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Edited Transcript of CDR.MC earnings conference call or presentation 13-Sep-19 2:00pm GMT

Q2 2019 Codere SA Earnings Call

Madrid Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Codere SA earnings conference call or presentation Friday, September 13, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angel Corzo Uceda

Codere, S.A. - CFO

* Vicente Gabriel Di Loreto

Codere, S.A. - CEO

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Conference Call Participants

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* Diogo Vaz da Silva

Aptior Capital - Partner

* Helen Alice Rodriguez

CreditSights Ltd. - Senior Analyst of European High Yield Retail and Consumer

* Karine Elias

Barclays Bank PLC, Research Division - MD

* Miguel Medina-Sivilotti

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Director

* Ronan Bernard Clarke

Deutsche Bank AG, Research Division - Research Analyst

* Victoria Elaine Pease

Edison Investment Research Limited - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Codere's Second Quarter 2019 Results Presentation. The management of the company will run you through the main business and financial highlights of the period. (Operator Instructions) I am now pleased to hand over to Mr. Angel Corzo, Chief Financial Officer of the company. Please go ahead, sir.

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Angel Corzo Uceda, Codere, S.A. - CFO [2]

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Good afternoon, everyone, and thank you for joining us today for our Q2 2019 financial results presentation. As usual, our CEO, Vicente Di Loreto will cover the most relevant events of the quarter. After his remarks, I will cover the financial highlights of the period, and then we will both take your questions. Vicente?

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Vicente Gabriel Di Loreto, Codere, S.A. - CEO [3]

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Okay. Thanks, Angel, and good afternoon to everyone. Before entering in-depth into the analysis of the results of the second quarter and the events that have followed, I believe it is of great importance to remind everyone of what we have achieved in this last 20 months and of the potential this company still has to continue growing.

I am convinced of this and I am heading a team that not only believes it, but also works relentlessly to achieve our common objectives. I think the results we are reporting today are remarkable from any point of view. Our LTM adjusted EBITDA is today EUR 288 million, the highest figure since 2012. It is also reflected by our LTM EBITDA, which has reached to EUR 159 million, again the highest figure since 2012.

Our cash flow generation is also growing at EUR 148 million on an LTM basis, and in this case, the highest since 2015.

As a result of this, our leverage ratio is also at 2.7x, the lowest since the company issued the first -- the current bonds in October 2016. Finally, we have also managed to stabilize our revenue in the last 4 quarters around EUR 356 million, by continuously growing year-on-year revenue outside Argentina.

And all of this has been achieved in an incredibly challenging context, where we have not only faced significant incremental fiscal pressure in Italy and Argentina, but also where the Argentine peso has gone from 13 to the dollar in January 2016 to 56 to the dollar today, implying a devaluation of 80%, and eroding EUR 175 million of our top line revenue in the process.

But it is not only what we have achieved, it is also how we have prepared this company to continue growing and face challenging circumstances in any of our markets. Since I took office 20 months ago, I set clear goals to make this company more agile, more oriented to results, more flexible, more capable of making the most of each opportunity and also more resilient to any external headwind in our markets. And there are many examples to these strategies. Numerically, we have increased our margins to 20% from 16.5% in 2017 or 15% in 2013, and this despite the gaming tax increases our business suffered during those years.

We have boosted our online presence, multiplying by more than 5x our revenue from 2016 levels, and are now operating in 4 markets with a specific business unit and a powerful base of talent in Malta, Melilla and Israel. We have reduced the weight of Argentina in our mix by half from 50% in our consolidated EBITDA in 2016 to 23% by year -- by year-end 2019.

Last but not less important, we have turnaround Carrasco and Colombia, have eliminated significant losses in Brazil, and are growing now in Mexico and Spain. The latter after years of setbacks and stagnant is not deteriorating results.

I wanted to spend some minutes on this. Unfortunately, recent events in Argentina seem to have put into question for the rating agencies, the sustainability of this evolution of results. As you know by now, while S&P has put us on credit watch to give themself the opportunity to assess carefully how the company evolves in the new Argentine cost context and how it impacts our ability to refinance our debt. Moody's has preferred to assume that our results will be severely affected in the second half of 2019 and 2020, ignored our actual performance for the first half of the year and decided to downgrade us to B3. I cannot sufficiently stress how uncomfortable I feel with this decision in the context of the performance I have just described. Moreover, our guidance just affirmed to the market in late August was not taken into consideration when doing the analysis nor the efforts by the company to tackle nonrecovering items or reduce maintenance CapEx in the first half of 2019.

What I can say you today is that the company will meet guidance for 2019 and will generate positive free cash flow for the year as we committed to you at the start of the year.

Indeed, we look to 2020 with optimism and believe that we will continue growing adjusted EBITDA at the group level.

We are fully aware of the impact that the political uncertainty in Argentina is having in the markets, but also would like to remind you that this company has been operating in Argentina since the early 90s and has known Peronist and non-Peronist governments both in the province and at the national level for many years.

We have faced macro uncertainties and capital controls in recent years and are well prepared to navigate them now. The [PD] finances that today. The rest of the group is growing at nearly 20% per year and produces more than 75% of our cash resources and definitely more than what is required to serve up our debt.

We expect that the initiatives already in place on those coming which unfortunately cannot be covered in detail today, together with a new organization we put in place this year, will allow us to continue supporting not only EBITDA growth, but also revenue growth in the coming quarters.

Very briefly, I would like you to pay attention to results in Mexico where despite a slowing down economy and increased competition, we're significantly growing EBITDA and maintaining revenue levels.

Also for Spain where our focus on profitability and profitable growth are showing great traction and results are surprising us quarter-by-quarter.

And finally, online, where we have been able to grow revenue, we brought in proven investments in marketing and where most -- more story is to come with the start of the football season in the past weeks.

I think I will leave it for -- here for now. Thanks, again, for joining us today, and we'll be happy to respond to any questions afterwards.

I will hand it over to Angel to cover the financial results of the quarter. Angel?

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Angel Corzo Uceda, Codere, S.A. - CFO [4]

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Thanks, Vicente. Now as usual, I will be following the presentation that we shared with investors earlier this morning. Unless otherwise noted, we will be referring to figures in euros and excluding nonrecurring items above EBITDA. We will also be excluding inflation adjustments due to the application of IAS 29 on Argentina's reported figure and continue to analyze the figures pre-application of IFRS 16, though the results apply in the new accounting standards are provided in the earnings release.

Finally, please notice that we have created a new online business unit that pulls together revenue on costs from the online businesses in all markets where we are operating today; Spain, Mexico, Colombia and Panama.

Starting on Page 6 of the presentation deck. Q2 2019 revenues dropped 5.7% to EUR 355 million versus Q2 last year due to the significant decline in Argentina of 20% -- 27% on the back of the depreciation of the Argentine peso which was partially offset by revenue growth in Mexico, online, Italy and Spain. In terms of geographic mix, Mexico took over as our main market with 24% of our consolidated revenues, followed by Italy also at 24% and Argentina at 23%, down from 29% in Q2 last year. Spain also increased its weight to 13%. Online, which we started to report as a separate business unit this year, continues to provide 4% of the total revenue of the group in this second quarter of 2019 as well as on an LTM basis. Last, but not less important, we have managed to stabilize revenues around the EUR 355 million per quarter level since Q3 2018, despite the continued deterioration of the macro environment in Argentina, trend that we expect to maintain to year-end.

On Page 7, Q2 2019 adjusted EBITDA increased 8% versus last year, reaching EUR 70 million. The LTM figure was up by EUR 13 million or 5% to EUR 288 million, our highest level, at least, since 2012.

This significant improvement is remarkable when considering the comparable was only partially affected by the Argentine peso severe devaluation from last year, which happened progressively between May and September. And that we are facing in 2019 higher gaming taxes in Argentina and Italy.

This performance was achieved, thanks to growth in Mexico, online and Spain, but also in Uruguay and Colombia on top of further reduction on corporate structure costs.

Mexico remained our main market in Q1 by a wide difference, representing 44% of our adjusted EBITDA in the quarter and 40% in the LTM period. This happened at the expense of Argentina, which reduced its weight in our EBITDA mix by 11 percentage points to 24% in the quarter and 14 percentage points to 26% on an LTM basis. Our Spanish operations are also gaining ground to 13% of our EBITDA in the quarter.

Skipping Page 8, which provides our results in U.S. dollars for reference purposes.

On Page 9, you can see how we continue to expand our adjusted EBITDA margin, which has reached its 6-year high at 20.2%. Operating expenses, excluding gaming taxes have been reduced by 6.4 percentage points since 2013, driving this significant margin improvement.

We continue to pursue efficiency gains through different avenues, including the digitalization of our operations, support functions and implementing advanced CRM techniques and data-driven tools to address our client needs more efficiently.

On Page 10, we are breaking down the macro impacts in Q2 2019 EBITDA, both in Argentina and in the rest of the group. In the case of Argentina, the hyperinflation in a recessionary context is affecting the gaming industry as a whole. Revenue in the sector is contracted in real terms and impacting our figures even if we are maintaining our market share.

More importantly, in the rest of the group, we are delivering over EUR 13 million of adjusted EBITDA growth, driven by operational efficiencies and growth efforts in Spain, Mexico and online.

On Page 11, we saw the continuation of 2 very relevant trends in our numbers: First, Argentina continues reducing its weight both in terms of revenue for more than 35% just 2 years ago to 23% today. Second, and more significantly, EBITDA has moved in the same period from 44% to 26%.

While part of Argentina's decline in the mix is due to its contraction related to FX, it cannot be denied that the rest of the group is accelerating the trend by producing steady growth on both metrics. Adjusted EBITDA outside of Argentina stands today at EUR 212 million, 60% above that of 2013.

Moving on now to country level results and starting with Mexico on Page 12. Revenue in the quarter grew by 5% to EUR 84 million, partially driven by a 7% appreciation of the Mexican peso against the euro, but also due to the increased capacity in the market as we opened 4 halls last year. Adjusted EBITDA grew considerably by 43% versus Q2 last year, as a result of significant improvements on operational efficiency and of the reduction on rental expenses associated to the acquisition of leased slots that we executed at the end of 2018. EBITDA margin in the quarter reached 38%.

On Page 13, performance in local currency was below that in euros due to the favorable FX trend I just mentioned. Revenues in Mexican pesos dropped 2% and EBITDA increased by 33%. The revenue trend was relatively flat due to a softening macro environment, but most importantly, to the increased competition levels we are facing this year.

The number of halls in the country has grown by more than 60 new one -- new ones versus January 1, 2018. The pace at which new halls have been opened is already declining, while the Mexican government has expressed their intention to freeze capacity in the market. As you can see on the bottom right-hand graph, our market share in terms of gaming halls is almost 2 percentage points lower than in Q2 last year and 3% -- 3 points lower than that of Q4 2017. However, we are maintaining market share in terms gross win through increasing levels of spent per visit and selective openings.

Moving on to Argentina on Page 14, revenue declined 27% or EUR 30 million to EUR 80 million in the quarter as a result of the significant appreciation of 77% of the euro against the peso together with a market contraction in real terms.

Additionally, the new cash-out tax applied since February and the cash impacts from last year are also impacting our revenue as they are indirect taxes netted out of our revenue figures.

As said before, our market share remains fairly stable at around 42%. In terms of EBITDA, it declined further by 29%, reaching EUR 17 million in the second quarter. The additional drop versus revenue being caused by higher taxes, not fully offset by our management efficiency plans yet.

In local currency, on Page 15, revenue on EBITDA grew 29% and 27%, respectively, still below inflation of 56% in both cases. Although the comparison against inflation under the current macro environment is misleading as it does not represent evolution of this possible income, the main driver for expanding leisure activities. However, as we saw on the bottom right-hand graph, the rate of revenue growth is starting to accelerate and converge to inflation levels. In August, annual inflation growth has been 55% and our revenue growth was close to 40%.

Turning to Spain on Page 16, revenue grew 3% to EUR 48 million in the second quarter, despite the positive impact of the World Cup last year on retail sports betting figures.

More importantly, EBITDA improved by 24% to almost EUR 10 million. As a result, margins improved by 3.4 percentage points to 20.1% in the quarter.

In 2019, Spain has been and continues to be a top priority for the management team. This EBITDA trend reflects our significant efforts to improve operational efficiency and optimize deployed capacity, especially on our sports betting business. Any new capacity deployment, both in our slot route and our sports betting businesses, continue to be thoroughly analyzed. Each existing point-of-sale is closely monitored so that anyone that is unprofitable or expected to remain as such is closed, while we are working on avenues to improve EBITDA contribution from each of the remaining ones.

This explains why we have 7 LBOs less in operation that we had last year.

On Page 17, we increased the AWP portfolio by 6% compared to Q2 2018. Part of this growth has been deployed in the arcade segment, resulting in a 2% reduction in average unit deals. With respect to retail sports betting, amounts wagered grew by 15% on an LTM basis in Q2, and take dropped slightly to 18.9%.

In Q2, we had a 19% increase in the average number of sports betting terminals compared to 2018. As we have been discussing on a sequential basis, capacity increases have already slowed down as the whole country is now regulated.

The sports betting gross win increased by 6% below the increasing terminals due to the one-off impact of the soccer World Cup in 2018 and the aforementioned decline in take percentage.

Moving on to Italy on Page 18, revenues increased 5%, while adjusted EBITDA dropped by 31% to EUR 3.6 million. This increase of revenue is a result of the increased accounting revenue recognition derived from the new tax increases, combined with increased yields per machine. EBITDA margin contracted 2.2 percentage points to 4.2 on the back of increases in the PREU tax of AWPs and VLTs.

On Page 19, the 6% reduction in the average installed numbers of AWPs was partially offset by a 19% increase in unit deals. On the reality side, capacity increased 2%, while unit deals declined equally.

In terms of network connected units, they declined 15% versus Q2 last year, but remained at the same level as in the previous quarter, as we operate within the objectives defined by the Italian government.

Please bear in mind that the first 2 quarters have been affected by accelerated renewals of machines to accommodate to the new regulation. That means higher taxes, but also lower payouts. And that the situation is now starting to normalize in Q3.

Looking now at Uruguay on Page 20. HRU revenues were flat in the period, but EBITDA grew 18% to EUR 4.6 million, resulting in a 4.8 percentage points improvement in margins. Carrasco improved by 2% its revenue and maintained EBITDA comfortably above breakeven. Although FX is helping us this year, we also continue to profit from relevant synergies between our 2 local operations.

On Page 21, Panama continues to be under pressure due to the market contraction we are seeing this year. Furthermore, revenues are still suffering the impact of closing 2 nonperforming casinos in the second quarter of last year. Altogether we are dropping 15% in terms of revenue and 32% in EBITDA decline. Towards the turn of the year, we will be opening the premises where we move the close licenses expecting a significant positive push in our figures in this country.

In Colombia, on the other hand, our turnaround continues to gather strength as EBITDA reaches EUR 1.6 million in the quarter, almost triple that of last year. Revenues are still dropping 7%, as we lap now the closure of a nonperforming casino in Q2 2019.

Finally, looking at our online business on Page 22. Revenue reached EUR 15 million in Q2 compared to EUR 11 million in Q2 2018. EUR 10 million of those EUR 15 million were generated in Spain and the remaining EUR 5 million mainly comes from Mexico, where the impact from our recently launched marketing campaigns is progressively contributing to our results.

On an LTM basis, revenues reached EUR 54 million, almost EUR 20 million more than in Q2 2018.

EBITDA reached EUR 1.2 million in Q2 2019, excluding the EUR 4.5 million in growth marketing efforts. Please remind, we consider this as a growth investment as they relate to above and below the line marketing costs beyond the 30% of the -- beyond 30% of the online revenue, expenses that are targeted to attract new customers.

Although it is still premature to draw conclusions, these early online results are aligned to our expectations. On Page 23, you can see how active users in Spain and Mexico are growing significantly year-on-year and across both sports betting and casino verticals.

Based on public data for Spain, we are also growing significantly above the market with our market share of 7% in the case of online sports betting, up from 5.5% last year and at 5% in the case of online casino games, up from 3% last year.

Moving on to the credit overview on Page 25. Our cash generation in Q2 was positively impacted by a EUR 10 million working capital inflow, which helped recover the large outflow we had in Q1. Corporate income tax paid and maintenance CapEx were significantly below Q2 last year. On an LTM basis, free cash flow before growth CapEx grew over 33% versus Q2 2018.

The LTM figure of EUR 148 million is the highest since Q2 2017 and gives us, as Vicente mentioned before, comfortable levels of cash not only to serve debt and deal with nonrecurring items, but to execute growth CapEx or face volatility in our Argentine operation.

Our free cash flow after growth CapEx was EUR 46 million or EUR 15 million after cash interest expense, as we paid the bond coupon in April. We maintained a selective approach to growth initiatives, having spent only EUR 3.6 million in Q2 or EUR 4.6 million in the first half of 2019 versus EUR 13.6 million last year.

On Page 26, we are providing additional details on how cash generation is split between Argentina and the rest of the group, given recent developments in Argentina.

As you can see, adjusted EBITDA is set to increase by nearly EUR 40 million with respect to 2016, EUR 36 million as of June 2019, on an LTM basis.

Well, Argentina has dropped from EUR 134 million or 53% of the group total to somewhere between EUR 61 million and EUR 66 million we expect today or around 23% of our group total.

In terms of our leverage and free cash flow, the group level has been fairly stable in the 2016 to '19 period, while the reliance from the group on Argentina cash flows has decreased considerably. It generated almost EUR 100 million out of EUR 136 million in 2016, while today it is only EUR 35 million out of the EUR 150 million we are generating.

Cash conversion has improved outside the group. And even if we were to exclude Argentina, we would still generate EUR 110 million, EUR 120 million, almost doubling our interest expense obligations.

To further deep dive in the cash flow contribution of our Argentine operations, we show you on Page 27 distribution to headquarters for the last 12 years. As the graph shows, there has been substantial cash generation in the period regardless of the circumstances. And the only period in which that cash was not repatriated to headquarters was when the local licenses were renewed between 2012 and '13.

Please bear also in mind that the period of '12 -- of 2012 to 2015 was also affected by capital controls, similar to those that have been introduced last week in the country. Still the local unit contributed to solve headquarter's cash needs during that period.

Moving quickly to other elements within free cash flow. On Page 28, you can see how our maintenance level -- maintenance CapEx level has been moving back to the EUR 70 million level below our guidance from EUR 75 million to EUR 80 million, as we continue to maintain rigorous approval processes to maximize returns of each euro we spent. Part of this decline is related to Argentina, as the depreciation of the peso makes more expensive to acquire new product and, therefore, better performance is required. But other efforts and a comprehensive and rigorous slot performance management analysis are also contributing to optimize this variable.

Corporate income tax paid, on Page 29, is also decreasing, as Argentina, the main market where we pay corporate income taxes continues to decline in euro terms. Over the last 12 months, we are paying nearly EUR 14 million less than we did in 2018.

Taking into account that we are still paying taxes based on 2018 results, the figure will continue to decline considerably in the coming quarters and early 2020. Additionally, we would like you to notice that so far the significant EBITDA growth for deals in other markets is not yet producing material increases in corporate income taxes paid in other markets or headquarters, trend that will be sustained for now.

Finally, on working capital, on Page 30, we have recovered around EUR 10 million in the second quarter of the year, improving our position to a net outflow of EUR 17 million. This was mainly the result of some one-off impacts being recovered as the Uruguayan government's payments to HRU that it leads from Q1 to Q2 or seasonally impacting Italy, mainly coming from the payment by the Italian regulator of the 0.5% network canon. We expect that the company will not produce significant variations of working capital in the remaining part of the year.

Regarding our credit profile, on Page 31, gross debt was relatively flat compared to December as a result of a EUR 9 million reduction on OpCo debt being offset by a EUR 15 million drawing on our RCF. This drawing -- this draw was done to accommodate the working capital outflow in Q1, while we continued to work on several local debt issuances that we expect to close in Q3 and Q4.

As these facilities materialize, part of the inflows will be used to reduce our position in the super senior.

Thanks to the growth provided on the minimal movements in net debt, leverage in June has stood at 2.7x, at its lowest level since 2016.

Liquidity remains strong with EUR 81 million of cash and EUR 63 million available under the super senior revolving credit facility, with total liquidity of almost EUR 144 million.

Finally, on Page 33, we are confirming again our adjusted EBITDA guidance for the year, just as we did 2 weeks ago for relevant fact. In our guidance confirmation, we're factoring FX projections according to Bloomberg forwards, which tend to be more conservative than the REM report that Argentina Central Bank does, upon which we usually rely. More so the forecast today, although still volatile, project end of year figures at 72 pesos to the dollar versus 79 pesos in mid-August that was the FX used to calculate the guidance.

I would like to give you a very special thank you to the team here in Codere, as these weeks have been a bit more complex than usual and their contribution has still been stellar as always.

This is it for my prepared remarks. Vicente and I will now be happy to respond to any questions you may have. Operator, please open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So we have our first question by phone from Ronan Clarke from Deutsche Bank.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division - Research Analyst [2]

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Angel, I guess, there's only one place to start, so let's dive into Argentina. I was just wondering about the cash position. Can you tell us what you have there today? And are you working on a strategy for moving that cash? I think in the last time you were -- it involved bond purchases. So have you lined up anything this time to ensure that the -- you can still access the cash there, please? And also have you revisited any of your strategic options in regard to Argentina since -- in the last month or so since the election news? And one other one away from there, just on the RCF, I'm just curious why you drew the further EUR 15 million down in the quarter? What was the intent -- what was the use of that, please?

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Angel Corzo Uceda, Codere, S.A. - CFO [3]

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Thanks, Ronan. Well, I will start with Argentina. You are seeing that we had EUR 13.4 million at the end of June. I think that figure is now below EUR 10 million, around EUR 8 million. We have in advance -- actually, after the primary elections, we were predicting that the situation could complicate, so we did a full cash sweep of funds in Argentina and reduced that to barefoot -- bare minimal levels. So now we have a bit of leeway to when we have to take money of Argentina out again. To do that, as you probably know, there are mechanisms that are already at work that you can derive from the local press, which is the implied FX at which that is happening. As we don't need to be rushing to that, we have been prudent. So we have all the machinery put to -- put together to work. We have everything prepared, and we will probably start doing moves towards the end of the month.

Regarding your question on the strategic movements around Argentina, I think we have discussed that many times. And we put the -- a slide regarding the contribution of cash from Argentina to headquarters not only for you guys to take a clear picture of how much money we have extracted from Argentina, no matter what happen, including capital controls, but also to make you -- to have everyone think about which is the value of that cash to-date. I think that today, we still believe that there is no strategic option that makes -- has more value to us than maintaining that cash inflow obviously because we are rational if there was an opportunity, we will take it. But that opportunity would have to be valuable enough to compensate that, I would say, significant cash flows that would have been generated in Argentina in the last years.

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Vicente Gabriel Di Loreto, Codere, S.A. - CEO [4]

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Perhaps, Vicente here, if I may add, we are just running our budgeting process on this time, it comes together with a realization of our business plans. The one that we produced last year and was approved by our Board in May of last year. So of course, all the different situations we are going through in the different countries where we operate, requires a contribution of everything, but so far, I don't foresee any relevant change of strategy. But again, we will -- it's our duty to review everything.

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Angel Corzo Uceda, Codere, S.A. - CFO [5]

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And finally, you asked about the draw in the super senior. We did draw in the super senior because, as you know, the first half of the year, we -- especially in the first quarter, we had a significant outflow in working capital, but also we have been repaying around EUR 10 million of local financings. We do have a number -- actually 3 operations in -- being finalized as we speak. 2 of them should be definitely finalized this year. One of them is being finalized as we speak. We are drawing obligations in Panama and the period of joining the facility will end in September 30, but we have already some draw in that facility. We have gone already through credit committees in Mexico for 2 instruments.

So we are moving now. And towards the end of the year, we will have, I believe, significant inflows that will help us stabilize our position and probably reduce the draw in the super senior because, as you know, on the [call] we said, I prefer to have ample liquidity on that facility. But there is no other reason than that. As you know, this year, we had a local debt amortizations for EUR 35 million. So that is a significant amount of money that we need to keep to take care of. In reality, as I said in the -- in my remarks, the level of debt is not moving.

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Ronan Bernard Clarke, Deutsche Bank AG, Research Division - Research Analyst [6]

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Okay. And the outstanding amortizations in the rest of the year, can you meet those and without drawing the RCF further? Or is it just a matter of timing?

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Angel Corzo Uceda, Codere, S.A. - CFO [7]

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We have -- in the second half of the year, we have amortizations for EUR 19 million 1-9, before any of the new instruments coming. We are expecting instruments for a little more than EUR 19 million so that would allow us to reduce the draw in the senior. This will always be a matter of time as one of the things that we are trying to do, the obligations in Uruguay is a lengthy process with regulators -- it is underway already. The papers are in the regulator hands. So we expect that towards the end of the year or very early next year that will also be on the table. With Mexico, Panama and Uruguay, we have more than enough to compensate the EUR 19 million and still reduce significantly or materially the draw on the senior.

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Operator [8]

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So we have another question from Jack Pobjoy from Barclays.

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Karine Elias, Barclays Bank PLC, Research Division - MD [9]

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It's actually Karine from Barclays. Just a few questions actually for me. Just going back to the performance of Spain and Mexico.

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Angel Corzo Uceda, Codere, S.A. - CFO [10]

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(technical difficulty)

Karine? Laurel, the line of Karine that falls or ours.

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Operator [11]

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Yes. Sorry, there is a problem. Just a few second.

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Angel Corzo Uceda, Codere, S.A. - CFO [12]

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Okay.

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Operator [13]

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(Operator Instructions) So you have the floor again, madam.

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Karine Elias, Barclays Bank PLC, Research Division - MD [14]

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Great. I hope you can hear me now. So just on Spain and Mexico, we see very strong performance in the quarter. In light of the situation in Argentina, I was wondering whether that changed your CapEx plans or expansion plans into those 2 countries that really seem to be driving results a little bit even better than I -- what I expected. And then secondly, just on your operational efficiency, if you can give us a little bit more color on that, that would be great.

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Angel Corzo Uceda, Codere, S.A. - CFO [15]

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Okay. To the first question, as you know, Argentina has been there, and I should have said that before, we have had 13 halls in Argentina for as long as I can remember. So that performance of Argentina has been made without adding new halls to the mix. So in this year, very little growth CapEx has gone to Argentina. Maybe now and then in the past, with good and larger hall, but not significant investments. But as you -- what you say is perfectly right. We are not investing growth CapEx in Argentina. It has been a long time. We don't do that. We are investing growth CapEx in the Spain and Mexico.

In Spain this year, we have focused on the turnaround of the operation on improving profitability, and we have been prudent in deploying a significant growth CapEx. If results continue to be as a strong as they are so far in the year, we probably will accelerate a bit next year.

While in Mexico, you know that we opened 4 halls last year. Since June 30, we have opened another one and we expect to open 2 more before the end of the year or around the turn of the year. Mexico, as you know, it's a complex market in terms of opening halls. It's a slow process. We keep opening 1 or 2 and buying 1 or 2 every year so that we increase the mix for 3, 4, maybe 5 halls per year depending on logistics and regulatory bodies, and that's all planned for the coming future.

In terms of efficiencies, well, on top of what I said before about digitalization of front office and back office, you know that we had made a very significant organizational change earlier this year, where we now have a Retail CEO for the whole operation. That is still driving efficiencies as all the teams that report to him are being unified also for the countries, marketing as well as performance management, controlling, a number of food and beverages, sports betting, a number of verticals below him are being integrated progressively, but also back-office functions.

And this is a long process, probably it will take 12 to 18 months, but we are simplifying. For example, in my case, the administrative processes for the group, unifying teams. We are starting to build a corporate service center to serve the countries. So there are still many other avenues in which we will still create efficiencies. And one field that is also very relevant that is being key in Spain, is that we are improving or enhancing the way we measure the profitability of each point-of-sale and the optimization and the improvement of the deal or the deal management of our capacity. That is also giving us a strong results, very especially this year in Spain, but also in other markets. I don't know, Vicente, do you want to add anything?

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Vicente Gabriel Di Loreto, Codere, S.A. - CEO [16]

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No. I think you were very thorough. And of course, as you know, it's a relevant part of our focus. What I think is that most of the initiatives, at least I have in mind, when I to go to the office a month ago, we are all in process or going. And as Angel has expressed, I mean the implementation of many of them will take some more time. So some more efficiencies will come. But now that is why I express in my initial speech, we have been preparing the company for resuming growth, and I think that we should see not only efficiencies, but also top line and eventually, depending on the scenarios in organic growth in 2020. This is part of what we are going to discuss in the relation of our business plan by -- until the end of the year.

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Operator [17]

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So we have another question from [Fred Emeh] from M&G.

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Unidentified Analyst, [18]

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Sorry, it's [Vladimir.] I have a few questions, some which have been answered. Just based on Moody's pessimistic view on the free cash flow generation, can you outline your view on cash-outs in the year ahead for restructuring charges, litigation charges and online marketing expenses, please?

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Angel Corzo Uceda, Codere, S.A. - CFO [19]

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Okay. Let me give it a try. I think that one of the more negative or more pessimistic view of Moody's regarding our cash flow generation, I think that we also have, by the way, to need to wait until they produce the full report as we have only seen the press release, but for more conversations with them what I gather is that they are reducing the expectation on adjusted EBITDA significantly because of the Argentine situation.

Secondly, they are being much more prudent that we are, in terms of nonrecurring items, reduction of nonrecurring items. You have to bear in mind that last year, we had 43. So that's a number that they are looking at very carefully. And this year, in the first half, we have only had 10. So we expect that this 10 more or less level will be maintained in the second half of the year, and they are taking a much more prudent view on that, that obviously it still has a spillover effect in 2020.

As I described in prior calls, most of the litigation expenses are already in our box relating to the processes with the family, as we are now approaching the hearings or should be approaching the hearings versus when we were preparing for those.

So in terms of nonrecurring items, this year will be between EUR 20 million, maybe EUR 25 million, next year, they should still go down. I have always said EUR 10 million to EUR 12 million between efficiencies, tax issues, et cetera, and maybe a bit more due to the online growth marketing spend.

And the other part that is very important in how more this is looking at our numbers is that given that we -- last year, we had spent a very significant amount of growth CapEx because we bought a very significant chunk of our revenue share and lease machines in Mexico. In their assumptions, the way I understand them, they are considering that we are going to keep very high growth CapEx figures in order to sustain our profitability levels.

And for that, I have shared my view. We have been spending EUR 20 million to EUR 25 million of real growth CapEx. In 2016, we had spent nearly EUR 60 million because we bought the minority in HRU. In 2017, we had spent EUR 60 million again because we bought the minority of Caliente. You just take those out, the number, the investment is EUR 25 million, around EUR 25 million per year. That would have been the case in 2018 had we not buy the machines.

And if you look at my numbers today, we are below EUR 5 million in growth CapEx year-to-date. It is true that we are going to spend a bit more on the second half because of these things, I told you, 3 new halls in Mexico, but we are going to be around EUR 20 million in the year maybe a notch above EUR 20 million, and that will be, in principle, the same number for next year. So obviously, I don't want to put words into Moody's mouth. I think that it's important that they give the full report and are more accurate on their projections. But give or take, this is what I'm seeing the differences.

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Unidentified Analyst, [20]

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Great. You've answered my following question, which was going to be on the CapEx. But what about marketing expenses?

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Angel Corzo Uceda, Codere, S.A. - CFO [21]

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On the online marketing expenses, as you know how we calculate it, it is 30% of what exceeds or 30% of our revenue. So it is pretty much predictable what we will do. This year, we expect to end the year at around EUR 12 million, give or take, and I expect a bit less next year or a similar amount.

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Operator [22]

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So we have a question now from Victoria Pease from Edison.

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Victoria Elaine Pease, Edison Investment Research Limited - Analyst [23]

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Just a follow-up.

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Angel Corzo Uceda, Codere, S.A. - CFO [24]

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(technical difficulty)

Laurel, can you...

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Operator [25]

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Again -- yes, I'm sorry. Again, the same problem. (Operator Instructions) So now you have the floor.

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Victoria Elaine Pease, Edison Investment Research Limited - Analyst [26]

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Hello, can you hear me?

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Angel Corzo Uceda, Codere, S.A. - CFO [27]

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Yes, Victoria, perfectly.

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Victoria Elaine Pease, Edison Investment Research Limited - Analyst [28]

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I had a follow-on on the online question with the additional marketing spend that's been going on. I was wondering the online revenue has been flat sequentially. I'm just wondering when you expect the additional marketing to kick in, in terms of revenue growth, meaningful revenue growth for the online business?

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Angel Corzo Uceda, Codere, S.A. - CFO [29]

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Well, the growth from Q2 to Q3 has been modest, but you have to bear in mind that we still rely significantly on sports betting for our online revenue and the sports betting still has a very significant seasonal profile, both in Mexico and Spain. So -- and it happened the same last year from Q2 to Q3, even despite the World Cup. So Q3, Q4, you will see, again, significant growth. We have already, as you may imagine, July numbers, August numbers. They have been relatively weak in July. August have been a little above our expectations. And September, we see that the numbers are -- were strong especially in amounts wagered. I think it's a bit lower than we would like, but the amounts wagered are being very strong. As always, Q4 is the stronger of the season and is where the game will be played, if you let me do the analogy.

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Victoria Elaine Pease, Edison Investment Research Limited - Analyst [30]

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And the same I suppose will be the case with sports betting terminals in Spain for the retail business?

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Angel Corzo Uceda, Codere, S.A. - CFO [31]

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Exactly with the only difference that the sports betting terminals in Spain should remain more or less flat in the remaining part of the year. Last year, in Q2 and Q3, we had the World Cup, which drives a lot of revenue. And this year of 2019 is the odd year that happens 1 every 4 years, that there is no World Cup, no EuroCup and no Olympics. So I have discussed this with the sports betting guys 10 or 12 times in the last couple of months is, it happens every 1 year every 4, and this is the year that happens. So I am betting on them and giving them a bit of leeway until we see how the statistics on the starts at the end of September and October to really assess what is the continuation or the potential of growth that we are seeing today.

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Victoria Elaine Pease, Edison Investment Research Limited - Analyst [32]

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Okay. Great. And just one last one on the growth CapEx in Mexico the amount you've been investing in. What sort of growth do you think would generate from the additional hall openings? And should we expect another uptick in the second half of the year and 2020?

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Angel Corzo Uceda, Codere, S.A. - CFO [33]

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Well, in the second half of the year in Mexico, you need the first -- the main thing you will have is the analyzation of the impact of the acquisition of machines that is being progressively analyzed and you will have the full impact of that on the second half of the year. Then the 3 new halls that we are getting, we are spending approximately EUR 8 million to EUR 9 million on total on those. So you should expect a couple of million, EUR 2 million to EUR 3 million of additional EBITDA on an annualized basis when that happens. On top of that, we hope to once the competition softens a bit, as I said before, openings start to slow down, or organic growth will start to kick in again, and that will also help us.

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Operator [34]

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So we have another question from Miguel Medina from JB Capital.

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Miguel Medina-Sivilotti, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Director [35]

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Two questions. One, of course, on Argentina, I guess, the administrations have more pressing issues. But on the other hand, they must be keen on raising new revenues. Just to see if you could update us on what the situation is regarding the sports betting online in both the city and the province? Whether that could go ahead or it's going to be postponed until there are new administrations in place? And also linked to this one, whether the new administration after the new general elections might consider bringing forward the whole license renewal process? That was the first question. And then the second one, are they a basic one and apologies because maybe I should know the answer. What is the definition of an active user in your online business?

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Vicente Gabriel Di Loreto, Codere, S.A. - CEO [36]

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Okay. Angel, if you want, I can take the first one. In terms of what's going on in relation to the sports betting and online licenses in Argentina. I think it's pretty simple to answer. In the case of the province, the process has been stalled by the current government. Something naturally after -- that after the elections, we internally were up to a certain extent, expecting. So it is possible that the process continues to have certain movements in which the government are analyzing the offers of the 15 offerings in the process. But we do not expect this situation to be solved by the current government. And I mean will be solved by the next one. Not necessarily with a scheme is underway, but we don't know. I mean there are so many changes, if you want in -- going on in Argentina, that this is not top of in the agenda we think of the current government or probably the new one.

In terms of the city, the process, we know it continues. I mean the current government, the government that will probably continue and will probably win the elections, we will see. But there is a clear -- a more clear, at least very clear picture of continuity there. They are continue to work in -- they continue working on the process, as we know. And we expect to -- that they officially launched the bidding process or whatever process they defined to our licenses. I think those were the...

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Angel Corzo Uceda, Codere, S.A. - CFO [37]

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For licenses, the renewal of the licenses...

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Vicente Gabriel Di Loreto, Codere, S.A. - CEO [38]

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No. And regarding the renewal of the licenses, I know there are certain anxiety or rumors or whatever, but the reality is, there is no clear signal at all that that could happen, and we will see once the new government is in place, what their policy is. What I can tell you is that in our view, although perhaps from the federal point of view, a different level, I mean in Argentina, the new scenario is complex from the political and macro economical point of view. We think that from the -- at the provision level from the regulatory and fiscal point of view, it could be positive for us.

Our business has prospered in the past in several governments, actually, our business suffer during the last government have begun with a several tax increases and also an anti-gaming sentiment that deteriorated our business, which has been stagnant for the last 4 years. I mean no authorization to grow. So we tend to have a positive view of what might happen in that regard, considering a clear path to license renewals, which we do not expect to happen next year. I mean with voicing, I think it will happen when it needs -- it has to happen, which will begin to -- the license, it will begin to mature in 2021, but we will see. And too early, a clear path to -- for the industry to resume growth if the disposable income and if the macro and micro allows for that, we will see. So I expect that answer the questions.

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Angel Corzo Uceda, Codere, S.A. - CFO [39]

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And some of your last comment around active users, we define active users as those that have been active in the last month.

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Miguel Medina-Sivilotti, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Director [40]

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Last month, okay.

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Operator [41]

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So we have another question from Diogo Silva from Aptior Capital.

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Diogo Vaz da Silva, Aptior Capital - Partner [42]

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I have actually 2 questions from my side. The first one is on Mexico. So I believe that the federal tax in Mexico is 30%. And there's a number of regional taxes, most of which I think can be offset against it. But when I look at the gaming and other tax that appears in your costs, you seem to be paying less than 10%. And I just wanted to understand how have you reconciled that about 9.8% that you're paying with a headline number of 30%?

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Angel Corzo Uceda, Codere, S.A. - CFO [43]

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Okay. For that, probably, I will need to give you a lot of grandeur to the numbers. The revenue and the recognition mechanics in Mexico are somehow complex. We don't recognize as revenue -- as gaming revenue, the full inflow we have in the halls, and that's why there is a combination of factors that reduces the effective accounting gaming tax that is what is represented in the annual accounts. Probably that discussion is a bit complex to be had on the phone. I will recommend you to discuss with Edree Moshe a follow-up. But yes, we are paying 30% of gross win -- of effective gross win of gaming tax. You can be sure of that is only that the revenue recognition is quite complex.

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Diogo Vaz da Silva, Aptior Capital - Partner [44]

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Understood. And just -- and then sorry, still part of the same question. But can you just comment on, I think, earlier in the year, there were some rumors in the local press that the current government was looking to increase gaming taxes and I'm quoting "to bring them more in line with either international standards." Have you been part of any discussions regarding that?

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Angel Corzo Uceda, Codere, S.A. - CFO [45]

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Well, I think, 30% is well within the international standards unless you are Italian or Argentinian, but Colombia is 14%, Panama is 15%, Europe is, outside of Italy is, around 20% to 25%. So whatever that is. But the opposite side, the government from what we know has not put gaming as a top priority in their mandate. Having said that, we, together with other noninstitutional operators are looking for ways to help the government have a tax press release that is fully enforceable. Because what usually happens in Mexico is that the question is not, which is the tax rate. The question is, is everyone paying the tax rate or only us? And as another group of non-institutional players, including PlayCity, including CIRSA, including even Caliente are trying to help the government to evaluate alternative tax schemes that will -- that could be much easier for them to enforce, regulate and make sure that every single operator plays by the same goal. It will take time. It is taking time, but we are trying to work on that avenue.

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Vicente Gabriel Di Loreto, Codere, S.A. - CEO [46]

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Yes. If I may add, this is, of course, part of the political agenda of the government and (inaudible) is not -- I mean is looking for higher taxes, but to collect taxes that should be collected. So this type -- that type of environment is from the competitive point of view is good for institutional competitors like ours. So we will be -- I mean we will try to foster that type of accelerated scenario, which is good for the country, good for us and for everybody we think. And we will not necessarily expect a tax increase impacting our numbers if this happens, but this is basically the process we know is going on. And by the way, by the beginning of this week, the federal government has passed -- no, I'm sorry, the Congress has passed a tax reform, which need not anything related to them. So we are following up very closely, and we will see.

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Diogo Vaz da Silva, Aptior Capital - Partner [47]

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I appreciate it. And if I may just ask one last question. Regarding Italy, can you just please update us on what is the expectation you have for payments for the VLT license? And also for the bingo licenses that I think are overdue? And if there is also kind of an expected timing for those bingo licenses?

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Vicente Gabriel Di Loreto, Codere, S.A. - CEO [48]

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Okay. Let me again begin perhaps with the bingo licenses. As you may know, the bingo licenses has been due, I mean they have matured 3 years ago.

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Angel Corzo Uceda, Codere, S.A. - CFO [49]

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2016.

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Vicente Gabriel Di Loreto, Codere, S.A. - CEO [50]

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About 3 years ago, and we are paying -- I mean a tax, by our basis, if you want. And we are expecting -- sorry, not expecting, waiting for the government to define how the renewal process will be.

In the case of VLT, I want to say that we expect the same, but the reality is and you may be aware of the political situation in Italy, which is pretty unfavorable to put it in words So this will depend completely on the political agenda of the government, who is -- which is in place at the moment. It is very, very uncertain at this time and very -- I mean we can't foresee what will be exactly the scenario. We're actually waiting also for something very important for the industry in Italy, which has to do with what they call the [reorg], which is how to put in all the licenses -- the permits, sorry, at the local level and this is something that needs to be agreed between the local governments and the federal government, the problem is that federal government has changed. So this is something that will take time. And this, we see as a prerequisite to any renewal license for VLTs or for whatever in Italy.

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Angel Corzo Uceda, Codere, S.A. - CFO [51]

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Just to complement what Vicente said, it is not only bingo license that are late, the sports betting licenses are late. They have -- they proposed something that the European Union rejected a couple of years ago, nothing has been fixed. They have promised a new regime for the AWPs that is also late. They (inaudible) And there are so many (inaudible). Having said that, so

(technical difficulty)

Sorry, there is a lot of

(technical difficulty)

The network license matures in January 2022. So there is still some time to have any clarification.

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Diogo Vaz da Silva, Aptior Capital - Partner [52]

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But again in terms of magnitude of the numbers you could give us, I mean it sounds like timing is very uncertain. And I appreciate you can't really predict it. But when you think about your business plan.

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Angel Corzo Uceda, Codere, S.A. - CFO [53]

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Yes. We can give you this what we have been giving to anyone who ask and this is on our papers, in the website. What we usually say is we say what we paid in 2013, which was EUR 15,000 per VLT license. The only comment I would make is that, that was on a much less onerous tax package. But that's the only reference point we have, and when we are prudent, we are using that figure.

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Vicente Gabriel Di Loreto, Codere, S.A. - CEO [54]

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But already there's devaluation of the industry. Yes, I will argue that, that should be the amount. But that's my personal point of view, okay?

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Operator [55]

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So we have no further questions by phone now, gentlemen.

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Angel Corzo Uceda, Codere, S.A. - CFO [56]

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Okay. Let's give it 30 more seconds to give anyone the opportunity to dial in questions.

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Operator [57]

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So we have a question by phone, which is coming. So we have a question from Helen Rodriguez from Crédit Suisse.

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Helen Alice Rodriguez, CreditSights Ltd. - Senior Analyst of European High Yield Retail and Consumer [58]

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CreditSights, actually. Sorry about that. My phone cut before. Apologizes if this is a repeat because as I say, I lost you halfway through the call. Can I just please ask a couple of questions. On the local currency facilities that you're discussing, can you talk about the seniority of those? Is there are any security in any of those facilities or are they will unsecured? And would you do any local currency? You've got a very small one in Argentina. Would you increase the size of your local currency facilities in Argentina?

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Angel Corzo Uceda, Codere, S.A. - CFO [59]

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Okay. In Argentina, I do not have anything and I'm not aware of having anything. We have a couple of leases in Argentina, maybe that is what driving the confusion. I would recommend that you check with Edree Moshe to make sure.

The other point, this company has always had local finances, and those have been contemplated in the indenture and the structure of the super senior. And what we do is put new debt when the old debt has matured in the same places where we have it. So the scope of the hall, the debt structure of the company is not changing.

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Helen Alice Rodriguez, CreditSights Ltd. - Senior Analyst of European High Yield Retail and Consumer [60]

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Sure, sure. They have security, or is it -- are they unsecured?

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Angel Corzo Uceda, Codere, S.A. - CFO [61]

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It depends on each of the facilities. They usually have security. What can be said security, for example, of loans in Mexico are usually in AMH. And the security they have is the sales of AMH. So there is no real asset associated to that, only shares.

In Panama, the only security that it will have is a lockbox for EUR 2 million or EUR 3 million -- 2 or 3 months of debt service. And in Uruguay is the same thing. The only security that the loans will have is lockbox on an amount -- on a multiple of what is being -- they require to service that. So there is very little real security attached to any of our local financings because, as you very well know, this is a company that is light in assets.

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Helen Alice Rodriguez, CreditSights Ltd. - Senior Analyst of European High Yield Retail and Consumer [62]

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Yes. Got it, got it. Great. And then I know you've given in your, I think it was, in the appendix or I'm not sure, the unlevered free cash flow for Argentina was like EUR 30 million, EUR 35 million, you think. Is it possible to get the different elements of that? The maintenance CapEx, tax minorities, just broken down into individual elements?

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Angel Corzo Uceda, Codere, S.A. - CFO [63]

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For Argentina or for the group?

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Helen Alice Rodriguez, CreditSights Ltd. - Senior Analyst of European High Yield Retail and Consumer [64]

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For Argentina? For Argentina?

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Angel Corzo Uceda, Codere, S.A. - CFO [65]

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For Argentina, in that number this year, we are putting around EUR 65 million of EBITDA. I believe, it is around EUR 25 million -- sorry, EUR 15 million to EUR 20 million of corporate income taxes, then around EUR 10 million to EUR 15 million of maintenance CapEx, and then the rest of the variations a little of unwinding of the working capital. But nothing relevant. So EUR 65 million minus EUR 20 million minus EUR 10 million is -- gives you EUR 35 million. There is some minority that takes around EUR 1 million every year, that's how you get to the EUR 30 million to EUR 35 million.

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Helen Alice Rodriguez, CreditSights Ltd. - Senior Analyst of European High Yield Retail and Consumer [66]

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Okay. And then in terms -- remind me, when you're getting money out of Argentina when there's capital controls, that's through you buy bonus, no? How does that work? I can't remember you buy government debt and sell it? Or is that the mechanism?

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Angel Corzo Uceda, Codere, S.A. - CFO [67]

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Well, it's called the blue-chip swap. You buy bonds locally and you sell them outside of Argentina with a minimum period to make sure that you are not speculating. So that's correct. We can explain to you that on a separate call.

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Vicente Gabriel Di Loreto, Codere, S.A. - CEO [68]

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Like, there will also be authorization to pay dividends or services, which is something that has been foreseen in the current...

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Angel Corzo Uceda, Codere, S.A. - CFO [69]

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In the current regulation, and we will be also going through the official channels as we have always done. So that will also happen.

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Operator [70]

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So we have no further questions, gentlemen, at the moment.

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Vicente Gabriel Di Loreto, Codere, S.A. - CEO [71]

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Okay. So thank you very much to all of you for joining the call. Thank you for your questions. We are -- Angel and I are always ready for your questions. And hope you have a great weekend. Thank you.

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Operator [72]

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Ladies and gentlemen, this concludes the presentation. Thank you all for your participation. You may now disconnect.