Codere S.A. 2Q 2009 Results Conference Call Thurs, 27 th August :00 Hrs UK time Chaired by Lily Arteaga

Transcription

1 Codere S.A. 2Q 2009 Results Conference Call Thurs, 27 th August :00 Hrs UK time Chaired by Lily Arteaga Lily Arteaga Good afternoon, this is Lily Arteaga, Director of Investor Relations. I am pleased to welcome you to today s call at which we have also Jose Antonio Martinez Sampredo, our President and CEO; in addition to, Robert Gray and David Elizaga, our outgoing and incoming CFOs, respectively. I will turn the presentation over to Jose Antonio Martinez Sampedro. Jose Antonio Martinez Sampedro Thank you Lily, good afternoon everyone and thank you for joining us today. I am pleased to be here today, especially to comment on the long awaited resolution of whole situation with the Franco brothers. As most of you have know, in late July we announced that we have reached an agreement to terminate the sales process through the cancellation of the sales and purchase agreement dating back to March Under the agreement we delivered one million shares to each of Joaquín and Jesús Franco representing a total of 3.6% of the Company. There is no Board representation or other governance rights associated with the shares. I would like to emphasise that agreement reached is consistent with the original intention of the March 2006 agreement which contemplated a price adjustment mechanism in the event either of the deferred payments was not made. With this agreement the issue is fully resolved. Considering the 191 million we paid the Francos in 2006 and 2007, the price per share or the 15.9 million shares purchased worked out to I also want to take this opportunity to thank Bob for his effort and dedication. Bob leaves Codere after a five year period of significant growth for Codere in which he led the Company s public market transactions and was a valuable member of the Management team. On behalf of the Company and the board I would like to thank Bob for his contribution to the Company s development over this time and wish him all the best in his future endeavours. I am also pleased that Bob has accepted my invitation to continue with Codere as advisor to the Board so that we will continue to benefit from his input at the Board. In his time at Codere Bob has put together a very solid team which I have no doubt will stand up to the challenge and opportunities and which will ensure a smooth and orderly transition. As announced we have named David Elizaga as our new CFO. David has been Deputy CFO since 2005 and before that he has spent several years working as a consultant to the Company; I am very pleased that David will assume this new role.

2 2 With that I will turn it to Bob, I will be happy to respond to your questions at the end of our prepared remarks. Thank you. Robert Gray Thank you very much. As announced I advised Jose Antonio earlier this month of my decision to join the United Business Media as CFO. UBM is a leading B2B media company traded on the London Stock Exchange with a market capital of over a billion Pounds. From my perspective this is an irresistible opportunity to join a highly respected management team leading the revolution in business communications made imperative by the development of web page technologies. Nonetheless it has been a difficult decision to leave Codere. I do so with great respect and affection for Jose Antonio and the team and enormous pride in what we have accomplished over the last five years and I will miss working closely with my colleagues here. There are many accomplishments to be proud of at Codere, we have achieved enormous growth, a sound capital structure and public listing and as today s results demonstrate, we have adjusted to adverse market conditions with agility and discipline and Codere is well positioned to take advantage of its unique business model. The accomplishment I am proudest of all though is also the most important to highlight today. We have put together an outstanding financial team and it is well prepared to succeed. Lily Arteaga will continue her outstanding relationships with analysts, rating agencies and investors; Paco Pino with banks and trading counterparties and I am very pleased that David Elizaga who provided my initial briefings on the Company when I joined, and who has accompanied me at every step of the way, will succeed me as CFO. With that let me bid you farewell for now and turn the balance of the call over to David. David Elizaga Thank you Bob. I will try to even be more rapid than usual to make sure we have enough time for questions at the end. As we have anticipated in our outlook, results for the second quarter reflect continued growth in Argentina offset by weakness in Spain reflecting the very tough macroeconomic environment, and in Mexico on a reported basis as a result of the strong depreciation of the Peso and the impact of the N1H1 flu. While we have continued to invest to maintain our competitive advantage, 71% of second quarter investment was maintenance Capex and total Capex was down 50% year-on-year for the quarter and down 20% compared to the first quarter of this year. We continue to manage the business with a focus on maintaining ample liquidity in the face of an uncertain environment. This quarter we are reporting a decrease of 8% in revenues driven by decreases in Mexico, Spain and Italy AWP. The latter, due to the absence of a positive non-recurring charge recorded in the second quarter of The business is actually performing well. These decreases are partly compensated by continued strong performance in Argentina, increases

3 3 in Panama, and a growth of our sports betting operations. EBITDA which decreased 14% to 50 million as a result of the aforementioned factors exceeded the outlook range of million we announced last quarter. I will now briefly review performance by business units. Spain AWP which accounted for 19% of operating revenue and 20% of EBITDA continues to be impacted by the severe macroeconomic slowdown in the country. Revenues decreased 18% to 44 million reflecting a 16% decrease in wins per day, a reduction in the number of machines sold, and a slight decrease in the number of installed machines as we rationalise the portfolio to eliminate unprofitable machines. EBITDA for Spain AWP decreased nearly 35% to 11 million. In light of this weak performance and more generally the macroeconomic slowdown in Spain, we continued to focus on cash flow in this business unit and have launched a series of cost and investment reduction initiatives, including an initiative to reduce upfront exclusivity payments to bar owners and make deferred payments conditional on the performance of the bar. Capex in the quarter was 4 million which is a decrease of 72% compared to the second quarter of last year and half what we invested in the first quarter of this year. Given the continued softness in win per day, we are also focusing actively on machine innovation. Manufacturers both local and foreign are starting to introduce more attractive machines in the market. It is interesting to note that the Recreativos Franco Machines now comprise about two thirds of the Spain AWP portfolio down from 95% a couple of years ago and Cirsa machines now account for about 15% of the park. Although we have yet to see a turnaround in the trends in win per day, the good news in Spain is that the long awaited Madrid regulation was published earlier this month. The most important change in the new regulation is that it reduces the price pay out from 75% to 70%. It has other changes which make the machines more attractive to the player including increasing the maximum wager amount and price as well as allowing the installation of video machines. In other communities in which similar regulation has been passed our margins increased by about 10%. Given the current situation in Spain we have to be more conservative about our expectations, but we do expect to see a positive effect in our portfolio in Madrid once these are adapted to the new regulation. As a reminder, approximately 25% of our portfolio or 3,800 machines is in Madrid. We have begun ordering the machines and expect 100% of our Madrid portfolio will be changed in the fourth quarter of this year. The first machines will be installed in late September so we expect to see some effect in the fourth quarter, as previously announced. Argentina, which accounted for approximately 38% of revenues and 48% of EBITDA continued to generate notable revenue growth and profitability. Quarterly revenues grew 13% to 90 million and EBITDA increased 11% to 27 million. This strong performance reflects a significant increase in win per day which was up in Euro terms by 12% from 173 per day in the second quarter of last year to 194 in the most recent quarter. TITO and other cash systems have so far been installed in eight halls so that at quarter end, it was in place for 70% of our machine portfolio, on target with our objective. Although we expect continued growth in local currency in Argentina through the year end, as mentioned in our release, we expect that our third quarter results will be negatively affected by the N1H1 flu.

4 4 Similar to the case in Mexico, following the declaration of a state of emergency by the Argentine authorities, beginning July 2 nd, Municipal authorities initiated a number of measures intended to control the contagion, including the cancellation or limitation of public events, and the closure of public venues such as gaming venues. In compliance with these measures, all 14 halls which we operate in the province of Buenos Aires were partially or totally closed to the public for heterogeneous periods between July 2 nd and 17 th. Since July 17 th, 11 halls have been operating at full capacity, and three halls operated with capacity limitations through August 18 th. Most halls recovered to pre-crisis levels relatively rapidly upon re-opening. We estimate that the EBITDA loss due to hall closures and reduced demand for this period, which will be reflected again in the third quarter, was approximately million. Lastly on Argentina, I would like to say a few words about license renewals. As we have said from the outset, we believe we have complied with all applicable legislative and regulatory requirements for the renewal and continued operation of all our license in Argentina, and we continue to pursue strongly, before jurisdictional authorities, to defend our right to operate the halls. While we await resolution for our appeal, we are very encouraged by the recent turn of event, including the favourable court decisions, our improving dialogue with the provincial Government, and the confirmation earlier this month that both the attorney general and the general accountant of the province have issued opinions which recommend granting the La Plata license. Turning now to Mexico, which accounted for 19% of revenues, and 25% of EBITDA; reported a 27% decrease in revenues to 44 million. The decrease in revenues is primarily associated with the reduction in sales to Caliente, given that the second quarter of 2008 included the sale of an 850 EBT hall at the Aguas Caliente racetrack in Tijuana. Quarterly revenues were also negatively impacted by the strong depreciation of the Mexican Peso, 11% against the Euro, and the impact of the H1N1 virus. At a constant exchange rate, and excluding the gain on the forward contract, revenues would have been 49 million. Reported EBITDA declined 4% to 14 million, primarily as a result of the impact of the virus, which we estimate was 3.5 million, and the depreciation of the Mexican peso. On a constant currency basis, EBITDA would have been 16 million. We are nevertheless encouraged by the improvement in EBT win per day, which increased 7% in local currency terms, despite significant growth in the EBT portfolio, which was up 9% over the prior year quarter, to more than 21,000 machines. While in the operations, I would like to comment on the closure of the Casino Colon in Panama. After a wait of many months, actually years, we opened the Casino last December upon receipt of necessary authorisation by the Junta de Control de Juegos, which is the Panamanian Gaming Regulator. Said authorisation is an administrative act that has a presumption of validity, until revoked by competent authorities. Nevertheless, on June , the regulators sent us a letter, ordering the closure of the casino, alleging that it lacks the necessary authorisation from the Controller General of the Republic. The Casino was closed that evening and remains closed to date. Although Casino Colon is the only venue which had been in operation, the authorisations for three other casinos have been withheld based on similar allegations. Codere is committed to complying with all applicable regulatory requirements for the operation of the Casino. As such, we are working independently, as well as with the gaming industry association, to defend our

5 5 right to re-open Casino Colon. The EBITDA contribution of the Casino in the first quarter of this year was 570,000. I will turn now to a couple of points on our liquidity and foreign exchange positions: At June 30, 2009, we had 68 million in cash, and we now have roughly the same amount. Approximately 31 million corresponds to our Europe based preparations, and 28 correspond to the Argentine and Mexican operations; 22 and 6 respectively. Half of the cash from the Argentine operation is held in Euro or Dollar repos outside of Argentina. As a result, 63% of the total cash is in hard currency. In addition, we currently have 24 million undrawn under the Senior Credit Facility, and 94 million in senior debt head room, under the High Yield Bond Indenture. As most of you are aware, nearly 90% of our debt is the 8.25% bonds which mature in 2015, so we have only modest debt amortisations in Our next important maturity is the Senior Credit Facility, which comes due in October 2010, more than one year from now. We continue to maintain prudent debt levels. Net debt at the end of the quarter was 672 million. Coverage and leverage ratios were both 3.1 times and we continue to project adequate room under our financial covenants. Therefore, we face the balance of this year and the opening of next year with confidence in our ability to maintain our competitive position, and meet our financial obligations. Moreover, we have very demonstrably shifted the focus in the business to cash flow generation. As I mentioned at the outset, and in line with our outlook for the year, we have reduced maintenance capex and all but eliminated growth capex. As a result of these efforts, free cash flow, that is following both maintenance and growth capex, more than doubled to 6 million. One tangible indicator of progress on the expense front is the reduction of corporate overhead, which was down to 7 million, even despite 800,000 in non-recurring charges recorded in the quarter, related to an arbitration settlement and a restructuring. This represents a decrease of 13%, compared to 8 million in the second quarter of I will now turn to the outlook for the business. Our consolidated results for the quarter were a little better than our expectation, particularly in our principle markets, and exceeded the range we had provided to the market. Given current training conditions, and trends in our markets, updated to reflect current foreign exchange forward rates, we continue to expect third quarter EBITDA in the range of 50 million, prior to the impact of the flu pandemic in Argentina, which for the full quarter, as I said, we currently estimate will be in the range of million, so our guidance for the third quarter 2009 is a range of 44 to 45 million. As we have discussed throughout this year, given the high degree of uncertainty in the current global macro economic environment, especially those impacting the Spanish business, and the forward exchange rates, and regulatory factors affecting our business, such as the Argentine License Renewals, the closure of the Panama Casino, and the potential introduction of anti-smoking regulation in Mexico, we have determined to continue to limit specific, forward looking information to our outlook for the next

6 6 reporting quarter. Having said that, for the fourth quarter, broadly speaking, we expect a continuation of the trends we identified at the beginning of the year. With that, I would like to thank all of you for joining this conference call, and we will now be happy to respond to any questions you may have. Bosco Ojeda UBS Madrid Questions and Answers I have a couple of questions and I wondered if you could give a bit of colour on two items. One is the new regulation for Madrid how would that impact, and what is the timing for that, and I m not sure if you could give us a bit of colour on how we can build our forecasts on the back of those changes, and the second area, if you could comment also on slightly more long term capex forecast, and how would that relate to your growth strategy, looking into I m not sure if it s a bit early, but if you could comment on that, I would appreciate it thank you. Regarding the regulation in Madrid, as you probably remember, there s been a wave of new regulations over the last two years, in the different Comunidades Autónomas. The main content of those regulations have been exactly the same. The main feature is the reduction of the prize, from 75% to 70%. In order to benefit from that increasing win per day, we need to substitute the machines in the bars to adapt to the new regulation, so it takes us a little bit of time from the publication of the regulation to actually seeing a change in the business. In the past, we have seen increases in the environment of 10% in win per day, when we changed the machines. The regulation has just been published - actually, like 10 days ago or so - and we will start changing machines in September, and I think we will finish towards the end of the year. Therefore, progressively, we will start to install those machines, and you will see some win uptick during the fourth quarter. At this moment, we cannot ensure, given the current macro-economic conditions, that the uplift in win per day would be the same as the one we have seen in the past, but we are confident that there will be some uptick in regulation, and it will be positive for the business. In terms of your second question, which was the capex guidance we see for the balance of 2009 and 2010, the focus as we have said previously, given the current macro-economic conditions, has been to be prudent, and generate as much cash as possible. You have seen in our financial statements that the reductions we have done in capex versus the previous year have been very significant. In fact, they have been bigger than the reductions we have seen in EBITDA. That keeps us free-cash flow positive, and that remains the focus of the management, until the balance of the year. At the beginning of the year, we published a budget of 83 million of capex; what we expect to have towards the end of the year will be at or below that level. There will be some more capex in the third and fourth quarter than we have seen in the first half, mainly driven, for example, by the Madrid regulation or some other initiatives that we have underway. Regarding 2010, it s still too early to tell. We have our strategic and budget processes starting right after the summer, so in a few weeks, and we will be discussing these aspects. At this moment, I anticipate that unless the situation changes, at the global level, the focus of the management is likely to continue to be the cash flow generation.

7 7 Francisco Ruiz BNP Paribas Fortis Madrid I would like to ask two questions. The first one is that you have mentioned that you are changing a little bit the way of doing upfront payments on the owners. Can you give us some light on that? How much is the current upfront payment? How is it affecting not only this up front payment, but also the values on net daily per winning in your internal rate of return, that if I m not wrong, it should be around 14 or 15% per machine in (). Additionally, I would like to know if you have seen any change in the trend of net win in Spain after the summer, or do you think that the worsening will continue also in the fall of this year? Also, I would like to know if you could give us some details on the latest investments in the Hotel Carrasco and the Cali Casino. Let me tackle them one by one. With regards to the upfront payments, as you might remember, the payments we pay for exclusivity to the bars, they are valued for the period of approximately five years that we signed the exclusivity contracts with them. In the past, they were signed with a fixed amount for the whole period. Given the deterioration in the win per day that we are witnessing in the market, we have changed the structure to a variable amount, and we are paying them in instalments, so the payment is fractioned over the five years of the exclusivity contract and the payments are variable depending on the actual win per day achieved by the bar, in order to maintain, or achieve to maintain the return we get from our clients. It s still early to actually see the effects of that in the financial statements and it will take a few quarters until you see a significant improvement, because basically, these contracts have a five year period. Obviously they get renewed every five years, so in every quarter we should renew a small amount of the contracts, and we are now renewing the contracts that started in 2004, 2005, and although the wins per day that we are seeing today are lower than the win per days that we had in 2008, they are much higher than the win per days that we had in 2004, 2005, when we signed the previous contracts with the borrowers. We think it would be very positive. It is aimed at maintaining the returns we get from the bars, but it will still take some time until you see a significant impact in a profit and loss account. Are you losing a big amount of contracts due to the new conditions, or are your peers doing more or less the same? No, not at all. This is a structural change in the market, and the fundamental relationship between the bar owners and the operators have the same dynamics as we have with the bar owners. It is a movement that is happening more or less across the market. With regards to win per day, it is still too early to be very happy about it, but we are seeing a few weeks in which the deterioration of the win per day is suffering. It may be a floor, but we are not sure for now, so we will have to continue to watch how it evolves. I don t know if that answers your question? More or less. It is obviously the detail you can give me. I hope I can give you better news in the third quarter, but I cannot guarantee I will give you better news in the third quarter. Of course, in the third quarter, we will have to compare against the third quarter of last year, because if you probably remember, seasonality wise, the third quarter is the softest of the year, because it is the one that comprises the summer.

8 8 In terms of Carrasco, Carrasco is a license we have not yet been awarded formally. We expect to be awarded that license in the near future, but every time it happens with these types of processes, the losers file claims against the regulator, and the regulator needs to deal with the claims, so it takes some time until the award is final. Once we are awarded that, we need to go into negotiations with Intendencia Municipal de Montevideo, which is the regulatory body in this case, to sign the final contract, and negotiate that one, and after that, we will have 24 months to build the casino until we operate, so it s still a long time ahead of us. The know capex in 2009, and the exact amount of the capex in 2010 will depend a lot on the negotiations we have with the Intendencia Municipal de Montevideo. Cali is an example of the refurbishments and the change of the strategy we re following in Columbia, where we re moving to a more affluent segment of the population. More of the street machines are suffering the pressure of illegality, and we have taken the strategic direction of moving upscale in the segments of gaming.. We have opened recently a hall with characteristics similar to the Cali Casino. We are encouraged by the results we re seeing in the name of this one is Palatino and Cali will open at the beginning of next month, but it is not a very significant investment. It is in the surroundings of 1 million. In any case, it was contemplated in the guidance for capex that we gave at the beginning of the year. Could you give us an indication, because if I m not wrong, in the first quarter you also announced that many of the investments in the new machines for Madrid have been already provisional, or done? Could you give us how much is the amount for a total capex of the new machines in Madrid? It will be a mix of several things. The machines we are going to substitute will have zero cost, because the machines we have acquired over the last three to six months we already previewed that the change in regulation was going to happen, so they have adaptation kits that are free to us. Some other of the machines will come in the form of rentals, so you will not see capex for them, and some other of the machines will show as capex in our financial statements, and they are contemplated in the number of guidance that we have given for the total. What we would probably said in the third quarter, I don t remember the exact sentence, is that the change in the machines for the Madrid region was contemplated in the forecast, but we did not make the expenditure at the time. Closing Comments If there are no further questions, let me just thank everybody for attending the call, and as always, we will be glad to attend your questions over the following days. Both, Lily Arteaga and myself are at your service. Thank you very much.