Embracer Group AB

Good morning and welcome to Embrace the Group Q1 presentation. My name is Simon Jönsson, an equity analyst with ABG Sundal Collier, and I will be the host today. We will begin with a presentation of the results by the management team and after which we will follow up with a Q&A session. And to participate on the Q&A, you can either send in your questions using the web or you can join the telephone conference. And without further ado, I will leave the word over to you Lars.

Thank you, Simon, and hello and welcome everyone to great Stockholm this morning. So let's go straight into the brief summary of the quarter. I'm pleased to announce a net sales of 10.5 billion, which is the growth of 47% year-over-year, or an organic growth of 20%. driven by solid performance of Dead Island 2. Our profitability with adjusted EBIT came in at 1.7 billion, representing a notable improvement sequentially. The Q1 result is also ahead of management expectations for the quarter. The positive sequential margin development in the quarter is a result of how we deliver on our games pipeline. Our Q1 execution builds a strong foundation to further improve the margin during the year after challenging fiscal 2022-2023. The free cash flow of minus 600 billion, 600 million, in Q1 is largely in line with the plan for the year, given the continued imbalance between investments of completed PC games game development, which in the quarter where we invested 1.7 billion into the pipeline, but the completion, the value of the game completed, including that island, was only 800 million. The adjusted earnings per share increased 4% year over year. So now looking again into the operational performance, we had Dead Island 2 and Remnant 2 that jumped start of the year. In recent months, those titles have been selling very well. Dead Island 2 reached a sell-through of over 2 million units in the first month. Released early in the second quarter, in this quarter, current quarter, Remnant 2 sold over 1 million units in the first four days and has continued to sell very well post this period. Developing and publishing great games is our core business. And I would like to highlight the great achievements of the teams behind the recent successes of Dead Island 2, which is PlayOn, Publishing, and DemBuster Studios. Jagd Alliance 3 with THQ Nordic Publishing and Hememont Games as a developer. And Remnant 2 with Gearbox Publishing in San Francisco and Gunfire Games. Looking for the year, we reiterate our adjusted EBIT forecast of 7 to 9 billion for the year. Based on the performance year to date, we have an increased confidence in our forecast range. We are also making good progress on the restructuring program announced on June 13 with the ultimate goal of significantly improve free cash flow and reaching a net depth of 8 billion by year end. Delivery of the program will allow us to operate with increased efficiency across the group and reduce business risk. This in turn will enable us to continue to grow and to deliver high quality products in the long term. At the same time, we acknowledge the uncertainty that such a program can cause for our colleagues. A painful consequence of the program is that a number of talented and passionate team members have left us or will be leaving us before the end of the fiscal year. With us today, we have Mygge, CFO of Asmodee and one of the key Workstream leaders in the restructuring program. She will provide an update on the program towards the end of this presentation. Now looking ahead, we have several large-budget games expected in this fiscal year, including Payday 3 and Warhammer 40,000 Space Marines 2. We have also several other exciting titles such as South Park, Snow Day, Homeworld 3, Hot Wheels Unleashed 2, Teardowns on console, Alone in the Dark, and the new Outcast, a new beginning. This makes us confident in growth for the reminder of the year in the PC console games segment. Looking beyond that, based on the restructuring program outline in June, we believe We expect to deliver a positive organic growth combined with a lower capex run rate and a more efficient cost structure. We have for several years made strategic investments into accelerated long-term organic growth in PC console games. Ongoing investments into the future game releases has outpaced completed development by a factor of two to three. increasing the value of ongoing game development to more than 10 billion by end of June. Although we now reduce capex and prioritise within our portfolio, completed development should continue to increase as our development pipeline matures, supporting the growth outlook. After the programme is completed, more focused investments into our highest return of investment titles should drive both growth and profitability. So let's look at the segments. To start, adjusted EBIT increased by 27% and amounted to 1.7 billion versus 1.3 billion in the quarter, yielding a 16% margin. The increase is mainly driven by PC games console segment and entertainment and services segment, which had a strong organic growth and a strong margin in the quarter. Also, the mobile games segment performed strongly from a profitability perspective, while tabletop games had a seasonally softer quarter in line with management expectations. Looking in the PC console games segment, sales grew 38% organically in Q1. Revenue from new releases amounted to 1.6 billion in the quarter, an increase of 341% year over year. The main revenue driver among new releases in the quarter was Dead Island 2. Other notable new releases in the quarter was All Elite Wrestling Fight Forever, developed by external studio Jokes and published by THQ Nordic. The game was released late in the quarter on June 29 and had a solid contribution in line with the management expectations in the first two days despite mixed receptions from critics. Other new releases included the System Shock remake, on PC only so far, and MotoGP 23, which both had solid reception from both critics and users. Revenue from back catalogue titles, which also include platform deals, amounted to 1.6 billion in the quarter, a 10% increase year over year, And here you can look at a lot of familiar IPs we publish. The top 10 titles of back catalog, Star Trek, Deep Rock Galactic, Borderlands, Neverwinter Night, Welcome to Bloxburg, one of the most popular games on Roblox, Chivalry 2, Risk of Rain 2, SnowRunner, Valheim, and Metro Exodus once again. Other revenue amounted to 800 million in the quarter, an increase by 67% year-over-year. This is mainly driven by growth in number of games under partnership agreement. The adjusted EBIT margin notably improved sequentially, but remains impacted by games development amortization combined with the soft performance of the previous financial year's releases impacting catalogue revenue this year. New releases with better ROI at the start of the year provides a strong base for continued margin development improvement throughout the year. Worth highlighting, it's encouraging to see Crystal Dynamic Eidos turnaround to solid profitability is ahead of plan. driven by cost-efficiency improvements, a stable back catalog business, and increased external funding for ongoing development. This is a testament to the commitment and focus of Crystal Dynamic Eidos Management, and it's supportive for our larger PC console games business. Looking ahead into the pipeline, Again, several additional large budget games are expected in this fiscal year 2023-2024. The release of Payday 3 was confirmed in January 2023 and quickly reached 1 million wishlists on Steam, which has up until early August reached 1.5 million. The game was revealed in Xbox E3 Showcase as one of the biggest third-party reveals. Payday has recently excited a successful closed beta, which was well received by the Payday community, driving a notable pre-order uplift. The full game will be released on September 21st. We also have other exciting titles, such as the recently announced South Park Snow Day coming in this fiscal year, and many other high-profile titles. In general, we believe we have a solid pipeline for the remainder of the year, even if something unknown to us today would drop out of the year. To ensure polishing and optimal release slots, we have confidence enough to deliver on our targets. Aside the titles you see on this slide, we still have more than 60 other products that will ship according to my management during this fiscal year. Looking on the return of investments, I'm happy to see an improved performance of new game releases in first quarter. Dead Island 2 and All Elite Wrestling had an ROI of around factor 2 to 3 in the release quarter alone, which should increase over time. Note that the wrestling game came out very late in the quarter. The weighted average ROI now stands at 2.41 as of end of the quarter compared to 2.48 in the end of last quarter and is still weighed down by soft releases in last fiscal year and the short period of inclusion of the stronger Q1 releases. We are confident in an improved ROI throughout the year. driven by successful releases in Q1 and at the start of Q2, as well as our pipeline of upcoming releases. Looking at investments and the pipeline. The PC console game segment continues to make notable investments into the future. In total, 1.7 billion in the quarter compared to 1.1 billion last year were invested. The final value of the completed and released games during the quarter amounted to 800 million compared to 545 million last year, driven this quarter by the release of Dead Island 2. In total, we had 215 ongoing game development projects as of end of June, of which 62 has been announced. Looking to mobile games, I'm pleased that the segment had a solid performance in profitability, which was ahead of our expectations. Even though organic growth was minus 12%, it's a notable sequential improvement compared to last quarter. The mobile game saw some headwind from lower ad prices year over year, impacted by platform changes related to privacy, a bit lower player engagement post-COVID and macroeconomic factors. The negative growth is also a result of lower user acquisition investment in recent quarter as a response to new market circumstances aimed to keep desired profitability levels. Underlying trends though have started to improve, including some positive trends with regards to monetization. Despite the sequential increase in user acquisition cost, Profitability was strong and ahead of management expectations with adjusted EBIT margin of 29% driven by systematic investment to balance growth and profitability. The mobile business are expected to show positive organic growth for the full year and continue to add both earning and cash flow diversification. Looking into tabletop games, the sales amounted to 3.2 billion in the quarter, an increase of 20% compared to the same period last year, or by 9% organic growth and 7% pro forma in constant currency. Growth was driven by trading card games product category, with more contained growth for board games. From a geographical perspective, growth in Europe notably outperformed growth in the U.S. Adjusted EBIT amounted to $260 million with adjusted EBIT margin of 6.5%. The result is in line with management expectation in one of the seasonally weakest quarter of the year. On a year basis, profitability was impacted by a product mix more geared towards trading card games, similar to in recent quarters. Operating costs also increased year over year due to inflation and the run rate impact of prior year's recruitments. In addition, in the comparative quarter last year, benefited from notable cost phasing into later quarters as a result of shifts of activities during the initial integration phase after transaction of closing. These impacts are expected to moderate over the next quarters. While the first fiscal quarter has historically appeared with significant inventory buildup in the preparation for the peak season, The inventory increase was around 400 million lower compared to Q1 last year. This resulted in a positive free cash flow for Asmodee in the quarter. The company is expected to convert about 100% of its adjusted EBIT into free cash flow in this fiscal year with a positive contribution in the first half of the financial year compared to the cash consumption seen in first half last year. Also worth highlighting, Asmodee signed a new partnership with Palindrome, one of Embracer Studios, an operative group of Amplifier, to expand the Legends of the Five Rings universe in a video game. Asmodee also received three prestigious Spiel des Jahres awards at a recent ceremony in July. Looking into entertainment and services, we had a very strong quarter, growing 70% organically with a 16% adjusted EBIT margin. The strong organic growth is primarily driven by play on partner publishing division, which had two notable releases from partners in the end of the quarter, contributing to the organic growth. The higher margin is primarily explained by a strong contribution from Middle Earth Enterprises. Driven by a strong licensing revenue for the Lord of the Rings, the performance of Middle Earth Enterprises is well ahead of the business plan developed at the time of acquisition a year ago. It's encouraging to see many exciting external projects based on this incredible IP. including the recently successfully released Magic the Gathering trading card game, The Lord of the Rings Tales of Middle-Earth, and the upcoming PC console survival crafting game, The Lord of the Rings Return to Moria, as well as many other exciting new products that will grow that IP further. These two titles are examples of potential key drivers for Middle Earth enterprises during this financial year. I would also like to highlight other businesses within the free mode vertical such as Limited Run Games that hosted a recent showcase announcing exciting pipeline of classic games such as jurassic park classic games collection clock tower and gex trilogy iconic ips if you've been in this industry for many years also in the quarter dark horse and asmodee also signed an agreement for the release over the next three years of a range of collectibles, art prints and comics based on Asmodee's Legends of the Five Rings and Arkham Horror IP. Soon, Johan, it's your turn. One slide more. So just to give you a bit of update on the market, I'm pleased to see that there is a growth forecast again in this industry. The global games market is expected to generate $188 billion, which is an increase of 3% year-over-year. The growth will be driven by a better console supply, a stronger new release lineup, and digital sales, among other factors. The longer-term growth prospects also remain strong and total games market values are expected to reach 212 billion by 2026. The console market this year is expected to see the strongest growth with around 7% year-over-year. Also, the tabletop market was slightly down by around 1% year-over-year in the first quarter. Growth was driven in Europe, growing 8%, while US market decreased. Growth in Europe was driven primarily by trading cards, which was up around 25% year-over-year, while board games market also grow slightly at 2% year-over-year. With that said, I would like to hand over to Johan.

Thank you, Lars. Let's have a look at the financial performance in our first quarter this year. So if we start to zoom out, we note that we have a solid or strong top line growth in the quarter, increasing our trading 12 months net sales to 41 billion. We see an improved gross margin in the quarter, 63%. It's mainly driven by improvements within the PC console segment and the entertainment and service segment. We note an increase in user acquisition costs in the mobile segment, which is the first time we see that in a year. We also note that marketing expenses outside in the mobile game segment was relatively high in the quarter in order to support releases, mainly the 9 and 2. Operating expenses remained fairly in line with last quarter in absolute terms, about 2.7 billion. In relation to net sales, they were lower at 26%. Due to the strong adjusted EBIT growth in the quarter, our training 12 months adjusted EBIT increased. and was 6.7 billion at the end of June. If we look at our cash flow and net debt, we note that the free cash flow is negative in the quarter, 600 million, which is broadly in line with our internal expectations. The main reason for the soft free cash flow performance in the quarter is the high level of investments going into the games pipeline. And in order to build the foundation for growth in cash flow and profits for the future. Also worth noting is that Q1 is the low season for our businesses. And they are gearing up towards the high season in Q3. We had net investment in financial assets of 200 million in the quarter. This is mainly driven by a long-term licensing contract within the entertainment and services segment. The increase in working capital was 500 million in the quarter, significantly less than what we saw during the same period last year. The main reason for the increase in working capital is seasonal build-up of inventory in the tabletop segments and an increase in operating receivables in entertainment and services and tabletop, mainly driven by strong sales in the later part of the quarter. The M&A outflow in the quarter is related to historical acquisitions. If we look at our net debt, it amounted to 16.8 billion at the end of June. Available funds was 5 billion. We expect to significantly improve our free cash flow generation already in Q2. and to reach our net debt target of 8 billion by the end of the financial year, with notable positive impacts from our restructuring program during the second half of this year. In July, we signed credit and facilities loan agreements with our banks extending the maturity to October 2024. So as of today the parent company has no short-term liabilities. Further negotiations regarding longer-term extensions are continuing according to plan with our banks and it is expected to be concluded during the fall. In the loan agreement, we have a covenant, and as per the end of June, we have substantial headroom for those covenants. Looking ahead, as Lars mentioned earlier, we reiterate the forecast for this financial year. We do this with increased confidence based on the performance year to date. If we look at the segments, we expect a solid earnings growth within PC Console. It's driven by releases of more large and mid-sized internally developed games during this year compared to last year. And we also expect that the adjusted EBIT within the segment will be weighted towards the second half of this fiscal year, driven by improved ROI on releases in H1 and a strong lineup of releases during the second half of this year. For the mobile games segment, we expect a low single-digit organic growth with gradually stronger growth during the year. The adjusted EBIT margin is expected to be largely in line with last year or slightly above. For the tabletop game segment, we expect a high single-digit organic growth driven by the trading cards product area with an adjusted EBIT margin slightly below what we saw last year. We also expect that earnings seasonality will be more pronounced this year, driven by cost-facing, timing of new releases, as well as product mix.