Embracer Group AB

Good morning, everyone, and welcome to Embracer's Q2 results presentation. My name is Martin Anell, and I'm an analyst with D&B Markets in Stockholm, and I'm here to moderate the Q&A after management's presentation. And if you have questions, please raise your hand for those of you in the room. And you can also dial into the telephone conference or send in questions online. If you send in questions online, please be short and snappy so we have time for your question. And with that, I want to hand over to President and CEO Lars Wingfors, and with him is Johan as well, Ekström, the Deputy CEO and CFO.

Thank you, Martin. And hello and a warm welcome to this Embracer Group's Q2 presentation from Stockholm. Before we get into the business details of our second quarter, I want to start this conference by saying a personal thank you to the 900 people that whom left Embracer during second quarter. As you will hear today, we are determined to transform Embracer into a leaner, stronger company. That said, it's painful to me that you need to leave the group and we have been and are doing everything we can to preserve jobs without changing what we need to achieve. Our people are what will make up the very fabric of Embracer. For me personally, it's crucial that the program is carried out with compassion, respect and integrity. Now, let's dive into the business highlights for second quarter. In Q2, we delivered a stable performance and improved cash flow. with the financial benefits of the restructuring program still mainly ahead of us. In Q2, our net sales grew 13% to 10.8 billion. The organic growth amounted to minus 2%, a result of solid organic growth within tabletop and entertainment and services, but tough year-over-year comparisons for PC console and mobile. Year to date, our organic growth is 8%. Adjusted EBIT came in at 1.8 billion in line with our expectations for the quarter. The tabletop games and entertainment and services segments had a strong second quarter above our expectations. I'm happy to see strength of both Asmodee and the Middle Earth enterprises. The margin within PC Console is still below where we want it, mainly as a result of the soft performance of titles released last year, but also a few soft releases in the second quarter. This includes Payday 3, which had a positive adjusted EBIT contribution with the investment recouped in second quarter, but has performed below management expectations. Free cash flow amounted to around 400 million, and it's a 1 billion improvement compared to first quarter, or 1.3 billion improvement year over year. We expect free cash flow to materially improve in the second half of the year, driven by stronger seasonality, for the tabletop game segment, as well as notable OPEX and CAPEX savings. For fiscal 2023-2024, we reiterate our adjusted EBIT forecast of 7 to 9 billion. We remain confident in our forecasted range. The second half outlook for PC and console games and mobile segments has however softened somewhat compared to our assessment in the first quarter. Johan will talk more about the forecast later in the presentation. Our key internal IPs and studios are performing well. This includes highly successful releases of the Dead Island 2 and Remnant 2. Remnant 2, internally developed by Gunfire Games and published by Gearbox Publishing, was successfully released on July 25th and has now sold more than 2 million units and generated more than 700 million SEC in net sales in second quarter. I'm glad to also see successful releases in the past week of Risk of Rain Returns, selling more than 500 copies in its opening week. Teardown for console, including a new DLC for PC, being well received by both players and critics. The Satisfactory Update 8 from Skövde and Koffeestein, The Awakened King, the first DLC for Remnant 2. All four products getting very well received by both critics and players. This is encouraging to see for the important holiday season period where players will spend a lot of time and money on games. We are also making good progress on our restructuring program. Mygge and Phil, two of our key people managing the restructuring, will go further details later today. From my point of view, we are making good progress and expect to reach our restructuring targets. A lot of focus is on free cash flow generation. To give some color, Our operations within mobile, tabletop, and entertainment and services provide a solid foundation with predictable, profitable, and cash-generated businesses. Adjusted EBITDA, less CapEx, with this three-segment is around 4.2 billion SEC during the last 12 months. If you include coffee stain, it's over 5 billion. The soft free cash flow in the past years is more or less only driven by an imbalance with PC games and console games, and we are now taking actions to make sure the PC console segment will have a solid free cash flow generation in the years ahead. In the past month, having opted for an agile and proactive approach, we have accelerated processes to divest assets relative to external funding for individual games. This shift is driven primarily by notable inbound interest, but also by market dynamics and reduced levels of platform content investments, As a result, we are now running a few structured divestment processes that give us flexibility and optionality to reach our targets. We are focused on maximizing shareholder value and on delivering on the targets in the most efficient way. Now let's move over to the details of the different segments. Net sales in the quarter for PC console games amounted to 3.9 billion, a decrease by 5% year-over-year, or minus 17% organically and 22% pro forma in constant currency. The negative organic growth development is mainly explained by tough comparisons stemming from the release of Saints Row and a notable platform deal in the corresponding quarter last year. Adjusted EBIT amounted to 621 million, with a margin of 16%, a decrease year-over-year. The adjusted EBIT margin remains impacted by games development amortization, combined with the soft performance of the previous year's releases and game delays, impacting back catalog revenue this year. The results are also impacted by two third-party publishing titles, Payday 3 and Trine 5, underperforming management expectations. Revenue from new releases amounted to 1.4 billion in the quarter, a decreased 7% year over year. The main revenue drivers among the new releases in the quarter were Remnant 2, developed by internal studio Gunfire Games and published by Gearbox Entertainment, as well as Payday 3, developed by external studio Starbreeze Studios and published internally through DeepSilver. Remnant 2, released on July 25th, reached a sell-through of 1 million units in four days and saw a peak concurrent user count of over 110,000 on Steam. The game has now sold more than 2 million units and generated net sales of more than 700 million SEK. Payday 3, released on September 21st, saw a mixed reception from critics and users. The studio saw an unforeseen error relating to external matchmaking software. The game had a positive adjusted EBIT contribution with investments recouped in second quarter, but performed below management expectations. Starbase is now hard at work to improve player experience. Other new releases in the quarter included Jagd Alliance 3 for console, developed by external studio Hemimont Games and published by THQ Nordic. Further new releases included Ride 5, developed and published by Milestone, and Trine 5, developed by external studio Frozenbyte and published by THQ Nordic. Now moving to the back catalog. we saw the sales of back catalog of 1.6 billion in the quarter, a decrease 14% year over year. Looking at the top 10 back catalog titles, you will recognize many great IPs and games we have in our catalog, such as Dead Island, Saints Row, Deep Rock Galactic, Star Trek Online, Insurgency, SnowRunner. Happen to see the new wrestling game there, Welcome to Bloxburg, Neverwinter Nights and Valheim. The decrease year over year is primarily explained by a notable contribution from Valheim in the comparison quarter, driven by a platform deal. Now, looking at the ROI chart. We are not looking at the arrow. We are looking at the pipeline. And we are excited for the pipeline for the remaining four and a half months until the end of the year. We have Alone in the Dark from our friends, pieces in Frøvde and THQ Nordic. We have our first publishing titles from Ghost Ship, Deep Rock Survivor. We have another game from Skövde. We have many Skövde games. Lightyear Frontier. And one of our first publishing titles from Amplifier. We have one iconic IP from the 90s coming back, Outcast. Developed in internal studio Appeal Studios in Belgium. Published by THQ. Moving to Saber and SnowRunner, they have a spin-off called Expeditions, a MudRunner game. SnowRunner is one of Saber's most successful IPs and recurring IPs, and they have high hopes for Expeditions. Homeworld 3, another iconic IP, is coming back to gamers through external studio Blackfire Entertainment, published by Gearbox, an owned IP by the group. And we have Arizona Sunshine, which I know has actually a new trailer video coming tomorrow that we are very excited about. That game is scheduled to release in December. sequel to one of the most popular VR games out there. And finally, we have Warhammer 40,000 Space Marines 2. And I'm sure there is a lot of other amazing content coming through in this period. Now look at the ROI chart. So I'm happy to see that our two largest releases had had the highest ROI, with Remnant 2 being the standout release from a ROI perspective in the quarter. That is very good for the return of investment in this chart, because we also had a number not performing in this quarter, at least, breakeven. For other releases, PC release of Jagd Alliance 3 as well as Riot 5 have performed largely in line with management expectation, while Trine 5 again has underperformed. The weighted average of ROI now stands at around 2.3 as of the end of the quarter, compared to around 2.4 in the first quarter. It is lower than we would like. due to the underperforming releases last financial year, as well as the short period of inclusion of the stronger, larger releases in first and second quarter this year. An interesting data point is that over the past two years, our internally developed games have had an ROI over twice as high compared to externally developed games. This speaks to the qualities of our key internal IPs and studios. Continued execution of the restructuring program will be key to improve the return of investment, profitability and cash flows within PC console game segments. Post the restructuring program, we have an increased confidence in our ability to deliver a general improved quality and ROI in the coming years ahead. Looking to investments and pipeline. In the PC console game segment, investments in game development remained high. As previously stated, the financial benefits of the program are primarily expected to be visible in the actual financial performance starting October 1st. In total, around 1.7 billion was invested during the quarter. The finalized value of the completed and released games during the quarter amounted to 1.1 billion, driven by the release of Remnant 2 and Payday 3. In comparison period, Saints Row, with a notable development and marketing budget, was released. The ratio of investments to completed games increased from 0.8 to 1.5 with a continued higher pace of ongoing investments into future game releases than completed investment in released games. As of second quarter, capitalized development costs for ongoing game development projects in the balance amounted to around 10 billion. In the quarter, we had around 1.1 billion in write-downs related to the restructuring program, which Johan will discuss more later. Let's head over to mobile games. First of all, I would like to say I'm pleased with the performance of mobile games. But it's important that you understand the data points here. Net sales in the quarter for mobile games amounted to around 1.5 billion. An increase 2% compared to the same period last year, or minus 10% organically and 4% pro forma in constant currency. Underlying market trends and monetization had a stable development in the quarter. EasyBrain continues to shine and had a stable or flat organic growth in second quarter, while DecaGames, including Crazy Labs, saw clearly negative organic growth. The number of monthly and daily active users both declined year-over-year, driven by DecaGames, partly driven by a shift to genres with smaller player bases, but with better retention and monetization. This is very important you understand this when looking at these numbers, the change of business models. Adjusted EBIT amounted to 372 billion, not billion, unfortunately, million I meant. or a 25% adjusted EBIT margin. User acquisitions amounted to 700 million, or 48% of net sales. User acquisition investments continued to grow sequentially, but partly moderated in the latter part of the quarter to optimize long-term profit projections. The strongest catalog titles or a number of classics here, sudoku.com, Blockudoku, Number Match, my own favorite game actually, Art Puzzle and Jigsaw Puzzles. EasyBrain released the game numbers some globally in the quarter and also had a number of soft launches around the world. Crazy Labs has shifted a great portion of focus to the hybrid casual segment, which has a mix of ads and in-app purchases monetization and a longer lifetime value than hyper casual games. The company saw a positive early result from Alien Invasion, a hybrid casual game for which the company took over the publishing rights in the quarter. The game is expected to have a very short payback time on the investment and to strengthen profitability. Move over to tabletop. I was very pleased to see this morning that Sällskapsspel or tabletop games became the Christmas present of the year in Sweden. That's big news if you're Swedish. And I think it's a fantastic nomination or win that tabletop games as a Christmas gift. And I'm also very pleased to report strong numbers from that business segment this quarter. Net sales grew 25%. compared to the same period last year, or by 15% organic and 13% pro forma in constant currency. Net sales were 4.1 billion. Growth was driven by the trading card games product category with low single-digit growth for board games. From a geographical perspective, growth in Europe outperformed growth in the States. Adjusted EBIT amounted to 661 million, yielding a 16% adjusted EBIT margin, which is an improvement compared to last year and a notable improvement compared to first quarter. Adjusted grew 47% year-over-year, despite the product mix more geared towards trading card games. driven by strong organic growth, sales, positive currency exchange rate changes and cost savings. Asmodee's inventory unwinding continued according to the full year plan in the second quarter. counter to historical seasonal trends, which typically means significant inventory build-up in the preparation for the peak season. The inventory increase in second quarter this year was notably lower than previous years. This drove a significant improvement in cash generation, with Asmodee delivering a positive free cash flow for the quarter. compared to a notable outflow in second quarter last year. A significant free cash flow generation is expected in the second half of the fiscal year, as Asmodee enters the seasonally strongest period. Asmodee released a number of games and novelties during the second quarter, including a new kids game line from Exploding Kittens, Other new original titles such as Champions from Repos Prod and Spellbook from Space Cowboys. Other titles released included new licensed games such as the Netflix titles Bridgerton and Cobra Kai from Mixlore. And a Disney edition of our evergreen Dixit game from Liberload. In the coming quarters, new releases will include a new legacy game in the successful Ticket to Ride franchise from Days of Wonder and Marvel Crisis Protocol, new edition from Atomic Mass. And finally, Star Wars Unlimited, Asmodee's eagerly anticipated new trading card game was demoed publicly for the first time at the Gen Con and Essen trade shows to an overwhelmingly positive reaction from the public and press alike. The global launch date was also announced as March 8, 2024. Stay tuned. Heading over to entertainment and services segment. Net sales in the quarter for entertainment and services amounted to SEK 1.4 billion, an increase of 76% compared to the same period last year. Or 13% organically and 28% pro forma in constant currency. The organic growth was primarily driven by PlayOn, partner publishing and film. Dark Horse had a negative contribution to organic growth due to a slower backlist publishing sales for graphic novels. The strong inorganic increase in net sales was primarily driven by the acquisitions within Embracer Free mode of limited run games and Middle Earth enterprises, with the latter growing strongly on a performer basis. Adjusted EBIT amounted to 216 million driving a much improved margin year-over-year of 16%. The higher adjusted EBIT margin is primarily explained by stronger-than-expected licensing revenue for the Lord of the Rings IP within embracer-free mode. The main driver in this quarter was the Magic the Gathering trading card game, the Lord of the Rings Tales of Middle-Earth. The game was released through Middle Earth Enterprises' long-term partnership with Wizards of the Coast, garnering positive acclaim from fans and critics. After the quarter, The Lord of the Rings returned to Moria, a new PC console survival crafting game. from external licensee North Beach Games and the development studio Free Range Games was released. The game saw mixed receptions from critics, but the title has positive received critics from amongst players for its co-op mode and its story. The game has performed in line with management expectations on Epic Game Store, and it's expected to be released for console later this financial year. After a quarter, Dark Horse was awarded the best international book for their Black Sad, They All Fall Down, Part 1, at the Harvey Awards. For their work on Cyberpunk 2077, Big City Dreams, they won the Hugo Award for the best graphic story or comic at the 81st World Science Fiction Convention. The Berserk manga book series soon reaches another milestone when closing nearly three million of sold books. Further, Dark Horse and Lucasfilm Publishing will be publishing Star Wars hyperspace stories, a number of books with standalone stories. First out is Star Wars hyperspace stories, QCon in April 2024. And Clear River Games announced at Tokyo Game Show in September. That will be publishing Omega 6, the video game based on the manga by ex-Nintendo veteran Takaya Amamura. and the beat-em-up of Rushing Beat X based on the classic Jaleco IP. On the same show, the studio Tatsujin announced Snow Bros. Wonderland. That's our own studio. And Truxton Extreme, both based on classic Toaplan games. This is really nerdy and amazing. So... Market. I'm soon done, Johan. So the market is stable. That's good news. But saw a bit decline in expectations over the past quarter. But it's a stable market, underlying market. And it's driven by better console supply, a stronger new release lineup. and digital sales generally, amongst other things. And at 2023, global video games markets is expected to generate 184 billion, an increase of 1% year over year. PC is now expected to grow by 4%, console is expected to grow by 2%, and mobile is expected to decline by 2%. PC is also the only segment with a higher 2023 market forecast and is also estimated to be the fastest growing segment this year. The longer term growth prospects remain strong. And total games market is forecast to reach 206 billion 2026. a 5% CAGR between 2019 and 2026. With that said, I will leave over to Johan for financial comments. Thank you very much, Lars.

Thank you. Yes, so let us take a look at an overview of our financial performance in Q2. Although we were up against tough comps versus last year in the quarter with the release of Saints Row and the platform relating to Valheim last year. Our full year sales increased in the quarter. So full year sales amounted to approximately 42 billion SEK. We note that marketing expenses in relation to net sales remain at 10%. User acquisition costs increased sequentially, but is still lower compared to the corresponding period last year. Marketing expenses outside of the mobile segment remained at a relatively high level and is mainly due to giving the support to larger releases such as Remnant 2 and Payday 3 and also supporting the healthy performance that we see in the tabletop segment in the quarter. Operating expenses was slightly lower than last quarter In absolute terms, 2.7 billion. And if we look at it in relation to net sales, it decreased to 25% in the quarter. Adjusted EBIT decreased versus the same period last year, amounting to 1.8 billion in the quarter and 6.7 billion on a full year basis. As mentioned in June, when we announced the restructuring program, we treat expenses related to the restructuring program as items affecting comparability, thereby excluding them from adjusted EBIT. Items affecting comparability amounted to 1.4 billion in the quarter, of which 1.1 billion relates to write-downs of game development projects. It is important to note that write-downs of game development are considered as items affecting comparability only when they are related to the restructuring program where the studio or the team has been discontinued let us take a look at the cash flow for the quarter first a reminder the positive effects from our restructuring program are expected to be seen in our current trading during the second half of this financial year. However, we have a positive free cash flow in the quarter of approximately 400 million, which is significantly better than the negative 900 million we had last year. As a result, the full year free cash flow increased to 1.5 billion. Compared to last year, there is a significantly reduced inventory build-up in the tabletop games segment, which has a positive effect on the changes in working capital. Sequentially operating receivables and liabilities increased, mainly driven by the tabletop game segment, but also an increase in accrued expenses in the PC console segment related to game releases in the quarter. M&A outflow in the quarter amounted to 120 million and relates mainly to payments for historical acquisitions. The cash flow effect of items affecting comparability amounts to 146 million and our cash outflow made under the restructuring program. Cash flow from financing activities were impacted positively by 2 billion SEK from the share issue made in July, and negatively by less utilization of credit facilities in Pleion. At the end of September, our net debt amounted to 14.6 billion, and available funds amounted to 6.9 billion. We expect to reach our net debt target for the full year of 8 billion at the end of March, with notable positive impacts from the restructuring program during the second half of this fiscal year. In July, agreements were signed for the parent company's main credit and loan facilities, extending maturity to October 2024. The second stage of this extension is being negotiated and is expected to be concluded during the restructuring program. Embracy Group has an agreement on covenants in its credit agreements. The terms of these are 2.5 times net debt through EBITDA. Okay, calculated according to the principles in the loan agreements. And as per the end of September, we have significant headroom versus this covenant. Looking ahead, as Lars mentioned earlier, we reiterate the forecast for this financial year with an adjusted EBIT between 7 and 9 billion SEK. We remain confident in our forecast. The outlook, the H2 outlook for the PC console and mobile segments have, however, softened somewhat compared to the assessment made in Q1. For PC console, it's due to actual or expected performance of new game releases as well as minor probable shifts in pipeline. For mobile, it relates to a slightly more conservative view on monetization and organic growth. In the PC console game segment, we expect a solid earnings growth for the full year, driven by back catalog revenue from games released during the first half of this year, as well as a strong lineup of new releases across our different operatives groups during the second half of this year. In the mobile game segment, we expect a mid to high single digit negative organic growth. Underlying market trends are assumed to be stable throughout the rest of the year. And we expect an adjusted EBIT margin that is slightly above what we saw last year. In the tabletop game segment, we expect a mid to high single-digit organic growth, driven both by board games and trading cards, with an adjusted EBIT margin that is slightly below what we saw in fiscal 22-23.