Fractal Gaming Group AB (publ)

And welcome to today's presentation of the Q1 report for Fractal Gaming Group. We have now closed the first quarter of 2024, and with that, my first three months as CEO of the company. My overall task is to lead our global team in taking Fractal to the next level. And we are just in the beginning of our growth journey, and after these three months, I'm even more excited for what lies ahead. Today, we'll take you through our Q1 numbers and the latest developments within Fractal and our industry. We're of course happy to answer any questions that you might have, either in the end of the call or if you reach out to us individually. We will start with some highlights from Q1. As per our expectations in the beginning of the year, sales in Q1 were in line with the same quarter last year, despite facing very high comparative numbers, following a 66% growth in Q1 2023. Our case sales grew by .5% in the quarter, and in total, we reached 192 million SEEK, which is a decrease year over year by .6% in SEEK or .1% organically, due to lower sales of other categories. Sales were positively affected by channel filling of our newly launched North Excel case, but also held back by slight restraint to build up stock from partners in some regions, following higher freight prices due to the Red Sea conflict in the beginning of the year. The Red Sea situation has also caused longer shipping times from China, which delayed our inventory replenishment and hence lowered our availability of high runners in especially EMEA markets during the beginning of the quarter. Despite that, our sales out of cases were on par with the same period last year. In total, sales out decreased .5% due to lower power supply and water cooler sales. The difference between sales in and sales out is explained by channel growth, channel stock dynamics, and our channel inventory by end of quarter are in line with our targets. EBDA in Q1 was 36 million SEEK with an EBDA margin of .9% compared to 42 million SEEK and .3% in the same quarter last year. This is close to our financial targets and primarily driven by preparation for our growth initiatives, including our upcoming launch schedule and expansion into new product categories that will be released during the International Technology Trade Show Computex in Taipei in June. Our product margin continued to improve and we are now reaching record levels at .8% compared to .4% in Q1 last year, as our COG saving initiatives continue to give positive effects at the same time as shipping rates for products sold in Q1 were still on a low level. We have a strong net cash position at 21 million SEEK compared to a net debt of 51 million SEEK in Q1 last year. Another major highlight for us at FRAGDOL in Q1 was the early March launch of the North XL, a larger version of our award-winning North PC gaming case that was released in late 2022. North XL is a result of us listening to the gaming community and their request for a bigger North case with enhanced component support while still blending into their living space and home interior. The case has already received great response from the market with almost 40 international awards, once again proving our team's ability to push the development of gaming hardware design and functionality. Now, moving over to the market development in general, where we also continue to see positive signs. In Q4, we could see that the global PC market turned a two-year negative trend and delivered -on-quarter growth. Also now in Q1, we see positive signs with .5% growth compared to the same quarter last year. The refresh cycle is estimated to intensify during the year, driving growth in the industry for the full year of 2024. Growth is also driven by the AI development, as well as upcoming component releases in the second half of the year. The long-awaited RTX 50 graphics card from NVIDIA, as well as Intel's Battlemage GPU are among the expected, rumored to be launched during the latter part of the year. New generations of graphic cards with significant performance improvements are important for case sales, and we believe that component upgrades will contribute to growth. To summarize, the quarter showed positive signs for the industry with continued PC delivery growth that will likely increase further during the year, driven by strong component releases as well as new game releases, whereas Helldivers 2 is a good example when it's taking the market with storm when launched in February this year. Now, moving over to the financials. So Karin, please go ahead.

Thank you, Jonas. The graph at the top shows the development in net sales. The first quarter had a net sales of 192 million SEK, a decrease of .6% -over-year. We also measure our sales in US dollar, as we sell exclusively in dollars regardless of the end market, and net sales amounted to 19 million dollars, which was an organic decrease of 1.1%. Net sales in the first quarter were still strong, and North, Pop and Terra were again among the best-selling cases. We continue to have a very strong product portfolio with many award-winning products, and during March we successfully launched North XL, which Jonas just talked about. We can see that the Red Sea conflict has impacted our net sales to some extent, and our partners have been more restrictive with purchases due to increased freight costs. During the fourth quarter, 2023, we worked to ensure that inventory levels at our partners were at balance level going into 2024. In general, we had healthiest channel inventory at the end of the first quarter. However, the Red Sea conflict delayed stock of some high runners, which impacted our sales out negative in some regions. In the graph at the bottom, you can see our quarterly development in sales out measured in dollars. Apart from external factors with delayed deliveries, sales out of other products such as water cooling and power supplies decreased compared to last year. The difference between net sales and sales out in the first quarter can mainly be explained by stock dynamics with channel filling of North XL in late Q1, where sales out will be visible in the coming quarters. Moving on to the next slide and segment development. The case category had a continued strong position and amounted to 180 million SEK, which was an increase of approximately .5% year over year. A strong product portfolio with several multi-award winning cases such as North Pop and Terra contributed to the increased sales. The other product category was down by 5 million SEK compared to last year, which had to do with a strategic initiative to sell out all the products from stock, primarily power supplies and water cooling to prepare for new product categories. Sales of cases were 93% of total net sales compared to 91% last year. The strongest region in the quarter was EMEA with net sales of 97 million SEK, a decrease of 0.6 million year over year. However, EMEA's sales of cases were strong and had a growth of approximately 1%. EMEA's share of total sales was 51%, one percentage point higher versus last year. America's net sales amounted to 74 million SEK, which was an increase of approximately 4% year over year, of which all was related to cases. America's share of total sales was 38%, which was one percentage point higher versus last year. Net sales in APAC were 21 million and like the other regions, we saw lower sales of other products compared to last year. Their share of total sales was 11%. In the first quarter, the product results amounted to 82 million SEK compared to 79 last year, and the product margin was 42.8%, which was an increase of 2.4 percentage points year over year. The main drivers for the strong and improved product margin had to do with mainly three things. The first one is product mix, which affected the product margin positive by approximately 3 percentage points. Lower raw material prices and other COGS saving initiatives during 2023 have given lower purchase prices on many of our high runners. We will of course continue to work on COGS reduction going forward as a part of our strategy. The second is lower shipping costs, which positively affected the product margin by approximately 3 percentage points. In the Q1 numbers, we did not see any effect of the increased freight costs related to the Red Sea conflict. We assumed this to be visible from the second quarter and believe that the increased freight cost is temporary and will not have any material effect on the full year. It is only the freight costs from China to a regional inventory in the US that affects our profit and loss, and we can see that the freight price had its peak in February but has then decreased to a more normalised level at the end of April. The third is currency effects, which affected the product margin negative

by approximately 3 percentage points. In the first quarter, EBTA

amounted to 36 million SEK and the margin was 18.9, which was a decrease versus last year and 1.1 percentage point lower than our financial target. Even though the product result was strong, OPEC had an increase of 3.8 million year over year. This was mainly related to increased marketing and warehouse costs, but also other operating expenses such as one-off costs related to our newly established entity in China and travel costs. In line with our long-term strategy and growth initiatives, we have continued to strengthen our teams and as a result, our personnel costs have increased year over year. Fractal have since inception been profitable and we will continue to keep cost control and new hirings will only take place if we see the sales growth we expect. Operating cash flow in Q1 was 18 million SEK with a cash conversion of 50%, which was an increase versus Q4 but a decrease year over year. The change in networking capital was positively affected by lower inventory versus Q4. However, increased accounts receivables was higher due to higher sales and we also saw a decrease of accounts payables which gave a total net of minus 30 million in networking capital. Cash flow from investing activities amounted to 5 million SEK and was related to the development of new products. We had net cash of 21 million compared to net depth of 56 million last year. We are very satisfied with the development of the cash flow situation during the last year. This is a receipt of hard efforts and the strong cash flow will enable us to invest in our continued growth. The bank overdraft facility has a limit of 120 million SEK and when closing Q1, 10 million SEK was used compared to 17 million last year. Cash conversion cycle amounted to 42 days, which is an improvement versus last year, mainly related to improved days

of inventory. So moving on to the next slide and the income

statement. As previously presented, net sales in the first quarter amounted to 192 million SEK, a decrease of 1.6%. However, sales in the case category increased by 1.5%. Capitalized development increased by 1.5 million related to increased amount of hours spent on development and total revenue amounted to 196 million. Goods for resale amounted to 110 million and were in percentage of sales positively affected by favourable product mix with higher margins on cases and lower shipping costs as I previously described. Other external expenses amounted to 26 million, approximately 4 million higher than last year, mainly due to increased marketing and warehouse costs but also other operating expenses. Personnel expenses amounted to 23 million SEK, an increase of 5 million year over year and the increase was mainly due to new hirings in 2024 but also full year effect of hirings from last year. This is in line with our hiring plan to be able to meet our mid to long term growth targets. Financial net were positive due to FX and due to a net cash position and therefore lower interest costs compared to the same period last year. Profit for the first quarter amounted to 27 million SEK which was in line with last year. With that we have walked through the

financials and I hand over to Jonas again.

So, to summarize

the quarterly report. Despite facing very high comparative numbers, we achieved sales in line with Q1 last year. Our case business were on par while other categories decreased slightly. The Red Sea uncertainties have impacted both sales in and sales out due to increased freight costs and shipping times. Our product margin reached record levels at 42.8%, up .4% year over year while EBDA margin decreased by the same percentage points to 18.9%. Preparations at Fractal are now full underway for our upcoming growth initiatives including an extensive launch program with two new product categories that will be revealed at Computex in June. Our strong financial position continues to provide us the opportunities to support these growth initiatives and we will hold a capital market day in September 25th where these new products will be displayed together with our existing portfolio. We welcome you to join us in Stockholm on this day. For the full year of 2024, we see good opportunities for continued growth with an expected weaker second quarter facing very high comparable numbers and a stronger second half of the year. Finally, it is our assessment that there is still a pent-up demand among gamers to upgrade their equipment with a stronger upgrade cycle in the coming two years. And with that, we are now finished with the presentation of the Q1 report and we open up for questions.

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your telephone keypad.

There

are no more phone questions at this time. So I hand the conference back to the speakers for written questions and any closing comments.

Okay, then I will hand over to you Karin to

lead the questions.

Yes, absolutely. So the first question has to do with headcounts and it says good day. You increased headcounts with 18, quarter over quarter with 18 people. Can you comment on whether or not this recruitment is related to the launch of your new product categories? And of course, some of it is. Many of those people we are hiring are hired to our product development departments. We have also hired, of course, to other departments such as marketing and supply chain. But some of these people, yes, they are hired to work with, for example, our new product categories. Next question. It seems that you are doing again a significant recruitment push. Could you elaborate on these recruitments?

I think you put it

fairly well, Karin, in your introduction. Yeah,

yeah, sure.

And the fact that the improvement or the hiring plan that we have in place is there to support our mid and long term growth initiatives, which do include our product launches, of course, now and in the future.

Yes, super. Next question. Should investors interpret your comprehensive launch program as to include launches of both new product categories as well as new chassis families and updates in existing chassis families?

That's a broad inclusion, so to say. But yeah, the launch program is both within existing and new product categories. Correct.

Next question. Do you have any idea of when we could expect a decision of whether or not Fractal will still be excluded from the tariffs on cases for sales in the US? Do you have any plans to move production to other countries if Fractal would not be excluded from the tariffs?

There is no way for us to say when. We would know if we would have an exemption or not on the tariff. It could be before or after the exemption expires. That's at least what our experience tells us. We are following this closely in different ways to see, to make sure that we have the information in the earliest point possible. And of course, if there would be situations where tariffs would not be excluded, there are plans for how we would mitigate that

in different ways.

Could you explain the logic

behind selling out inventory of other products to make room for new product categories?

Primarily due to the focus of how Fractal wants to steer our portfolio going forward. And I think it would be very clear when we move into new product categories and how we present that in June, in the end of the quarter when we're having our launch day. So it's also a process that has been ongoing for a while. So we had quite heavy sales out of older products a year ago, which made the comps quite high on other categories in Q1 2023. Whilst we now have a controlled portfolio where we want to be in these categories and making sure that we have the right setup for the future.

What

is the rationale behind a new entity in China?

A new entity? Well, it's a good

question. I mean, our impact or our business and operations, of course, have an interest in the Chinese market, both from a sourcing, production and sales point of view. And we need to make sure that we have the right representation

and setup in the market.

Could you expand on the negative currency effect on product margin of 2.9 percentage points? Which currency is driving this effect? Good question. When it comes to product margin and the FX effect, it is US dollars only that is driving this. And the effect comes from buying products to a different rate from what we are selling it from. So this month or this quarter, we had unfortunately a negative effect of 2.9 percentage points. So it's US dollar effect. Product margin is at an all time high. Should we expect some kind of normalization to a lower level going forward or is the improvement

sustainable? Well, we have a

product margin strategy, of course, and we are thriving for increasing our product margin, which we have compared to last year. Through our COGS initiatives that have been successful during 2023. And as I said before, we will continue to work on those initiatives going forward as well. So we are fighting for a product margin and we believe that it will be

in the area where we are right now. You write that you estimate a tougher

Q2. How do you expect that to manifest itself in the numbers, primarily in net sales or in sales to the end customer?

We believe that, first of all, you should say that we are putting that in comparison to an extremely strong Q1 back in 2023 due to multiple effects in the same quarter. Whilst we 2024 and onwards believe that the market will go back to more normal seasonality pattern where Q2 traditionally isn't that strong or is more among the weaker quarters of the year. So we believe this effect will have an effect both on sales in and sales out as that's how the market traditionally moves.

Shipping delays resulted in shortage of high runners in the quarter. Are the situation back to normal?

Yes,

primarily. There are still always a catch up to do. But in general, by end of Q1, we were, as we said, on normal levels. But we had especially an effect of that, the shortage in the beginning of the quarter, especially during the month of January, where we saw the very long shipping times from China. That was primarily when ships had to move out towards the Red Sea and then turn around and go down again, which added even longer shipping time for a shorter period. So we had inbound delays during the beginning of the quarter, but that has normalized and everyone's more now used to the new normal.

Yes. Hi, you are talking about launching two new product categories. Can you give more details on this? What are the categories more specific?

We are still not disclosing which exact product categories it is that we will go into the market with. What we're saying now is that it is two product categories that is coming and then that the launch timing will be at the trade show Computex in Taipei in June.

And the last question we might already touch on that, but what would be the sales out if the unrest in the Red Sea have not taken place?

Very difficult to quantify exactly what that is, because of course, seeing, as we said, a restraint in how to fill up stock in the market and due to higher freight costs, it's difficult to say, which is not that an order has not come in or something like that. So we could quantify it in this way, but we can see that it has impacted the momentum in both sales in and actually sales out.

OK, that was the last question.

Thank

you. That was great questions and thank you all for listening in. We are always open if there would be someone wanting to have a -on-one. And again, I want to reiterate that we have the capital market date planned for September 25th in Stockholm. And you are all welcome to attend. And if so, please just reach out to us. Otherwise, I hope to meet you again in about three months from now.

Thank you.