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 1.5% in the quarter and in total we reached 192 million SEK, which is a decrease year over year by 1.6% in SEK or 1.1% organically due to lower sales of other categories. Sales were positively affected by channel filling of our newly launched North XL 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 4.5% due to lower power supply and water cooler sales. The difference between sales in and sales out is explained by channel stock dynamics and our channel inventory by end of quarter are in line with our targets. EBITDA in Q1 was 36 million SEK with an EBITDA margin of 18.9% compared to 42 million SEK and 21.3% 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 42.8% compared to 40.4% in Q1 last year, as our COG saving initiatives continue to give positive effect 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 SEK compared to a net debt of 51 million SEK in Q1 last year. Another major highlight for us at Fractal 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 quarter-on-quarter growth. Also now in Q1, we see positive signs with 1.5% 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 1.6% year over year. We also measure our sales in US dollar as we sell exclusively in dollars regardless of the end markets. and net sales amounted to $19 million, 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 continued 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 balanced level going into 2024. In general, we had healthy 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 1.5% 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 four percent year over year of which all was related to cases. America's share of total sales was 38 percent 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 three 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 three percentage points. In the Q1 numbers, we did not see any effect of the increased freight costs related to the Red Sea conflict. We assume 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 cost 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 normalized level at the end of April. The third is currency effect, which affected the product margin negative by approximately three percentage points. In the first quarter, EBITDA 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 targets. Even though the product result was strong, OPEX 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 account payables, which gave a total net of minus 13 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 debt 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 a favorable 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 effects 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 reports.

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 cost and shipping times. Our product margin reached record levels at 42.8%, up 2.4 percentage points year over year, while EBTA 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.

If you wish to ask a question, please dial £5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial £6 on 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 head counts, and it says, good day, you increased head counts 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 chains. 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 presentation. yeah yeah sure and the fact that the the improvement or the um the hiring plan that we have in place is there to support our mid and long-term growth initiatives which do include our 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's 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 make sure that we have the information at 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 uh fractal wants to steer our portfolio going forward and and i think it will be very clear when we move into new product categories and how we present that um in end of june or sorry in june in the end of the quarter uh when we when we're having our launch day so um 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 and well, good question.

I mean, our impact or our business and operations, of course, have an interest in the Chinese market, both from a sourcing and production and sales point of view.

And we need to make sure that we have the right representation and set up in the market.

Could you expand on the negative currency effect on the 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 a unfortunately a negative effect of 2.9 percentage points so it's a 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 striving 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 we believe that first of all it should say that we are putting that in comparison to an extreme really 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 2-2 traditionally isn't that strong or is more among the weaker quarters of the year. So we believe this will have 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 up 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 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?

It's 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 because it's 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 and actually sales out then.

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 one-on-one. And again, I want to reiterate that we have the Capital Market Day 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.