Fractal Gaming Group AB (publ)

hi everyone and welcome to today's presentation of the q3 report for fractal gaming group today we will be presenting the key highlights from our just released q3 quarterly report focusing both on the headwinds that we have been facing and the positive outlook that we see ahead for our company and industry we are 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 general comments from Q3 and the changes in the headwinds that we are facing and the long-term positive outlook that we believe can take us back to growth already by end of year. Our net sales for the quarter was 157 million SEK, representing a decrease of 17.5% in SEK, but 13.9% organically. This development is in line with our expectations, following the high comparative numbers that we are facing from Q3 2023. A quarter where we saw a very strong growth of 45% year on year. We are seeing a gradual improvement in the market compared to the first half of 2024. The restraint in retailer purchases that we observed earlier in the year have eased towards the end of the quarter as rates costs have started to come down and many partners are looking to increase their stock levels ahead of the crucial sales period in the fourth quarter. This is also positively affected by our successful product launch program that we activated during the summer. Sales out in the quarter declined 16.5%, primarily due to reduced consumer purchasing behavior following long-term high inflation in interest rates. We also understand that many end consumers are postponing purchases in anticipation of new graphic cards and other component releases that are expected in early 2025. Our sales out in the quarter benefited positively from our new product categories, which are less reliant on the component upgrade cycle. We believe this trend will continue to benefit us moving forward. Our EBTA for the quarter was 12 million SEK, down from 35 million last year, with an EBTA margin of 77.4% compared to 18.5 last year. The lower result is mainly due to the increase the decrease in net sales in combination with a lower product margin. The product margin decreased to 37.8% from 41.8% last year, primarily driven by increased general discount levels in the market. Additionally, our net cash position continued to be at good level with 30 million SEK at the end of the quarter. On another positive note, the reception of our new product categories continued to be very encouraging. Our new refined computer and gaming share launched with strong sales following very positive reviews from end consumers and media. Additionally, Era 2 was introduced during the quarter and received a strong reception from the market. We also see that the interest in Scape, our upcoming gaming headset, is increasing further as the success of Refined is proving that we are making impactful entries also into new categories. So in conclusion, while we are still facing some short-term challenges our long-term outlooks remain strong, following the gradual market improvements and the positive reception of new products. During the quarter, Fractal reached significant milestones through the introduction of the new products as part of our extensive launch program that was presented in Computex in June. We have proudly launched our first computer and gaming share, the Refine, as well as the next generation small form factor case, the Era 2. With the introduction of the refined gaming share, Fractal has made a significant entry into the gaming furniture market and the share has been celebrated for its ergonomic designs combined with Scandinavian aesthetics. The initial sales has exceeded our expectations and we are confident in the positive future contribution of our new product categories. Refine has received strong positive reviews both from gamers and media, getting praise for its adjustability, premium materials and seamless integration into home environments. It is proving that our combination of design and high performance is successful also for new categories. In September, we also launched the Era 2 small form factor case, which received glowing feedback for its enhanced cooling, innovative design, strong compatibility and premium materials. These new product launches continue to solidify Fractal's position as a leader in the gaming hardware market, meeting the needs of the modern gamers around the world. Now, let's look at the current trends and future outlook of the gaming market in general. 2024 is proving to be a transitional year for the gaming market. We are witnessing weaker demand and delays in computer launches. However, there is a positive aspect as strong consumer engagement and upcoming PC upgrade cycles suggest a promising rebound in 2025. So, despite the temporary stagnation in 2024, consumer behavior shows resilience and pent-up demand. This is also supported by the development of the global games market, where we are seeing a growth rate of about 6% during 2024. primarily driven by engaged gamers spending more time and money not just on playing games, but also on other gaming community activities. A remarkable 80% of consumers below 18 identify as gamers today, with increasing time spent in gaming environments. Furthermore, the importance of streaming is growing with more and more consumers buying a product based on recommendations by a streamer. This highlights our own ambassador network called Fractal Creator Program that daily promotes our products and brand. This is currently the fastest growing team in our industry on Twitch. Looking ahead to 2025, the gaming hardware market is set for growth. This will be driven by components like NVIDIA's RTX 50 series and advancements from AMD and Intel. The demand for high performance versatile gaming setups is further reinforced by the growth of more advanced game titles. also driven by AI. In conclusion, while 2024 presents some challenges, the future of the gaming industry looks bright. With strong consumer engagement and technological advancements on the horizon, we can expect both significant growth and innovation in the coming years. Fractal's growing product portfolio, which now includes gaming headsets and gaming shares, fits well into these market needs and offers opportunity for us to capture a broader audience. And with that, I'm giving the word to Karin that will take us through the financials for the quarter.

Thank you, Jonas. So the graph at the top illustrates the quarterly development in net sales. In the third quarter, net sales amounted to 157 million, reflecting a 17.5% year-over-year decrease. We also measure our sales in US dollars since we sell exclusively in dollars regardless of the end market. Net sales were $15 million, representing an organic decrease of 13.9%. Last year, we had strong comparative numbers with 45% organic growth in Q3, but we still see a slower market compared to last year. In Q3, freight prices remained high and resellers continued to be more restrictive with their purchases as they are responsible for covering the shipping expenses. However, compared to the first half of 2024, we see a gradual improvement in the market. Resellers are increasing their stock levels ahead of the holidays and the important sales period in the fourth quarter. The graph at the bottom shows our quarterly development in sales out reported by tracked partner and measured in dollars. In Q3, sales out amounted to $15 million, reflecting a 16.5% year-over-year decline. In the last quarter, we discussed Fractal's upgrade cycle, which typically spans three to five years, but is highly dependent on consumer sentiment, purchasing power, and the timing of new components such as graphics cards. We experienced weaker consumer sentiment in the third quarter as well, but there was a gradual improvement. This sentiment was a market-wide issue affecting not only Fractal, of course, but also our competitors. Due to these market-related issues, we anticipate the upgrade cycle to occur in 2025. Moving on to the next slide. and segment development. Sales of the cases accounted for 91% of total sales. This was approximately one percentage point higher year over year. Other products have decreased compared to the previous year due to lower sales and higher discounts on water cooling and power supplies. However, The sales of our new product category shares contributed positively to other sales and is expected to increase in the latter part of 2024 and have full effect in 2025. Total net sales of cases in Q3 amounted to 142 million, which is a decrease of 29 million year over year. The decrease year over year was primarily driven by increased channel inventory at our customers. The strongest region in the quarter was EMEA, with net sales of 80 million, a decrease of circa 15%. EMEA's share of total sales was 51%, which was two percentage points higher compared to last year. America's net sales amounted to 57 million, which was a decrease of approximately 17% year over year, of which the main part was related to cases. America's shares of total sales was 36%, which was in line with last year. Net sales in APAC were 20 million and their share of total sales was 13%, which was a decrease of 2 percentage points compared to last year. Moving on to the next slide and product margin developments. In the third quarter, the product results amounted to 59 million compared to 79 million last year, and the product margin was 37.8%, which was a decrease of four percentage points year over year. The main driver for the changes had to do with sales discounts. which affected the product margin negatively by approximately three percentage points. The damp demand in the market has led to more campaigns and discounts to drive sales across the industry. However, Fractal's core philosophy as a premium brand is to be restrictive with the discounts and we closely monitor market developments. As the market strengthens, we expect to return to a more normal level of campaign activity, going forward. Shipping costs slightly affected the product margin positively by approximately 0.2 percentage points. During the third quarter, shipping prices were higher compared to the same period last year, which was expected. However, this was offset by significantly lower handling costs during the quarter. FX impacted the product margin negatively by one percentage point due to a weaker US dollar rate compared to last year. During the third quarter, EBITDA reached 12 million with a margin of 7.4%, reflecting a decline compared to last year, primarily due to lower sales. We can see that several cost items have decreased compared to the previous year, such as inventory costs and consultants. During the quarter, we have continued to focus on streamlining our operations and ensuring good cost control. Operating cash flow in the third quarter was 15 million with a cash conversion of 127%. The change in networking capital was positively affected by decreased inventory and accounts receivable and negatively affected by decreased accounts payable due to lower purchases. The lower inventory was mainly due to cautious purchasing because of a weaker market and also because Fractal is adjusting inventory levels to better match demand. Cash flow from investing activities amounted to 4 million and was related to the development of new products. With 30 million in net cash and no use of the overdraft facility, Fractal demonstrates strong financial stability and flexibility. Cash conversion cycle amounted to 29 days, which was an improvement versus last year by 14 days, mainly related to improved days of inventory and days payables outstanding. Moving on to the next slide and the income statement. As previously presented, net sales in the third quarter amounted to 157 million, a decrease of 17.5% year over year, mainly related to higher comparative numbers and the weaker markets. Capitalized development increased by 0.7 million related to the increased number of hours spent on development. Total revenue amounted to 159 million. Goods for resale amounted to 99 million and were in percentage of sales positively affected by a slightly favorable product mix and freight costs, however, negatively affected by FX. Other external expenses amounted to 26 million, a decrease from last year primarily due to reduced warehouse costs. but also due to the transition of some long-term consultants to full-time employees. Personnel expenses amounted to 23 million, an increase of 5 million year over year, and the increase was mainly due to new hirings in 2024 and the full-year effects of hirings from last year, but also the movement of some consultants. 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 when recalculating from US dollar to SEK. 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, our net sales in SEK decreased 18%. compared to high figures in Q3 2023, where we achieved a 45% increase year-over-year. However, compared to the first half of 2024, we are witnessing a gradual improvement in the market as partners look to increase their stock levels ahead of the sales season by end of year. Our product margins decreased to 37.8%, down 4 percentage points year-over-year, as we're faced with negative FX effects and higher sales discounts in the market. The EVTA margin stands at 7.4%, down about 11 percentage points year-over-year as a result of the lower net sales and product margin. During the quarter, we have received very positive reception for our refined computer and gaming share, as well as our new Case Era 2. We have also seen big interest for the Scape gaming headsets, and this supports the shift in Fractal's global brand and market position. Our strong financial position gives us the opportunity to pursue our strategic initiatives and further advance our position in the market. We are committed to expanding our presence in both existing and new product categories, and we are continuing to invest in the long-term growth strategy. Additionally, we are observing a trend where gamers are spending more time and money on gaming. This behavior aligns with our positioning and vision, and we believe it will continue to support our growth. The upgrade cycle for gaming hardware has been pushed forward with stronger industry performance expected in 2025, supported by key PC component launches. To summarize, we are still facing some short-term headwinds, but we believe in a strong long-term outlook and foresee a stronger sales development already in the fourth quarter of 2024, where we again can show growth supported by our new product launches, expansion into new product categories, and increased marketing and channel initiatives. And with that, we have taken you through the Q3 report and we open up for questions.