Evolution AB (publ)

Good morning and welcome to the Evolution Q4 2022 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Martin Collison, CEO. Please go ahead.

Good morning. Welcome, everyone, to the presentation of Evolution's year-end report of 2022. My name is Martin Collison, and I'm the CEO of Evolution. With me, I have our CFO, Jacob Kaplan. I will start with some comments on our performance in the quarter, whereafter I will hand over to Jacob for a closer look at our financials. After that, I will round off our presentation with an outlook for the rest of the year, and at the end, we will open up for your questions. Next slide, please. I'm very satisfied to be able to present yet another strong quarter, which concludes a successful 2022 for Evolution. As always, operationally, it has been a very hectic year for us, and in the fourth quarter, we continued at the high pace from the previous quarters. We continue to see strong worldwide demand for our product in live casino, both existing as well as new games launched during the year, continue to attract new players, but also new player groups. We can also now notice how different parts of the world have issued slightly different preference when they begin their journey within Ablution. At the beginning of the year, I spoke of 2022 as the year of the product. I think 2022 has lived up to that belief. In the quarter, we have further expanded our North American footprint with the launch of a third studio in New Jersey to support the growing demand there, and the build-out of the new studio will continue in 2023. We're also gradually starting to expand our games portfolio in North America after the launch of Crafts in Pennsylvania last quarter, and we finally also launched a fantastic new game in New Jersey in Q4. In addition, the new studio was launched with our newest game called Football Studios. Furthermore, we will shortly also launch Mega Ball with the British Columbian Lottery Corporation with the other Canadian lotteries to follow. This will be the first real lottery game launched with a lottery in Canada. In January, we also went live with the Canadian province in Saskatchewan. Things are also moving within slots. Red Tiger, the third game supplier, to introduce Time Jackpots in North America. Time Jackpots is a mechanic for slots games that allows operators to set up a progressive jackpot that are guaranteed to hit before a certain time. In the fourth quarter, Red Tiger launched these unique time jackpots against in Connecticut, Ontario, and Quebec. And a week ago, they were launched in Michigan. They have been an instant success. At the end of the quarter, we had over 1,300 tables live, resulting from an increase of over 300 tables during the year. The high demand for our products means that we must expand in existing studios and be new ones to keep up the pace. We will continue to increase our studio capacity also during 2023. During the second quarter last year, we launched a new fantastic lobby, and since then we have rolled it out. And now in January, the transition to the new smart lobby was completed for all customers. The lobby's recommendation engine, powered by artificial intelligence, assures that the players will always get the content best suited to them. The recommendation engine gets smarter every time the player enters the lobby, and our goal with the new lobby is simple, to help players quickly find a game that they will enjoy. The new lobby is smart, powerful, and personalized, and it does definitely enhance the playing experience for the end users. During the year, we have faced difficult macroeconomic environments, with war in Europe, increasing cost levels, and pressure on supply chains. We tried to put pressure on our margins, but even throughout the year, we have continued to invest in growth. This year, as always, our main priority has been to continue to serve an ever-better experience with all fantastic new games, as well as enhanced existing games. With that backdrop, we delivered an EBD in margin within the guided range for 2022, despite the cost increases we have faced this year. In 2023, cost efficiency will increase remain as important as in 2022, and our efforts to increase efficiency and throughput will continue. The round of 2022 with a strong financial result comes into the new year with a fantastic pipeline of new gains and a strong momentum which makes us well-placed to further strengthen our market share and continue to widen the gap to our competitors. Now, let's move to the coming slides and see the effect on numbers on products on all our efforts. Operator, next slide, please. Our financial results for both the quarter as well as for the full year 2022 are strong. Revenues increased by 36%, both in the quarter as well as for the full year. EBITDA increased by 35% to 279.5 million euro in Q4, corresponding to a margin of 68.6%. For the full year, the EBITDA growth amounted to 37% and reached a margin of 69.2%, in line with our guidance of 69.71%. for the year, and an increase compared to the full year 2021. Two. Hard with the years now, when we are in the beginning of 2023. Land Casino delivered a very satisfactory growth of over 41% in the quarter, and for the full year, R&D revenue amounted to 72.5 million euro, a growth of 15.3% in reported numbers. The growth in the quarter compared to the combined revenue evolution and no-limit city for Q4 2021, the performer growth of R&D amounted to 5.1%. As earlier communicated, we have a target of double-digit organic growth in R&D. Moving forward into 2023, the path to our goal within R&D will not be linear, but we look forward to 2023. We will double the releases of our method brand, add new bonusing tools for slots and increase distribution for slots through OSS. Our EBITDA margin guidance for 2023 is 68 to 71, and we have widened the range with 1% as a result of the uncertainty of the macroeconomic situation in the world. It is, as always, important to state that the investment will continue to be high, and our main priority is to continue to grow, and as always in the trade office in growth and margin, we will always opt for growth. Important also to note that the Board proposed a dividend of €2 per share for 2022. This is in line with our policy and slightly above 50% of net profits. All in all, fantastic numbers, and I'm very pleased with our financial performance in the fourth quarter, and we are definitely well-placed to deliver a strong 2023. Operators, next slide, please. Expanding our student capacity means we need high recruitment pace, and in the quarter, we increased the number of evolutionaires with 1,100. Increase in staff 2022 amounted to 3,600, adding to over 17,000 evolutionists at the end of the period. Evolution is a truly global company. Our products can be played in most corners of the world, and our employees are a good mirror of that global reach. And at the end of the period, we had over 100 nationalities employed all over Evolution. We will continue to increase headcount during 2023 as we expand in and we will continue to consider diversity a strategic advantage and a key asset. It is a condition for evolution's operational excellence. I'm very proud of all our employees and the work ethos they show in their daily work. They make up a fantastic company. Next slide, please. Last quarter, we replaced bet spots as a measure of player activity on our network. and replaced it with game rounds. The bad spots slide was only related to live games, and by that did not cover the whole network and simply had played out its role as a performance indicator. A game rounds index instead shows the development of the whole evolution network and includes all games. A game round is what it sounds like, one round of a game. One round of roulette, one hand of baka, or one spin of a slot. All count as one game round. There are still differences between games, and for example, since the hand of Blackjack takes longer time than a spin of a slot, each game round of Blackjack typically carries a higher bet, so all game rounds are not equal in value. In the chart, the index values for game rounds from Live and RNG and other are weighted according to revenue contribution. This gives us a joint index that includes all games based on equal revenue contribution. Game round index will over time give a better view of the activity in our network. This index will not correlate exactly with the revenue each quarter. As you can see in the chart, activity has remained high in the quarter, over 70% year-on-year growth for the second quarter in a row. One reason for the high growth in game rounds compared to the revenue is that we are adding many game rounds from new markets that typically have a smaller bet size, so activity increases more than revenue. Still, increased activity in the network is a very positive sign and will contribute to growth in the future. Right there. Next slide, please. This slide shows the breakdown on revenue by geographic region. We see very good growth year-on-year in all geographical markets, and it's evident that demand is truly global. Year-on-year growth in North America amounted to 66%, with the highest growth rate of all regions for the fourth quarter. For the full year, the growth amounted to 65% compared to last year, In Asia, we saw continued strong growth of 50% year-on-year and the growth of 67% per full year. It's a good potential in both these markets and expect a continued high growth rate going forward. Europe as a whole, including UK and Nordic, saw the good growth of 7% quarter-on-quarter. European markets in general have a slower growth than North American and Asian markets due to both regulatory changes as well as that they are more mature. It's worth noting that this table does not include pro forma figures of the growth year on year, so to some extent it can be attributed to acquisitions. Other, including Latin America, Africa, and the remaining part of the world, shows a very good growth of 61% year on year. In this market segment, it is Latin that is the main driver for growth. Share of revenues from regulated markets amount to 40% in Q4. Next slide, please. Products. Most important thing, products. In 2022, we grew the Evolution live offering significantly, further widening the gap between Evolution and our competitors. One year ago, I said 2022 would be the year of the product. I set a goal for ourselves to deliver 88 new games in 2022. It would mean a record number of releases from Evolution in one year. We did it. I'm very proud of all the people within Evolution Group that made it happen. In 2023, we'll launch over 100 new games. I think it's fair to say it will be yet another year of the product. Among the new games in 2022, Extreme Lightning Roulette was an out-of-the-gate success. Monopoly Big Baller is another mega hit, and I'm happy to report that the original Monopoly Live continued to see good increase in player numbers even after the launch of Big Baller. A third exceptional game to point out is this live slot crazy coin flip, a truly unique game that combines slots and live show entertainment, and the game found a very large audience. I'm excited to do more in 2023, combining the worlds of live and slots. In the fourth quarter, we learned two new and exciting football team games, Football Studio Dice and Football Studio Roulette. Another game in Q4 was the Free Bet Blackjack, a variation of our classical blackjack, But what makes the version difference are the exciting free bets. Also new in the quarter is the gripping experience with Dead or Alive Saloon, a card game set in a fantastic Wild West Saloon-style environment. Actually, the studio I showed you on the cover of the Q3 report presentation, if you remember. While we want to see more in RNG, we have released many very good games also in 2022. During the fourth quarter, one of my favorites is Dead Canary from No Limit City, Other releases in the quarter, as you can see in the slide here, are in the rabbit hole from Red Tiger and cupcakes from NetEnt, but there were more. We will have a very high focus on RNG vertical 2023, and we will do everything in our power to deliver the best and most innovative slots in the world this year. Now, let's say just a few words about the roadmap for 2023. Operator, let's move to the next slide. Yes. Product 2023, exciting 2023. Here on this picture is a sneak peek at one of our launches of ICE next week. It's one of our headline games in 2023 and the most technically complex game we have ever built. It's the largest and most spectacular game show we have ever made. It's a strikingly beautiful studio and a bonus and multiplier extravaganza. end users will see something they have never seen before. I won't get into details of the release on ICE, but I'm very, I would say even extremely, excited to bring this experience to players across the world. 2023, we have a great variety and innovation amongst existing releases, both live and RNG, from all seven of our brands. We will show some, but not all, of what we are having in store for players next week at ICE. Looking forward to see you all there. At Evolution, we always try to be a little bit better every day. So, of course, 2023 is going to be our strongest product year ever. End-user entertainment and satisfaction is what will be the future, not only 2023 or 2024 or 2029. It's the ultimate goal for all of us trying to make a difference every day. We need to stay on our toes, breaking boundaries, create what others dream of and think is impossible. We can never stop. We need to relentlessly continue to create evolution's future. That's what all of us evolutionists do every day, trying to create what others dream of, and that is called ambition, hunger, and energy. That is why all of the soon 18,000 employees of evolution should be proud. With that, I will pass on to Jacob, who will speak more about financial details. Operator, next slide, please.

Thank you, Martin, and good morning to all of you listening. We now have a couple of slides with comments on our financial development during the period, and I'm on slide number nine. Revenue amounts to 407.5 million euro in the quarter. That is made up of 334.9 million euro related to live casino and 72.5 million euro from our RNG games. Live casino has had a very strong performance throughout this year. or 2022, I should say, and shows strong development also in the fourth quarter. Year-on-year growth is 41% in the final quarter of the year and 42% for the full year. As Martin mentioned, we see year-on-year growth in all regions and have also been successful with several strong game releases this year, and we feel good about the roadmap for 2023, as Martin just pointed out. There are still large growth opportunities for us in many markets. All that said, I expect the growth in percentage terms to continue to come down as our revenue base gets larger. RNG revenue amounts to €72.5 million in the quarter. Growth rate for RNG, just looking at the reported figures, is 15% in the quarter, but that does include No Limit City that was acquired in the third quarter of this year, so not included in the comparison period. Growth compared to performance figures is about 5%. This is a slight improvement in growth from Q3, but still lower than the goal of double-digit growth we communicated at the beginning of 2022. We stated also then that the development will not be straight-lined towards that goal, and I see that comment as still valid looking into 2023. We remain committed to the goal, as Martin pointed out, and are continuously working to improve productivity in our R&D operations, but we will not set a firm deadline for when the goal of double-digit growth can be achieved at this time. EBITDA for the quarter amounts to €279.5 million, given an EBITDA margin of 68.6 in the quarter and 69.2 for the full year. We are in line, albeit at the low end, with our margin guidance of 69% to 71% set at the beginning of this year. For 2023, we expect to achieve a margin in the 68% to 71% range. I guess you can say that's a lot slower than the guidance for 2022, but given the uncertainty in the world, the pressure we see on cost right now, and the fact that we exit this year just over 68%, we think the larger interval does make sense. As we have said many times before, and I will repeat now, we do prioritize growth over margins, so this guidance is a way to share our expectation today, rather than that it's a hard goal in and of itself. Operator, let's move to the next slide, please. We are at the end of the calendar year, so I have added this slide to the presentation, a little bit to zoom out and also take a look at the multi-year performance of Evolution. As you see here, we closed this year, or 2022, with almost 1.5 billion euro in revenue and just over 1 billion euro in EBITDA. When you look at numbers all day, sometimes they can be more than just numbers, and for me it was very nice to see us break the 1 billion level for EBITDA. Of course, 999 million wouldn't have been a huge difference, but still a milestone, and I should say we all are happy for that. Looking at the multi-year development, we also see that we have been able to increase margin with the growing top line. We do increase margin also 2022 versus 2021, but not with the same jump as we saw during pandemic years in 2020 and 2021. During 2021, we also added the main part of the R&G business through acquisitions of NetEntred, Tiger, and Big Time Gaming, which, as you can see here, gave an extra boost both to revenue and EBITDA. So as we talked about on the previous slide and earlier in the presentation, we have more work to do to achieve the future growth we want in R&G, but it's a highly profitable business that we feel has a very good fit in the group. Looking at revenue, we increased top line by almost 400 million, or 36%, 2022. That revenue figure does include a mix of organic and required growth, but looking at live casino revenue isolated, which is all organic, we add over 300 million euro in both 20 and 21, respectively, with growth rates around 50%. So while we actually add even more revenue 2022, the math works that the growth rate starts coming down a bit, as I mentioned on the previous slide. That was a quick look at the full year development. Let's go to the next slide and we'll have a more detailed look at the most recent quarter. So moving to the next slide. This shows our P&L in a bit more detail. As usual, we'll walk through the table from the top. Live revenue just under €335 million for the three-month period October to December 2022 and €1,188,000,000 for the full year. This is organic growth of 41% and 42%, respectively, compared to the same period as last year. Orange year revenue amounts to €72.5 million in the three-month period and €268.4 million for the full year. And the total growth, including organic and acquired growth, is 15% and 17%, respectively, as mentioned earlier. The majority of that was, of course, acquired, as was covered also earlier. Total revenue sum is up to €407.5 million for the quarter and just over €1,456,000,000 for the full calendar year 2022, a 36% growth in the full year numbers versus reported figures. And pro forma, that works out to about 33% for the quarter and about the same for the full year. Moving down to expenses, personnel expenses amount to €81.5 million in the quarter an increase of €26 million compared to the same period last year. This includes increasing staff compared to last year in all our teams, commercial operations, engineering, business support, across the board. The appreciations amount to €29.5 million. That does include €11 million in amortization of intangibles related to the acquisitions of NetEnt, Big Time Gaming, and No Limit City. Other operating expenses include items such as consumable equipment, communication costs, consultants, and royalties. Totals 46.4 million euro, an increase of 22% compared to the same period last year. Summing up, total operating expenses, 158 million euro, increase of 36% compared to reported figures same period last year. That brings us to operating profit. It sums up to €250 million in the quarter and €908 million for the full year period. Increases of 35% and 39%, respectively. Financial items includes, as always, a charge for right-of-use assets, according to IFRS 16. Also on this line, we have currency-related effects from the revaluation of balances on bank accounts that we hold in non-euro currency, as well as effects on intra-group loans. So it's a little higher cost there than the previous quarter, but it's not related to interest rates. We carried no external debt, so that's not what it is. Tax is just under 17 million euro in the quarter. That's a tax rate of 7.1%. For the year-to-date period, it's 7%. It's almost 1% higher than the previous year, and our tax rate will continue to gradually increase in 2023 as we increase our global footprint. Regarding the upcoming project of global minimum tax of 15%, or Pillar 2, as it's referred to in tax speak, I guess, the current timetable is that it will come into effect from 2024. A lot of work still remains, and we will probably know more as the year progresses how and when it will affect us. But expect a higher tax level from 2024, as I know most of you already have in your models. All this sums up to profit for the three-month period of €223.5 million. That's equal to an earnings per share of €1.03 per share for the quarter. And that's an increase of 34% compared to fourth quarter of 2021. And finally, the rolling 12-month period, the full year earnings per share is €3.88 per share. Operator, let's go to the next slide, please. Before handing back to you, Martin, a look at cash flow and financial position. And we'll start to the left, where we see a development of capital expenditure. The gray part of the bars, that represents investment in tangible assets. That means our investment in studio projects. And in the fourth quarter, CapEx intangible assets is almost 18 million euro. We have had a high activity in studio projects in the quarter. The blue part of the bar is intangible investments in intangible assets, and that's related to new games and features to the platform. It's about 10 million euro in the quarter and in line with previous quarters this year, as you can see. For the full year, 2022, CAPEX amounts to 97 million euro. It's much higher than the 90 million euro we estimated at the beginning of the year, but fully in line with our plans from later in the year. For 2023, we will maintain a high pace in our investments, and I estimate CAPEX will total around 120 million euro for 2023. In the middle of the slide, we show operating cash flow in the quarter. It amounts to 221 million euro. Operating cash flow in relation to EBTA on a rolling 12-month basis is still on a very good level at around 75%. And finally, to the far right in the slide, a quick look at the balance sheet. We maintain a very strong financial position, €532 million in cash on balance at the end of December, which if the board's proposal to the AGM of dividend of €2 per share goes through, €426 out of that will be paid as a dividend in early April. That was the end of my prepared remarks. I'll hand back to Martin for some closing words and we'll take questions after that. Martin, over to you.