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 .5% in SEK but .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 .5% primarily due to reduced consumer purchasing behaviour 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 .4% compared to .5% last year. The lower result is mainly due to the decrease in net sales in combination with the lower product margin. The product margin decreased to .8% from .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 Refine 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 Refine is proving that we are making impactful entries also in the quarter.

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 Refine 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 have 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. This is 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. This is 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 .5% -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 TrackPartner and measured in dollars. In Q3, sales out amounted to $15 million, reflecting a .5% -over-year decline. In the last quarter, we discussed fractals upgrade cycle, which typically spans 3-5 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 fractals, 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 cases accounted for 91% of total sales. This was approximately 1% higher -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 -over-year. The decrease -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 2 percentage points higher compared to last year. America's net sales amounted to 57 million, which was a decrease of approximately 17% -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 4 percentage points -over-year. The main driver for the changes had to do with sales discounts, which affected the product margin negatively by approximately 3 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 discounts and to closely monitor market developments. As the market strengthens, we expect to return to a more normal level of campaign activity going forward. Shipping costs likely 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 1 percentage point due to a weaker US dollar rate compared to last year. During the third quarter, EBTA 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 Fraxel 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, Fraxel 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 .5% year over year, mainly related to higher comparative numbers and a weaker market. 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 FX when recalculating from US dollar to CEX, 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 CEX 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 .8% down 4% year over year as we are faced with negative FX effects and higher sales discounts in the markets. The EVDA margin stands at .4% down about 11% 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 behaviour 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 summarise, 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.

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. The next question comes from Simon Grunath from ABG. Please go ahead.

Hi Jonas and Karin. Thank you for the presentation. I was initially wondering if it would be possible for you to give any more colour on the sales impact from the new product categories or rather the gaming chair here in Q3. Particularly in light of the flat sequential sales growth for your other segment sales here.

Yes, thank you Simon. First of all the other categories here as we talked about before includes all other categories for fractal events that we are including water coolers and power supplies etc. That we are not moving out of but reducing our inventory or lineup of. And the impact that you are seeing in the other categories meaning that it is not positive here is also related to that sell out of these products. So lower sales of water coolers and power supplies outweighs sort of the increased sales that we see in shares. So we have had a positive impact both from a sales out, selling and margin perspective by the shares in Q3. But it is something that will have full effect now during Q4 and as we move into 2025.

Very good, thank you. And on the customer discounts you mentioned that you expect these to normalise going forward. Should this be the case already in Q4 or is it more so a gradual normalisation as we enter 2025?

It is likely going to be a gradual normalisation. We believe Q4 will be a big step in the right direction there. That is the direction we are working on. Q3 was more abnormal in that sense. We believe market coming back and the changes now with also the campaign season here that we have a better position in the market.

That is crystal clear. As mentioned your resellers are currently increasing stock levels ahead of Q4 and on the solid 2025 outlook. Would you expect this trend to continue in Q4? That they might end up with some excessive inventories or would you expect sales in and sales out for you to match one and the other relatively well?

We would expect them to match relatively well and as always continuously monitoring and making sure that we close the year. And every period on as good channel inventory situation as possible. But at the same time we are expecting the Mark 2, as we said, to come back also with the new releases and components coming in beginning of 2025. We might have a slightly different baseline compared to where we have been in the last few months.

Another very clear answer. Finally, on the demand situation in 2025 perhaps it is a difficult question to answer. But how important would you say that the anticipated GPU launches from Nvidia are to the demand for your PC cases, sales to improve? Would you expect a negative impact if this were to be pushed towards the latter part of 2025? Or is the current pent up demand combined with recent product releases simply too strong near term forces?

We believe that our own roadmaps definitely have a positive impact on the sales development also for 2025. And definitely so with our other categories and then with shares and with headsets that is not as reliant or dependent on the component upgrade cycle. Which we believe is very good to decrease the volatility. However, for the impact of case sales in particular, the component cycle is important and the release of particularly Nvidia's next series will have impact. So delaying that later into 2025 could have impact definitely on the numbers, especially for cases.

It makes a lot of sense. Thanks for having me and I appreciate the call.

Of course, thank you.

There are no more phone questions at this time, so I hand the conference back to the speakers for any written questions or closing comments.

Yes, so the first written question as we have is, as of today, four out of the 12 best selling gaming shares on UEG are fractal shares. Can you comment on how you think you can achieve this considering that your pricing point is three to four times as high as the other best selling shares?

Well, we believe it's the combination of the ingredients, so to say, for our product development and product success. The combination of the design direction that we're moving with the performance of the products that we are delivering. Of course, that is something that we believe is attractive and is meeting the demands of the consumers. It's correct that there is a big difference in prices in the gaming share category, but the products that would be competing with the refined could probably rather be on a higher price point than on a lower. So we believe that the value for money that

you also

have on the fractal refine is very, very strong. So that's a strong selling point for the refined gaming share.

Yes, your other category where the defined share is included had negative sales development quarter over quarter. Can you put some color on why, given that sales of refined have exceeded your expectations?

We just as I tried to explain the other categories includes also sales of other categories, so to say, and this sales have dropped significantly compared to especially last year, which is planned and moving and setting giving room for both shares and headsets for the future. But it outweighs, so to say, the sales of refined that is a positive contribution both from the sales out and cross margin perspective.

Any update on the release date of scape?

We're moving closer, but the fractal usually does. We don't go out in advance with too much information or release dates and these things, but we still be looking at the effect of scape in the Q4 revenue as we have been saying before. And more information will come in during the next few weeks and months.

How high are your expectations on the release of scape given that the release of refined had such a good reception from both customers and reviewers?

I think I would be too modest if I would say that our expectation of scape has increased now after the launch of refined. It is a feeling we have a sentiment in the market with the relation with our partners, customers and also in users that people are even more interested in the scape now after the refined launch as it sort of proves that the products we're coming also within new categories are really strong compared to competition that's out there. So we have very high expectations on scape, but still we are of course modest in saying this. We're moving into a new product category and we are taking it as a gradual launch just as for refined. We're taking it step by step making sure that we do things right here. So scape will have a good impact for us in 2025 just as refined will be having.

Can you comment on your recent partnership with Best Buy? Does it differ from your partnership from other resellers and if so, how?

Correct. Now in beginning of Q4 we have shared information that we've moved into a relationship with the partnership with Best Buy in the US. It's a big step forward for Fractal as well, especially with the new product categories as well to be available to more customers in other platforms. The partnership per se doesn't differ materially from any of the other big partnerships that we might have, but it's a good step forward for Fractal to make our products available for a bigger audience also on the American market.

Will Fractal's cases be sold only online through Best Buy or in Best Buy physical stores as well?

At the moment we are available in the online channel, but of course long term it's a broader strategy.

Does the collaboration only include cases, why not shares?

As with every product that we launch we have launch partners that are set and involved in that product launch process since quite long before the actual launch happens and here Best Buy wasn't one of the launch partners or the product wasn't released when we went into those negotiations.

Can you elaborate on marketly lower processing costs during the quarter? Was this a one-off or did you change your way of working? Well we have not changed our accounting processes, it's the same as before. However last year there were exceptionally high container costs in Q3, so that's why we have that offset now this year. What did the chassis grow in sales out?

I don't have the exact number in my head right now, but we would say that we see that the new categories that were refined had a positive impact on the sales out number, but it's in line with the overall development of the business. Overall portfolio.

Yes, thank you. Is it fair to assume 40% gross margins on your two new product categories?

Do you want to answer it or me?

I have to say monster as always. The margin on our new two product categories share and headset will be in our span so to say with current product margins as we have. So yes, they will. Can you explain the lower gross margin in the quarter? Are you seeing the margin going back to normal levels ahead?

The lower gross margins that we are seeing overall is affected by the discount situation that we are having in the market driven by the market itself, not primarily driven by us. So it is our expectation that that will come down and the impact on the product mix and so on will be continuously positive as we have seen in the past. So as long as discounts move in the right direction, margins will as well.

Can you talk about when your new product categories will be available on Amazon?

Amazon of course as a global player will have different availability of different markets around the world from Japan, Europe and also America. We will have our shares available there in not too distant future so you can keep your eyes out for that. But it is related to what I talked about before with launch partners

and activations of our new product categories and how we are

activating sales.

You expect a stronger sales trend already in the closing quarter of 2024. Could you expand on that? If measured on net sales, that is not saying much because net sales Q4 2023 was very weak. Can you comment on sales to end customers? That was many questions in one.

It is correct. We were not facing as strong comparative numbers in Q4 2023 at least not in comparison with the previous quarter during that year that was very strong. But we believe that the market is moving in the right direction that is related to the changes in the freight cost that is a barrier that is going to be reducing or decreasing. But also that we are moving into high sales season and that component launches in the beginning of 2025 will also have a positive effect.

Could you update us on your thoughts on progress with distribution through Amazon especially in the US?

On the American side Amazon is now working on that during 2024 as one of our key objectives and initiatives that we are exploring and developing. We are having good progress with Amazon exploring different routes of distribution, expanding our portfolio but it is a gradual work as well and not something that will go from 0 to 100 in a day but we are pleased with the development as where we are heading right now. So the overall development of the distribution network in the US is progressing according to plan with the involvement of Amazon in combination with existing network and then the addition of new players such as Best

Buy. Any production bottlenecks for Fractal Refine or can you meet the high demand?

That's a good question not to say that it's a bottleneck but of course we as we talked about with our new product categories we do ramp up production and we do ramp up supply of this product and we have a good approach to that from in our plan to see that we will have a long term best effect. So the ramp up sort of refine is not an issue but of course we would have loved to have more products available in the market already now we have been out of stock for a month or two in some markets which was not expected but it's due to significantly higher demand initially from these products than what you could expect. So it will be a bit of a catch up here in Q4 but by the end of the year we would be in a better position.

Do you think you will have growth also in sales out?

In Q4 we believe we will move in the right direction also in sales out we're moving in closing in already in Q3 and it's moving

in

the right direction for us.

And that was it.

I think there's one more from Thomas.

Did I miss that?

So the question is could you talk about discounting and how you share some of the distribution discount distributors discounts or was that very visible in your cross margin this quarter? So essentially on discounts of course it's a constant planning with our partners and distribution channels on how the cost is shared between us and them so either we would initiate depending on activities and campaigns that would be initiated by Fractal or by the partner and how they are split depends on what type of activity it is that we are running. It was very visible in the quarter and it is due to the channel or the industry driving high discount levels at the moment.

Great, thank you.

Very good. Thank you all for the questions and participation and as usual please reach out if you have any further questions we are available for you.