Thunderful Group AB

Good morning and welcome to today's presentation of Thunderfield Group's financial results for the third quarter. My name is Dennis Bergen and I'm an equity analyst at Carnegie. I'm here today with the company's CEO Anders Maikvist and CFO Lennart Sparud, who will present the company's financial and development throughout the third quarter for the coming approximately 40 minutes, which then will be followed by a Q&A session that I will moderate. Please feel free to submit any questions in the message box below the stream, and I will make sure to read them in the Q&A session. With that, I think it's time to kick off your presentation.

Thank you, Dennis. Good morning and welcome to today's presentation of Thunderfall Group's financial results for the third quarter. Today's presenters are me, Anders Maikvist, as acting CEO, and also with me today is our CFO, Lennart Spadud. Today's presentation includes the key highlights in this third quarter, some background of Thunderfall Group and our segments, and some explanation of our diversified revenue streams in Thunderfall Games, where I will also touch briefly on the recent reorganizations in both games and distribution. Lennart will then guide you through the financials and finally we will round this off by giving you some background and details to the binding agreement of an acquisition of the British game developer Jump Ship that we announced earlier today. So starting with the key highlights from the Q3 report, Thunderfall Games delivers EBITDA of 51 million SEK and is back on profit generating levels in line with the comparison quarter of the three week quarters. The releases in Thunderfall Games in this quarter have contributed with 10 million SEK in net sales. That is higher than in previous quarters and together with the new structure, which has been very well received internally, this strengthened the team in games and lays a pretty good foundation for continued growth, both organic and through acquisitions. The inventory levels in distribution have been reduced by 94 million SEK year-over-year and with 140 million SEK from the end of June up until the end of October. We still have November ahead of us and that's typically the best sales month in distribution. There's still pressure margins in distribution both caused by high OPEX for logistics and also from gross margin pressure caused by closeout sales and discounts in Nordic Games Supply and Arma Toys. For the third quarter we had an operating income growth of 9% where the game segment grew by 21% while the distribution segment had negative growth of minus 7%. Both adjusted EBITDA and adjusted EBITDA had negative growth of minus 21% and minus 29% respectively. The profitability decrease is all related to the distribution segment where we are affected not only by high OPEX for logistics as in the previous quarters but now also lower gross margins caused by discounts and closeout sales. Our main focus now in both the third quarter and the fourth quarter is to reduce the inventory levels in both Nordic Games Supply and Armaltoys and that focus has been impacting profitability in the third quarter. So the inventory levels are being reduced. Total inventory reduction from end of June up until the end of October is minus 140 million SEK. Finally, Burgsala, our Nintendo distribution business, has okay EBITDA performance this quarter, and Thunderfall Games reaches an EBITDA of 51.3, which is basically in line with the comparison quarter after three quarters with weak profit levels. So let's have a quick look at Thunderfall Group and our two segments. I will also briefly mention some of the changes that we have implemented up until today. So Thunderfall 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 are now almost 450 employees. We have 12 internal games in development at this moment and 20 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. So this is a financial trend overview for both segments. CFO Leonard will guide you through the details in both segments. So I'd like to use the slides to elaborate a little bit on the current trends in each segment. Starting with games, our net sales is up with almost 19 million SEK year over year and almost 3 million SEK from previous quarter. But the composition of net sales in this quarter is vastly different from the comparison quarter in which we still had nearly all of the Swedish game developers in externally financed game development projects. So basically over the last 12 months we've built a new structure with much more diversified revenue streams and the net sales growth quarter of a quarter indicates that we are in the right direction. Continuing with distribution, the main driver for net sales decline year over year is Nordic Game Supply. Amatois is actually growing year over year. So both companies have started closeout sales and discounts in the third quarter. And in Amatois, we see an expected development where closeout sales is adding to the normal sales, while for Nordic Game Supply, the negative market sentiment results in significant negative growth, even though we actually do closeout sales and discounts. So looking ahead, the general retail market sentiment in the Nordics is nowadays far from positive. But for Thunderfall Distribution so far, we have not seen any negative impact on demand in Bergsala or Amatoys. But for Nordic Games Supply, however, we are experiencing significant demand decline and a lot of uncertainties among the retail customers. For Thunderful Games, this is a new slide that is presenting the transition from our old structure of studios, publishing and investments in Thunderful Games to our new structure based on the four pillars of diversified revenues. The old division studios is represented in both co-development and IP building, while the old division publishing is represented in the IP building pillar only. Our former division investment has now been split up in partners and investments. So in line with these four pillars of diversified revenues, we have also changed reporting lines and structure and created an integrated decentralized structure with four business units aligned to the four revenue pillars. The new structure has been well received by the leadership team and I'm very confident that we are now laying a foundation to secure entrepreneurial freedom with the decentralized business units, while at the same time we are supporting the business units with our support functions, all led by experienced professionals to support the entrepreneurs in reaching their visions and goals. So shortly to tell you a little bit more about the four pillars of diversified revenues, I'll start from the left with our co-development pillar. This pillar currently includes two of the studios, primarily developing games based on IPs from external licensees. This revenue stream contributes with predictable revenues with stable and high margins, but it also contributes with rev share from the developed games. There is no need for investments from Thunderfall within this revenue stream. Next, our IP building pillar is represented by all other studios, focusing on our own IPs. And this is also where we do publishing both of our own IPs, but also when we help external studios to build up their IPs. This revenue stream is dependent on a high rate of investments, but we can also get high profitability levels when published games reach commercial success. As for our partner activities, this is where we are helping external game development studios to self-publish their games. As with co-development, this pillar contributes with predictable revenues and with revenue shares from games that our partners are self-publishing. Also in this pillar, there is no need for investments. And lastly, the investment pillar ranges from investments in early prototype phases in specific game projects to acquisitions of larger companies. This revenue stream is naturally dependent on investments, but we also get revenue shares from the game projects where we have invested. Next on, our distribution segment. It consists of three companies. First, there's BergSala, that has led the license to sell the Nintendo products in the Nordics and Baltics for more than 40 years. Then there's AmoToys, our toy distributor with a distribution portfolio of around 80 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. There has also been some changes in distribution. Bergsala's managing director Henrik Mathiasson has been appointed interim managing director also in Nordic Game Supply. We've removed the layer chief distribution officer and the two managing directors in the three distribution companies are now reporting directly to me. We've done this to increase our focus on inventory reduction, and since the market conditions in Nordic Games Supply are worsening, we have implemented cost initiatives, including a 20% cut on workforce. We will see some effects of this from the fourth quarter, but we will also see full effects from the first quarter 23. For the releases in this quarter, we've released three games, all developed by external studios. The released games have contributed with almost 10 million SEK in net sales, which is the highest amount since we started presenting this earlier this year. After the quarter, we've released five more games, of which two have been developed internally, including today's release of Somerville from Jump Ship that we've announced this morning. Excluding Somerville, the other games released after the quarter have already, up until today, delivered net sales contribution higher than what we achieved in the third quarter. Gaming media GamesRadar published an article in October listing the top 10 LEGO games ever released and the very best LEGO game ever released according to GamesRadar is LEGO Brick Tales from Thunderful Publishing. So it's very pleasing to see that our production and marketing teams are finally now experiencing sales successes from external games. Both teams have been working really hard with all the releases that we have for the second half in 2022 and also in 2023. And I believe the successes boost morale and self-confidence ahead of our major releases now in 2023. So the new studio Jump Ship is releasing its sci-fi adventure Somerville as of today. At Thunderfall we expect a net sales contribution from Jump Ship and this game in excess of 70 million SEK from today up until the end of this fourth quarter. Here are the 12 titles we have in internal development, and there's now only one of them left to be released this year. It's Wavetail, a game created by Thunderfuss Studio in Gothenburg, and so far only released on Stadia. The upcoming release in December will be for PC and all consoles. For 2023, there's now seven releases planned, six of them currently planned for the first half of 2023. Games worth monitoring a bit extra in the first half next year includes PC console SteamWorld game with project name Coffee, as well as CodeSync's PC game under project name Cicada. For the external pipeline in Thunderfall Publishing, we now have a pipeline of 20 games, two more to be shipped this year and 14 currently planned for 2023. Some of the games announced for 2023 having received high interest and positive feedback includes Planet of Lana, Replaced and Wordless. Planet of Lana was successfully announced at Gamescom with very positive feedback from press. And lastly, it will of course be interesting to see how LEGO Brick Tales will be received by players on mobile platforms. With this, I'm handing over to our CFO, Lennart Sparud, who will guide you through the financials.

Thank you, Anders, and hello everyone. The third quarter was a solid financial quarter for the game segment, but a weak quarter for the distribution segment. To guide you through the details, starting with net sales development, where we have seen a growth of minus 5% year over year, reaching just above 700 million SEK in the quarter. The game segment has a growth of 19% and the distribution segment a growth of approximately minus 8%. For adjusted EBITDA the growth is minus 24 million SEC or minus 29% reaching 60 million SEC in the third quarter. Adjusted EBITDA in the game segment came in just above last year and the distribution segment showed an adjusted EBITDA growth of minus 24 million SEC. The cash flow from operating activities was better in this quarter versus the comparison quarter, even though it was still negative. We reached a negative cash flow from operating activities of minus 71 million SEK compared to minus 86 million SEK in the comparison quarter. Less inventory buildup in distribution contributes with a cash flow of 70 million SEK in Q3 2022. Looking on segment level, for Thunderfall Games we have seen a growth in net sales year over year of 19%, reaching 180 million SEC in this quarter. Organic growth in games is minus 4% and growth from companies acquired in the last 12 months is 23%. Breaking down the organic growth, only CodeSync and StageClear are contributing with organic growth in the third quarter. In total, the old core Thunderfall Games companies have a growth of minus 20%. The reason for this is that ThunderFull Development had external financing in the comparison quarter, while there is no external financing for any development project in this quarter. And it's mainly RoboTeddy driving the positive net sales growth and adjusted EBITDA contribution in the quarter in the games segment. Speaking about investment in games, we have reached a total investments of 54 million SEK in the third quarter. For development CapEx, we have reached 28 million SEC. This is partly because we have more developers employed. We have now reached 309 developers in the group, but the main driver is that most developers are now working on games not being externally financed. For the distribution segment, we see an overall net sales growth year over year of minus 8%. Breaking it down in subsidiaries, We can see that Bergisala is decreasing with minus 5%, driven by less availability of hardware compared to the comparison quarter. And this is due to lack of components and not logistic obstacles. Nordic Game Supply is increasing with minus 26% due to a general lower market demand for game accessories. We will have difficulties matching the comparison quarter also in the last quarter this year. Arma Toys, on the other hand, has a growth of 16% year over year. For profitability, measured in EBTA in distribution, the segment has an overall growth of minus 22 million SEC or minus 55%. Bergsvallars EBITDA delta is down 4.4 million SEC. Sorry. This is primarily explained by lower net sales, negative FX effects and increased costs for personnel and logistics. In Nordic Game Supply, the EBITDA delta of minus 8.7 million SEK is primarily explained by lower gross profit and higher marketing costs and sales expenses. The lower gross profit comes from lower net sales. Even though net sales are up 16% in Omotoist, the EBITDA delta is minus 9.3 million SEK. This is explained by pressure on margins from clearance sales of inventories and continued high logistics overhead. To sum up the profitability challenges in distribution, it's important to understand that the EBITDA margin pressure that we are guiding for in Q4 is affecting primarily Nordic Game Supply and to some extent also AmoToys. Bergsala will continue to be affected by disruptions to hardware deliveries during the last quarter as a consequence of the lack of components. We continue to work hard on reducing the inventory levels and we'll continue to do that throughout the year. The inventory level is 70 million SEK lower than the end of Q2 and preliminary figures by the end of October, as Anders mentioned before, shows another 70 million SEK in reduction of inventory level. Regarding the net sales development, we can see that the Thunderfall Games segment has an organic growth of minus 4% and the acquisition driven growth is 23%. The old core Thunderfall Games companies have a growth of minus 20% in the third quarter. As mentioned before, Robothead is the main driving factor to the non-organic net sales growth in the quarter. Also looking ahead, we should not forget the impact the acquisition of Jumpship will have on our financial figures. Regarding the EBITDA development for the adjusted EBITDA, the situation for the organic companies is similar to the negative sales development. That said, the negative organic adjusted EBITDA growth in almost all companies in the game segment. And again, the all-Thunderful game companies are affected by the lack of external financing. The acquired gaming companies Roboted and Early Morning Studios have a positive adjusted EBITDA contribution of 40 million SEK. In terms of adjusted EBITDA, this quarter is the strongest so far by the games segment. Adjusted EBITDA in the distribution segment is negatively affected by pressure margins from clearance sales of inventories in AmoToys and NGS and continued high logistics overhead. Then a final slide. As mentioned earlier in this financial section, the cash flow from operating activity was better in this quarter versus the comparison quarter, even though it was negative. The key driver behind the negative cash flow is a net effect in core working capital in distribution segment with a negative net contribution of minus 106 million SEK. By the end of the quarter, we had 223 million SEK in total available cash if we include unutilized credit facilities. In the third quarter, we have made cash earner payments of 13.6 million SEK in total. Net debt by the end of the quarter is 377 million SEK, resulting in a net debt over the last 12 months EBITDA ratio of 1.1. And that was the end of the financial section. I now hand over to Anders again.