Hello, and welcome to the Codere Online Second Quarter 2023 Earnings Conference Call. I would I would like to advise all participants that this call is being recorded. I'd now like to welcome Guillermo Lancha, Director of Investor Relations to begin the conference. Please go ahead.

Thanks, operator, and welcome everyone to Codere Online's earnings call for the second quarter of 2023. Today, you will hear from our CEO, Aviv Sher, and CFO, Oscar Iglesias. Our former CEO and Executive Vice Chairman, Moshe Edree, will also join us in the Q&A section. Before turning the call over to Aviv, I'd like to remind everyone that during this call, we will be referring to a presentation we uploaded to our website earlier today, which includes non-GAAP financial metrics, such as net gaming revenue or adjusted EBITDA, for which you can find reconciliations in the appendix of the presentation. Let me also remind you that our accounting information is prepared under IFRS accounting standards and that throughout this presentation, all monetary figures will be in euro unless expressed otherwise. Finally, please note that a replay and transcript of this call will be available on our website at codereonline.com, where you can also sign-up for our investor email alerts. With that, I will go ahead and pass the call on to Aviv.

Thanks, Guillermo, and thanks for everyone joining the call today. I'm excited to be presenting the second quarter earnings and unpacking what has been another solid quarter for us. Our team's unwavering commitment to improving both our product offering and customer experience has allowed us to continue exceeding our expectations during this period. And while we are very clear with this performance, we continue working to build upon this positive momentum and to ensuring that we meet our goal of being a profitable company in 2024. So let's get into the details and discuss the road ahead. Jumping into the highlights of the second quarter of 2023 on page 7. We delivered EUR39 million, in net gaming revenue, a 34% growth versus the prior year quarter. This was more or less flat with the first quarter and better than we expected, especially considering the first quarter benefit from the World Cup tailwind and the seasonal decline in sporting event in the second quarter, in particular, the European football leagues. What is now becoming a re-occurrence seen in our earnings, the contribution from casino continued to increase this quarter with 54% of our net gaming revenue being generated by this segment. This was driven by our continued relative focus on both acquiring casino-oriented players and managing our portfolio of existing casino customers together with the slowdown in sport in this quarter. The growth in net gaming revenue was driven by a 20% increase in our active customers to nearly 126,000, together with a 12% increase in our average monthly spend per customer to EUR104. Mexico, drove most of the increase in active customers with 54% more active than in the second quarter of 2022. Customer acquisition declined 18% in the quarter versus last year with 69,000 first-time depositors in the quarter.…

Thanks, Aviv. And before diving into the numbers for the quarter, I wanted to quickly walk everyone through a few items impacting the figures that we have presented in prior periods. Related to changes in our accounting for value added taxes in Columbia, which resulted in a reduction to the previously reported adjusted EBITDA of approximately EUR1 million in 2022 and EUR0.8 million in the first quarter of 2023. In regards to the first quarter of 2023, the EUR0.8 million of non-deductible VAT was previously included in provision for corporate income taxes, but has been reclassified as gaming and other taxes, that is as an above the line operating expense. And we are reflecting this change in the earnings deck on a pro forma basis, that is a negative EUR3.1 million in Q1 2023 of adjusted EBITDA versus the EUR2.3 million we reported to the market in May. In regards to 2022, the approximately EUR1 million in Colombian VAT was capitalized to the balance sheet and not expensed as at the time, there was an expectation of recovery of this amount. However, this amount will not be recovered and should be expensed as non-deductible VAT, which will be recorded here in the third quarter. Please note, however, that we have not made any pro forma adjustments to the 2022 figures reflected in our earnings deck. Turning now to the financial performance. Consolidated net gaming revenue grew 34% to nearly EUR39 million in the first quarter, driven primarily by our Mexican business, which grew 51% to EUR18 million, together with a 24% growth in Spain to over EUR17.5 million. Adjusted EBITDA, meanwhile, was negative EUR4.5 million in the second quarter, including a nearly EUR6 million positive contribution from Spain, 58% more than in Q2 last year. Mexico also improved its contribution…

Thanks, Oscar. Before we turn to Q&A, I would like to thank the Codere Online team for their hard work day in and -- for their hard work day in and day out. And as always, thanks to the analysts, investors, and other participants for your interest in Codere Online. We look forward to speaking with you again soon. With that said, we'll turn it back to the operator to open up the call to Q&A.

Thank you. [Operator Instructions] we will pause for just a moment to compile the Q&A roster. First question is from Jeff of Stifel. Please go ahead.

Great, thanks. Good morning, Aviv, Oscar, thanks for taking our questions and congrats on another excellent quarter here. Maybe just starting off on the Spain business, looks like margins are kind of settling in around the 33% level last couple of quarters. Oscar, is this the right level kind of to think about this business moving forward or is there still some operating leverage left in the model as that continues to scale quite rapidly?

Hi, Jeff. Thanks for the question. I think there is -- I think there is still further improvement to go in terms of the operating leverage of the business. This will be something that I think we're -- with the guidance that we're putting forward today in terms of adjusted EBITDA for the full year, I think it's fair to say is cautious given the first half results, that we've that we've delivered and announced to the market. I think we are also being cautious given where we are in the year going into the return of the Spanish and European football leagues, which is always a little bit of an uncertain time in terms of the strength of the customer coming back after some of the summer lull in in sporting events. And otherwise, we're going to be engaging going into this fall with, obviously with our Board of Directors in the context of our budgeting process for next year and thinking about our focus and our objectives for 2024. And I think what's still going to be the focus at least as things stand today is that we're going to focus on sustained growth. So we're not going to move off the objective that we've set forth in terms of being EBITDA and cash flow positive into year, but for sure, there's work we're doing to build upon the operating leverage, especially as we get to -- especially as the mix increasingly is casino players, which, as you know, in general, tend to have higher player values or have higher a spend per active per period figure. So we're optimistic going forward, but obviously, cautious given where we are in the year.

Great. That's helpful. Thank you, Oscar. And then shifting gears here a bit. I was hoping you could just kind of talk to the product development roadmap a bit, market by market, what features are you planning to roll out in the back half and into 2024? And maybe where do you see the product as perhaps still lagging some of your competitors in your various markets? Just any thoughts there would be helpful. Thanks.

Aviv, do you want to jump in?

Yes. So in terms of product offering, I think we closed most of the gaps on the sports side, and we are starting to offer a little bit more sports market and a little bit more functionality to our customers in Spain and in the -- and in Mexico. In terms of our casino engine, we are continuing to develop and to improve our customer experience, mainly aiming at a better prediction and recommendation engines to our player, plus unique content that we are aiming to launch during the next couple of quarters and during next year. We have some very nice deals and content that already locked in. So for our casino players, we have a very good experience. We also launched and probably you will see communication in Mexico what we call the [indiscernible]. So it's kind of a gamification on our platform. So we have a much more to come in terms of the casino product and in the sport product.

Great. That's really helpful. Thanks, Aviv. And then, if I could just squeeze in a couple more here, anecdotally, it does feel like we're starting to hear more from some of the US and the European focused global players regarding the Latin American opportunity. Can you just talk about what maybe you're seeing on your end in terms of appetite from some of the larger global players to enter and expand in the region?

Yes. So I'll take this one as well. Up till now, we didn't see any American players going south to LatAm, not something with high investment over there in Mexico or in other territories, except maybe last trip in Columbia. Most of our players are still very local, and they still have our competitors -- the local competitors in each of the markets, not just in Mexico, have a huge stake in the terms of market share. So we haven't seen any American competitors, starting to put the marketing investment into those markets. What we do see is that the local competitors are working very hard to maintain their market share and their position in the market and increase their investment, year-on-year. So the competition is hard. I think whoever wants to go south will need to come with a lot money in order to compete now.

Okay, great. And then if I could just squeeze in one last here, it sounds like there's some news flow recently that Chile is poised to regulate online gambling by the end of the year. Can you just talk about -- do you have any appetite to expand into that market based on the population size and the structure they've laid out?

Well, we have appetite, but we remain with our strategy to focus on Mexico and Spain for now. We see better ROI and we -- with the current plan that we have in cash and working towards 2024 profitability, we are not sure that we will take more new markets in order to be able to stand behind what we said to the market. So for us, it's a good opportunity. We look at it as a positive thing. Both Chile and Peru are under our radar. But in terms of investment, I'm not sure that we are ready to make big investments over there. We are looking into the regulation and the tech part of the regulation and maybe capitalize on some of the sponsorships that we already have in South America, but they will not be a focus market for us in stage.

Great, that’s all for me. Thanks very much, a nice quarter.

Thanks, Jeff.

Next question is from Pat McCann of Noble Capital Markets. Please go ahead.

Hey, this is Pat on for Michael Kupinski. My first question was, with regard to the province of Mendoza, can you provide any updates with the launch of the operations there or when that is scheduled for? And then also kind of piggybacking on that, if you could talk a little bit about your efforts in Buenos Aires?

Aviv, do you want me to take that?

Yes.

So, in Mendoza's -- in Mendoza, we're working diligently to get all everything from an operating standpoint prepared to be able to launch in the market. It’s taking a little bit -- I would say it's taking a little bit longer than we initially expected. We've been focused on a few other things over the past few months. But it should be something that we would be in a position to launch before year end without committing to any specific date. So we're making progress there. As you as you probably know in Argentina, the regional licenses, there are differences in terms of, in some cases, small, in some case, large, in terms of the regulatory frameworks from one to the other, which creates some technical issues that need to be managed from a platform and technology standpoint. As it relates to Buenos Aires, as you know, we continue operating in the city and are -- and continue to work toward acquiring a license in the province of Buenos Aires. Obviously, that's the biggest market in Argentina, by population, also by its disposable income. So that's really the focus, it has been for some time. It's a tricky year with elections and also all the other macroeconomic issues that the country is facing now that sometimes get in the way of deal making, but we're working. And hopefully, we'll have something to announce at some point to the market.

Okay, great. And then I think this question probably mostly answered, when Jeff asked about the competition. But I was just wondering in Mexico, it sounds like it has remained pretty competitive, but just given the state of the capital markets and the tightness of capital, I was wondering if there had been any shakeout or if any of the competition had -- if there had been any shakeout as a result of that, maybe the answer is already out there that not really -- it sounds like it's still pretty competitive, but I was just going to ask about that.

I can't call it a shakeout, but I think some of our mid to small size competitors have lowered their investment in the last quarter. We are still in Mexico, I think, let's say, three companies that has most of the market shares and all the rest are falling a little bit behind. No one is really out like a shakeout, but I think they lowered their investment and they're more on a defensive position at the moment. Don't forget that, I think globally, we see media prices going up, year-on-year. So the barrier of entry is harder, as I said before.

Got you. Thanks. And then one last question, with Columbia, with the slight reduction in revenue. I imagine that was to be expected given that you sort of deprioritized that in favor of some of the other expansion markets. Should we sort of expect Colombia to be relatively stable going forward?

I think that's a fair comment. I mean, we're just seeing so much strength in our two major core markets that I think the focus and given the strategic priority of reaching profitability next year that what we really are looking to do is keep Colombia, let's say, cash flow or EBITDA breakeven. I think that's what we're looking to and improving the quality of the portfolio of customers we have in building upon the success that we're having with that portfolio of customers. So it's a market where our focus and our priority may change over time. Right now, it's more of a -- in more of a holding pattern.

Okay. Great. Well, congrats on the great quarter and thanks again for the color.

Great. Thanks, Pat.

[Operator Instructions] Next question is from Oli Westbrook of BlackRock.

Hi, guys. Congrats on the results, and thanks for taking my questions. I just wanted to start off on guidance. So just comparing the EBITDA outlook of negative EUR15 million to EUR25 million this year, with your guidance of positive in 2024, I was just wondering if you could give a bit more color on sort of what the main driver is going to be to help you bridge that.

Yeah. Hi. Thanks for the question. I think, most of the driver, I would say, of our of our improvement in EBITDA this year has been not only the increase in the continued strength that we're seeing in the revenue front, but it's also on the decision that we've taken to take our foot a little bit off the pedal from a marketing standpoint. And as you know, how this business works, it's a significant upfront investment that that you're harvesting over longer periods of time. So I think looking out into next year, our expectation is to continue doing the same. I think that's something that we'll work through given now that we're eight months into the year and starting to think about our ‘24 budget and let's say our strategic plan for the next two, three years. There will be decisions that will be taken over the course of this fall that very much will govern, beyond just all the different things we're doing and all the other initiatives have on the operating front, financial performance into next year. But I think mostly it's, let's say, taking the foot a little bit off the pedal on the marketing combined with the continued success and strength that we're seeing quite honestly across both verticals, sports and casino, but especially on the casino side, where we feel like the investments we've been making since destocking over 18 months ago and the focus, quite honestly, from an operating standpoint in our two core markets are starting to pay off. So I think those are going to be the key drivers, for the back half of this year and then going into next year to be both EBITDA and cash flow positive.

That's great. Makes sense. And I guess for your guidance next year, do you have any sort of rough idea of how the EBITDA is going to be phased? And do you guys have a quarter in mind when you're aiming to be EBITDA breakeven?

Yeah, it's a good question. I think that that's one that we'll have to have a debate going into our Q3 earnings about 2024, whether we want to be a little bit more specific as to guidance. And then as you say, I think everyone has the same question in terms of the cadence from quarter-to-quarter, is this going to be first half positive? Is this going to be full year positive? I think we're going to have to wait until Q3 earnings to be able to share any additional information because it very much is impacted by what ultimately is decided from a budgeting standpoint for next year and the markets we're going to be focusing on as it stands today continues to be staying in Mexico. But I think there's other things that we're looking at, especially in the context of having licensing with Argentina on the opportunity we see there, notwithstanding that it's a complicated year [indiscernible]. So I think it's a little bit early for us to give more specifics around ‘24, but I would just say that now with another quarter behind us, we're more confident than we were, after the Q1 when we came to market in May. We're even more confident I think even then we were comfortable with the guidance we were giving generically for ‘24 being full year, EBITDA and cash flow positive.

That's great. Thanks for the color. And then last question on the cash side. And do you guys think you'll need any additional external cash to keep your plans in ’23 and ‘24. And I guess what would be the minimum level of cash you guys would be comfortable operating the business at?

Yeah. I think the answer to the first question is no. We have no intention of raising additional capital. I think we, and especially given the current state of the capital markets, I think we're operating under an assumption that we will not have access to additional external capital and that we're going to be running this business and focusing on that sustainable growth. I'd rather not share a minimum cash figure per se, but I think that we're comfortable where we are with the year with our planned investment in marketing and how the business is trading even since closing of Q2, that, we're going to be running better than what we initially planned and expected from an available cash position. Obviously, we always would retain some level of -- some level of buffer in the event of some unexpected surprises, which from time to time do come up.

Great. Thanks for the color. Good luck in the next quarter.

Thank you. Thanks for the questions.

Thank you. I would like to turn the call back over to Guillermo.

Hi. Yeah. So we have a few questions coming in through the webcast. First one is around Argentina. The primary election was more eventful than usual. Do we expect that the political situation could impact the rollout of the new online licenses?

Aviv?

We don't know. I think the straight answer is that we don't know. We have no assumption over it. We continue to operate as we are operating now. We do think that any elections will change -- that will change the map will have some impact on the online gambling, but, I'm not sure that this is the top priority of any new government that will come. So for us in the short term, we don't see any foreseen changes over there. It is something that we are monitoring closely, but I don't think that right now we can say what's going to happen. We are looking forward to see how it will affect the macroeconomics and, of course, eventually, the licensing processes. But I don't think anyone put it as top of his agenda, any of the politicians now.

Okay. We have another question around Brazil and whether we expect to have a presence there once the market is fully operational?

Brazil. Moshe, you want to take Brazil?

Yeah. I will. So the answer is that at the moment, we are not foreseeing any activity or definitely before the -- there will be more clarity about the regulatory environment. But, we, as Oscar mentioned before, we are very much focused for the next, I would say, 12 to 18 months, to keep and support our core markets and especially, Spain and Mexico due to the very good performance. And therefore, at the moment, we are not -- we don't have any intention to talk about Brazil.

Yeah. We're monitoring the legislative developments as it relates the executive order that emerged, see what comes back from the Congress in terms of comments or if that ultimately is ratified and we'll continue monitoring developments, but I don't think there's anything actionable for us right now.

Exactly. I think that the people are confusing the fact that it's in the same continent, that it's from the same, because there's the region that it can be the same -- more of the same as other countries in Latin America, but it's completely new market for us. It's, Portuguese. It's not Spanish. It requires, like, a full-on operation on ground and [Technical Difficulty].

Okay. Well, we have one last question on the webcast related to Spain. And if we can comment on the EUR0.5 million fraud, if that was in Q2 statements on kind of mitigation plans in terms of IT systems or whatever we are planning.

Yeah. In terms of the fraud that we disclosed in the press release here in Spain, it's under police investigation. So unfortunately, there's not much we're going to be able to say about what happened. But obviously, we -- the most important thing is we're pursuing recovery of the money and as there are new developments and as the police investigation moves forward, obviously, we'll come back to the market and be able to provide updates or new developments in due course.

Okay. I'm not seeing any more questions on the webcast. I don't know, operator, if, anybody else on the line would like to ask question?

Yeah. [Operator Instructions]

Okay. So, it looks like we have no further questions. If you would like to follow up on anything, feel free to reach out to me or Oscar. And, if not, we will speak again in November for our Q3 earnings. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.