Embracer Group AB

Good morning and welcome to Embracer's Q4 report presentation. My name is Jacob Edler. I'm an equity research analyst with Danske Bank in Stockholm, and I'll be moderating this Q4 presentation here today. We will start with a handful of presentations from Embracer's management team, including some reflections on the recently finalized restructuring program and some comments on the spin-off events that are yet to happen, so to speak. And I think with that word, I'll leave the stage to you, Lars. Thank you. Thank you, Jakob.

Hello and a warm welcome to this Q4 presentation in Stockholm. Let's dive straight into the business highlights for the fourth quarter. Net sales came in close to 9 billion SEK, which is a 5% decline year over year. mainly impacted by a weaker revenue within entertainment and services compared to last year. Looking at the profitability, I'm glad to see that we are making more money. 56% in adjusted EBIT growth to 1.4 billion in the quarter. driven by an excellent performance within mobile, solid performance within tabletop, and in line with expectations within PC console. Worth noting, this is despite a significant negative contribution from the divested companies to adjusted EBIT. Looking at the free cash flow, came in at 500 million, which is a significant improvement over a flat cash flow last year, despite, again, negative impacts from divested assets of 500 million EBITDA minus investments. Looking at the year, full year, we have a double-digit growth, both in sales and adjusted EBIT, to 42 billion and adjusted EBIT just over 7 billion in the year. Worth noting that the Performa sales excluding Sabre and Gearbox were 40 billion with a higher adjusted EBIT of 7.3 billion and EBITDA minus capex of six or EBITDA of 6.3 billion. The full year cash flow were one and a half billion, despite a negative 2.2 billion EBITDA contribution from the divested assets. End of March we had our annual or year end and we're doing impairments. And this morning we reported a significant amount that I'm very respectful of. 20 billion impacting our reported EBIT in Q4. And it's important for all shareholders to understand what that is. 11.4 billion is relating to the divestments of Sabre and Gearbox. One billion is relating to the finalized, now finalized restructuring program in the fourth quarter. And then we have an annual impairment of all our goodwill across the group. And this year we have decided to, and which also resulted in a 6.7 billion impairment of Asmodee, which equates to around 20% of the 34.4 billion that we paid in consideration 2021. The actual cash effect of all this is 265 million. We are now looking ahead to a solid year. This year, ending March 25, we are expecting a similar performance compared to the actual adjusted EBIT reported last year. But with the material, and most importantly, with the materially improved free cash flow in EBITDAQ. in the course of the year. Within PC Console, we have two titles. I would say one of them, Kingdom Come Deliverance 2, is a very important game for us this year. And Killing Fork 3. And you can compare them to Dead Island and Remnant that we had last year. I'm personally excited to all our games, but Kingdom Come Deliverance 2, I think will be a hell of a game. And done by one of the absolute best teams in Europe. And I think it will excite a lot of players. And obviously having such a game with their own IP, own studio and their own distribution, partly, to consumers, you are able to capture a lot of that value creation. So if you sell another million or a few million units, obviously it has a swing factor in the year. I believe, considering that, we still have reasonable expectations on that and other titles in the year. In total, we expect to release more than 70 projects in the course of the year. including three important unannounced titles for the year. Not to the scale of Kingdom Come, but important. We are expecting to complete games of around 3.9 billion in the year. That's our expectations today. Last year we completed of 3.4, I'm looking at Johan, 4 billion. which approximately 10% only in Q1, 20% in Q2, 55% in Q3, and the balance obviously in Q4. That's our current estimation today. But beyond this year, we see growth in the business, driven by a good number of very sizable PC console projects. based on both established and new IPs. Our resources within PC Console are increasingly focused towards our owned and controlled IPs, such as Darksiders, Dead Island, Deep Rock Galactic, Kingdom Come Deliverance, Killing Floor, obviously the Lord of the Rings, Metro, Remnant, Satisfactory, Tomb Raider, Breakfast, and many, many others. Looking in Q1, ending now in June, we see a broadly stable adjusted EBIT for mobile and tabletop, but a limited adjusted EBIT contribution for both entertainment and services and PC console due to the timing of new product releases. Also worth highlighting that we finally completed our restructuring program end of March. It's been a rough year for us. And I'm glad that we now are posted. And we are expecting a notable delivering of our balance sheet in the course of the year. Driven obviously by the considerations from the two recently announced divestments, but also the stronger free cash regeneration. We were able to reach a CapEx run rate of around 4.3 billion as of Q4, which I think is a notable achievement comparing when we started of 7.9 billion a year ago. Over the past year, we have made significant process shaping the future of the Group. We have improved the balance between growth and cash flow generation. The divestments of parts of Sabre and Gearbox will improve profit margins and cash flow conversion, reduce financial leverage while subsequent decisions to initiate the separation of the Group into three publicly listed companies sets a clear strategic direction into the future. And I'm encouraged to see that all shareholders, or most shareholders, all I've spoken to, share our view of that transformation process. And so far, it's all good. and process our tracking according to plan. Ultimately, this will create value for all stakeholders, but importantly, it would improve the conditions for our entrepreneurs and employees to create more and better products ultimately. That's the reason we're doing it. Also, finally, in the highlights, or I don't know if this is a highlight, but I was sad to, in a way, but also glad that Johan came to me a few weeks ago, start talking about that For private reason, he needed to change his role. And we agreed that you will remain until end of March. You have been absolutely essential to the built up of Embracer. And you are a really good leader and a human. And I'm really thankful for that. And you are welcome back any day you want. But we still have a year almost. But being a public company, CFO is kind of driving a Formula One race, and I have all the respect of that decision. But really glad also to have Mygge already on board that could actually take on this duty from September 1st. So you will see both me and Johan here in Stockholm in August. Also glad that Phil Rogers accepted to take on the duty of a deputy CEO on June 1st. He's currently leading the group of Mill Earth and Friends and CEO of Crystal Dynamics and a very experienced leader within the industry. Right. A bit more details. PC console. Mixed performance in the quarter. We had a number of highlights. Really glad to see a strong performance for some smaller budget titles, but very important to the group, such as the remaster of Tomb Raider. published by Aspire. I'm really glad to see that we own the IP, Aspire done the work and the development together with Sabre and publishing it, and then now we are able to physically release it exclusively to consumers by our company Limited Run Games. So we kind of have the whole value chain there, capturing the full margins, which were a notable contribution in the quarter. We also had other titles exceeding our expectations, such as Deep Rock Galactic from our amazing teams in Denmark, performing very well. Aspire also had Star Wars Battlefront, contributing financially in the quarter. We also had a number of mid-size titles from THQ Nordic not reaching their full potential, unfortunately. And it was part of the weaker performance on the margins within PC console. Overall, we had a minus 14% organic, but 3% growth from Performa in the quarter. We see a stable back catalog performance of 1.6 billion. And here to the right, you can see the top 10 titles. Dead Island 2 continues to perform. We had the last quarter of SnowRunner. Then we have Star Trek. Remnant 2, that we continue to invest into. Arizona Sunshine 2. Risk of Rain 2. Hot Wheels Unleashed continues to perform. Deep Rock Galactic, obviously. Neverwinter Nights. And finally, from Gothenburg, the Bloxburg team at Roblox. The ROI chart has many dots now. This quarter, it's a mixed performance again. Glad to see three titles above four times return of investment. Remember, this sample includes projects with sales above 40 million or investments above 40 million, which is currently 98 projects or dots on this slide. The average are still stable at the level that I would like to see increasing in the future. I'm confident it will increase in the future, but still at 2.2 in average. And it will increase on the long term. Obviously, now there's a 26 billion of net sales in this formula, so it will take some time to, you know, to have the maths to improve, but our updated capital allocation process focusing on what we believe the most in will improve the return of investments over time. I'm confident in that. Here's a slide showing that we continue to invest more into the future than we are completing. In the quarter, we completed games of 700 million, but we invested 1.4 billion. That gap will be smaller going forward, but still we would see a growth in investments. As of March 41st, we had 6 billion of capitalized games on the balance sheet. So, solid pipeline of new games for this current financial year. 70 projects. I already talked about Kingdom Come 2, Killing Floor 3, but there is more important titles of the year. Epic Mickey Rebrushed, Hyper Lightbreaker, Gothic Remake, Titan Quest 2, alongside many, many other projects. We will also continue to invest into our live and kicking games such as Remnant, Goat Simulator, Satisfactory, Deep Rock, Dead Island, Valheim, Star Trek, Neverwinter Nights, and many others. Moving to mobile, which had a very strong profitability in the quarter, reaching 38% or 514 million, which is over 50% increase year over year. Driven by a number of factors, but one of those factors is obviously the transition that Crazy Labs has been doing from hyper-casual, which is a low-margin business but high revenue, to a hybrid casual where gamers engage longer within the games and is monetized differently, partly differently. We also see lower user acquisition costs coming in this quarter at 478 million or 35% of revenues. We still have 29 million players daily playing our mobile games. Or 229 million players on a monthly basis. Easy Brain continues to shine and perform strongly with the high single-digit organic growth in the quarter. Tabletop had a solid adjusted EBIT performance, growing more than 50% year-over-year to 380 million. It's a notably improved margin mix driven by more owned or published products. The free cash flow generation within Asmodee are excellent, and it was actually more than 100% of the adjusted EBIT in the full year. The new trading card game Star Wars Unlimited shined in the quarter, exceeding our expectations, and has been selling out all across the world. We're now working with the teams to set the future of that, and they have a very solid plan with a number of new sets reaching the market. But it's important now for all digital gaming shareholders to understand it's a bit different dynamics of trading card games. This is not a short cash grab to just print things and then leave the consumers. You are building an ecosystem together with your players over a long time. So this will be an important product for us obviously this year, but also in the coming years. This is a recurring business. If you manage that well to please that ecosystem with players. And so far they are out to a really strong start and I'm glad to see that. We also, in the quarter, worth noting that we had a bit shift of releases within distributed products, and that was partly a reason for a small decline in organic growth in the fourth quarter. Entertainment and services came in at 1.2 billion or 48 million in profitability, which is 18% organic growth. Obviously, this business segment has a big swing factor in new product releases. Also, there's a great swing factor in profitability coming out from Middle Earth enterprises. depending on how much royalties they have coming in. And obviously it's been swinging over the quarters because of, for example, the relationship with Hasbro that has been very successful earlier in the year. Happy to see that Dark Horse has transformed back into profitability and growth again and has some solid new releases in the quarter. What I'm most excited about in this segment is obviously the future and the future of Middle Earth and what we announced together with Warner a few weeks ago. I think that is one very important piece in the whole journey of Middle Earth over the coming decade. It will benefit fans and shareholders over the long term enormously. Yes, we will have royalties coming in from the movies. But most importantly, it will widen the overall interest in Middle Earth and that whole world. And we could also create more gaming products based on that interest. And the same thing goes with Tomb Raider. The relationship with Amazon becomes stronger and stronger, and we're not only having the the biggest game being developed together with Amazon. Now we have a relationship on film and streaming for Tomb Raider in the future. Also announced a week ago or a few weeks ago. Very important for that franchise. And finally, looking on the market. We see a stable market development 2023. with a flattish year-over-year. But ahead, we see a 3% expected growth this year, driven primarily by PC and mobile. Looking on the long term, we see roughly a 5% compounded annual growth rate up until 2026. So with that said, I would leave over to Johan for financial comments. Welcome, Johan.

Thank you very much, Lars. And thank you for the kind words earlier. Let us take a look at an overview of our financial development. So sales are 0.5 billion lower than last year, but adjusted EBIT is 0.5 billion higher, thanks to improved profitability. Full year sales amounted to 42 billion for the year, with an adjusted EBIT of close to 7.1 billion, or 17%. The sequential increased gross margin in the quarter is in line with our expectations, with the product mix more geared towards PC console and favorable development within tabletop segment. We also note that marketing expenses in relation to net sales amount to 7%. Marketing expenses outside of mobile are lower compared to previous quarters and mainly due to fewer larger releases in the quarter. And within mobile, we note that user acquisition costs are lower in the period, which is in line with the increased focus on profitability in the segment. Operating expenses continue the decreasing trend as effects from the restructuring program continue to be realized. In the quarter, operating expenses amounted to 2.4 billion SEK, which is a reduction of 11% compared to the same period last year. Adjusted EBIT increased to 1.4 billion in the quarter, setting a new all-time high on a yearly basis at close to 7.1 billion SEK. We thought it would be beneficial to highlight and explain the bridge between adjusted EBIT and reported EBIT for the quarter. And as you can see, reported EBIT was negative in the quarter, 20.4 billion, and adjusted EBIT amounted to 1.4 billion. The difference of 21.8 billion comprises of two parts. 1.5 billion is related to specific items for historical acquisitions, and the remaining part, 20.3 billion, is related to items affecting comparability. It's worth noting that 21.5 billion are items not affecting cash flow, and only 0.3 billion is affecting cash flow. Specific items related to historical acquisitions are acquisition-related expenses, such as expensed earnouts, as well as planned amortizations for acquired surplus values. If you look at items affecting comparability, we have four projects or initiatives. 1.2 billion relates to our restructuring program. And it is important to note that the write-offs of game development are considered items affecting comparability only when they are related to projects affected by the ongoing restructuring program where the studio or team has been discontinued. 8.6 billion are related to the previously announced divestments of Sabre and Gearbox. And the remaining 10.4 billion is an effect of our annual impairment process. Where 2.9 billion is a direct consequence of the divestment of Sabre, due to change composition of cash generating units, as well as internal transfers of business agreements. 6.7 billion relates to Asmodee and is mainly caused by higher interest rates as well as a more prudent view on future expectations. It is also worth noting that revaluations of earnouts have been recorded in different reporting periods since the closing of each transaction up until the end of March 2024. The revaluations are part of the financial net and mitigates the effect of the goodwill impairments. For the remaining assets within Sabre, The re-evaluations amount to 1.6 billion on an accumulated basis. And for Asmodee, plus 2.2 billion. For Asmodee, the impairment corresponds to approximately 20% of total consideration by closing date valued at the exchange rate as per the end of March. or 13% if you consider the positive mitigating effect from the revalued earners. If you look at the cash flow for the quarter, free cash flow amounted to approximately 0.5 billion, growing with 0.5 billion over last year. It is worth noting that this is despite a negative 0.5 billion EBITDA contribution from divested entities. And we continue to see positive effects from the restructuring program in our cash flow, both on operating expenses as well as reduced capital expenditures. Cash flow from financing activities in the quarter are impacted negatively by less utilization of credit facilities in play on. Net investments in acquired companies in the quarter relates to payments made for historical acquisitions. And the cash effect of items affecting comparability relates to cash payments made under the restructuring program. Looking at the full year cash flow generation, we note that free cash flow increases with 1.5 billion over last year, driven by improved EBITDA as well as reduced working capital. At the end of March, net debt amounted to 16.4 billion, and available funds amounted to 5.3 billion. It is worth noting that the net debt does not include the interest-bearing receivable we have towards the buyers of Sabre Interactive, which amounts to 2.1 billion. In April, we signed or secured a financing agreement at the Asmodee level. The financing amounted to approximately 10.5 billion or 900 million euros. with a maturity of up to 18 months. The loan is secured by Asmodee Assets and ring-fenced. The loan was used to refinance our bank loan of 8 billion with maturity in February 2025. And to further reduce our revolving credit facility with 1 billion to 8 billion. And our existing revolving credit facility matures in May next year. We have agreements on covenants in our credit agreements. The terms for these are 2.5 times net debt in relation to adjusted EBITDA calculated according to the loan agreements. And by the end of the quarter, we have substantial headroom for these covenants. Here we have some pro forma financials. These pro forma financials show Embracer's performance excluding the divested assets related to Sabre and Gearbox for fiscal year 2022-2023 and 2023-2024. And they are also split by the three new entities following the announced separation. Asmodee and Kofi Steen and Friends, Middle Earth and Friends. As Lars mentioned earlier, we see a slightly higher profitability in the year at 7.3 billion at the adjusted EBIT level. But more importantly, we see a higher cash flow generation on a pro forma basis, where EBITDA would be or are 2.2 billion higher for the full year on a pro forma basis. If we look on the liability side, there are three important areas. Net debt, earn out obligations to be settled in cash, and also the number of shares. As we saw earlier, net debt amounted to approximately 16 billion by the end of March. If we include an estimated contribution from divested assets, net debt would have been 11, approximately 11 billion. where 9 billion relates to the ring fund structure of Asmodee. Earnout obligations to be settled in cash amount to 5.4 billion at the end of March. Considering accelerated and collapsed earnouts following divestments and agreements, this amounts to 4.1 billion on the pro forma basis. The estimated number of shares to be issued to settle earn-out obligations was 67 million by the end of March. Considering the accelerated and collapsed earn-outs following divestments and agreements, this amounts to 26 million on a performer basis. By the end of March, we had 1,339 million shares outstanding. And if you add the 26 million shares, the number of shares after expected dilution on the performer basis is 1,365 million shares. That being said, let us take a closer look at the restructuring program and the summary thereof.