Fractal Gaming Group AB (publ)

Hi everyone and welcome to today's presentation of the Q2 report for Fractal Gaming Group. We have now closed the first half of 2024 with a quarter that had challenging headwinds for the whole market, while at the same time delivered confidence and optimism that Fractal is on the right track. Today we'll take you through our Q2 numbers, the latest development within our industry and how we are embarking on a new journey. We're of course happy to answer any questions you have either in the end of the call or if you reach out to us individually. We will start with some of the general comments from Q2. As said, it has been a quarter where we have met short-term headwinds, while at the same time gaining strong confidence and optimism for the future. As per our expectations, we were seeing that seasonality is starting to normalize after the last years of disrupted sales patterns. Q2 is usually the weakest quarter in our industry, but this year, sales have been further dampened by reduced consumer demand, as well as increased freight costs and shipping times, as the Red Sea situation has continued to impact sea freight between Asia and Europe. At the same time, we had very high comparable numbers in the quarter, following our extreme 157% growth in the same period last year. then driven by inventory build-up following reduced trade costs and our successful North launch. Q2 2023 were our strongest quarter ever. As a consequence, our total revenue decreased 41% in the quarter. This is slightly more than expected, but explained by the short-term headwinds the market has been experiencing. Looking at our sales-to-end consumers, we see a more modest decline of 12% in the As lower consumer demand following high inflation and high interest rates, as well as postponed releases of important gaming PC components, have had a dampening effect on the market. But despite this decline, we are strengthening our position and we are gaining share in key markets. EBDA in Q2 was 7 million SEK and with an EBDA margin of 4.8% compared to 48 million SEK and 19.5% in the same quarter last year. The result is due to the decrease in net sales in combination with increased costs in the quarter, primarily related to our extensive launch program. We continue to invest for the future while at the same time working to streamline the operations. Our product margin continued to improve year on year, reaching 41.4% compared to 40.2% in Q2 last year. And we have a strong net cash position at 21 million SEK compared to a net debt of 51 million SEK in Q2 last year. Despite the current headwinds having a negative impact on financials for the quarter, we are at the same time filled with optimism after the launch of our long-awaited new categories in June. We then revealed our biggest launch program ever, marking the shift in Fractal's brand and market position. We presented two new categories, shares and headsets, as well as two new cases, all developed based on our Scandinavian design principles and quality focus. The reception from and after our launch event has been overwhelming and gives us strong confidence in the future. Fractal's long-awaited launch event at Computex 2024 in Taipei was the largest and most successful launch event Fractal's done to date, showcasing our strategic direction to expand into new product categories and our dedication to enhance the gaming experience worldwide. We introduced an extensive launch program that will continue during the second half of the year with four new products, the Mood and Era 2 K-series, the refined share and the scape gaming headset. Each design based on our signature Scandinavian design principles and commitment to quality. With this, we are entering two critical new product categories that will open up new opportunities and broaden our market potential. We saw the event getting overwhelming positive feedback from key industry players, including resellers, tech and gaming media, experts and professional streamers. all underscoring the success of our strategy to blend Scandinavian design with high-demand gaming performance. And besides our traditional media, we also secured major media coverage from outlets like The Verge and Forbes. This significantly increased Fractal's brand visibility after the event, with our products receiving top honors as best of competence, driving strong consumer interest and engagement. Now, moving over to the market development in general, where we see some mixed signals. On one hand, it's supporting the perception we have of a short-term slowdown in our market, while at the same time showing positive signs for the future. The overall PC market continues to show signs of recovery, with a 3% growth in Q2. This is the second quarter of growth after eight previous quarters of decline, and it's primarily driven by the upcoming Windows 11 update, as well as the introduction of AI-capable computers. This market includes pre-built gaming PCs and gaming laptops, which is now, with our new categories, an addressable customer group for Fractal. The DIY gaming PC market is however seeing a slightly weaker development, as awaited upgrade cycles have been delayed due to later launches of important PC gaming components. For example, NVIDIA's RTX 50 series is now expected to early 2025. temporarily dampening the interest in gaming PC upgrades. We do, however, believe that it's likely to result in a strong demand once these components are available. It is also worth noting that the PC gaming platform revenue grew almost 10% last year, supported by strong games releases, while we are not seeing as many strong titles released and therefore not as strong growth in 2024. The long-term growth outlook for the PC games industry does, however, remain positive, and is supported by larger game releases in the beginning of next year and onwards. In conclusion, the pre-built PC market, PC gaming as a platform, and encouraging trends in the PC games industry, along with pent-up demand in the DIY sector, collectively indicate promising signs of recovery and growth in the coming years. So now, moving over to The financials, Karin, please move ahead.

Yes, thank you, Jonas. So the graph at the top illustrates the quarterly development in net sales. In the second quarter, net sales amounted to 144 million SEK, reflecting a 41% year-over-year decrease. We also measure our sales in US dollars since we sell exclusively in dollars. regardless of the end markets. Net sales were $13 million, representing an organic decrease of 42%. We had strong comparative numbers last year with a remarkable 157% organic growth in Q2. The successful launch of our North product and increased channel stock significantly contributed to this growth. In Q2, the ongoing Red Sea conflict continued to affect our sales by causing longer delivery times and significantly increasing freight costs. This led to resellers becoming more restrictive with their purchases as they are responsible for covering the shipping expenses. Fractal's upgrade cycle is typically a three to five year period, but it's very dependent on consumer sentiment and their purchasing power, but also the timing of new graphics cards. We experienced weaker consumer sentiment in the second quarter, which was a market-wide issue affecting not only Fractal, but also our competitors. Due to the market related issues, we now anticipate the upgrade cycle to occur with full effect in 2025. Additionally, our business is seasonal, typically seeing higher sales during the second half of the year, with the second quarter generally being the lowest. In the graph at the bottom, you can see our quarterly development in sales out to end customers. reported by distributors and resellers and measured in dollars. In Q2, sales out amounted to $15 million, reflecting a 12% year over year decline. It is important to note that while sales out declined by 12%, net sales saw a much sharper decrease of 42% compared to last year. This significant difference is mainly due to channel filling during Q2 the previous year. For the first six months, sales outs were $2 million less than net sales. But it's important to note that the sales out numbers only include key customers, which means it does not provide 100% coverage. Moving on to the next slide and segment development, Sales of cases accounted for 89% of total sales. This is approximately three percentage points lower year over year. In Q2 last year, we had very high sales of our newly launched Case North, which drove up the percentage of case sales. In Q2 this year, we had the sales introduction of a new product category, which is categorized under other products. However, we do not yet see any material effect from the sales of new categories in Q2, but sales are expected to increase in the latter part of 2024 and give full effect in 2025. Total net sales of cases in Q2 amounted to 128 million, which is a decrease of 99 million year over year. And this is mainly related to EMEA. The decrease compared to previous year was primarily driven by a significant increase channel inventory at our customers. The strongest region in the quarter was EMEA with net sales of 76 million, a decrease of circa 50%. However, sales of other products was in line with last year. EMEA's share of total sales was 53%, which was nine percentage points lower compared to last year. America's net sales amounted to 46 million, which was a decrease of approximately 21% year over year, of which the main part was related to cases. America's share of total sales was 33%, which was eight percentage points higher versus last year. Net sales in APAC were 16 million, and their share of total sales was 14%, which was in line with last year. Moving on to the next slide and product margin developments. In the second quarter, the product results amounted to 60 million compared to 99 million last year, and the product margin was 41.4%, which was an increase of 1.2 percentage points year over year. The main driver for the strong and improved product margin had to do with product mix, which affected the product margin positive by approximately two percentage points. Lower raw material prices and other COGS saving initiatives have given lower purchase prices on many of our high runners, and we will of course continue to work on COGS reduction going forward as a part of our strategy. Your shipping costs negatively affected the product margin by approximately one percentage point. The main reason for increased freight cost had to do with increased freight prices related to the Red Sea conflict, but also to America's having a higher share of sales compared to last year. It is only the freight cost from China to our regional inventory in the US that affects our numbers. Other shipping costs are managed by our distributors and resellers. So let's have a look at the next slide. During the second quarter, EBTA reached 7 million with a margin of 5%, reflecting a decline compared to last year, primarily due to lower sales. Although many of our costs are variable, we saw an increase in expenses during the second quarter, primarily driven by our extensive product launch program. These costs mainly include marketing activities, participation in the Computex exhibition and certification for new product categories. As part of our long-term strategy and growth initiatives, we have been strengthening our teams. primarily within product development, which has led to a year-over-year increase in personnel costs. We remain committed to future investments while at the same time streamlining our operations to ensure greater efficiency and improve overall effectiveness. Operating cash flow in the second quarter was 9 million with a cash conversion of 128%, which was an increase versus the first quarter, but a decrease year over year. The change in networking capital was positively affected by decreased inventory and accounts payable and negatively affected by decreased accounts payable. Flow from investing activities amounted to 5 million and was related to the development of new products. We had net cash of 22 million compared to net debt of 13 million last year. Overdraft facility has a total limit of 120 million, and at the end of the second quarter, 1 million had been utilized. With a low utilization rate of the overdraft facility, Fractal demonstrates strong financial stability and flexibility. Cash conversion cycle amounted to 38 days, which was an improvement versus last year by 10 days. mainly related to improved days of inventory. Onto the next slide and the income statements. And as previously presented, net sales in the second quarter amounted to 144 million, a decrease of 41% year over year, mainly related to high comparative numbers, the Red Sea conflict, postponed upgrade cycle, and a more normal seasonality. Capitalized development increased by 0.8 million related to the increased number of hours spent on development. Total revenue amounted to 147 million. Resale amounted to 85 million and were in percentage of sales positively affected by favorable product mix with higher margins on cases. However, freight cost increased due to increased freight prices and higher share of sales to America. Other external expenses amounted to 13 million, mainly affected by costs associated to our successful extensive product launch program. Personnel expenses amounted to 26 million, an increase of 5 million year over year, and the increase was mainly due to new hirings in 2024 and full year effective hirings from last year. This is in line with our hiring plan to be able to meet our mid to long-term growth targets. Finance net was lower due to negative effects, however, lower interest costs due to a net cash position. With that, we have walked through the financials and I hand over to Jonas again.

Thank you, Karin. So to summarize the quarterly report, we faced very strong comparable numbers and short-term headwinds in the quarter, leading to a decrease in revenue of 41%. Consumer demand is dampened, and the Red Sea uncertainties continue to impact both sales in and sales out due to increased freight costs and shipping times. Our product margin continued to improve year over year, up 1.2 percentage points compared to the same period last year. EBITDA margin decreased following lower sales in combination with significant investments in our extensive launch program. In the end of the quarter, we revealed Fractal's biggest and most successful launch ever, introducing two new cases as well as product families in two new product categories, shares and headsets. The launch marks Fractal's development into gaming station brand with multiple categories, opening up new opportunities and broadening our market position. The response from the launch has been overwhelming. Our strong financial position continues to provide us the opportunity to support these growth initiatives. And we continue our planning for a capital market day later this year to showcase the full portfolio to the market. We see that the awaited upgrade cycle has been pushed forward slightly as launch of important PC gaming components is now expected in early 2025. This is making 2024 an intermediate year with stronger development next year as we believe there is a significant pent-up demand among gamers to upgrade their equipment. As a result, we expect a continued software development in the third quarter followed by a Q4 where our product launches in new and existing categories together with continued marketing and sales initiatives will support us to show growth. And with that we have walked you through the quarterly report and we open up for questions. Thank you.