Thunderful Group AB

Thank you and good morning and welcome to today's presentation of Thunderfall Group's financial results for the second quarter. Go to slide two, please. Today's presenters are me, Anders Mikus, as acting CEO and Thunderfall's new CFO, Lennart Sparud. Yesterday evening, the board of directors in Thunderfall Group distributed a press release stating that the company has a new acting CEO as of today. Most of you know me from before, since I was the CFO in Sunflow Group up until May this year. And at the end of this presentation, I will outline a few actions and thoughts for the short-term future. With me today is also our new CFO, Lennart Sparud. Lennart's experience and CV speaks for itself, but I'm also genuinely happy and delighted to have experienced the fast and smooth handover process from myself to Lennart. Lennart has proven to be a fast learner with a high level of street smartness. Go to slide three, please. We start this presentation by looking at the key highlights in the second quarter. Go to slide four, please. Thunderbolt Games presents a strong quarter. In our acquired companies, we have signed new deals and have seen strong performance in both net sales and EBITDA. The acquired companies deliver EBITDA of more than 34 million SEK in this quarter. The main contributor is Robot Teddy, our business development and strategy agency. Robot Teddy has again proven their ability to find and sign game-changing titles that few others would have noticed at the time of signing. In the organic games companies, this quarter sees a negative impact of minus 19.9 million SEK from ordinary planned depreciation, and an extra impairment related to the game The Gunk. The Gunk was released to PC Steam in this second quarter and the value of the one-off impairment is minus 10 million sec and the remaining minus 9.9 million sec was banned depreciation. We are confident that the impairment is a one-off item as the game's book value now corresponds to the sales performance and naturally the depreciation amount will be lower in the coming quarters based on our digressive model for depreciation. Finally, and as communicated in the Q1 presentation, two of our distribution companies are facing pressure on EBITDA margins in this quarter. Nordic Games Supply manages to deliver 2.6 million SEK in EBITDA, and Arma Toys has a loss of minus 6.9 million SEK. Then I will guide you through the details in the financial section, but EBITDA pressure in these two companies is mainly driven by high inventory levels that are driving increased logistics costs. And we once again reiterate our guidance for the third quarter, where we will continue to face pressure on EBITDA margins in these two companies. Go to slide five, please. For the second quarter, we had an operating income growth of 11.1%, where the game segment grew by 48.8%, while the distribution segment grew only slightly by 3.2%. Adjusted EBITDA is showing a growth of 26.9%, while adjusted EBITDA has a negative growth of minus 25%. Main driver for the diversification between EBITDA and EBITDA performance is the minus 19.9 million SEC in combined depreciation and impairment for the GUNK. And most of this is to be seen as a one-off item in this quarter. This item also negatively impacts organic games EBITDA growth, but since games has an overall strong quarter, this means that acquired games companies have a very good performance, delivering 40.5 million SEC in net sales and 34.4 million SEC in EBITDA. As mentioned before, the main contributor is Robert Teddy and the high EBITDA margin is explained by revenues being a mix of a smaller portion of consultancy fees and the bigger portion being revenue share from game projects where we have invested and are providing business consultancy services. For the distribution segment, the consolidated profitability is impacted by increasing logistics costs and Lernart will provide details of the mixed effects within the three companies. My takeaway, and this is an important one, is that we reiterate our guidance on EBTA pressure in Nordic Games Supply and Armatoys also in the third quarter of this year. Go to slide six, please. Let's have a quick look at Thunderful Group and our two segments. Go to slide seven, please. Thunderful Group operates in two segments, games and distribution. While the distribution business covers the Nordics, the games business is global. We sell our games all over the world. We're now almost 450 employees. We have 14 internal games in development at this moment and 22 games from external developers in our pipeline. Across the segments, we manage a portfolio of around 100 brands, and we've kept our famous Nintendo partnership for more than 40 years. Go to slide eight, please. A financial trend overview for the two segments presents a net sales growth in both segments in this quarter, both versus the comparison quarter, but also compared to the previous quarter. For adjusted EBITDA, games is growing both compared to the comparison quarter and compared to the previous quarter, so we do see an EBITDA growth, even including the impact of minus 19.9 million SEC from the GUNK in this quarter. The distribution segments EBITDA has significant negative growth, both versus the comparison quarter and the previous quarter. We guided from margin pressure in both Q2 and Q3 in our Q1 presentation. And again, this is what we see now, and we will also see it in the third quarter. Go to slide nine, please. Within games, we do a few different things. We develop games mainly based on our own IPs in the division Thunderfold Studios. We are convinced that quality is vital to earning success, and currently we engage almost 300 employees within our studios and have capitalized around 173 million SEK at the end of this quarter. Developing high quality games takes time, and to be able to release games more frequently, we are also involved in publishing our games developed by external studios. Publishing is more hands-off than development, so we can publish more games than we can develop. As part of the publishing process, we often invest in the externally developed games that we publish. And at the end of this quarter, we had around 100 million SEK in committed future investments in our pipeline of externally developed games. We also want to be involved in even more games. That's why we started Thunderfall Investment, to invest in game projects around the world. That takes an important box for the game segment, and we believe there are strong synergies with development and publishing. We are now a 360-degree game company that offers development, co-development, publishing, investments, and M&A. And in this quarter, Thunderfly Investments, through Robot Teddy, has really proven that investments can be a vital part in our financial performance. Go to slide 10, please. Our distribution segment consists of three companies. First, there's Bergsala, that has held the license to sell all Nintendo products in the Nordics and Baltics for more than 40 years. Then there's Arma Toys, our toy distributor with a distribution portfolio of around 75 brands, including some of the most popular toy brands. And finally, there's Nordic Game Supply, that distributes gaming accessories, gaming merchandise, and boxed video games, including products from brands like Razer and HyperX. Go to slide 11, please. We released seven titles in the second quarter and one additional game after the end of the quarter. The total net sales value for the released SKUs in this quarter was not more than 4.9 million SEK. And as Thunderfall Group evolves as a 360-degree gaming company, it's becoming more and more obvious that specific releases are not always the main driver behind our growth. Of individual games, I'd like to highlight Source of Madness as a positive contributor. The game left early access and was fully released to PC and console in this quarter. Go to slide 12, please. Here are 14 titles that we have in internal development, and five of them are being planned to be released before the end of this year. There's not many significant updates compared to our financial presentation for the first quarter, but we have released the Gunk on Steam and also removed it from the pipeline, as there's no future releases planned for the Gunk at this stage. Go to slide 13, please. For our externally developed games in Thunderbolt Publishing, we now have a pipeline of 22 games. Nine of them are planned to be released before the end of this year. There are a few more updates in this pipeline. Release-wise, Source of Madness was a good release for us. For games not yet released, we presented some new material, for example, Lego Brick Tales and Planet of Lana. And we are seeing positive reactions from players around the world for these two games. And that's it for the segments. Go to slide 14, please, and CFO Lennart Sparhud will guide you through the financials.

Thank you, Anders, and hello, everyone. My name is Lennart Borud, and as Anders said, I'm the new CFO at Thunderbolt Group since two months, roughly. My most relevant background is the position as CFO at Exatronic Group, a company listed on NASDAQ large cap today, for six years, from where I left one and a half years ago. Move to slide 15, please. As Anders also has mentioned, the second quarter has been a strong financial quarter for the game segment, but a weak one for the distribution segment. To guide you through the details, we start with the net sales development, where we have seen a growth of almost 8% year on year, reaching 581 million SEK in this quarter. The game segment has a growth of 35% and the distribution segment a growth of 2%. For adjusted EBITDA, the negative growth is minus 10 million SEK or minus 25% reaching 31 million SEK in the second quarter. The game segment has a growth in EBITDA of 4 million SEK and the distribution segment a negative growth of minus 14 million SEK. Regarding cash flow, the cash flow from operating activity was significantly better in this quarter versus the comparison quarter, even though it was negative. we reached a negative cash flow from operating activities of minus 40 million SEK compared to minus 63 million SEK in the comparison quarter. And the inventory build-up in the distribution segment is the main reason for the negative cash flow. Move to slide 16, please. For Thunderbolt Games, we have seen a growth in net sales year over year of 35%, reaching 115 million SEK in this quarter. which actually is the highest net sales figure in games in a single quarter so far. We see a negative organic growth in games of minus 13%, and growth from companies acquired in the last 12 months is 48%. Breaking down the negative organic growth, only Thunderbolt Publishing is contributing with organic growth in the second quarter. In total, the all-core Thunderbolt game companies have a negative growth of minus 14%. The main reason for this is that Thunderfall Development had external financing in the comparison quarter, but there is no external financing for any development project in this quarter. And it's mainly Robothead that's driving the positive net sales growth and EBITDA contribution in this quarter in the game segment. I just mentioned EBITDA includes depreciation and one-off impairment of almost minus 20 million SEK for the GUNK. And we expect no further impairments for the GAN, because the remaining book value corresponds to the game sales performance. Adjusted for this one-off impairment, this is one of the best quarters to date for the game segment, and the growth is non-organic. We can move to slide 17 please. For investments in games, we have reached total investments of 61 million SEK in the second quarter. For development CapEx, we have reached an all-time high of 43 million SEK. This is partly because we have more developers employed, almost 300 people today in the group. But the main driver is that most developers are now working on games, not being externally financed. And in Robotech, we have agreed to fund prototype development for a number of games, and we continue to evaluate titles for investments. In the balance sheet, we have also added a specific line for investments in game products. You can move to slide 18, please. For the distribution segment, we see an overall net sales growth year-over-year of 2%. Breaking it down in the subsidiaries, we see that Barisala is increasing with 21%, driven by higher availability of hardware compared to the comparison quarter, though affecting the gross margin negatively. In Nordic Games Supply, uh the net sales is decreasing with minus 22 percent and this is due to lower demand from key customers we also see that we will have difficulties matching the comparison quarter also in the third quarter this year in ammo toys on the other hand other hand has a growth of 12 year-over-year in the comparison quarter we suffered from late deliveries of spring summer products but in this quarter availability of products have been good In terms of profitability measured in EBITDA distribution, the segment has an overall negative growth of minus 11 million SEK, or minus 59%. Even though net sales are up 21%, basal of EBITDA delta is only plus 1.1 million SEK. And this is primarily explained by negative sales mix effect due to higher share of hardware sales, negative FX effects, or minus 3.8 million SEK. and also increased costs for personnel, marketing and logistics. In Nordic Games Supply, the EBITDA delta of minus 1.9 million SEK is primarily explained by lower gross profit and higher costs for logistics. And the lower gross profit comes from lower net sales. Even new net sales are up 12%. Amatois EBITDA delta is minus 10.9 million SEK. explained by price pressure in the market negative sales mis-effects and also increased cost for marketing and logistics of minus six million sec to sum up the profitability challenges in distribution it's important to understand that the ebta margin pressure that we are guiding for in q3 is affecting nordic game supply and armored toys only so very solid will be business as usual and the lower ebta margin in the second quarter It's affected by sales mix and the negative FX effect of minus 4 million SEK. We are working hard on reducing the inventory levels, and we continue to do that throughout the year. Operating expenses will be affected for Nordic game supply and armatoids in Q3. But in our most important quarter, Q4, we are now working hard to be in a better position in terms of the number of pallets in the warehouses when Q4 starts. And it's also important to remember that the planned reduction of inventory levels, of course, should contribute to improved cash flows later on this year. We can move to slide 19 please. Thunderful Games segment has a negative organic growth of minus 13%, as mentioned before. And the old core Thunderful Games companies have negative growth of minus 14% in the second quarter. The main driving factor for the non-organic net sales in this quarter. And also looking ahead, net sales development in RoboTED and Cootsync looks promising for the next quarter based on the ongoing deal negotiations we have today. Move to slide 20, please. For adjusted EBITDA, the situation for the organic companies is similar to the negative sales development. EBITDA includes depreciation and a one-off impairment of 19.9 million SEK in total for the guns. We have a negative organic EBITDA growth in almost all companies in the game segment. And again, the all-core Thunderbolt games companies are affected by the lack of external financing, which we had in the comparison quarter. Looking at the acquired gaming companies, RoboTeddy, Early Morning Studio, and Stage Clear Studios, they have a positive EBITDA contribution in the quarter of almost 35 million SEK. And you have to put a one-off impairment. This is one of the best quarter to date for the game segment. And the group is Nono Games. Okay, you can move to slide 21. As mentioned before, the cash flow from operating activities was significantly better in this quarter versus the comparison quarter, even though it's negative. The key driver behind the negative cash flow is the net effect in core working capital in the distribution segment, with a negative net contribution of minus 54 million SEK. By the end of the quarter, we had 335 million SEK in total available cash, if we include unutilized credit facilities. During the second quarter, we have made cash earn-out payments of 3.5 million SEK to the sellers of the station. Net debt by the end of this quarter is 252 million SEK, resulting in a net debt over the last 12 months EBITDA ratio of 0.7. And that was the end of the financial section. So move to slide 22, please, and Anders will take over again.

Thank you, Lennart. After the end of the quarter, there's been one major event communicated to the market. Go to slide 23, please. Yesterday evening, the board of directors in Sandefur Group distributed a press release stating that Brian Sigrigason leaves the role as CEO and that they have appointed me, Anders Miklis, as interim CEO. The board of directors have also initiated a recruitment process for a new permanent CEO. Brian will remain in the company in a new role within Thunderful Games. And my own background in this company group is that I have been the CFO since Thunderful Group was incorporated up until May this year. I was also CFO in the previous combined group of Bergsell and Thunderful Games. So I have been involved in these companies as CFO for almost seven years. In the press release, our chairman Mats Lundqvist states that he's grateful that Brian will remain in the group so we can continue to utilize his experience and network And our chairman is also expecting a higher focus on increased profitability and improved cash flows. I would like to take this opportunity to outline my own initial thoughts and short-term agenda based on our chairman's statement. And I would also like to send a warm-hearted thank you to Brian for everything he has done so far for this company. I'm also looking forward to continuing our cooperation in Brian's new role within Thunderbolt Games. Go to slide 24, please. The immediate short-term actions to improve profitability and cash flow generation will, for games, be focused on a few of the organic companies. By analyzing one of the slides that Leonard presented before, it's clear that the recently acquired companies are presenting high EBITDA margins with good EBITDA growth. But for the organic companies, even if we ignore the impact from the GANK being minus 19.9 million SEC in this quarter, there is still a negative EBITDA development year over year of minus 10 million SEC. It's also clear for us in management that a few of the organic companies are performing well. And my conclusion as new acting CEO is that I will set up an immediate action plan to reduce losses and improve profitability in some of the organic companies. And also, I believe that this group of companies are the key reason why Thunderbolt Games have faced negative EBITDA and EBITDA margin development in the recent quarters. We've also now seen what the new deals can do for the acquired companies and our focus on signing new deals in all of the gaming companies will be a never ending focus area for our leadership team in games. Go to slide 25, please. For our distribution segment, I will immediately set up an action plan focused on improving our cash flow generation. This slide presents the group's core network in capital development since the IPO, and the darkest bar in the middle represents inventory in distribution. Even though we identified inventory buildup already four quarters ago, there's been a year and we still haven't seen any signs of inventory reduction in the balance sheet. So reducing inventory levels in all the toys and Nordic games supply is the most important task that we have in front of us. But it should not be the most challenging task. Two months ago, mid-June, the former CEO and the board of directors in Thunderful Group asked me and another senior advisor to get involved in the distribution company's inventory production plan. And this means that I'm personally already involved and that the action plan for distribution will be kickstarted already this week. This is an area I will monitor and follow up closely and frequently for the rest of this year. So to summarize, my initial short-term focus as acting CEO will be on the inventory reduction plan in distribution together with the action plan in games focused on reducing losses and improving profitability in some of the gaming companies. And finally, move to slide 26, please. And thanks everyone for listening to this session. And we are now ready to answer any questions you might have.

Thank you. If you wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will be a brief pause if questions are being registered. No questions from the telephone line at the moment. I hand over to you speakers.

All right, sure. Well, if there isn't any further questions. Yeah, we have presented this presentation and we are happy to To answer any other type of questions you might have, feel free to send them to ir.standardforgroup.com or send them directly to myself, Anders, or to our CFO, Lennart. Thank you for listening in.

I'm sorry to interrupt, speakers. We have just received two questions, if it's possible. And our first question comes from Simon Youngton. ABG, please go ahead. Your line is now open.

Hi Anders and Lennart, and thanks for taking my questions. I'm on a bad line, so please bear with me here. First off, could you please maybe give some more color on the new deal signings here? Are they mainly in Robert Eddy, and what kind of deals are they, and what is the visibility into coming quarters? I also wonder if you have signed all the deals that you've guided for in Q1 report or if we should expect more deals in Q3?

Yes, thank you Simon. Yes, the first part of the question is true that the majority of the deals have been signed in the acquired company RoboCity. If you look at Ibiza development from the first quarter to the second quarter, we reached almost 20 million SEC in the first quarter and 35 million SEC in the second quarter. But there's also this impact from the GUNK being around 20 million. So adjusted for the GUNK, you can say that Ibiza is around 35 million SEC stronger in the second quarter compared to the first quarter. And in the first quarter, we mentioned that we had done deals for $6.5 million, and then we were about to sign deals for the future. And then we were also trying to guide how much of those deals that were coming in 2022 and 2023. So basically, you can say that the majority of the deals in RoboCity are, as I mentioned before, they are based on a on a rev share plus consultancy fee and the consultancy fee is very very small and the rev share is the majority of the revenues so this means that we now have rev share from from games generating good revenues and and those games haven't been released in this specific quarter so so ultimately and one should be able to expect that that those rev shares are bringing fairly the same amount quarter by quarter if there's not any seasonal variation or something happening to the individual games where we have rev shares.

Another question on the distribution. You ended the call here presenting an action plan for improving the inventory levels. Could you maybe give us an explanation or maybe go into more detail on how you'll do that?

Oh yes, I mean looking at the first half of this year Nordic Games Supply is a company that I've seen um you know lower net sales both in q1 and q2 compared to the comparison quarter it's also a company with high seasonal variation so most of the sales in in on a yearly basis happen in the second half of the year so this means that we now have a much lower purchase amounts for the for the for the peak season the second half of the year And we have also already sold in quite many products that we have on stock. So that's basically the more detailed plan for Nordic Game Supply. And for Amatoys, this season is about selling some of the uh second half products from last year that we didn't have time to sell yet last year basically because they were delayed to our warehouse so we kind of missed the the peak season just before christmas last year and many of those products have been pre-sold before the season starts now in august and september and we will also focus uh quite much on on on

on the products that we already have in stock so so the purchase amounts have been decreased also for for amateurs okay thank you what can you say about the risks for any and the write downs of the inventory for any of the ngs or almost

I think that's too early to say. I was basically appointed in this position today. We have started looking through this since I got involved in the distribution business in mid-June. But that is one part of the action plans, so we will need to look into that now in August and September.

all right thank you and last one for me and sorry for putting on the spot here anders but as a new ceo although temporary what can you say about the plan for capital allocation i mean you have a solid underlying cash flow to invest if you adjust for the current inventory levels causing problems for distribution But how do you view investing in new game projects versus, let's say, returning capital here to investors?

Yeah, I know that this was a question that basically came up from quite many investors shortly after the Q1 presentation. I think where we are right now, and this is something that we discussed yesterday in the board of directors meeting, Where we are right now, I think both me, our CFO, Lennart, and also the board of directors would like to see that the inventory levels are going down, that we really manage to follow the inventory reduction plan, and then we can make a new decision after that, so to speak. um liquidity hasn't been very good in these two recent quarters due to the inventory build up so we will need to focus on are reducing the inventory levels and then we are in a new position both in terms of you know if we should do mnas or not or if we should do further game project investments or not or if we should yeah follow your your suggestion or or question here so i think that's a that's actually a question for the future when we have seen the inventory reduction actually happened.

Okay, that makes sense. But is capital distribution, is that something that is on the table?

Yes, as I said, that was something that we discussed yesterday.

Okay, thank you. That's all for me. Thank you, Anders Lennart. I'll get back in the queue.

Thank you. And our next question comes from Dennis Berggren, Carnegie. Please go ahead. Your line is now open.

Perfect. Thank you very much. Good morning, Anders and Lennart. Just following up on the first question that you received, I think in Q1, you said the quantitative estimates of the design. Could you please clarify the magnitude of the value of the new design until today compared to the The line wasn't very good, but I think I heard your question.

As I, in my first answer to Simon's questions before, Evita development compared to the first quarter and adjusted for the Gunk is around 35 million SEK. And you can say that basically all of that is deal based. So there were a few deals being made in the organic companies, especially CodeSync. And then the remaining and the majority of those deals have been made in Robot Teddy, the new company. I mean, if you look at it from comparing EBITDA with the previous quarter, that we've added 35 million SEC in EBITDA this quarter, and based on what I said with Robot Teddy and the rev share structure of those revenues not being released based, one could imagine just by doing a mathematical model that it could be three quarters times those 35 million SEC and in that case that would that would mean that we have side deals for around 10 million dollars uh so far based on on what we have actually um you know presented as as financials in the second quarter got it perfect right there and then this is a quick one on inventory i get that you're about to implement new action plans but

What risk is your products potentially being or becoming outdated?

For Nordic InSupply, I think the risk is fairly limited based on where we were before and where we are now, because we now have the slow season behind us, the Q1 and the Q2 season. So basically, now we're getting to ship products from September to December, which is our peak season. So, I mean, if there's a risk for write-downs or not, it's difficult to say that at this point in time. So it's easy to reflect on that in December or January. And I think for Amatois, there's a few novelties and products with seasonal variations. So my personal opinion would be that the risk is slightly higher in Amatois than in Nordic Game Supply. okay thank you very much thank you no further questions at this time i hand over to you speakers for any closing remarks nothing from us feel free to send us questions to ir at underfootgroup.com and again thank you for listening in and i wish you a nice day thank you