall playability, whereas the draw based games segment has noticed slowing growth.
Consequently, instant ticket sales, as a percentage of the total lotteries market has increased from ~39% in 1999 to
over 56% in 2015.
FIGURE 5 | POLLARD BANKNOTE LIMITED | U.S. INSTANT TICKET SALES
US Lottery Ticket Sales
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Canadian Lotteries
Canadian instant ticket lotteries generate ~$2.28 a year in sales, which represents 27.4% of total lottery revenues for
the country. Much the same as the overall Canadian lottery market, Ontario and Quebec represent the largest
segments (47.7% and 19.7% respectively). This segment has noticed stronger annual growth rates of 2.6% per year,
‘which is driven by Ontario and the Western provinces that have achieved a 5.8% and 5.0% compound annual growth
rate over the last 10 years, respectively.
FIGURE 6 | POLLARD BANKNOTE LIMITED | CANADA INSTANT TICKET SALES
Canada Lotteries’ Instant Ticket Sales History
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rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeshen [Asrocte Ants] (03) 571-0530 | nmemeekenBacumencaptoLcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 ACUMEN CAPITAL | RESEARCH
Re ag aaa
Price Point Trends
Instant ticket lottery sales have been trending towards higher value tickets, and we highlight the trend in figure 7. As
illustrated, the $1 and $2 price point tickets made up 84% of retail ticket sales in 1995. This proportion has consistently
declined since that time, dropping to 47% of retail ticket sales in 2004, and 18% in 2015. This trend has been driven
by a growing proportion of customers that demand more entertainment and better prize payouts.
FIGURE 7 | POLLARD BANKNOTE LIMITED | NORTH AMERICA INSTANT TICKET SALES BY PRICE POINT
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You can see the y/y changesin figure 8, that show the $25+/ticket segment isthe fastest growing ticket by price point,
followed by the $10/$15 tickets and $20 tickets. Conversely, the smaller priced tickets have been noticing considerable
declines for many years now, as customers are drawn more to the higher payout/prize winning of the larger tickets.
FIGURE 8 | POLLARD BANKNOTE LIMITED | U.S. INSTANT TICKET SALES BY PRICE POINT
US Lotteries’ InstantSales by Price Point
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INDUSTRY OUTLOOK
The worldwide lottery industry is a $2768 a year business. The outlook for the lottery industry is very stable over the
long-term due to strong government support, new product development, and overall economic growth. With recent
announcements of lotteries generating record sales (which translates to positive tax contributions and charitable
giving), demand looks strong, especially for the instant ticket segment. Lotteries look to be expanding operations to
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeshen [Asrocte Ants] (03) 571-0530 | nmemeekenBacumencaptoLcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 ACUMEN CAPITAL | RESEARCH
Re ag aaa
increase customer engagement, through technology based applications (e. social media, interactive apps, loyalty
programs), which should further drive profits for both government jurisdictions and manufacturers.
According to the most recent Global Lottery Market Outlook (2015-2019), the industry is expected to grow at an 8.85%
CAGR over the five year period. This growth is driven by an economic recovery in core countries (i. USA, UK, Germany,
South Korea, China, and Singapore), which brings improved income levels for consumers that can be spent on leisure
activities. The growing popularity of mobile gaming is also expected to be a key contributor.
Instant Tickets
‘The market for instant tickets is projected to increase in-line with its 5-year historical average of 6.3% in F17. This will
be driven by increased consumer spending levels in the US and continued growth in the premium price point lottery
tickets (tickets in excess of $10). According to La Fleur’s data, the $10+ ticket prince point accounts for over 50% of,
total instant sales, with the $20 ticket accounting for 16% of total US instant sales, and the $25+ tickets represent 10%.
Charitable Gaming
The market for charitable gaming has been flat, to declining, for quite some time. With this in mind, many regulatory
authorities running charitable gaming operations across North America have been targeting different revitalization
programs that look to expand its current size. Due to the charitable nature of this segment, governments are trying to
reboot this once healthy market, which supports local level charities and benefits, by modernizing the products and
services offered.
Despite these initiatives, we still see this segment remaining flat over the foreseeable future, until some more tangible
catalysts present themselves. As an example, the Ontario Lottery & Gaming commission is forecasting a 22.9% CAGR
for its charitable gaming division (2014 to 2018), as a result of new physical locations, a better online presence, and
new product launches. This is obviously not the norm for the charitable gaming industry, but it does speak to the
potential revitalization that could occur with a targeted stratecy.
itottery
iLottery continues to be a much talked about opportunity throughout the lottery world, in particular with the US.
Expectations are for adoption rates to remain low, until current iLottery states show improvements in activity levels
and economics. Longer term, this remains one of the largest untapped potential growth avenues for the lottery
industry.
‘According to research from Lottovate, a global digital lattery services provider, the digital lottery market in the US
could be worth as much as $17.58 in incremental annual sales to US lotteries, of which a third could be attributed to
new players, These findings provide strong indicators of potential demand for US customers. Key finds of the report
Include:
* 27.1% of US adults are interested in playing lottery games through interactive channels (PC, laptop, tablet, or
smartphone),
© 8.3% of US adults are consumers who currently do not play the lottery, but are interested in playing digitally,
© 18.8% of US adults are existing customers interested in playing digitally (~41% of current retall player base),
© The best lottery customers are most attracted to interactive, and would play more,
Multistate draw games are the primary attraction,
© Amulti-device strategy is essential, with demand for play across web, mobile, and tablet.
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeeken /-zrocate An (03) 571.0590 | riemeskensocumencaptolcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 ACUMEN CAPITAL | RESEARCH
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COMPETITION
The global instant ticket business is highly competitive, as suppliers face competition from domestic and foreign
instant ticket manufacturers and other competitors. In the mid-90's, there were 10-12 instant ticket manufactures
‘that supplied the market. Due to a mix of economies of scale, technical proficiency, and customers becoming
increasing more risk adverse, the industry has consolidated dramatically. The North American market currently has
three companies that compete within the instant ticket industry: Scientific Games Corporation ("SG"), Pollard, and
International Game Technology PLC ("IGT"). Internationally, there are anumber of lottery instant ticket vendors which
compete. We summarize the North American industry leaders in figure 9, and provide a brief summary of each below.
FIGURE | POLLARD BANKNOTE LIMITED | MARKET SHARE 2015
Market Share
Pollard
(gean)
peas
icetena)
Smee: Company Pesemton Boonderg Acumen Cpl Pomers
Competition by market share:
70% Scientific Games Corp (SG)- isthe largest market player with 70% of the North American market. SG also was
the first lottery company to provide secure instant tickets in 1974. They have a considerable first mover
advantage in many jurisdictions, and were the first operator of instant ticket sales in~70 lotteries around the
‘world, and essentially all of the US lotteries.
22% Pollard Banknote — The second largest player with ~22% market share. PBL has been in the industry since
1985,
8% International Game Technology (IGT) — operates and provides technology products across lotteries,
electronic gaming, sports betting, and interactive gaming worldwide. IGT represents ~8% of the North
American lottery instant ticket market, which is due to the acquisition by GTECH in early 2015. IGT's business
has comprehensive lottery solutions with a focus on the draw-based games segment. IGT has business
relations with more than 100 countries around the world. In the US, IGT serves 38 of the 44 state lotteries,
with long-term relationships with the larger operators (NY, CA, TX). The business remains the top gaming
equipment company in North America, with a leading casino and VLT presence.
The lottery market is a dificult industry to break into, with high barriers to entry. Excluding the high costs to bulld a
manufacturing plant (industry estimates ~S50MM to build out a facility/printing press/logistical network), the
technological learning curve is steep, and products are dificult to produce correctly and efficiently. Adding to this,
lotteries are very risk adverse and tend to stay with established suppliers while avoiding manufacturers without a long
history of services. Most RFP processes require a certain number of years’ experience in the industry to qualify (some
asmuch a5 10 years). Additional barriers exis for suppliers targeting the US, as itis illegal to import lottery tickets into
the US, except from Canada. Of note, the last greenfield lottery ticket supplier to enter the market was Pollard in 1985.
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeeken /-zrocate An (03) 571.0590 | riemeskensocumencaptolcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 ACUMEN CAPITAL | RESEARCH
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COMPANY HISTORY
Pollard Banknote has been involved with the lottery industry since 1985, and has grown the business from 0% market
share in 1985 to ~22% of the global instant ticket sales market currently. The Company was originally established in
11907 as an offset printing business, and has grown over the years into a highly specialized, secure printing entity with
service and support expertise. During the course of 100+ years in business, the Company has printed everything from
company letterheads and business cards, to cheques, bond certificates and postage stamps. In the early 1980's, the
Company began printing pull-tab lottery tickets and bingo cards for charities. twas during thistime, that management
noticed a growing opportunity in the government lottery business. PBL's first lottery contract was with the Western
Canada Lottery Corp (includes: AB, SK, MB, Yk, and Sport North Federation) in 1985, and has been the dedicated
partner with the WCLC ever since.
Pollard went public in August 2005 as an income trust under the name Pollard Banknote Income Fund, and
subsequently converted to the current entity on March 26, 2010. The Pollard family retains a significant interest in the
business (73% ownership) and has direct influence on the day to day operations of the Company.
PBL implemented a dividend policy in 2005, and paid a monthly distribution of $0.0792/unit from September 2005 to
May 2009. The dividend was subsequently cut to $0.0475/unit per month in May 2009, and then again in January 2010
to $0.01/unit. After the conversion, PBL declared a $0.02 quarterly dividend (for May and June 2010) and subsequent
quarterly dividends of $0.03/sh for the quarters ending September 30, 2010, to present. There are currently~23.5MM
shares outstanding (see Appendix Il for breakout of insider ownership). We summarize key corporate highlights over
the past four years in figure 10 below.
FIGURE 10 | POLLARD BANKNOTE LIMITED | STOCK CHART WITH COMPANY HISTORY
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‘Acquisitions
Pollard has completed two acquisitions since the mid-1990's, which includes the purchase of Webcraft Games Inc in
11996 and the operating business of American Games in January 2002. The purchase of Ypsilanti-based Webcraft
Games gave PBL better access into the US markets and established the Company's printing capabilities on a much
larger scale. The American Games acquisition gave PBL direct access Into the charitable gaming Industry, through an
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Share Price
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeeken /-zrocate An (03) 571.0590 | riemeskensocumencaptolcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 Pesca ACUMEN CAPITAL | RESEARCH
eeeres Re ag aaa
array of bingo and bingo-related products. It also included the prototype of a newly designed instant ticket vending
machine ("ITVM"). PBL has subsequently entered into two major contracts for ITVM’s with the Michigan and lowa
Lotteries. We summarize the elements of Pollard’s growth strategy in Appendix lV.
Key Investments
Pollard has remained committed to the investment into technological upgrades throughout the years. The Company
hhas purchased and installed two significant printing presses in the last eight years that have dramatically improved
the Company's capabilities and competitiveness.
‘* Instant ticket Printing Press (Winnipeg facility) - In 2008, PBL invested US$8.5 MM on an “alk-in-line” printing
press for its Winnipeg plant. This press provided increased efficiencies and cost reductions due to its alkin-line
configuration, and provided the added flexibility of two different manufacturing processes for day to day
operations. Prior thereto, PBL only had a modular press which limited the scale of printing projects it was able to
undertake. The modular approach allows the printing process to be broken down into discreet stages, which
creates the most flexibility for shorter run size games. However, the ability to print under two scenarios greatly
expanded the job size and type of games that PBL was able to bid on.
‘© Tresu 22-Station Inline Press (Ypsilanti facility) — In 2015, PBL undertook their largest investment to date, which
included the purchase and installation of the 350-foot Tresu 22-station inline press for the Ypsilanti facility. This
press cost the firm US$20 MM, and provided PBL with the most advanced instant ticket printing press in the entire
lottery industry. The press began live production in Q315, and provides a 35% net increase in print capacity, and
includes a number of unique features that will ensure it provides the most efficient and flexible inline instant
ticket printing available. Further optionality arises from PBL now having the ability to relocate their former
Ypsilanti printing press to their Winnipeg facility (or another plant), which could increase productivity and output
further.
Innovation
PBL has demonstrated a focus on innovation throughout the years, and is aleader in supplying lotteries with new and
creative products. They have been recognized by the industry asa key contributor to market growth and have supplied
‘numerous ‘game-changing’ products over the years, such as:
‘© Translucent Marking System — PBL’ s industry-leading marking system hasbeen used to generate more Crossword
and Bingo game sales in the U.S. than its competitors combined. Due to the success of the translucent marking
system, PBL's Crossword games represent “57% of the $2.18 annual Crossword salesin the U.S., while their Bingo
games represent “67% of the $937MM annual Bingo games sold in the US.
‘© Scratch FX® Games —PBL’s patented Scratch FX® process (an industry exclusive) letslotteries replicate the sparkle
of either foil or holographic foil in a way never before possible using recyclable paper stock. Scratch FX® presents
a cost-effective, eye-catching meansto associate its higher price points with the likes of other premium consumer
products.
‘© PlayBook®- A four-page booklet usually featuring 6 or more separate instant ticket games designed to enhance
the playing experience. This product has proven to be amarket leader in moving players up the price point ladder
thereby increasing lottery revenues,
‘+ Fusion® Games — These patented, custom-developed games offer an opportunity to bring variety and fresh
instant ticket concepts. While not limited to higher price points, these games are especialy effective at attracting
established players looking for extra entertainment.
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeeken /-zrocate An (03) 571.0590 | riemeskensocumencaptolcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 ACUMEN CAPITAL | RESEARCH
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‘* Double Play®—These are a combination of instant and break-open tickets that account for over $500MM in USS.
lottery sales.
Some of the most notable recent innovations include: Play Around® fold-over tickets and their environmentally
friendly Eco Scratch™ tickets.
PBL has developed a low-cost and efficient manufacturing process, and has taken steps over the years to continually
refine and perfect their processes. By increasing their use of technology and leveraging their buying power, it's
expected that further manufacturing efficiencies are attainable. Additionally, PBL is investing into a company-wide
ERP system, which will help simplify and synchronize all IT processes, and result in improved operational productivity.
Contracts
PBL has a longstanding and stable history with its customers. A majority of customer contracts range from two to ten
years in duration, with many contracts being extended upon completion or re-won for a future term. Industry
contracts usually range from three to five years, encapsulate various services (ie. instant tickets, pulltab tickets, bingo
paper, ITVM’s, LMS, among others), and can be for the sole distribution rights or any combination of partnerships
(with various levels of weighting between two or more providers). We summarize the contract process in Appendix,
and provide a full breakdown of corporate contracts as of March 14%, 2016 in Appendix V.
Legal Dispute
PBL has been involved in a legal dispute with Scientific Games Products Canada ("SG"), over intellectual property rights
in Canada for SG's original design of a scratch-and-win lottery ticket (patent#: 2,752,551). PBL has been fighting the
patent since 1996, on the basis that concepts were already known to lottery ticket makers. The Federal Court of
Canada agreed with Pollard, and has declared that the patent held by SG, is invalid and of no effect. Summarizing the
verdict, the FCC stated that without too much trial and error, anyone knowledgeable about the lottery ticket printing
business could have independently replicated the process described in the patent. The patent was impeached on
‘August 9", 2016, but SG is appealing the verdict. We will continue to monitor this action closely.
MANAGEMENT
Pollard has an experienced management team, with the Pollard family actively involved in the business since its
inception in 1907. The current entity has four Pollard family members in senior positions: Co-CEO's (Doug and John),
Chair Emeritus of the Board (Lawrence), and Executive Chair of the Board (Gordon). The Company has been able to
maintain a loyal and experienced management team. Senior management has successfully navigated the business
from a small regional printing business with 0% market share, to an international supplier of high-end lottery products.
The Company is currently run by Doug and John Pollard. Doug joined the Company in 1997 as Vice President, Lottery
Management Services, and subsequently became Co-CEO in 2011. He manages with his brother, John, who has been
with the Company since 1986, and has held the role of Co-CEO since 1997. Current management has successfully
integrated two significant business acquisitions over the last 20 years, and is capable of targeting further M&A. Overall,
the management team brings with them a wealth of experience, and possess the tools to expand the Pollard brand
into new and exciting avenues. PBL’s Board also possesses strong industry experience to help navigate the Company's
plans moving forward. See Appendix VI & Vl for Management and Director biographies.
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeeken /-zrocate An (03) 571.0590 | riemeskensocumencaptolcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 ACUMEN CAPITAL | RESEARCH
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FINANCIALS
PBL has experienced excellent growth since expanding into the lottery markets. Over the last ~29 years, the Company
has grown at an average compound annual growth rate of 12.6% (from 1986 to YE2015). Over the past 5 years, PBL
hhas maintained its growth above industry levels, and has shown compounded annual revenue growth of 6.2%, which
is led by instant ticket sales (6.7% growth over the period). Revenue growth has been driven by new product
development, sizable contract wins with key contract renewals, and favorable f/x adjustments. The gross profit has
grown at a faster pace than revenues on consistent margin improvement. Over the last five years, PBL has increased
its GM% from below 18% to greater than 20%. This margin improvement is due to the implementation of cost
Initiatives across the company, along with continual investment into technology. These improvements have led to
strong Adj, EBITDA growth. PBL experienced a 13.53 CAGR in Adj, EBITDA to $26.8MM in 2015 while averaging an
EBITDA margin of 11.8%. We summarize PBL's financial summaries for the past six years, including the trailing twelve
months, in figures 12.
rian O-Pow, MBA [VP Reseach & Equity Anat | 608) 5710308 | ipBacumencoptoLcom
Mike MeMeshen [Asrocte Ants] (03) 571-0530 | nmemeekenBacumencaptoLcom
‘Aeumen Copal Finance Parnes Limited #700, 48 6 Avenue SW Colgary AB | T2° OR] Moin Phone: 403-571-0200 Dee) ACUMEN CAPITAL | RESEARCH
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FIGURE 12 | POLLARD BANKNOTE LIMITED | FINANCIAL SUMMARY
[oleserncSntsezomerni pce) epaarie
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Key Metric
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