Embracer Group AB (publ)

presentation of embrace groups Q free report. My name is Simon Jönsson and I will be the moderator today. On today's agenda, we have two sessions. In the first part, Lars and Johan will have a presentation of the Q free report. We will also have a presentation from Asmodi. Following that, we will have a Q&A session where you as an audience can send in questions via the web or verbally via email. And then we will have a teleconference. In the second part, we will have two deep dives. First, we will hear from Karin, the new head of strategic partnerships. And then also from Sören, who is the founder of Go With Chips Games. With that said, Lars, I'll leave the floor to you.

Thank you, Simon. Hello, everyone. And welcome to Stockholm and embrace groups interim report for Q3 2022-23. First of all, I just wanted to take a moment to reflect on what we have built at Embracer. We today consist of 12 operating groups, over 16,000 employees and over 130 studios and 800 IPs. With a business that is well diversified between four operating segments. We firmly believe that our decentralized model that empowering entrepreneurs, creators, and our great people is the best model to drive long term profitable growth in a highly creative industry. I would like to send my thanks to all our shareholders, employees, customers, and business partners for contributing to the prosperity and success of the group. Now on to the highlights of the quarter. We are pleased to announce another stable quarter, delivering largely in line with management expectations. Our diversified business across segments draw solid net sales of 11.6 billion, adjusted a bit of 2 billion and 1.7 billion of free cash flow in third quarter. Free cash flow exceeded management expectation driven by great cash flow generation within operating groups of Asmody, Coffee Stain, Easybrain and Crystal Dynamics. The organic growth of in the third quarter of minus 3% reflects tough year on year comparisons and limited new PC console game releases. Delays announced in previous quarters have led to a limited number of large budget game releases for the PC console game segment and the lower gross profit contribution in 2022-23 impacting operating margins. For the overall group, we iterate our adjusted EBIT forecast of 8-10 billion in this physical year and -13.6 billion in the next physical year. As previously communicated in second quarter, the forecast includes a notable range of outcomes from partnership and licensing deals with several industry partners expected to be completed during this quarter ending March. Coffee Stain continues their success this quarter driven by Goat Simulator 3 that had a strong acclaim from fans providing a platform to further grow the player base over time. Together with our Danish colleagues at Ghost Ship Games who continued their impressive work with Deep Rock Galactic, there is a lot to look forward to from Coffee Stain in the quarters and years ahead. Sören, the founder of Ghost Ship Games, will join us in the second part of today's presentation. Within Tabletop's segment, Asmodee delivered a solid performance driving strong SQL revenue and earnings growth as well as strong free cash flow despite a challenging macro environment in seasonality's strongest quarter of the year. I'm happy to see that Dead Island 2 went gold this week and is ready for release. The game coming out a week earlier than previously expected on April 21st this year. The response from Dead Island community and media has been exciting and we are looking forward to April. The key driver for our future organic growth will be the execution of our game development pipeline. In total we had 8.2 billion invested by the end of the quarter. Looking ahead, we got 94 projects expected by local management to be released next fiscal year. Looking further out, we got in total 31 AAA games to be released up until fiscal year 27-28. 26 of these AAA games are still unannounced. However, we need to be humble and acknowledge that our overall return of investment performance on PC console games release this financial year has underperformed management expectations. Rather than a structural shift, we believe it's mainly an effect of mixed reception for several releases, combined in a more normalized market and softer consumer purchasing power this year. Our core business is making a healthy risk-adjusted profit on games. We have therefore increased management focus and efforts to optimize investments and efficiency across the group even further. To simplify, each project has to earn its right to exist, which means we will increase our efforts to put quality first even further and make sure we are creating engaging, unique, positive player experiences. We are confident in clearly improved return of investment on new products compared to the last quarters. In late December, we successfully changed the listing venue to Nasdaq Stockholm main market, further strengthening transparency, governance and liquidity in our shares. The uplisting is a testament to the strong foundation we have built over the years. As stated, we expect partnership and licensing deals with several industry partners expected to be completed during this quarter ending March. The demand for content has never been greater, and Embracer is well positioned to leverage that demand with the largest portfolio of games and IPs in the industry. We have set the goal to increase the mix of PC console games development that is wholly or partly funded by third parties from today's level. This mainly relates to a number of sizeable game development projects over the coming six years with high development budgets. While a majority of the overall pipeline will still be wholly funded with the group, expanding the third party funding is expected to significantly improve cash flow and profit predictability. The Tomb Raider publishing agreement with Amazon announced in December that we entered into the third quarter is one example of this kind of partnership. Finally, a key part of our ongoing development and progress is an increased focus on sustainability. A priority area for me, our business and our people. It's encouraging to see that those efforts and the strengthening of our corporate capabilities at the parent company are paying off true improved ESG ratings. In the past few months, MSCI upgraded our ESG rating from BBB to A, and we are now also part of SustainAlytics' 2023 top rated ESG companies list. Moving a bit to the numbers, and Johan will enter the stage soon here, but I would like to highlight a few things. We have seen that we have been growing in the last few months, that we continue to grow both in financial and operational terms. On a trailing 12-month basis, our adjusted EBIT has grown by a four-year compounded annual growth rate of around 90%. More importantly, the way we look at it, the adjusted earnings per share has grown by CAGR of over 50%. Finally, the total number of projects stood at 224 at the end of third quarter, driven by previous years organic and inorganic investments in our studios and personnel. We would like to talk more about the pipeline in the second part of this presentation, so stay tuned. Embracer operates through 12 operating groups across four segments. In third quarter, the tabletop games and mobile games segments stood for a majority of adjusted EBIT in a slower quarter for PC Console. It is a notable difference compared to second quarter, when PC Console draws sales and earnings and shows our increased diversification. PC Console games. Net sales in the quarter for PC Console games amounted to about 3.5 billion, an increase by 64% compared to the same period last year, or minus 6% organically and minus 5% per forma and constant currency. Adjusted EBIT amounted to 579 billion and adjusted EBIT margin of 16%. The muted organic growth development is mainly explained by less new significant game releases. We see a continued stable performance for live game services and for our strongest PC Console franchises. But also note a more normalized market for certain categories, partly due to softer consumer purchasing power after a strong market both in 2020 and 2021. The clear positive in the quarter was Coffee Stain, which had both the largest new game releases through Goat Simulator 3, as well as one of the best performing back catalog titles with Deep Rock Galactic, developed and published by Ghost Ship Games. Coffee Stain also added Welcome to Bloxburg, one of the most popular games on the Roblox platform in the past years. I'm happy to see the game is performing in line with or slightly above management expectations so far. That said, the delays announced in the previous quarter have led to a limited number of larger PC Console games releases and lower gross profit contribution in fiscal year 2022-23, impacting our adjusted EBIT margin. The profitability in the third quarter is also impacted by amortization of game development costs for titles released with low return of investment in Q1 and Q2, including the Saints Row Reboot. In our fourth quarter, we have several mid-sized titles that have been released or will be released, including Spongebob Squarepants The Cosmic Shake, Warlander Pinball FX, one of the most ambitious pinball games ever, and Decisive Inc from Trickbuyer and Valheim finally on Xbox. Moving to mobile games, net sales in the quarter for mobile games amounted to about 1.5 billion, an increase by 2% compared to the same period last year, or minus 14% organically and 15% per forma. Adjusted EBIT amounted to 464 million, with 29% adjusted EBIT margin, a notable improvement compared to last year. Easybrain and DECA have successfully optimized user acquisition investments, which has provided strong profitability and cash flow in the quarter. The quarter saw solid, sequential growth, reflecting positive seasonality effects. However, the segment also saw some headwinds from tough comparisons and lower ad prices compared to last year, impacted by Apple's change relating to IDFA, lower player engagement, and post-COVID and macroeconomic factors. Easybrain released its new backgammon game Global in the quarter and has five titles in soft launch. Looking at the catalog, the strongest titles was Blockoduko, Sudoku.com, Jigsaw Puzzles, Art Puzzle, and Nanogram.com. I would like to highlight that our mobile games business companies are expected to show continued profitable growth in the years ahead. So moving over to Paris, I would like to highlight the tabletop segment. Asmodi delivered a solid performance, driving strong sequential revenue and earnings growth, as well as stronger free cash flow, which I'm happy to see. Performa growth year on year was slightly negative at minus 5% in the quarter, with very tough comparisons. Asmodi reached 21% adjusted EBIT margin and stood for 40% of the group EBIT in its seasonally strongest quarter of the year. Asmodi is expected to deliver full year earnings largely in line with expectations last year, with significantly improved free cash flow in the second half of the year. With that, I would like to hand over to Asmodi's CEO Stefan and CFO Mygge. Welcome to Stockholm.

Thank you Lars. Can you hear us well? I hear you very well. So thanks Lars. It's a pleasure to be joining you once again. This is a hello from sunshine in Paris today. Good morning, everybody. Before we get into the detail of the presentation, just wanted to take one minute to cover some of our key messages. In a challenging macroeconomic context, we're happy, as you said Lars, to present a solid Q3 performance for Asmodi. Q3 year to date, the tabletop market of Borg & Plus strategic TCGs has remained stable year on year, with growth in strategic TCGs offsetting, I would say, a moderate decrease in the board game segment. The tabletop market still remains well above the pre-COVID levels of 2019 and then shows its strong resilience. Tabletop games also remain a favorite with consumers over the holiday season, and mass market sell-out reached a record level in December. From a financial standpoint, as we exit our seasonally stronger quarter, we delivered a solid top line performance with Q3 net sales up 28% above versus Q2 and only slightly below Q3 last year against a very strong competitor. And Mygge will go into more detail in a couple of minutes. On the EBIT, despite the inflationary environment, our adjusted EBIT performance remained resilient, with Q3 up 91% versus Q2 in our seasonally stronger quarter. Finally, on working capital on cash, I'm happy to report to you that we've delivered on our projections, as you will see in detail in the coming slide presented by Mygge. Looking now in a bit more detail at the market and sell-out data, again, as for the selling performance, we see that the tabletop market is resilient in a challenging context. The tabletop market was slightly down in Q3 again, against in an all-time record comparator, which was 25% higher than pre-COVID levels. And on a -to-date basis, this result in a stable tabletop market. Looking now at the two main categories, we see strong growth in the STG segment, which is up 18% in the EU, for example, while the board game segment was softer with a moderate decrease of approximately 6%. This being said, the market remains significantly above pre-COVID levels, with 2019-2022 CAGR of plus 11%. I'm handing over to you now, Mygge.

Thank you, Stefan. Hi, everyone. I'm very pleased to report on Asmoda's performance. In our seasonally strongest quarter, Q3 net sales of 4.1 billion SEC were up 28%, and adjusted EBIT was up 91% compared to Q2, driven by the seasonal effect of the holiday season. Versus last year pro forma, Q3 net sales were only slightly down, circa 2%, but as Stefan mentioned earlier, sales remained well above pre-COVID levels. The performance was impacted by the softer board game market. This was partly offset by growth in trading card games and other distributed products, despite a strong comparator due to Pokemon 25th anniversary release in the prior year. The increased contribution of trading card games had the negative impact on a product mix, but this was partly offset by lower royalties and other selling expenses. This led to a limited decrease of 0.1 point in gross margin percentage, which combined with the volume effect on top line resulted in Q3 adjusted EBIT of 864 million SEC, slightly below pro forma last year at minus 4%. For the financial year to date, net sales of 10 billion SEC were up 5% versus pro forma last year. The trend in full year reflects the pattern just described for Q3 with growth driven by TCGs. This offsets the soft performance on games, which were down 8% after two consecutive record years, nevertheless remaining above pre-COVID levels. The positive volume effect of top line growth is offset by product mix impact from increased contribution of trading card games, as well as higher shipping costs. And I shall precise, these have started to moderate in the latter part of the year. This gives the gross margin largely in line with pro forma last year. As with most companies, we are also experiencing significant inflationary pressures on our cost base, with inflation running at an average of 8% in markets where we operate. We have put in place actions to mitigate these impacts, limiting the increase in operating costs to 3%. This results in adjusted EBIT of 1.8 billion SEC, slightly down by 3% versus pro forma last year. Moving on to the next slide. I want to take a few minutes now to remind you what we said during Q2 presentation with regards to inventory and cash. We'll then take a look at the progress we have made at the end of Q3. I hope this will help to demonstrate the predictability of our business. In Q2, we emphasize the seasonality of our working capital cycle, where inventory levels historically reach a peak around the end of September. We also explained that our inventory was impacted by a number of temporary effects amounting to around 670 million SEC. Finally, we showed the historic seasonality in free cash flow generation, with most cash generation occurring in H2. Our expectation at the end of Q2 was that we would see the unwinding of seasonal and temporary effects over the next 12 months. We also mentioned our expectation of strong H2 cash generation, despite the partial phasing to next year, linked to the unwinding of temporary effects in inventory. Well, having said all of that, let's take a moment to see where we find ourselves at the end of Q3. Firstly, I'm happy to report that we have seen the seasonal unwinding of inventory that we described. Inventory decreased by 543 million SEC, or 15% on a -for-like basis versus Q2. The inventory unwinding, combined with a focus on working capital management, resulted in strong cash flow generation of 780 million SEC. This compares to around 550 million SEC of free cash flow consumption in H1. The Q3 free cash flow represents around 90% cash conversion of Q3 adjusted EBIT. Overall, we are in line with our internal forecast for the unwinding of inventory to year-end and still expect the temporary effects in inventory to unwind over the next quarters. We are also on track to deliver further free cash flow generation in Q4. As a matter of fact, January has already delivered over 20 million euro free cash flow and we maintain our expectation of strong H2 generation, cash generation we mentioned previously. Handing back now to Stephane.

Thank you. Thank you, Mugge. Moving on some of other highlights and business updates. As we mentioned in Q2, we had a strong slate of releases in Q3, combining new iterations in major franchises and a number of original and own IPs board games. These new releases were, I must say, well received with, for example, our new game Challengers, published by our studio Z-Man, notably being nominated for a prestigious French board game award. We continue to work closely with other embrace operating units and we currently have a number of projects in the contractual phase. I'm very happy that two projects have already been signed, namely Descent and Exploding Key Terms VR, which will be developed by Sabre Studios. In terms of M&A, last quarter we announced the acquisition of VR distribution in Australia and happy to report that the integration is proceeding smoothly. We currently have five active discussions underway with a solid pipeline of other targets under consideration. Finally, as we approach the end of our first year as part of the Embracer family, we are working on our strategic priorities for next year. We expect this to include a return to a high pace of new releases and novelties after a slower rhythm during the peak of COVID. We will maintain a strong focus on driving growth in our back catalogue. As we cannot ignore the global inflationary pressures, we'll continue to focus on the responsible management of our cost base. We aim to secure a return to normalise inventory level, as Miguet just said, and we expect this to drive strong free cash flow generation. We'll continue working closely with the other Embracing Operative units to realise mutual opportunities for leveraging our great IPs. And finally, as mentioned before, we'll continue to pursue inorganic growth opportunities within the context of the Embracer Group's wider M&A strategy. That ends our presentation. I'm handing over to you, Lars and Johan. Thank

you, Stefan. Thank you, Miguet. So let's head over to our last segment of entertainment and services. Net sales in the quarter for that segment was 2.3 billion. An increase of 71% compared to the same period last year, or 16% organically and 16% per forma. Adjusted EBIT reached a peak of 187 million, yielding 8% adjusted EBIT margin. The organic and former growth was mainly driven by a partner publishing title released in the third quarter. In the quarter, Fremold closed the acquisition of Middle Earth Enterprises. The acquisition has generated a lot of interest among both internal and external partners for the Lord of Rings IPs across different media formats. There are currently five games in production by external partners to be released in financial year 2023-24. There is also one film under production by an external partner. Stay tuned for more news in the future. Fremold continues to make selective key recruitments as a group in various parts of the business to strengthen the organization. Within Fremold, Grimfrost, the e-commerce specialist, is a leading player with Viking merchandise. Also had a stable quarter. The company successfully launched a Valheim Community web store and this has been a success. There could be further opportunities for Grimfrost from increasingly strong IPs and franchises within the group. Looking briefly at the market. The global Wiedegens market is estimated by Newso to grow 5% year over year 2023 to US$194 billion. Driven by a much better console supply and a stronger lineup of new releases amongst other factors. 2022 was corrective year following two years of pandemic and with the global games market declining 4% year over year. But if you compare to 2019, the market has grown by 28%. Let's head over to Johan so we have some time for Q&A later on.

Thank you Lars. So let's start with the key P&L metrics for the quarter. As said, sales amounted to 11.6 billion in the quarter, up 128% over last year. The growth is driven by the inclusion of Asmodee, Crystal Dynamics, Eidos, as well as Dark Horse. And also a positive effect from weaker ASIC, SEC, versus last year. Organic growth and pro forma growth at constant currency were slightly negative at 3%. If we look at the PC console game segment, it includes the successful release of Goat Simulator 3. And also an important contract with or regarding Tomb Raider 12. Fewer larger releases in the quarter as well as mixed receptions on some releases impacted negatively. On the mobile game side, we had tough comparisons last year and also lower ad prices affecting in the quarter. We are happy to see that Asmodee delivered well during their peak season in the quarter, adding 4.1 billion of sales in the quarter. Adjusted EBIT came in at 2 billion in the quarter, growing with 78% over last year, yielding a 17% EBIT margin. Looking at the segments, the profitability within PC console was 16%, which is lower compared to prior quarters. The main reason for this is higher amortization in relation to net sales for less successful titles, as well as lower profitability in the initial phase of the large contract related to Tomb Raider. Mobile games reached their highest margin since the inclusion of Crazy Labs in the quarter, with 29%. For Tabletop, we also see a healthy contribution to EBIT in the quarter, 864 million SEK. Looking at the adjusted EPS per share, it reached 0.76 in the quarter, which is lower than the corresponding period last year. But if you exclude the effects from exchange gains and losses in both quarters, it's a growth of 23%. Moving on to financial development, gross margin in the quarter reached 56%, which is lower than previous quarters, and mainly related to product mix-shifts within PC console and Tabletop, but also a segment mix-shift towards entertainment and services. Looking at marketing expenses, user acquisitions, both in absolute terms and relative terms, are lower in the quarter. If we look at the marketing expenses excluding user acquisition costs, they amounted to 400 million SEK in the quarter, and mainly relates to Asmodee during the high season, but also to some extent the PC console segment. Operating expenses increased in the quarter in absolute terms, mainly driven by the new companies joining Embracer, but also an increased headcount. We, as everyone else, is impacted by inflation. The visibility of it is more clear on the physical side of the business. On the development side, the lead times are longer, and we first see an impact in CapEx, and we will later have the impact through eBit through amortizations. We are happy to report a solid free cash flow in the quarter of 1.7 billion, which was slightly higher than expected. The solid cash flow generation is related to the reduction of inventory, as well as payments from notable customer contracts, where the Tomb Raider contract is an important part. The actions initiated in previous quarters to focus on working capital reduction are progressing according to plan. And we also expect to see a solid cash conversion in this current quarter. Cash outflow from acquisitions is mainly related to the closing of Middle Earth Enterprises, as well as Tripwire, and also acquisitions closed in prior periods. At the end of December, net debt amounted to 14.3 billion, and available funds to 7.2 billion. We expect to reach our internal financial leverage target of 1x by the end of this fiscal year. We have in our loan agreements, covenants, which are 2.5x net debt over adjusted eBTA, and at the end of December we had substantial headroom to these covenants. By the time of this report today, available funds amounted to 6 billion SIG. Looking at the forecast, as Lars mentioned, we reiterate our adjusted eBIT forecast, which is between 8 and 10 billion for this current financial year, and between 10.3 and 13.6 for the next financial year. For the PC console segment, we see a continued stable performance of live game services and for our strongest franchises. But we also know the more normalized market for certain categories, after a strong market in both 2020 and 2021. There are no major game releases expected in the quarter, as previously communicated a notable range of outcomes from partnership and licensing deals is expected to be completed and contribute. For the mobile game segment, we expect a seasonally lower Q4 and lower ad prices, resulting in an adjusted eBIT margin for Q4 that is below the -to-date average. It's also worth noting that in the comparable period last year, we had a notable income from one specific partnership deal within the segment. In the tabletop segment, we expect the seasonally lowest activity and adjusted eBIT margin of the financial year in line with historical patterns.

Welcome to the Q&A. Thanks for the presentations. Thanks Simon. Maybe start off with each saying one thing you did really good in the quarter and one thing that you think you should have done better,

starting with you Lars. No, I think you can always improve if you are satisfied. I think in all segments there is always room to improve, but obviously it was a bit disappointing to see some return of investment on new games releases. But it's something we've been talking about and I'm sure you'll have some more questions.

Maybe talk about the guidance, the forecast. What is needed for you to reach the top end? Do you still expect without the partnership deals you talk about? Could you still make the range without that?

Well, the range is as we state today, we expect to close partnership licensing deals in the quarter. There is a notable range outcome of those deals. But as usual, we are in the games industry, so until all games releases and the quarter is finished, you don't fully know the outcomes of

game titles either. Alright, but making the range is that dependent on the deals? Are you that sure that you will sign them?

Well, we are expecting to have these deals closing this quarter.

Alright, thank you. Johan, on the free cash flow, you had a divestment of around 450 million in the quarter, lowering the net investment. Could you elaborate a bit about that item?

So that's related to the Tomb Raider contract. So it's really the proceeds for the sales of that project, the completion rate of that project by the end of the year.

So it's fair to assume that positive effect is also included negatively in the capex before? So it's like a neutral effect? No,

not necessarily. So the 450 million will be the revenue related to the contract. And then within capex, you will have capitalisation for Crystal Dynamics Aidos for the quarter and the project. But it doesn't necessarily mean that it's the same amount.

Alright, so it's fair to assume that as the contracts continue, that you will receive more income?

Yes, and as stated also, when you are sort of in the initial phase of quite large project, the profitability and of course the risk adjustments that you need to make lowers or reduces the profitability in that initial period.

Alright. Lars, you talked about improving the ROI. Could you elaborate a bit on why now and how you will do it?

I think it's a constant progress and we've been talking a lot about quality, the importance of quality and I mentioned here on stage before about creating unique engaging player experiences. I think it's even more important now and going forward. So I think it's a renewed focus because we could see that in order to be successful, the games need to hit a bar with the consumer. And if it does, you do great. If it doesn't, it's a tough market.

Could it be that you had some tailwinds in the pandemic that made you do some project which today would receive poorer ROI and you therefore do less projects or more restrictive going forward? Or how should we think about the new pipeline going forward? Will you make lesser games or more games or focus on big ones?

I think making PC console games is a long-term investment. We have some amazing IPs, studios and people that are making those. You set a long-term plan and you don't change that but what you need to make sure is you're hitting the bar that you set out from the beginning. And I think now when the market is more muted, it's very clear that it's true that quality comes first and it's just critical that we need to hit that quality bar in order

to be successful. Looking at the reviews of the recent games, it seems like the performance has actually improved somewhat in recent months and quarters. I'm glad to see as well. That said, I think it's time we invite the telephone conference.

I'm not sure if that was a question. I think it's coming.

There are no questions from the talk at this time so maybe you can go ahead with a few more while people are queuing up.

Yes. The audience, do we have any questions from the audience? Yes? Mike? Mike

is coming.

Thank you Martin and Elwid. Good morning. My first question is on the cash flow. I remember that you said during this year that Q4 is the big delivery quarter. Is that still the case? Could you elaborate a little bit on the mechanics?

For cash flow, I think we have always said that Q3 and Q4 will be better than the first half of the year, especially if you look at businesses that have clear seasonality. For example, I think the good thing within Tabletop, we see the inventory reduction, but we also know and see that our receivables related to the revenues generated in Q3 that will flow in on this in the last part of the quarter. And as I said, we expect to see a high cash conversion and a strong cash flow also in Q4.

And on cash conversion, you mentioned high expectations for Asmodi in the next year. But what about the remaining business of the group when it comes to cash conversion? Can you give any flavor on what you expect there?

I think clearly for Asmodi, you have a specific effect, right? That we have excess inventory this year that will be unwind this year partly, but also under during next year. So that's a shift within the mobile game segment cash conversion is solid. If you look at the PC console segment, it's very much dependent on performance of titles, but also of course, CapEx and to what extent you found the projects internally or if you have co-development or co-publishers. Thanks.

And my final two questions maybe to you Lars, could you comment anything on the special review that the board has ongoing and was presented in November? Or is it too early for that?

No, it's too early. It's still ongoing. So I don't have any more color than we already gave in the second quarter.

And finally on the transformative partnerships, you mentioned that it's with several partners, but how come you don't announce them separately or are you expecting to close them all at once or how should we think about that?

Well, announcement is it's always a delicate thing regarding communication and there is always two parties to dance. You noticed that we announced Tom Rader deal with Amazon and that was driven by commercial factors from one party. So I think we need to look in each and every communication and obviously also relating to the regulation that's that's the public listed company as well.

Thank you.

Do we have any more questions from the audience? Yeah, one hand over there.

Hello, Carl-Hanvel, Tim Fonder. Regarding the acquisition from Square Enix, now it's been a while and you have gotten your arms around it. Can you comment regarding what shaped the business in if you're very happy with that and what you've learned since the deal has closed?

No, I think in general we are very happy to have them on board. It's still early in a very long journey. First of all, I'm super excited to have the people. I think there are some amazing games developers with a very long pedigree or legacy of making amazing games. So I'm confident about their ability to make high quality or AAA games going forward. That brings value to the group and to potential future business partners. Secondly, I think the interest around Tom Brady as an IP has also strengthened the group alongside our acquisition of Lord of the Rings that also came last year. So that has definitely positioned strategically embrace a group on a different level against various potential business partners around the world. Obviously, there is, you know, we are talking about people and we are talking about different parts of the business. We unfortunately had to close the mobile parts down, but we tried our best to keep it running. But in the end of the day, we need to take responsibility also for our shareholders money in the company.

No, we can have some questions from from the Web. So first off regarding the increased focus on third party publishing going forward. What could that mean for for the cash flow? Does it mean that you is this mainly on the new projects or could you also to a large extent give existing internal projects to external publishers or how should we view that? What is the rationale behind that?

Now you're talking about partnership and licensing deals.

Now using more third party publishing on your titles. Well, it's a bit different things here. But if you're talking, you talked about that you want to have more third party funding. Yes, projects. Yes. So I guess that is for part could be publishers could be. Could be industry players. It's not necessarily an external publisher. Could be. Could be. But it doesn't have to be. But is it a change in strategy because you kind of know I

think we have a significant portion, not a significant portion, but a notable portion of our people under the third games developers within the group are working with third parties. And funded by them already. We have quite sizable work for higher business working with industry partners. We have what we define as percentage of completion projects, for example, in gearbox and tech to and another example. But we want to increase that level. We would still have the absolute majority of the games funded on our own balance sheet. But even when we have third party funding, you're confident that we have a very good chair of or a good chair of the economic upside of that project.

All right. But is it mainly when you refer to it now, is it more about new projects or is it more towards existing projects?

We haven't. We haven't given you know, we gave the color really in our CEO report. What kind of projects there is, you know, there is it's regarding a number of very large or larger game development projects over the coming six years. OK,

regarding the Lord of the Ring IP and Amazon lottery series, have you received any royalties from that?

I can't confirm whether we have or not. We have received royalties from various partners during the third quarter. I don't think that was a particularly very strong quarter in terms of royalties, but. I know they're expecting a lot more from existing partners, but also driven by a number of new projects that are to be released in this year.

And you want for you, maybe you touched upon it in the presentation, but in the DNA depreciations and amortization, was there any one time write downs or impairments or everything?

No, so amortization according to plan, the model we have. So no extraordinary amortization only in the period.

And on the mobile side, active players was down, QVQ, if I remember right, but the revenue is still holding up quite well. So underlying, is there a shift in in sales mix or product mix or how should you view that change?

On the mobile side and mobile. Yeah, obviously, the mobile segment makes up different businesses, you know, and their own have their own drivers, you know, the whether they're ad driven business or in app purchase. Do you

see any change in the specific trends QVQ here from from last quarter? Now we don't have the last the Q freebing for the mobile market. I think the Q3

has been fairly similar to second quarter. So there is not like any big shift that happened between the quarters. But I think the big shift, if you look like a year or a few years ago, it's obviously the ad prices has decreased. I'm I'm I simply we have fantastic engagement from our mobile players and our games. We have 34 million players daily. And they are, you know, they're sticky. They love to play those Sudoku games and other games. So I think it's a very solid business.

All right. Thank you. I think we'll leave it on that note and continue with the second half of this presentation, the deep dives. Thank you, Simon. Thank you.

Hello, everyone, and welcome back. So we will show a few slides and have a few people visiting us here. Johan,

so we're continuing to build scalable corporate capabilities at the parent company. If we look back five years earlier or from now, we were nine people at the parent company. And now we are fifty five looking at the parent company team and the functions that the team provides its focus on on corporate support. I would say the majority of the people or the employees are within the corporate finance and accounting team. So that's approximately 50 percent of the employees in the parent company. Twenty five percent is within the legal legal team as well as ESG and cybersecurity. And the remaining part is focused on M&A and business development and also communication and investor relations. If we also zoom out and take a look at the global finance team within the Embracer Group, we have the 26 people in Karlstad. We also have senior CFOs, 12 of them, one for each of the operative groups and an additional close to four hundred and eighty people working within finance and accounting globally. So in total, slightly above five hundred people. We are very happy to welcome new hires and joining us this quarter is Adam Weisbach, Atay Yardenes, Arman Teymuri. So super excited about that. And last but not least, we are also very excited to welcome Karin Jep, our Embracers Chief Strategic Partnerships Officer. And Karin, you're with us here today. So very nice to have you here. Welcome.

Yes, thank you, Johan. I'm so thrilled to be part of the Embracers Group team. I joined the video game industry in 1999 at THQ. So it feels like I've come home, although the family has grown quite a bit and has grown quite impressively. Over the course of my 22 year career, I've met with, worked with and or have negotiated with a majority of the teams across the Embracers Operating Groups. I am now lucky to get to work alongside some of the best people I've met in this industry. I'm excited to lead business development at the group level and to work together with the group executive management team and each operating group to help shape strategic partnerships. Our goal is to create sustainable organic synergies across the group's ecosystem and to drive group wide results, all while maintaining the culture of the decentralized operating model. And finally, I look forward to continuing to support the individuals who shape the future of the video game industry through my work here at Embracer, through my work as chairman of the Board of Women and Games International and as a board member of the Entertainment Software Association Foundation. Back to you, Johan.

Thank you very much, Karin, and very much welcome on board.

Thank you, Karin. Speak soon. Let's head over to the pipeline. I want to share a bit more color on the Future Games Pipeline and as well as our pipeline of AAA games. It's a refresher from our AAA pipeline deep dive around 15 months ago. First of all, I would like to highlight that the release timings is based on local management latest estimates. When doing group financial forecasts, we would assume a notable number of games moving out from these 94 games and potentially a handful moving in. As of 31st of December 2022, we had 224 games in our PC console pipeline, an increase compared to 216 in Q3 last year. Looking at the split between different categories of games, we have 31 AAA games in the pipeline and around 150 AA, AA and Indie titles. Of those around half have a development budget of more than 40 million SEK. In addition, we have a number of major DLCs and porting projects. G-Box, PlayOn, Sabre and THQ Nordic stands for majority of the projects hunt. Note that the size of the game projects can vary significantly between operative groups. Worth noting, this is only PC console. We have decided to take out any mobile games from this KPI. And also the closure of the mobile business in Montreal reduced a number of games. Looking at the 94 games we have in the pipeline for next financial year. I would like to give some more color. For example, we have four AAA games scheduled for release next year. And they have a median number of developers of around 150 people. The AAA titles next year includes Dead Island 2, now planned for April 21st. It also includes Space Marines 2, Payday 3 and one unannounced AAA title. Apart from this, we also have large budget titles not classified as AAA. Such as Remnant 2 and the range of small and mid-sized titles expected to be released during the year. Now let's turn to our pipeline of AAA games. I would like to start with the definition. Because it's very interesting to talk about AAA games in the industry. And there is no clear definition, but everyone has their own opinion. What is a AAA game? But for Embracer, when reporting, we have the following. It has to have all three of these different criteria. About 100 full-time game developers at peak of development phase. It should have a notable or significant marketing budget. And expected to become a minimum of 2 million unicellular. And if development work is paid by an external partner. Embracer should have a notable economic upside. So any pure work for hire projects are not included. Even though they might be developed within the group. So we have 31 AAA games to be released until Physically Year 27-28. Of which 4 next year. Thereafter we expect to bring to the market around 7-8 AAA games per year in the following 3 years. Of the 31 AAA games, 17 are in full production. 9 in pre-production and 5 in concept phase. The majority of the projects are from 4 operating groups. Gbox, PlayOn, Sabre and Crystal Dynamics Eidos. Just to give you some more color. 24 of the games are published internally. 28 are developed internally. 23 are based on owned IPs. 24 are based on established IPs. And 7 on new IPs. And only 6 of the AAA games are announced so far. To conclude, over the coming years. In the second quarter we see a notably strengthening pipeline of AAA releases. Which provides a solid base for organic growth and improved free cash flow. The project ROI. The average ROI increased slightly over the second quarter to 2.44. We released 6 games that fulfilled the criteria to be included in the quarter. 2 of those reached a clearly positive ROI already in the release quarter. In particular, Goat Simulator 3 had a positive contribution to ROI in the quarter. While Let's Sing 2023 also performed well. The average remains weighed down by the substantial release of the Saints Row Reboot in the most recent quarter. As stated in my initial remarks. We need to be humble and acknowledge the overall ROI performance of our PC console games. The game that released this financial year has underperformed management expectations. That said, we are confident in clearly improved ROI on new products compared to the last quarters. Again, as with the. We wanted to give some additional color on Asmodee in this deep dive section. We have received some questions from shareholders on Asmodee's performance. And historical figures which we are happy to share about. First of all, we are happy with Asmodee's stable performance in third quarter. Both in terms of sales, profits and cash flows. I'm excited to have Stefan, Mygge and the team on board. And look forward to see the company continuing to execute on a strategy. Including pursuing inorganic growth opportunities. In many ways, Asmodee has had a similar strategy to Embracer over the years. By combining organic and inorganic growth and onboarding great entrepreneurs and creators. Asmodee did 14 acquisitions in 2014 until 2022. Including five acquisitions in 2021 until the time of announcement of joining Embracer Group. Many of these acquisitions. Asmodee's strong publishing and distribution capacity can be used to leverage these assets. And it's a core part of the company strategy. Although we as a group have become the first to have a strong distribution capacity. And as we have seen in the past 6 to 12 months, we have seen more selective of M&A in the past 6 to 12 months. I'm sure the pace of acquisitions also for Asmodee will again gather pace in the coming years. Asmodee's business is diverse across activities and geographics. And even with the evolution in the market that we have seen recently with the strong growth in TD's trading card games. At the end of third quarter board games represent around 46% of total net sales. Of which 70% are owned IPs. TCGs, collectibles and other distributed products represent around 41%. With the remaining 13% coming from Asmodee's emerging platforms in digital and direct to consumer sales. I will now hand over to Johan for some comments on Asmodee's financial performance.

Thank you. So if we look at Asmodee and we compare the reported numbers for 2021 to the adjusted performance numbers that was announced at the time of the deal announcement. We can see that on the slide here. The objective of the data provided during the acquisition announcement in December 2021 was to provide the best representation of the current trading of Asmodee at the time of acquisition. And as such the financial information provided was on a pro forma basis. Where you take into account the full 12 months contribution from closed M&A done in the period and also adjusted for non recurring items. If we take a closer look to the pro forma adjustments made. There were 109 million euros and 38 million euros at the EBITDA level related to pro forma for M&A closed. These are the 2021 performance of the acquisitions of Borgia Marina Plan B Miniature Market. The island and exploding kittens. Jointly they had a pro forma adjusted EBITDA of 35% in 2021. It's also a adjustment for personnel costs related to acquisitions which is primarily related to provisions for earn outs on past acquisitions amounting to 13 million euros. We adjusted another 16 million euros to reflect the impact of the suspension of additional custom duties on imports into the EU of a number of products including trading cards. Originally in the US. This amounted to 16 million euros. So to sum up the pro forma adjusted EBITDA of 2021. For us, we believe that in order to appreciate the underlying performance of the business that was acquired. It is more appropriate to use pro forma adjusted financials where you include the full 12 months performance of companies acquired.

Thank you Johan and moving from pro forma numbers to Denmark and very welcome here to Stockholm Sören online.

Thank you Lars. Happy to join this. Let's just dive straight into it. So next slide please. So a year and a half ago we traveled to Karlstad to meet up with Lars and sealing the deal in the acquisition of Ghost Ship. We went there alongside Anton CEO of Coffee Stain who we have worked together with all these years and are still working together with and entered into a new constellation now as a sister company to Coffee Stain under the Embracer Group. And we're still extremely happy with this setup and relationship. We have been developing Deep Rock Galactic for many years and released so many updates that at this point we were also changing our strategy towards a season release instead. We worked on season one for quite a while and announced it as our biggest update ever alongside a free battle pass. Can you take the next slide? Thank you. And it worked really, really well when we released it. As you can see in the graph below, we broke all our records on player numbers and revenue. It surpassed our 1.0 release and paved the way for where we are today with Deep Rock. Already two months later we took advantage of this. Take the next slide on PlayStation Plus deal. We entered into PlayStation Plus and very, very fast. 10 million players claimed the game and started playing, enjoying the new season content, buying the cosmetic DLCs and just having had a really good time together. And this propelled the Deep Rock Galactic IP even further into closing into mainstream. One month later, take the next slide, we released a Kickstarter on a board game for Deep Rock Galactic. And this board game Kickstarter reached almost 20,000 backers and 2.5 million euros. Thank you. Which we later found out was actually is still the biggest Kickstarter in the Nordics. Not just board games, but of course all things. The board game has now been produced and is in the hands of fans all over the world rolling out right now as we speak. And it's being really well received. To us, this has proven that we can transcend the IP. We can take it to other medias. In this case, the relationship, the partnership was with Mood, a visual studio here from Copenhagen that we know really well. And we'll look into more of these partnerships in the future. So next slide, please. Oh, one back. Thank you. So on this one, in April, we released season two for Deep Rock Galactic. We revisited the robot theme and it didn't go just as well as the first one. And we were, of course, a bit disappointed in the numbers. So maybe Deep Rock was going downhill now. But then we looked more into the details and the robot theme was initially in the first season, maybe not the most popular. We also missed out on some promotions on Steam and a few other things. So we said, let's pull our act together. Let's do it better. And we did. So next slide, please. We released Plague Fall, a new theme for season three in November last year. We timed it very well with a promotion on Steam and hyped it in the community. And it broke all our records once again, placing us now squarely in the top 100 most played games on Steam, where we are still at. And it definitely told us now that as long as we are pulling in, putting in the effort and are doing the right things with Deep Rock Galactic, this brand can still grow and still has a lot of potential in the future. Take the next slide, please. So in January, one month ago, we released this infographics to the fans. It was an update to one we did two years ago. And as you can see in the graph up in the top left on daily active users, the user base of Deep Rock Galactic just keeps growing. The recognition as a brand is slowly going into mainstream. We crossed 5.5 million units sold across all platforms. Our social media channels are still growing really well. We have one of the 10 most active Discord servers in the world. Our TikTok channel is exploding and it's a lot of fun. And we see a lot of user engagement on the social media channels. Next slide, please. Thank you. So meanwhile, developing and releasing and promoting Deep Rock Galactic, we've been investing. This is a very different way of investing than the normal Embracer way of acquiring. These are all investments back into the Danish gaming ecosystem, smaller startups or companies that need some seed funding to get moving. They are very different, as you can see as well. One is into the EdTech sector. One is more indie games for Steam and Switch. And the latest one is specializing in VR games. So we're spreading out and helping these teams as good as we can, both with the investment, but also with advice and support as much as we can. The goal here is, of course, for them to grow into mature companies and eventually, if possible, they could be acquired. But we'll see where that goes. We'll continue with this strategy moving forward. And then we final slide. We have an announcement. If you could take the next one. Thank you. So today we are announcing Go Ship Publishing. We are really proud of what we have accomplished with Deep Rock Galactic. And we feel we can share this experience. We need to share this experience with other developers. We want to help other game developers take the same journey as we have taken. This is not a publishing setup where we will publish every game out there. We have set up some specific pillars of focus. So we will seek out game developers that embrace open development, that are community driven and really want to bring their passion products in a personal and real way to the market. And these are often Steam Early Access games like we had ourselves with Deep Rock Galactic. The games themselves need to be flexible in game design so that they are endlessly expandable. The focus here is more on world building than the narrative. We want them to be flexible and open so we can form them or the developer can form them as they go along the journey of working together with the community. And they need some deep gameplay systems so there will be a lot of playtime in these games. We believe in games that are played, are games that sell. This is exactly what we see with Deep Rock Galactic. This leads into the final part, the solid business and the consumer friendly business models where we will support and encourage these developers to pursue the same type of model that we have been successful with. Where the fans feel us being extremely generous with content and then they are very generous by playing the game and talking about it and making their friends buy the game and everybody is just happy when you get into this positive loop. We will also work towards having equal partnerships and full transparency with the developers just as we've been experiencing with copystain publishing throughout the years. So that was our deep dive into Ghost Ship where we are today and what we're going to do moving forward. We're still working on Deep Rock Galactic. There will be more announcements both on Deep Rock Galactic and on the titles for Ghost Ship publishing in two weeks when we have our five year anniversary stream live from the office here. And we will make sure to send out press releases and communications about that event as well. Thank you.

Thank you Søren. I think we are all super excited and very happy to have you within Embrace Group and the success you have created with Deep Rock is just amazing. So thank you so much and thank you for sharing this with us today. So with that said, that was the deep dive session we held for today. I hope Simon you have some few remaining Q&A questions perhaps.

Welcome back to the second Q&A session. Thank you Karin and Søren as well. I want to start off with listening to Karin here. Can we view this as Embrace entering a phase where you try to achieve some more synergies? And can you elaborate a bit more on her position in general? I

would like to highlight or to start with Karin is one of the smartest business persons I know in the industry and I've been waiting for her for a few years to actually join this position. Now she wanted to have a good ending at Google and they closed down and now it was time to join. Super excited to have her. She knows the CEOs and many of our games developers which obviously being very efficient to now join the group. Now it's been a critical part of the strategy of the group to in the belief of aggregating or adding a lot of fantastic games developers within PC console segment. And I believe there is a value for many business partners and industry players within globally. A higher value on the aggregated basis than you necessarily have from each and every game. And this is what we're trying to achieve. With Karin, obviously there is many other things we could have. Other kind of business relationships with industry players increasing margins and improve marketing and just build a better way of communication into the group and other way around. As you know, I've been against any kind of centralization and I believe firmly in a decentralized model. But I would like to see Karin here as a middle point on more on operational daily level on the absolute highest level working aside myself, Johan, Ion together with the CEOs to make this, I would say quite notable relationships and agreements going forward.

Interesting. Could you give us any kind of indications or hints of what kind of things or synergies or partnerships internally or externally that you could derive from having this group of companies?

No, but obviously talking with platforms, if we are able to strengthen our content together against them, we could improve business terms. And there is many different kind of business terms with the industry player. So that's a very clear synergy. But there is also over the years, there's been a number of reach out from very big media companies, tech companies, Asian companies, Chinese companies wanting to do business with the overall Embracer Group. And I've been giving them the number to the CEOs or the local sales teams. But now we actually have a coordinating function where there is an interface to do something substantial across all our eleven thousand games developers. It's an enormous opportunity. But it requires a lot of respect for the decentralized model and for the local management. We need to work together with them to have this working. We will never struck deals with partners that are not aligned with our with our management teams. You know, you need to dance together.

Sounds good. I should also mention that in a few minutes we will open up for questions from the telephone calls conference. So if you have any questions, stay tuned for that. But one more question for me here before turning to the pipeline. Before you had 25 games scheduled for release, AAA games scheduled for release before March of 26. Now it's 19. Could you elaborate a bit on what has changed in the pipeline?

Mainly classifications, I would say, in that number moving. But there is also some or a few moving into the coming financial year after March 2026. Because we had a number of titles in that financial year. And now, you know, with what I stated earlier this morning, we need to make sure we have the right quality and planning and everything. So there is a combination of definitions and for example, a title like Remnant 2, which I think looks amazing. I wouldn't I don't want to say how gamers or the industry will look whether it's AAA games or not. But for definition reasons, it's super close to be 100. They are not. So kind of bad luck when you define this here.

So some of those six games could still be in the pipeline and scheduled for release in the same period, but not classified as AAA. Is that correct? Exactly. All right. And hopefully the sales

could be as good as well. Yeah, yeah, this is very much a KPI driven from interest from financial markets to give color on the pipeline. Internally, we don't talk AAA or not.

We talk games. I guess people just worried that you had canceled some projects proposed all of them. So it's good to get some clarification and on the games in full production. I believe you stated 17. Is that correct? Could be. Is that the current run rate of games in full production, AAA games in full production? Is that run rates sufficient enough to support the release schedule you have? Or do you think you need to up the number of AAA games in full production to deliver on the pipeline in the coming two to three years?

Obviously, there is a very long cycle. Either have a longer time period and have a smaller team or you scale up and down. It really depends on what studio there is and how much external resources. So it's a very hard question to answer. Then we need to do a deep dive on a very, very detailed forecast on head counts and capex and other things. Perhaps one day, Simon, but not today.

All right. Not even if we simplify it to the capex. If the capex is sufficient to fund what you have currently or should we expect capex to slightly increase?

Well, I want to be clear. Due to our partnership and licensing deals and funding that we expect to close, I think it's a fair assumption that our capex will significantly be lower. I leave it to the analysts to read into that.

All right. Let's see if we have any questions from the telephone conference this time.

We have the two analysts on the line. So I'll just open the lines and check if they want to ask any questions. Rasmus and Nick, do you want to ask any questions? Rasmus or Nick, do you want to ask any questions?

Nick Dantzler here. Can I ask a couple of questions?

Yes. Brilliant.

So the first one, when we look at recent performance from Ubisoft, perhaps the performance of EA outside of a couple of their very largest franchises, it seems that recently, regardless of how well the games are received critically, the small to mid-sized AAAs are really suffering in terms of the number of units sold, whereas the very largest games, Call of Duty, Call of War, are a winning share. Those companies I referred to have suggested that relates to the squeezed consumer. But is that something that you recognize in the market? And do you think it relates to this particular moment? Or do you think it is a big picture multi-year structural trend that potentially presents some risks to yourselves? That's the first question. The second question.

Let's start with that question, Nick, because I will forget the first question otherwise. I have too much in my head this morning. So I think I wouldn't say it's a structural shift. We actually have been looking into that particular question in detail. And there is a marginal difference if you look on the performance of small and mid-sized titles versus big titles in the third quarter. But I think potentially, and without having full science, because it's quite hard to have full science in PC console because there are so many factors. But one data point we can look at is obviously destroy all humans that were very successful for us during pandemic. And now the second game came last year. The game is as good or not even better, but it did not perform as good. But there are many factors to that. This release window, how many other games are coming in a similar genre. So I wouldn't say it's a big structural shift. We don't see that. But I think there is more an effect from very, at least early in the pandemic, aggressive consumption of every game you can get hold of.

OK, that's helpful. If I could just go to my second question. Inside Asmodee, you mentioned that trading card games have continued to perform pretty well against a very tough comp, a very strong period last year. When we look forward for Pokemon in particular, is it not inevitable that we have to come off the top of the current spike of interest? And if so, can we expect that in the next couple of quarters?

You know, you mentioned one very valuable business partners, and we have many valuable business partners. And in the respect of them, you know, we are happy to support their distribution and publishing of their products in different markets. But I will leave their assumption of their business and IPs to them. And we are supporting that. So, you know, obviously we were excited to see a very good performance in that business segment of TCG last year. And I have not heard anything from Paris that there is a trend going in a different direction at the moment.

OK, thank you.

There are no more questions at this time, but maybe we should unmute Rasmus to make sure that he doesn't have any questions. Rasmus, do you have any questions?

No, thanks. OK,

thanks a lot.

Then I hand the word back to you, Lars. Yes, thank you, Simon. Simon, perhaps the audience doesn't mind to leave early today, unless you have some final questions from your side, Simon.

No, I could just highlight that from the web we have a lot of questions surrounding the special review. If there is any update on that, if a potential spin-off could create any value, that you have assets that could be valued higher separately. Is that something you have any comments on?

We don't really have any new. I think I gave quite extensive color on the special review in the last quarterly. But I want to be clear, the strategy remains the same to back entrepreneurs. Now, looking at myself as a shareholder, a long-term shareholder, and the promise I've given to people, it's still the same to back entrepreneurs and creators on the long-term. I would leave it to the market to do their own analysis on valuation on assets. Alright.

Maybe finish with seeing if there's any questions from anyone in the audience before we leave. Please raise your hand if that is the case. We'll give you the mic. No questions at this point. With that said, I think it's time to round off. Thank you so much Lars and Johan and all other presenters and the audience for coming as well.

Thank you Simon. Thank

you.