Cd Projekt Sa Unsp/Adr

Good afternoon. My name is Adam Kiciński and I'll be your host during today's conference dedicated to the CD Projekt Group's financial results for 2022. I'll run the presentation together with Piotr Nilubowicz. Michał Nowakowski will join us for the Q&A session. Before discussing earnings, I'll sum up last year's main events. 2022 can be defined as the year in which we laid solid foundations for our future business. First, beginning parallel development of two AAA projects. As we continued working on Phantom Liberty, we started production of the next Witcher game. Parallel development should eventually let us increase the frequency of releases. Second, we entered into a strategic partnership with Epic Games. We decided to transition to the Unreal 5 engine for our future titles. This should eventually support more stable and efficient development. At the same time, we continued to improve our key products, Cyberpunk 2077 and The Witcher 3 Wild Hunt. They both received a number of significant updates. Speaking of Cyberpunk, two important events took place in 2022. In February, we released patch 1.5. This substantial update brought various improvements to the game. What's more, we updated the game to the full next-gen version. This means Cyberpunk 2077 can make the most of the additional power delivered by next-gens. Later that year, in September, we released patch 1.6, the so-called Edgerunners update. It brought another batch of meaningful improvements to the game, many of which had been directly requested by the community. Also, the update contained tie-ins to the anime series Cyberpunk Edramus, which was released on Netflix at the same time. Speaking of the direct impact of these events, let's move to slide 4. Analyzing the Steam reviews, there is a clear increase in positive ratings at the beginning of the year when patch 1.5 was released. It's worth mentioning that this was a next-gen patch, so the quality increase was especially noted by console players. But as we can see, PC players also appreciated the improvements. However, these results were disrupted by a review bombing linked to the war in Ukraine. It is clearly visible in March, when we were hit with a massive number of negative off-topic reviews. Our understanding is that it was a direct effect of pulling out our games from Russia and Belarus and our financial support for Ukraine. The impact of the war aside, starting from September, the impact of the transmedia synergy was particularly visible. The release of the Adranos update, combined with the very positive global reception of the anime, gave the game another boost. Sentiment around Cyberpunk is clearly good, laying a solid foundation before the release of the expansion Phantom Liberty. Now let's move to the next slide, number 5. The highlight of the late 2022 was definitely the release of the next-gen update for The Witcher 3 Wild Hunt. In December, we invited players to return to the Witcher universe and enjoy girls' adventures in the best possible quality. The update featured multiple visual and technical enhancements, including performance and ray tracing modes. On both next-gens, Witcher 3 hit a 94 score on Metacritic, and a must-play distinction. We believe that thanks to this update, we have extended the game's lifespan by another generation. Now let's move to slide 6 to take a look at the long-term revenues from our key games. 2022 was another year when our back catalogue generated solid sales. Significantly, revenues of Cyberpunk grew on a year-on-year basis. This is a good sign ahead of the release of Phantom Liberty and its potential of supporting sales of Cyberpunk 2077 in the years ahead. Now let me walk you through the effects of strengthening the red team presented on slide 7. We are rescaling as a company, now able to work on two AAA games simultaneously. We have turned to data through employee service to support our path for the next transformation steps. The initial results are encouraging, especially the involvement of employees. More than 85% of the team took part in the survey. This is way above the benchmarks. At the same time, we see further room to develop the company as an attractive workplace. by giving not only voice but also real empowerment to each team. What's more, we have stabilized our teams with a drop in turnover by 6 percentage points compared to 2021. In order to further minimize turnover and compete for the best talents, we are transforming our payroll policy. This year's dynamics of salary increases will be maintained On top of that, we have already integrated our company-wide bonus system into the base salaries. So the total base salary growth in 2023 will be even higher than in previous years. At the moment, our compensation system does not include long-term incentive plans. To be even more competitive, we are proposing an incentive program. It will be voted on at the next shareholders meeting, which will take place on April 18th. If you have any questions in this matter, do not hesitate to contact us. As for our current operations and development, let's move on to slide 8. Our focus remains unchanged. We are at the final production phase of Phantom Liberty with 340 developers on that project. In parallel, we have grown the Polaris team to almost 200. Before I turn the floor over to Piotr, I would like to announce that in June we'll be launching a marketing campaign for Phantom Liberty. So stay tuned. Now it's time for financials. Piotr, the floor is yours.

Thank you Adam. Now let's dive into our 2022 results. First, our consolidated profit and loss account on slide 11. In total, our sales revenue in 2022 reached 953 million zloty. Most of that was delivered on sales of products of CD Projekt RED. Three major events helped us to achieve this result, in chronological order. The release of the Cyberpunk Next Gen version, the whole event of the Cyberpunk Edgerunners update and anime launch, and last but not least, the introduction of the Witcher 3 Complete Edition on Next Gens. In contrast to total group sales, our cost of sales slightly decreased, which is attributable mostly to the GOG segment. Moving on to operating costs. Our selling expenses in the amount of 222 million Zloty decreased by over one-fourths. This was mainly driven by the decrease of Cyberpunk servicing costs from over 80 million Zloty in 2021 to nearly 23 million Zloty in 2022. The updates and improvements published over the past two years significantly enhanced gameplay performance and have been met with a positive response by gamers, as shown by Adam. Our focus and team involvement now naturally shifted towards future releases, including Phantom Liberty. Still, overall, the selling costs were high as last year we were actively promoting the three events I just mentioned. Next slide. Our administrative expenses increased by 5%. On the one hand, we spend less on the early phase research expenses as we progressed our projects to more advanced phases and further expenses were capitalized, but on the other, most costs are, in general, on the rise, including costs related to our historic incentive program, which only this year increased our administrative expenses by over 5 million zloty versus last year. Speaking of the historic incentive program, as you may imagine, due to a strike price of 390 zloty and goals practically out of reach for now, the program, although still costly for us, entirely lost its motivation function. We aim to replace it with a new one, supporting our team retention, recruitment, growth and, in consequence, efficient and timely developments. Since the last General Meeting we collected feedback from the market and incorporated substantial changes into the new resolutions. We would like to invite you to support the company on that voting at the next General Meeting on the 18th of April. Moving further to other operating income and expenses, I am aware that it is not great to hear from a company that a project is being re-evaluated. But at the same time, in order to stay innovative, we must experiment and be brave when trying new paths. And to stay in control and keep the right course, especially with a project that is new to us in terms of design, developed by a new studio in our family, we need to keep evaluating the situation as we move along. It's better to cut costs early and even restart if needed than to carry on. As a result of this approach, we experienced negative results on our other operating activity due to the impairment related to Project Sirius, which we reported 10 days ago. Moving on to the EBIT line, our operating profit reached 377 million zloty, which is 62% above the result of last year. EBIT was supported by positive results on our financial activity. Although the 16 million zloty positive financial activities performance included 27 million zloty of revaluation of Spoko company shares upon this year's decision to sunset the Witcher Monster Slayer project. All in all, our net profit for 2022 reached 347 million zloty, which is a nice two-thirds more than a year ago. Most of the result was delivered by CD Projekt Red segment. However, unlike last year, GOG also delivered over 5 million zloty of net profit for the group. What is also worth mentioning is that the net profitability of the group for this year exceeded 36% and for CD Projekt Red alone it was even close to 44%. Let's now move on to the next slide, number 12, our consolidated balance sheet. Over 2022, our balance of expenditures and development projects increased by 123 million zloty. This figure represents the balance of new expenditures and development projects for the period, 262 million zloty, less the amount we've recognized as costs for the period in the amount of 139 million zloty. The latter includes impairment related to project series and one-time amortization of our expenditures related to cyberpunk genres. As usual, I'll come back to expenditures on our new developments in a moment. Our property, plant and equipment position increased by 25 million Zlotych, mainly due to our investments on the Warsaw campus and acquisition of office equipment. At the same time, looking at current assets, our trade receivables increased by 40 million Zlotych, which I see as a consequence of higher Q4 sales than this year versus the comparative period. At the same time, the other receivables line item decreased by 55 million Zloty. This was mainly driven by limiting our tax-related receivables and also decrease of advances on development works due to completion and delivery of the Cyberpunk Edgerunners project. And last but not least, the total value of cash, deposits and treasury bonds included in the three items marked with an asterisk is summed up under the table and totals 1 billion 91 million zlotych as of the end of 2022. I will walk you through our main cash flow drivers in a moment. Let's move on to the second part of the balance sheet, slide 13. As of the end of 2022, our group's equity had a value of over 2 billion zloty and grew by nearly 140 million zloty driven by our profit for the period. But what is also reflected here is that during 2022 we shared over 200 million zloty with shareholders, half-half by way of share buyback and dividend payout. Another noticeable change among the liabilities section involved the liabilities themselves, which decreased by 22 million zloty This was mainly driven by other financial liabilities and reclassification of part of the liabilities to the other financial assets position, resulting from positive valuation of instruments hedging foreign exchange risk, as well as from the realization of part of our liability for the payment of the purchase price of shares in the Molassos flood. Parallel to that, we increased our trade liabilities and decreased our income tax liabilities. As regards provisions, this line item grew by 10 million zloty, mainly in relation to provisions for team bonuses set based on 2022 results. Having mentioned the team bonuses, I would like to add to what Adam said just now. Starting from the beginning of 2023, we've changed the general remuneration policy to the private credit. So the project now offers a predictable remuneration system based on an attractive salary. The salary has been just revised upward with an annual rise, inflation adjustment and annual bonus all rolled up into one flat monthly remuneration package. We believe that the ability to offer base remuneration, which is both higher and more predictable, should strongly support our recruitment activity as we look to attract top talent in our industry. At the same time, when it comes to top management, the existing bonus system based on net profit is still in force, as the top management should be directly involved in maximizing our sales and profits. Now, please move on to the next slide, number 14. Teleproject Red's expenditures on research, development and service of released games are presented quarterly for 2021 and 2022 to illustrate the changes happening at the studio recently. The decreasing yellow part represents our total cost of servicing our released games, mainly Cyberpunk and Gwent. What is also clearly visible, the scope of our development continues to grow and the team is progressively moving on to new projects in development which are represented by the blue part. Main projects included in the blue part in Q4 were Cyberpunk Phantom Liberty, Polaris, Sirius and Witcher 3 Next-Gen Edition. And now, our simplified cash flow on slide 15. Cash-wise, the 347 million zlotych in net book profit for the period was supported by 117 million zlotych in depreciation and amortization for the period. We used these positive cash flow drivers to finance 207 million zlotych expenditure on development projects at CD Projekt Red. GOG also invested in its business by contracting licenses for new games for the store, which drove the increase of prepayments and deferred costs presented by the next part. In cash terms, the group also invested 48 million zlotych into both intangible and tangible assets, mainly investments on our campus, software and equipment for our business. In 2022, we also shared over 200 million zloty with our shareholders, over 100 as a dividend payout and close to 200 as a share buyback program. Altogether, our financial reserves kept in cash, bank deposits and t-bonds decreased over the last year by 63 million zloty. which means that putting aside the transfers to shareholders we were able to self-finance from our 2022 positive cash flows all our outflows including investment into development and on top generate 138 million zloty surplus. That's all from me for now. Thank you for your attention. We can now proceed with the Q&A session.

Ladies and gentlemen, if you would like to ask an audio question, if done by telephone, please press star one on your telephone keypad. The first question is coming from Mr. Omar Sheikh. Sorry, Mr. Omar Sheikh is just disconnected. Please go ahead, sir.