Embracer Group AB

Q2. My name is Martin Arnell and I'm an analyst with D&B Markets in Stockholm. Welcome to all of you online and welcome to everyone in the room here in Stockholm. Today we will have first presentation of the quarter followed by a Q&A. And then there will be a deep dive. We will have sustainability, gearbox, and crystal dynamics, ADOS, and also Asmodee. And we will take questions from you online, so please register your questions online, and we will also take questions in the room, and I will also ask a lot of questions. And with that, I want to hand over to Embracer Group Management, CEO and founder Lars Vingerfors, and CFO Johan Ekström is here today as well. Thank you.

Thank you, Martin. Good morning and welcome everyone to Stockholm. We are pleased to announce another stable quarter. The second quarter is the strongest quarter so far in terms of net sales of over 9.5 billion SEK, supported by a solid organic growth of 35% and a performer growth of 18%. Adjusted EBIT came in at 2.1 billion, implying 115% growth year-over-year and a margin of 22%. Adjusted earnings per share after full dilution more than doubled to 1,95 krona in the quarter. More than doubling year over year. To put that into perspective, it represents close to 40% growth compared to the full year of 2019. For the overall group, we now expect adjusted EBIT of 8 to 10 billion SEK in the financial year 2022-2023, ending March. This is a slight reduction compared to 9.2 to 11.3 previously. For fiscal year 2023-2024, we are pleased to reiterate the forecast of 10.3 to 13.6 billion. Looking at operations, the reboot of Saints Row, which was released on August 23rd, was as expected a key revenue driver in the quarter. Financially, Saints Row has performed in line with management expectations in the quarter. However, the reception of Saints Row did not meet the full expectations and left the fanbase partially polarized. The game development studio Volition has been working hard to improve the player experience. And today we are announcing that Volition will transition to become part of Gearbox, which has all the tools including an experience management team in the US to create future success at Volition. This is the first internal group transfer where we transfer a major studio between operating groups, but it's not necessarily the last. Today, we and PlayOn Deep Silver also announced that the release date for Dead Island 2, the long-awaited action horror game developed by internal studio Deep Silver Dam Buster, has seen a slight delay. The release, originally planned for February, has been moved to April 28 by internal publisher Deep Silver. Another highly anticipated game, Goat Simulator 3, developed by CoffeeStain North here in Stockholm and published by CoffeeStain will be released later today. Our ongoing project to change the listing venue to Nasdaq Stockholm main market is on track to be concluded before the year end. further strengthening transparency, governance and liquidity in our shares. The increasingly challenging market environment has proven to be a factor year to date. In early November, Newso cut its forecast for the video games market again, from 2% growth to a 4% decline in 2022. As we are gearing up to meet an increasingly challenging market environment, we have today stated that we are working on a transformative content and partnership deal, expected to be closed this financial year. Separately, we have also launched a special review of our business to further optimize our decentralized model, capture new opportunities, and add strategic flexibility. We will talk more about this further on in this presentation, and I'm sure Martin and others will have some questions about this. Looking at some KPIs, we see continued growth. Looking into perspective, we have grown our business from 3 billion sales to 27 billion sales on a trailing 12-month basis the past five years. Growing earnings per share nine times on a trailing 12-month basis. Looking at the total headcounts, we are now close to 16,000 people across the group. We do have 132 internal game studios and 237 ongoing game development projects. Now looking a bit deeper into the segments, As you remember, we started the segment reporting last quarterly report. So we now report under four segments, PC console, which is our main segment, mobile games, entertainment and services, and tabletop games. Looking at the PC console segment, We reported this morning a record quarter with 57% organic growth, reaching above 4 billion in net sales, generating a 34% margin in adjusted EBIT or close to 1.4 billion. Looking into the pipeline of the 237 games we have, 234 is actually PC console. And in the pipeline we have 25 AAA projects planned for release up until March 2026. The performance in the quarter was not only driven by the release of Saints Row. We also had a record quarter of back catalog sales reaching close to 1.9 billion in the quarter. The top 10 back catalog titles were Valheim driven by the addition of Valheim into PC Game Pass in the quarter. We also had the first royalties coming into the group of Tiny Tina Wonderlands. And if you look at this slide, you see some well-recognized IPs that continues to perform. Borderlands 3, Star Trek Online, Neverwinter Nights Online, Deep Rock Galactic, Hot Wheels Unleashed, Breakfast, happy to see Mythforce for the first time. And finally, Risk of Rain 2. which we also confirmed this morning that we have acquired the rights to both the game and IP post the quarter end. Looking into the mobile games segments, we had a stable quarter. Even though we have seen a decline in the advertisement market and an impact of lower ad prices, we saw a solid 8% organic growth in the quarter of reaching sales of 1.4 billion with a 22% margin. We had a slight decline in use acquisition cost reaching 52% or 755 million in the quarter. happy to see that our players continues to engage with our products and we have a solid 300 million active users on a monthly basis or 36 million daily active users on our across our mobile portfolio and actually we were the most downloaded company in games during the first half in the world reaching 600 million downloads. We are expecting our mobile business to perform above the market growth going forward. Looking at the tabletop gains segment, Asmodee had a solid performance in Q2. Net sales grew by 9% year-over-year, performed at over 3.2 billion SEC. Adjusted EBIT came in at around 450 million SEC, with a margin of around 14%. Asmodee continued to gain market share in its two main product categories, although in somewhat more hesitant market environment for board games. The growth was driven by an especially strong performance of trading cards, games and related accessories, impacting the product mix and the gross margin in the quarter. In part two of this presentation, Asmodee's CFO Mygge will join us virtually to give us some additional color on tabletop markets, inventory, cash flow, phasing and product pipeline. So stay tuned. Finally, looking at the entertainment and services segment. We had a growth in revenues. However, we had a decline in adjusted EBIT margin, driven by weaker performance in the distribution of video games, driven by less releases. Happy to see that we finally closed the transaction of Middle Earth Enterprises and looking into the future, we now have four announced licensed Lord of the Rings games in production with external game developers. There is many things happening within this segment, and one of those things announced post the quarter end was the acquisition of Anime Limited, Europe's premier distributor for Japanese animation. And with the acquisition of Anime Limited, it gives us full European coverage for that business segment. Looking to the market, as stated, we now knew so, are now expecting a decline in the overall gaming market to generate $184 billion. in this calendar year. That's a decrease of 4% year-over-year. Looking at the segments, they're expecting the PC market to grow 0.5%, the console market to decline 4%, the mobile market to decline 6%, which is the most significant change from the previous forecast. Looking at tabletop markets, including the trading card games, we are expecting, or research analysts are expecting, a 7% year-over-year growth. Johan, finally.

Thank you, Lars. Thank you. So let's have a look at the financial performance and we start by looking at the P&L. So sales grew 190% over the last year, reaching 9.6 billion, driven by a strong organic growth of 35% and also acquired growth, especially related to the addition of Asmodee and Crazy Labs. The growth in PC console is driven by the release of Saints Row and also strong back catalog performance, especially from Valheim. Despite the softer market, we see organic growth in our mobile segment amounting to 8% in the quarter. We also note a solid performance in tabletop, growing on the pro forma basis with 9% over last year, reaching 3.2 billion SEK. As said, our adjusted EBIT reached a new all-time high, 2.1 billion for the quarter. Up 115% over last year, yielding an EBIT margin of 22%. The main driver of the growth in adjusted EBIT is the performance within the PC console segment. Adjusted earnings per share after full dilution. Reached 1.95 SEC per share in the quarter, which is 114% up compared to the same period last year. Driven by the growth in adjusted EBIT, as well as some favorable exchange rate gains on financial items. If you look at the financial development, we can note that we have a stable, slightly positive gross margin development in the quarter, reaching 66%, despite the slight negative product mix shift effect within PC console and tabletop. Turning to the marketing costs, the user acquisition costs are lower in the quarter in absolute numbers, as well as relative numbers comparing it to the sales in the mobile segment. 755 million, 52% in relation to sales. The marketing spend outside of mobile segment was high, reaching 523 million in order to support new releases in the quarter. Operating expenses increased in the quarter to close to 2.1 billion in the quarter. In relation to sales, a slight decline over previous quarter, 22%. The growth in operating expenses is mainly driven by the addition of new companies joining the group, as well as increased headcount. We are impacted by inflation, like everyone else. Predominantly, we see this in the physical side of our business. I'll just be a bit reached 2.1 billion in the quarter, yielding 22% EBIT margin. Free cash flow before changes in working capital was 1 billion in the quarter. We had an increase in working capital during the quarter of 1.9 billion. So the free cash flow after changes in working capital is minus 0.9 billion. The main reason for this is that we see increased receivables in the tabletop segment driven by increased sales in the quarter skewed towards the later part of the quarter being end of August and September. Also, we see cash inflow from releases, new releases, as well as notable customer contracts coming in after quarter end in October and November. We have an increased inventory, mainly related to inventory build-up in the tabletop segment. Myge from Asmodee will comment on this later on. But There is a seasonality within tabletop, so in terms of peak levels for inventory, it is normally in the end of September. This is also impacted by decisions to increase safety stock levels due to increased lead times, as well as the product mix shift towards trading cards within the tabletop segment. It's important for us to reduce the working capital, so actions have been initiated to focus on working capital reduction, and management expects to see tangible results during this financial year, with emphasis on the fourth quarter. At the end of September, our net debt amounted to 11 billion and available funds, 10 billion. We made a voluntary debt repayment of 6.2 billion in the quarter. We expect to reach our financial leverage target of 1x by the end of this financial year. And we have substantial headroom on our cabinets. Looking ahead, we note, as Lars described earlier, that the market has changed. The market expectations for growth has changed from plus two to minus four. A clear downward revision compared to the previous forecast for this year. We now expect a reduced forecast for this fiscal year, and we reiterate the forecast for the next fiscal year. So for this year, our current forecast is between 8 and 10 billion SEK. Previously, it was between 9.2, 11.3. And for next fiscal year, it is reiterated between 10.3 and 13.6. And the main reasons for the reduction in the forecast is to reflect mixed reception of our key Q2 PC console releases that will have an impact on catalog sales in the coming quarters. It also takes into account shifts in the release rate within PC console, including the shift regarding Dead Island 2 from February to April. We also have a more cautious view on the current macroeconomic situation, particularly related to the mobile segment and the tabletop segment. The forecast includes a range of outcomes from partnership and licensing deals with several industry partners. expected to be completed during the financial year of 2022-23.