Codere Online Luxembourg, S.A. Q2 FY2022 Earnings Call

Hello and thank you for joining us. My name is Regina and I will be your conference operator today. I want to welcome everyone to the Codere Online Second Quarter 2022 Earnings Presentation. All lines are muted to minimize background noise. After the speakers' remarks, we will hold a question-and-answer session. Now, I will turn the conference over to Guillermo Lancha, Head of Investor Relations. Please proceed.

Thanks, operator, and welcome everyone to Codere Online’s earnings call for the second quarter of 2022. Today, you will hear from CEO, Moshe Edree, and CFO, Oscar Iglesias. Before turning the call over to Oscar, 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. 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 to our Investor Email alerts. With this, over to you Oscar.

Great, thanks, Guillermo and good morning or good afternoon to everyone joining the call. Before moving into details regarding the quarter, let me again remind you that Codere Online is Luxembourg-based and as a European company, our accounting information is prepared under IFRS accounting standards and our functional currency is the euro. As such, throughout this presentation, all monetary figures will be in euro unless expressed otherwise. Please also note that the historical consolidated income statements and accountable net gaming revenue and adjusted EBITDA figures have been moved to the back of the presentation. And we will be focusing on the quarter, year-to-date, and LTM figures in this and subsequent quarterly presentations, in each case versus applicable prior year periods. With that, I will go ahead and pass the call on to Moshe.

Thanks, Oscar and thanks everybody for joining the call. For those of you who are new to the company, I would like to provide a quick overview of Codere Online. I joined the company in late 2019 when it was a wholly owned subsidiary of Codere Group, which is a Madrid-based gaming operator with over 30 years of retail gaming operation expertise in Spain, Italy, and Latin America. In November last year, we completed a merger with another listed SPAC, which resulted in Codere Online being a U.S. listed business and raising over $100 million to finance the substantial opportunity we have to grow this business, particularly throughout Latin America. Moving to the highlights of the second quarter of 2022, we are pleased to have delivered strong operational results in this period with our net gaming revenues up 41% to nearly €29 million and 15% versus Q1 2022. This growth was driven by a significant increase in average monthly active customers to nearly 105,000 and a €10,000 increase in our monthly spend per active to €93. Mexico again drove most of this growth in active customers with a 45% increase in the period. In terms of our customer acquisition, we continue to see an encouraging trend as our first-time deposits increased almost by 47% to 85,000 at an average cost of around €150. Having now delivered two consecutive quarters of strong performance, we believe that we are in a good position to meet our full year guidance of €110 million to €120 million euros of net gaming revenue. We expect that this growth will continue to accelerate as it did in the second quarter, over the second half of the year, especially going into the fourth quarter where the World Cup should provide an additional uplift to our business. In terms of recent developments, in early August we applied for an online license in the Province of Cordoba in Argentina. This is the second most populated region in the country, and we believe that if we are granted the license, it could be a very good market for us. We expect that the license will be granted before year-end, with operations starting early next year. Finally, we took a significant step forward with our sponsorship of River Plate, becoming the main sponsor. Following our new agreement, we have rebranded the shirt with the Codere logo now being placed in the front, which should give us an increased ability to improve our brand awareness in the country across Latin America.

Thanks Moshe. Turning to the financial results for the second quarter, and as Moshe mentioned, consolidated net gaming revenue grew 41% to €29 million, driven by an impressive 85% growth in Mexico to nearly €12 million and an equally impressive 12% growth in Spain to over €14 million, exceeding the levels we had prior to the regulatory restrictions that came into effect starting in May of last year. These restrictions impacted our advertising, sponsorship, and promotional activities. So, we are encouraged to see the positive trend we mentioned last quarter for our Spanish business continue in this most recent quarter and beyond. In regards to EBITDA, as we discussed in last quarter's earnings call, the uptick in negative EBITDA versus the prior year quarter was primarily due to the higher levels of marketing and other operational investments to drive the accelerated net gaming revenue growth we are delivering and expect to continue delivering into year-end. At the country level, the negative EBITDA generation in Latin America was partially offset by Spain, which generated €3.6 million of positive EBITDA in the second quarter, the highest level since the second quarter of 2020, despite the regulatory hurdles in place since last year. We have spoken with a number of you on this call and understand that you and the market in general are interested in having further information regarding our pathway to profitability in Latin America and overall as a company. We expect to be in a position to share additional information with you in our third quarter earnings call scheduled for mid-November once we have finalized our operating plan and budget for 2023 and updated our expectations for 2024. In the meantime, please note that this is a business where we make significant upfront investments to acquire customers, none of which may be capitalized and which on average generates net gaming revenue of between three and five times that upfront investment over a five-year period. The payback periods on that investment vary market-by-market, depending on how developed the market is and our strategic and financial objectives for that market. Generally, we seek a contribution margin-based payback of between one and two years. On a sequential basis, however, our EBITDA decline from negative €13 million in the first quarter to just below €10 million in the second, partially due to timing issues regarding the marketing investments we made in Mexico in the second quarter. As a reminder, a significant portion of our overall marketing spend is discretionary, meaning it can be increased or decreased at any time based on what we are seeing across our markets and our objectives as a company in terms of balancing higher growth with acceptable levels of cash burn and minimum levels of liquidity, especially considering the current challenging state of the capital markets. Turning to the Spanish operating and financial metrics, we see net gaming revenue in the second quarter increase 12% versus the prior year quarter, despite having 4% fewer active customers as a result of the promotional restrictions in place. On an LTM basis, we are 2% below revenue levels with 6% fewer average monthly actives in the period, reflecting the higher spend per active on the back of improved results, especially in our online casino business. In Mexico, meanwhile, net gaming revenue reached €12 million in a quarter, an increase of 85% year-on-year and almost 20% sequentially. This strong performance is supported by both a higher number of active customers and a higher spend per active. Regarding our omnichannel activity, our online business benefits from Codere Group's leading retail presence in the country and sizable customer database, which allows us another channel to acquire customers, offer them a differentiated omnichannel customer experience, and improve our overall return on investment in the market. Moving to Colombia, we continue to see strong growth in the market with a 57% increase in net gaming revenue and 37% in the number of actives. This continues to be a small business for us, but one that we expect to continue growing with an improved return on marketing investment. Turning to the balance sheet, as of June 30, we had approximately €80 million in available cash on the balance sheet having utilized approximately €11 million in the first half of 2022. In terms of our net working capital position, we ended the second quarter at negative €26 million, a quarter in which we did some catching up in regards to what is payable with third party providers. We continue to be a few million extended in terms of payables to Codere Group, which we expect to be addressed here in the third quarter. You have further details regarding the cash flow statement and the variation in net working capital in the first half of 2022. Please note that we have changed how foreign exchange impacts on cash balances are reflected. This is now included in the reconciliation of the cash position located at the bottom of our cash flow statement, as opposed to reflected as cash flow from financing. That's all from my end. I will now hand it over to Moshe for closing remarks.

Thanks Oscar. I just want to stress again how pleased we are with second quarter results, which in many ways have been ahead of our expectations and give us confidence that we are on track to deliver our guidance to investors for the year. We continue to be encouraged by the potential of the business, and we're working hard to execute our plan and beginning to explore other exciting opportunities that may present themselves, like the one we're currently pursuing in the Province of Cordoba. With a strong first half of the year now behind us, we hope investors will share our view that the ambitious growth rates we set out to reach are achievable and that Codere Online provides investors with a unique opportunity to invest in the early innings of one of the fastest-growing regions for online gaming. We look forward to speaking with you again in November when we publish our third quarter results. With that said, we'll turn it back to the operator to open up the call for Q&A. Thank you everyone.

Our first question will come from Jeff Stantial with Stifel. Please go ahead.

Hey, good morning, Moshe and Oscar. Thanks for taking our questions. I wanted to start off on customer acquisition trends in the quarter if possible. You discussed CPAs came in around €150 per customer acquired, looks like that's a nice sequential and year-on-year decline. I was hoping you might just unpack that a bit more as we had contemplated more of a €200 or so run rate moving forward? And then as a follow up to that, aggregate marketing spend was down sequentially, both in nominal terms, and as a percentage of revenues. Should we expect Q1 to be the peak in terms of marketing investments and EBITDA losses, or is some of this just sort of natural ebbs and flows as you execute on your marketing plan? Thanks.

Yes. Moshe, do you want me to take that one?

Yes, take it and I will jump in if there is anything to add.

Yes, Jeff I think you picked up on something that clearly jumps off the page in terms of trend from Q1 to Q2 in terms of the blended Group CPA and some of the marketing spend. Some of this is, I would say largely driven by some of the timing issues that I alluded to in my prepared remarks, specifically in Mexico where toward the, let's say, the back half of the second quarter, we took our foot a little bit off the pedal in terms of some of the line marketing that doesn't necessarily have any immediate impact in terms of the top line revenue that we deliver. But it did, let's say, distort a little bit that blended CPA that you're seeing in terms of the acquisitions that we delivered in the quarter on a blended basis, but that's driven primarily from timing issues. So I think that some of that investment that we didn't do in the second quarter, you'll see when we come back to the market in the third quarter what will have been made. And as you say, the €150 is I think our expectations this year in terms of a blended across all our geographies. Average cost of acquisition for this year was probably closer to €200 per acquisition as opposed to the €150 that you saw in the second quarter. So I think it's largely timing differences. Moshe, anything to add on that?

No, the way that we are calculating the CPA obviously depends on a lot of changes that occur in the proportion that we spend above the line and below the line and that's why we see some kind of moving parts in the cost of CPA. But I think that the main factor is that we are keeping the ratio between the lifetime value and the CPA, meaning that if the CPA goes higher, we'll ensure that the lifetime value of the group of players will also be higher. What we can do is to monetize the spend we have between any channels below the line, which is mainly digital cost per click in different platforms, Google, Facebook and so on, or TV advertising. So we are monitoring that in relation to the results.

Great, that's helpful. And maybe just to kind of reiterate the second piece of that question, the aggregate marketing spend was off 10% or declined 10% quarter-on-quarter. The percentage of revenues was down considerably, about 20%, went from 90% to 70% of net revenues. Is that mostly timing with Mexico or is some of that kind of sustainable declines in your reinvestment rate as you continue to mature along in your marketing plan?

Yes, I would say a significant part of that is timing difference as Moshe says; there are always adjustments that are made within any given market above the line and below the line, but also across markets depending on what we're seeing at any given time and how the players that we're acquiring are performing in those early months after acquisitions. So there's a mix of both, but I would say largely it's timing differences. In the front half, we did a minus €23 million in terms of, let's say, an adjusted EBITDA of 13 in the first quarter, a little under 10 in the second. I think looking out to the back half of the year, I think the quarterly trend will be something closer to what we did in the first quarter, rather than necessarily what you're seeing in the second that benefited from some of that reduction in marketing spend, Jeff.

Great, that's helpful, thank you, Oscar. Moving on to more of the competitive landscape, if you look at your two largest Latin American markets, Mexico and Colombia, just what are you seeing in terms of new competition coming in or existing competition ramping up or down investment in those two markets? And then similarly in Spain, are you starting to see some stabilization of competitive dynamics or does it feel like operators are still pulling investment there in light of some of the well-discussed regulatory challenges?

So Jeff, in Spain, we do see some reduction in competition, and as stated, that as a result of the advertising ban, small brand or non-brand or international brands find it more and more difficult to build any market share without any opportunity to invest in marketing or advertising, except post-midnight between 1:00 AM to 5:00 AM, which is not a significant portion of anyone's budget. So we see that we maintain or even grow our market share, but definitely we're growing our brand presence. In Mexico, it's a bit different. We saw that in the beginning of the year, there was a trend of small and medium operations entering the market.

In Argentina, on the other hand, we think that we have a very good opportunity to be one of the market leaders because we do have Escudero; we do have the retail presence, although it's in the province, not in the city, but we're working toward what we can do in the province as well in terms of license. We believe that together with Cordoba, as we mentioned in the presentation, having the Province of Cordoba, hopefully, we'll get the license and with the City and maybe later on with the Province, we'll cover a very high percentage of the country in terms of the exposure. We believe that there we will have the opportunity to be, if not the market leader, one of the first three market leaders in the country.

Great, that's really helpful. Thank you, Moshe. And then if I could just squeeze in one more on the technology front, you've been vocal that a portion of the IPO proceeds were earmarked for some upgrades to the tech stack. Could you just provide an update on where you are at in terms of some of the more discretionary improvements and what's still left to complete moving forward?

Are you referring to the platform itself?

Correct.

Right. So, you obviously know in Mexico we are working mainly with Playtech as the main software provider. Although we add a lot of different processing vendors and different contents, we initiated and asked Playtech to integrate it into the platform. We just finished with Playtech a very big software upgrade of nine specs last month. It was quite complicated, but it brought us to the level of I would say our main competitors in terms of all, I would say, the content and the cashier capabilities and processing capabilities, cashing in and cashing out. We are aligned with any other major competitor that we have in terms of the platform. In regards to the other market that we are maintaining, and we are managing the platform with Codere Group, which they are the platform provider for Codere Online, we see strong improvement. We keep investing in that, as we mentioned in the presentation on the roadshow, and we allocated a budget for the software improvement. Thankfully, in the past six months, we have not experienced any major downtimes, and we are meeting the industry standard in terms of the SLAs. Obviously, we have a great advantage by managing our own IP in terms of amalgamating the software like in the City of Buenos Aires, as we hope to do in the Province of Cordoba, as we've been in Colombia and Panama. Overall, we are satisfied, although we continue investing in improvements. At the same time, we started a significant project called the Platform 2.0, which evaluates and considers where we can either replace, improve, integrate, or buy any other IP in order to elevate us to the next level of platform. So to summarize, in Mexico, we're quite happy with the turnkey solution that we have from a third-party provider. In the rest of the countries, we're in a good stage. There's always room for improvement on the cashier side and player experience. We just launched last week the Android app in Colombia, which is quite a challenging environment in terms of regulators and in amalgamating the software, and we managed to do so and we're doing it quite well. Overall, I am happy with what we've achieved, but still have investments in the pipeline for the next quarter.

Perfect, very helpful as always. Thank you both. I'll pass it on.

Great, thanks, Jeff.

Our next question comes from Michael Kupinski with Noble Capital Markets. Please go ahead.

Hey, this is Pat McCann for Mike Kupinski. I had a few questions. First, I wanted to discuss the inflationary environment. Are there any increased costs related to your expansion strategy that are prompting you to adjust your approach? Is there anything that you've significantly altered in your business expansion due to inflation?

Yes, hi Pat. Okay, thanks. At a very high level, different parts of the cost structure are obviously more impacted by the inflationary pressures across different geographies than others. But we typically expect, it's not always the case, and especially given that we're coming off several years of COVID and economic impact on some of the geographies that we operate in, somewhat weakened disposable incomes from certain pockets of our customers, it's not always easy to see that and to manage around and compensate through pricing. Pricing varies market-by-market, but is largely governed by the competitive landscape and where you are positioned within that landscape and what your competitors are doing. So it's not always possible nor advisable to simply pass on additional costs to our customers. We also must be mindful of the customer experience and the impact that the economic environment has on our customers to keep them playing, while ensuring their engagement remains at a level that allows them to consistently engage with us as a company. Therefore, our focus is on consolidating more of their overall play with us as a group, instead of driving higher revenues in the near-term from those players to offset different impacts that we're seeing in our cost structure in certain aspects. That’s a very high-level, but kind of generic answer. It’s a complex one, especially in the context of this market where we manage theoretical holes across both sports and the casino front.

Got it, makes sense. I have another question about Brazil. I know that things may get delayed and everything, and maybe to some extent it's a watch and wait situation, but could you provide any commentary you might have on the situation there and what your expectations are with that being such a large market opportunity when it does come online?

Yes, Pat hi. I will start and if you have anything to add, just jump in. So yes, Pat, from the last, I mean, the last call that we had again there was, that question was asked, and we envision internally that the deal we had signed will not be regulated in this quarter or the next quarter. So therefore we decided the moment that we will not enter Brazil on the dotcom license. We will wait for full regulation to happen. We are following closely with lawyers and advisors to see what the landscape looks like. Obviously, we appreciate that like any other Latin American operator as one of the biggest and most interesting markets for us. We started at a very low level to search for potential channels that we can enter once it's regulated. We need to build our position slowly. We do have a strategy to initiate local operations once it is regulated. We have the capability to migrate our software in Portuguese, given the expertise available, and thus we aim to be prepared for the eventual regulation.

Great, thank you so much. That's all I have. Congrats on a great quarter.

Thank you.

Thanks Pat.

Your next question will come from the line of Mike Hickey with The Benchmark Company. Please go ahead.

Hey, Moshe, Oscar, good morning guys, great quarter. Thanks for taking my questions. I guess as a follow-up to the question on inflation, I'm not sure I heard you exactly, but on your consumer, obviously, you serve a lot of different geographies, but on your consumer, as you see them today, are you seeing any impact on that consumer given economic inflation sentiment? Are you seeing any direct impact on their behavior?

Moshe, could you address what we're observing from an operating perspective, particularly regarding our markets, player spending, or anything related to the players?

Yes, well, at the moment we don't see any real impact from inflation or macroeconomic trends in terms of customer spending. We don't observe a decline in customer spend. On the other hand, during 2020 and 2021, there was already inflation in advertising channels' costs. We don't see any significant increase in costs in 2022 for the first six months, meaning that advertising and media vendor prices have thankfully remained stable. If anything, we are starting to see some mitigation in the cost of sponsorship, and hopefully, we will soon announce other sponsorship deals. We notice that some competitors are struggling to invest money and advertising, and there’s a reduction in spending in advertising across various channels. Therefore, we are experiencing either stable prices or even decreases in some cases. However, we do not see any major changes in clearer spending at the moment.

Thank you, Moshe. You mentioned profitability, obviously that's a narrative all operators are working to achieve now, given the environment if they're not already there. I realize you're probably not in a position, you said after Q3 you'll probably give us more visibility. But can you sort of talk about puts and takes on how you think about rewiring your business to potentially accelerate profitability given capital restraints and everything else challenging the market?

Yes, maybe I'll take, Moshe if it's okay I'll take the first one and then if you want to speak to Spain. Mike, I think that the key here is, as you say, we need to get through our two full quarters, plus a couple of months post-business combination. We need to work through, which is already a process underway; our preliminary numbers for our 2023 budget and our estimates are forecasting for 2024. From there, we can assess the tradeoff between growth and cash burn, and see if as a company we feel that we need adjustments, especially in the context of new opportunities that already exist, others we've discussed with the market, and others that will present themselves govern what we do across the individual core markets. Today, we have no indication or view that the plan has changed at all versus what we set out to do. What we are communicating after this second quarter to the market is that we've executed this plan and are mindful of market conditions, where capital markets are located, and how shares are trading. We continue to see the market opportunity across our core markets and some other projects as great opportunities with significant growth potential and will maintain our focus, even if we tweak some priorities across existing and new markets. Moshe, do you want to touch on Spain and discuss how we are viewing Spain for profitability?

Yes, sorry, Oscar. Excuse me? Yes, as I mentioned previously, in Spain, although it's extremely challenging to acquire more customers due to the advertising ban and limited advertising channels, we are working towards creating regulated channels that will enable us to increase exposure. We are also enhancing our omnichannel and cross-channel activity on the ground to increase acquisition toward the retail side. In Spain, I believe two things will happen. We will see a trend of competitor reductions continuing next year. We know already that the mid and small-sized operators are struggling without new customer databases and will consequently decrease their digital spending. At the same time, we are growing our brand presence, slowly but surely, toward achieving a double-digit percentage of market share, which is a positive trend. Therefore, we believe that the positive EBITDA will remain consistent in the next quarter as well.

Nice, good to hear. Last question, definitely I think more long-term focused and Oscar probably not helping your profitability, but originally you guys sort of targeted the U.S. market, sort of long-term, sort of into the baseball game maybe, but just curious, obviously there's a lot happening in California and California has about 16 million Hispanics and Latinos. That seems like a compelling opportunity for you to enter the U.S. market through California in 2023, 2024. Are you looking at this as a significant opportunity given your player and brand base? Is there a path to entry for you as the state potentially legalizes sports betting?

Yes, for sure. I think the same answer that applied to Brazil could apply to California or any other states with a significant Latin American population presence. As a public company, we're looking to make very impactful moves. We see North America as a major market and we recognize the potential size, capabilities, and customer spending based on operators already in New Jersey. We are prepared to explore these opportunities when they arise.

Thank you guys, good luck.

Thanks.

Thank you.

Okay, in the meantime, I will ask a couple of questions that we have on the webcast platform. The first one is on Q2 performance in Mexico, and if it was helped by any COVID-related restrictions that may have played to the advantage of online?

That was more; I think that was more related to the second quarter of last year. I mean, this year we didn't have any restrictions; the retail operations have been open for more than six months. Is that right, Oscar?

I think that's right. I think the retail operations largely were up and running and performing. In the second quarter of 2022, we did not necessarily get much benefit from the COVID impact on the retail business.

Okay. One final one on the webcast, can you comment on the terms of the Cordoba license? Will the 10 licenses be awarded to the different applicants?

Yes, I can take that one. I mean, it's a good question. We'll see how the process evolves. We submitted our application on the 5th of August. In theory, we can hear something back in the early part of this month. I believe it's in the public domain, but we understand that one of the 10 applicants didn't have their second envelope opened, which we understand they wouldn't have met the technical criteria for the applications. But I think we have no reason to believe that we, as one of nine or 10 are requesting up to 10 licenses wouldn't be granted a license. But we have to continue in the process, see how it evolves. It will probably unfold over the next couple of months, and we'll see where we are from there. We are preparing to be up and running and operating next year and starting to think about how we include this business and the priority we give it in our 2023 budget and beyond.

Okay. So we have no more questions from the webcast. So I think we can…

Operator, any other questions from the callers?

Not at this time.

Okay. Well, if there are no further questions, we will leave it here. Anyone feel free to reach out to myself or Oscar for any additional questions, and we look forward to speaking with you again for our Q3 results in mid-November. Thank you.

Thank you. Thanks everyone.

Thank you everybody.

Ladies and gentlemen, this will conclude today's presentation. Thank you all for joining. You may now disconnect.