Hello, and welcome to the Codere Online Second Quarter 2023 Earnings Conference Call. 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 euros 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 to 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 pleased with this performance, we are continuing to work to build upon this positive momentum and ensuring that we meet our goal of becoming 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 benefitted from the World Cup tailwind and the seasonal decline in sporting events in the second quarter, particularly the European football leagues. What is now becoming a recurring theme 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 focus on both acquiring casino-oriented players and managing our portfolio of existing casino customers together with the slowdown in sports in this quarter. The growth in net gaming revenue was driven by a 20% increase in our active customers to nearly 126,000, along 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 customers than in the second quarter of 2022. Customer acquisition declined by 18% in the quarter versus last year, leading to 69,000 first-time depositors in the quarter. This decrease was primarily driven by substantial declines in both Colombia and Argentina, which combined contributed 25,000 FTDs less than in Q2 last year. As we have discussed in our prior earnings calls, we have been and will continue to prioritize investment in our core Spanish and Mexican markets, where we are seeing not only strong overall growth but also attractive unit economics. Our blended CPA across all markets is more or less in line with our average cost throughout 2022. In terms of recent developments, we are pleased to see our hard work being recognized with three nominations in the upcoming SBC Awards in Barcelona. This award, now in its 10th edition, celebrates the main achievements in the industry, and it's an honor to be nominated. Finally, we are announcing today the appointment of Gonzaga Higuero as a new member of the Board, replacing Daniel Valdez. Gonzaga recently became the CEO of Codere Group, and we wish him much success in that endeavor. This appointment follows the naming of Michal Elimelech in June, who replaced Oscar Iglesias on the Board of Directors. Michal previously held multiple positions at 888, including Head of US Marketing, Head of Bingo, and Head of Developed Markets for EMEA. We welcome these new additions, which will contribute significant operating and marketing expertise to our Board, and we look forward to working with them. I would like to thank both Daniel and Oscar for their valuable contribution and unwavering support during their term as Board members. As you know, Oscar will continue in his role as CFO, and I will now turn the call over to him to cover the financial highlights of 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 Colombia, 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. Regarding the first quarter of 2023, the EUR0.8 million of non-deductible VAT was previously included in the provision for corporate income taxes, but has been reclassified as gaming and other taxes, that is as an above-the-line operating expense. 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 second quarter, driven primarily by our Mexican business, which grew 51% to EUR18 million, along 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 meaningfully with an adjusted EBITDA loss of EUR1.7 million, less than half of last year's loss. All in all, this negative EUR4.5 million represents a 55% reduction from the EUR10 million adjusted EBITDA loss in the prior year quarter, reflecting the progress we continue to make towards sustainable growth and cash flow generation. Looking now at our P&L on page 10, the EUR5 million improvement in adjusted EBITDA in the quarter was driven not only by the EUR10 million net gaming revenue growth but also significant efforts made by the team to keep operating expenses in line, notwithstanding a higher level of gaming taxes in the period due to both the mix effect, with a higher contribution by Mexico to total net gaming revenue, and the impact of the non-deductible VAT in Colombia. Turning to the Spanish operating and financial metrics, net gaming revenue in the second quarter increased 24% versus the prior year, driven by an increase in both the number of active customers and spend practice on the back of a stronger-than-expected casino business. In Mexico, net gaming revenue reached EUR18 million in the quarter, surpassing Spain for the first time, an increase of 51% year-on-year, and 3% sequentially. This strong performance was driven by a 54% increase in the number of active customers, driven by increased engagement, particularly in the casino sector. Moving to Colombia, net gaming revenue remained just above the EUR2 million mark in the second quarter. As mentioned on prior earnings calls, our focus on Colombia is and, for the time being, will continue to be on improving the quality of our customer acquisitions and our portfolio of active customers. Turning now to the balance sheet. As of June 30th, we had over EUR45 million of total cash on the balance sheet, of which approximately EUR40 million was available, having utilized about EUR9 million throughout the first half of 2023. In terms of our working capital position, we ended the quarter with negative EUR23 million or around 16% of our LTM net gaming revenue, which included about EUR5 million of extended accounts payable, which have already been paid in the third quarter. On page 16, you have our cash flow statement for the first half, together with further details regarding the variation in net working capital. Please note that a EUR350,000 net worth tax was paid in Luxembourg in the period. While reflected in the P&L and provision for corporate income tax, the cash impact of this payment is reflected in the variation in net working capital. Turning to our 2023 outlook on page 18, we are increasing the net gaming revenue and adjusted EBITDA guidance we provided earlier this year when we reported Q4 earnings. Given the strong performance in the first half, we now expect to generate between EUR150 million and EUR160 million in net gaming revenue, which reflects a 7% improvement in guidance at the mid versus the prior range. For adjusted EBITDA, we now expect a range of EUR15 million to EUR25 million, a EUR5 million improvement versus our prior outlook. We otherwise feel increasingly comfortable that we will meet our goal of delivering positive EBITDA and cash flow for the full year in 2024. That's all from my end. I will now hand it back over to Aviv for closing remarks.

Thanks, Oscar. Before we turn to Q&A, I would like to thank the Codere Online team 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 the call to Q&A.

Thank you. We will pause for just a moment to compile the Q&A roster. The 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 settling in around the 33% level last couple of quarters. Oscar, is this the right level 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 still further improvement to go in terms of the operating leverage of the business. This will be something that I think we're cautious about with the guidance we're putting forward today in terms of adjusted EBITDA for the full year. I think it's fair to say 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 uncertain in terms of the strength of customer return after the summer lull in sporting events. Otherwise, we're going to be engaging this fall with our Board of Directors in the context of our budgeting process for next year and thinking about our focus and objectives for 2024. I think the focus, at least as things stand today, is that we're aiming for sustained growth. We're not moving off the objective we’ve set forth in terms of being EBITDA and cash flow positive this year, but for sure, there’s work we’re doing to build upon the operating leverage, especially as the mix increasingly comprises casino players, which, as you know, generally tend to have higher player values and spend per active customer figures. 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 behind 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 more sports market and more functionality to our customers in Spain and Mexico. In terms of our casino engine, we are continuing to develop and improve our customer experience, mainly aiming at building better prediction and recommendation engines for our players, plus unique content that we are aiming to launch during the next couple of quarters and into next year. We have some great deals and content that are already locked in. So, for our casino players, we expect a very good experience. We also launched what we call gamification on our platform. So we have much more to come in terms of the casino product and the sports 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 European-focused global players regarding the Latin American opportunity. Can you just talk about what 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 haven't seen any American players going south to Latin America, not with any high investment over there in Mexico or in other territories, except perhaps in Colombia recently. Most of our players are still very local, and they have local competitors in each of the markets, not just in Mexico, who have a significant stake in terms of market share. So we haven't seen any American competitors beginning to put marketing investments into those markets. However, what we do see is that local competitors are working very hard to maintain their market share and their position in the market, increasing their investment year-on-year. So the competition remains intense. I believe whoever wants to enter will need to come with substantial investment to compete effectively.

Okay, great. If I could just ask one last question, it seems there is recent news that Chile is set to regulate online gambling by the end of the year. Can you share if you have any interest in expanding into that market considering its population size and the structure they have proposed?

Well, we have appetite, but we remain committed to our strategy of focusing on Mexico and Spain for now. We see better ROI there, and with the current plan aimed at achieving profitability in 2024, we are not sure that we will take on more new markets to support our commitments. For us, it's a favorable opportunity. We view it positively. Both Chile and Peru are on our radar, but regarding investment, I'm not sure that we are ready to make substantial investments there. We are looking into the regulation and technology aspects of it and maybe capitalizing on some sponsorships we already have in South America, but they will not be a focus market for us at this 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, if you could talk a bit about your efforts in Buenos Aires?

Aviv, do you want me to take that?

Yes.

So, in Mendoza, we're working diligently to get everything from an operational standpoint prepared to launch in the market. It’s taking a little longer than we initially expected. We've been focused on a few other items over the past few months. But it should be something we're in a position to launch before year-end without committing to any specific date, so we are making progress there. As you probably know, in Argentina, the regional licenses involve differences in the regulatory frameworks from one region to another, which creates some technical challenges to manage from a platform and technology standpoint. Regarding Buenos Aires, as you know, we continue operating in the city and are working towards acquiring a license in the province of Buenos Aires. This is the most significant market in Argentina, by population and disposable income. So that's really the focus, and it has been for some time. It's a tricky year with elections and the other macroeconomic issues the country is facing that sometimes get in the way of deal-making, but we're working, and hopefully, we will have something to announce to the market at some point.

Okay, great. And then I think this question was 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 faced challenges as a result of that. Maybe the answer is not really, but I just wanted to ask about that.

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

Got you. Thanks. And then one last question concerning Colombia, with the slight reduction in revenue. I imagine that was expected given that you sort of deprioritized that in favor of some of the other expansion markets. Should we sort of expect Colombia to remain 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 focus and the strategic priority of reaching profitability next year means we are aiming to keep Colombia at least cash flow or EBITDA breakeven. I think that's what we're looking to accomplish while improving the customer portfolio and building upon the success we’re having there. So it's a market where our focus and priority may change over time. Right now, it's more in a holding pattern.

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

Great. Thanks, Pat.

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 wondering if you could give a bit more color on the main drivers to help you bridge that.

Yeah. Hi. Thanks for the question. I think most of the drivers of our improvement in EBITDA this year have been not only the ongoing increase in revenue strength, but also on decisions we've taken to ease our marketing spend. As you know, this business requires significant upfront investments that yield returns over longer periods. Looking ahead to next year, our expectation is to continue the same strategy. I think there will be decisions over the course of this fall that will greatly inform our financial performance for next year. But primarily, the strategy consists of taking our foot off the pedal on marketing expenditures while capitalizing on the continued success we're seeing across both sports and casino, especially on the casino side, where we believe our past investments are starting to pay off significantly. So, I think these will be the key drivers for the second half of this year and into next year to become both EBITDA and cash flow positive.

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

Yes, that’s a good question. We'll have to debate this going into our Q3 earnings about 2024, and whether we want to be more specific with the guidance. As you said, the same question arises about the cadence—whether this will be first-half positive or full-year positive. I think it's early for us to provide specific guidance for ’24, but with another quarter behind us, we're more confident now than we were after Q1 when we reported back in May. We're increasingly comfortable that we will achieve our goal for ‘24 to be both EBITDA and cash flow positive.

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

I think the answer to the first question is no. We have no intention of raising additional capital. We're operating under the assumption that we won't have access to further external capital and we're focused on sustainable growth. I'd prefer not to specify a minimum cash figure, but I think we're comfortable where we are with our planned marketing investment and how the business is trading since closing Q2, indicating a better than expected available cash position. Of course, we will always retain some level of buffer for any unexpected surprises, which do arise from time to time.

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

Thank you. Thanks for the questions.

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 currently. We do expect that any elections that change the political landscape will have some impact on online gambling, but I'm not sure that's the top priority of any new government that comes into play. So for us in the short term, we don't foresee any changes there. It is something we are monitoring closely, but right now we can't predict what will happen. We're looking forward to seeing how the political situation will affect macroeconomic conditions and, of course, the licensing processes. However, I don't think any politicians are currently prioritizing this matter.

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

Brazil. Moshe, do you want to take Brazil?

Yeah. I will. So the answer is that at the moment, we are not foreseeing any activity there, at least until we have more clarity about the regulatory environment. As Oscar mentioned before, we are very much focused for the next 12 to 18 months on maintaining and supporting our core markets, especially Spain and Mexico due to their strong performance. Therefore, we do not have any current intentions to invest in Brazil.

Yeah. We're monitoring the legislative developments regarding the executive order that emerged, seeing what comes back from Congress in terms of comments or if that ultimately is ratified. We'll continue to monitor developments, but I don't see anything actionable for us right now.

Exactly. I think people confuse the fact that it's in the same continent; it's in the same region, and because it can appear similar to other Latin American countries, it’s a completely new market for us. It's Portuguese, not Spanish. It requires a full-on operation on the ground.

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

Regarding the fraud that we disclosed in the press release here in Spain, it's currently under police investigation. Unfortunately, there's not much we're able to say about what happened. The most important thing is that we're pursuing recovery of the funds and, as the police investigation progresses, we will update the market with any new developments.

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 a question.

Yeah.

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. 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.