Thunderful Group AB

Hello and welcome to Fundafold Group Q4 presentation. My name is Simon Jönsson, equity analyst with ABG and I will be the moderator today. First, we'll have a presentation by Anders and Lennart. This will be followed by a Q&A and you can send in your questions in the box below the presentation on the website. With that said, I will leave the floor to you guys.

Thank you, Simon. Good morning, everyone, and welcome to today's presentation of Thunderful Group's financial results for Q4 2022. Today's presenters are me, Anders Mikvist, the acting CEO in Thunderful Group. With me today is also our CFO, Lennart Sparud. And we're also very glad and happy to be standing here in front of the father from Somerville, which was our best top selling title here in Q4. Today's agenda, I will start with the key highlights in Q4. I will then continue with some background of Thunderfall Group and our two segments. This time, I'll also add some reflection on each segment's performance and achievements in the full year 2022. Lennart will then continue and guide you through the financials. And finally, in the events after the quarter, I will briefly present two add-on acquisitions made by two of our subsidiaries at the beginning of this first quarter 2023. So starting with the key highlights, Thunderfall Games delivered a strong quarter with the net sales of 199 million SEK and with EBITDA of 124 million SEK. The net sales from new releases in the quarter was 46% of games total net sales in Q4. Throughout 2022, we've seen increasing net sales from new releases quarter over quarter in every quarter in 2022. The organic growth in Thunderfall Games is 23%. I should mention that most of the revenues are coming from US dollars, so there's some FX tailwind built into that as well. The cash flow from operating activities in Q4 was fantastic at 406 million SEC. So because of the strong cash flow in Q4, the free cash flow was also positive at 196 million SEC for the full financial year 2022. The free cash flow for us is cash flow after investing activities without any adjustments. So this really marks the first year with the positive free cash flow since 2019 in the Consolidated Thunderbolt Group. In Q4, we also closed Jump Ship. We presented the acquisition in our previous quarterly financial update. And now in this quarter, we are pleased to inform that Jump Ship contributed with 75 million SEK in net sales, which is in line with the upfront consideration that we paid of 6 million pounds. In Thunderfall distribution, Bergsal had delivered a strong performance in Q4 with 61 million SEC in EBITDA and with 10% EBITDA margin. The other two distribution companies faced gross margin pressure as a result of the closeout sales performed also here in the fourth quarter. The closeout sales had impact on profitability, but the positive message is that we've completed the closeout sales and we have not performed any inventory write-downs. Both companies are now having a much better structure ahead of 23, and I will talk more about that later on in the distribution segment. So an overview of the entire group's financial performance in Q4 show that we had negative net sales growth of minus 9%, but games delivered 96% positive growth, while distribution had minus 18% negative growth. The adjusted EBITDA was plus 31%, and adjusted EBITDA was plus 41%. Both these profitability metrics saw significant positive impact from games, while distribution had negative profitability contribution. Cash flow from operating activities reached 406 million SEC, which is a year-of-year improvement of more than 2,000%. And pausing here for a while, looking at the graph to the right, it's clear that we've reached our highest EBITDA level in the last five quarters, even though distribution is very far from its historical profit levels. So the EBITDA growth comes from games where we have formed a new structure in 2022. Throughout the year, we've seen consecutive EBITDA growth quarter over quarter in our games segment. I said before that net revenues from new releases have had higher and higher net sales contribution every quarter in 2022. But even without new releases, we have consecutive EBITDA growth every quarter. So before 22, Thunderfall Games was heavily dependent on successful game releases to reach decent EBITDA levels. Now when we've reached a stable EBITDA baseline from our low risk revenue pillars, co-development and partners, we are in a very different situation where we managed to release successful games. So successful game releases can now take Thunderful Games to new levels, as we've seen here in Q4, and it all starts from a much higher and more stable EBITDA baseline. So also spending some time on the black bars, the not so nice development in distribution, We have been talking for a long time about high inventory levels. So finally, now in the second half of 22, we managed to reduce inventory levels with 280 million SEC. This resulted in a free cash flow after investing activities for the whole group of almost 200 million SEC for the full year 22. So this means that cash flow generated in distribution has not only financed all of the investment in games, but was also used to amortize bank loans. The net debt was reduced with 260 million SEK in Q4 and is 180 million SEK lower than what it was at the end of the last year. So, we have now been able to finance all game investments in 2022 with a cash flow from distribution, and we have also been able to amortize bank loans and reduce our net debt. And this is what Thunderfall's equity story was all about in the first place. Use the strong cash flows generated in distribution and invest in games. So let's have a quick look at Thunderfall Group and our two segments. I will also spend some time summarizing the full financial year 22 in each segment and briefly touch on a few initiatives and achievements in both of the segments. Thunderfall Group operates in two segments, games and distribution. While the distribution business covers the Nordics, the games business is global. We are now almost 480 employees. We have 11 internal games in development and 18 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. In Thunderfall distribution, this segment consists of three company groups. BergSolar is selling Nintendo products in the Nordics and in the Baltic states. BergSolar's business has been stable in the last years. There is a clear seasonalization toward the end of the year. And BergSolar also has a clear margin mix where software sales have higher margins than hardware sales. Amotoys is our Nordic toy distribution group and is currently distributing around 70 brands, including some of the most popular toys on the market. Amotoys business has had a stable top line over the last four years. And before the pandemic, this was the distribution company Thunderfall with the highest margins. Nordic Games Supply is a Nordic distributor of gaming accessories, gaming merchandise and boxed video games. Nordic Games Supply's business saw revenue growing fast during the pandemic, but the company has seen significant negative growth post the pandemic. And over time, this company group has had the lowest margins of the three distribution companies. As we've now closed the financial year 2022, we've included a slide to compare Thunderfall Distribution's financial performance to previous years. Starting at the top, we have three graphs of company-specific developments in net sales and adjusted EBITDA. Starting from the left, the performance in 2022 was very similar to 2021. Bergsala has been stable for several years and has not been causing the problems we've seen in distribution in 2022. Amatoi's top line, the net sales, has been very stable for four years. But in 2022, we only reached one million SEK in EBITDA when we were reaching around 30 million SEK in the two previous years with similar net sales. The explanation is significantly increased costs for warehouse operations and a need for an extra external warehouse throughout 2022. In Nordic Games Supply, we've seen a clear growth in 2020 and 2021 that was caused by the onboarding of the new distributor brand Razer and the effects from the pandemic. In 2022, we've had a decline accelerating quarter over quarter, and here in Q4, we had negative growth of 40% year over year. As with Amatoys, Nordic Games Supply has been negatively affected by increasing costs for warehouse operations in 2022. Under the three graphs, we have historical snapshots of inventory and development of cash flows for every year since 2018. And already at the end of 21, inventory levels had reached 760 million SEC. The inventory buildup continued in first half of 22, and we were not able to reduce inventory levels until the second half of 22. So here in the second half of 22, we managed to reduce inventory levels with around 280 million SEC. But this graph clearly also tells us that there are further improvements to be made. At the end of 2022, we are in a level somewhere in between where we were at the end of 2020 and at the end of 2021. But net sales in both Amortoise and Nordic Game Supply are similar in the full year 2022 as they were in the full year 2020. So the last graph, cash flow from operating activities in the whole group, showed that we had negative cash flow from operating activities in both the full financial year 2020 and in the full year 2021. This was mostly caused by distribution. In 22, we had small but steady development in each LTM period for Q1, Q2, and Q3. And now finally in Q4, we managed to see a major impact in a 12-month period. So we are glad to see that the overall company group is again cash flow positive, but it's also important to remember that we have initiated a few cost initiatives in distribution. In the previous financial update, I talked about some workforce reductions. In Q4, we've decided to cease our small operations in Germany for Nordic Game Supply, where we have been loss making for quite some time. For Armatoys, we managed to start both inbound and outbound operations from Thunderfall's own warehouse in Jönköping, now here in January. The warehouse move will continue for some time, but we will see significant cost reductions for warehouse operations for both Armatoys and Nordic Games Supply in 2023. So with the reduced inventory levels and the performed cost initiatives, both Armatoys and Nordic Games Supply now have better structures ahead of 2023. Then, it's a question of how the pressure on purchase power for consumers in the Nordics will continue to affect us. So far, we haven't seen much impact in Burgsala or Amatois. But Nordic Game Supply was down more than 40% year-over-year in Q4, even though we did close out sales. So the start in 2023 seems to be going in the same direction, and it's very difficult to give long-term guidance for Nordic Game Supply in these challenging market situations. Moving on to Thunderfall Games. Thunderfall Games is structured around our four revenue pillars. Our co-development 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 shares from the developed games. There is no need for investments in this revenue stream. Our partners activities is where we are helping external game development studio to self-publish their games. As with co-development, this pillar contributes with predictable revenues and with revenue shares from games that our partners self-publish. Also for partners, there is no need for investments in this revenue stream. The IP building pillar is represented by all studios focusing on our own IPs, and this is also where we do publishing. Both of our own IPs, but also when we publish external games and help external studios building up their IPs. This revenue stream is dependent on a high rate of investments, but can generate high profitability levels when published games reach commercial success. Finally, the investment pillar ranges from investments in early prototype game projects to acquisition of larger companies. This revenue stream is naturally dependent on investments, but for game projects, we benefit from revenue shares from the games in which we have invested. For these game projects, we always try to sell in our partners' activities. So looking back at 2022, also for Thunder for Games, there certainly have been a few achievements made. For co-development, the collaboration between our two studios, CodeSync in the UK and StageClear Studios in Spain, have increased over the year. We have managed to grow revenues and EBITDA quarter-over-quarter throughout 2022. We have signed new contracts and increased the number of developers engaged in co-development. For the partners revenue pillar, we have had fantastic revenue improvement in 2022, but it has not been as stable quarter-over-quarter as co-development. We have restructured the organization and recruited new senior staff members. We have leveled up our service offering and have been able to onboard a few new clients. Two of those new clients are Ponkle, the developer behind Vampire Survivors, which has been nominated to Indie Game of the Year here in 2022. We've recently also onboarded GSC Game World, the AAA developer behind the Stalker series. And the team is now working on one of the most anticipated AAA titles for 2023, which is Stalker 2. This also marks the first AAA client for Thunderfall Partners. As for IP billing, our sales contribution from releases in each quarter have increased quarter of a quarter throughout 2022. We've completed organizational changes in our marketing and production team and seen effects from these changes in the second half of 2022. We have now announced some titles resulting in the highest interest we've ever seen before game releases, and we will continue to work as hard as we can to try to maximize the sales potential for these games. Our back catalog sales have been stable in 22, despite the negative market sentiment. The positive development comes naturally as we've been releasing games more frequently in the last two years. So if we summarize all of this, the explanations behind Thunderful Games' consecutive EBITDA growth in every quarter in 2022 are one, the stable revenues from co-development and partners, low-risk revenue pillars with no need for investments, and naturally, these two pillars are also contributing with positive cash flow. And second, the IP building pillar, where we have seen net revenue increase quarter over quarter in 22. And in Q4, we finally managed to reach profitability in the IP building pillar. In fact, IP building was profitable also excluding the successful release of Somerville from Jump Ship. So reaching a much higher EBITDA baseline from our low risk revenue pillars, co-development and partners has really been the achievement of the year in Thunderfall Games. And whenever we have a quarter with some truly successful game releases, as we have had now in the Q4, we will see revenues and EBITDA starting to come up from this much higher EBITDA baseline. So moving on to the releases in games. In Q4, we have released eight games. Three of those games were developed by internal studios and another five games from external studios. The released games have contributed with almost 92 million SEK in net sales in Q4. In descending order, the main contributors are Somerville, Lego Brick Tales, and The Last Hero of Nostalgia. After the quarter, we have released two more games, both coming from our internal studios. Yesterday, Early Morning Studio, our mobile first studio, released Vendir, Plague of Lies. It's the first game released from Early Morning Studio since we bought the studio about a year ago. The title was released globally on Apple iOS and Google Play. And today, Code Sync's VR title, Jurassic World Aftermath Collection, is being released as a day one title to PlayStation VR 2. For the games we currently have in development, we start with this list of games from our internal studios. We currently have 11 titles in development, of which four are planned to be released in 2023. Some key highlights since we presented Q3 in mid-November has been the announcement of SteamWorld Build in late January, This announcement has turned out to be our most successful announcement in Thunderfall's history. Wishlist has been built up fast and we've had more demo downloads than what we've ever seen for any other game in Thunderfall's history. In early February, we also announced CodeSync's Astronimo. It's the first own IP game since Thunderfall acquired CodeSync back in 2020. The game is coming soon to early access. Lastly, Project Cockadon has been added to the internal pipeline since we bought the studio Fitspin after the end of the quarter. I'll give you some more details about that acquisition after Lennart's financial update. For the externally developed games, we now have a pipeline of 18 games. As many as 15 of those games are currently planned to be released in 2023. Some key highlights for the external pipeline since our last financial presentation in mid-November includes Viewfinder, a game announced at Game Awards in December. The game is published by Thunderfall and developed by Sad Oil Studios, a studio in which Thunderfall is minority owner. Planet of Lana is now set to be released in May. Recently, our team posted that the game has reached more than 300,000 wishlists. The last game is a little teaser with project named Raspberry. We still haven't announced it, but the game entered close alpha testing in November 22, and Thunderfall will announce our publishing efforts for this title in the very near future. And now I'm handing over to our CFO, Lennart Sparud, who will guide you through the financials.

Thank you, Anders. And hello, everyone. I will now guide you through some more detailed financial slides. The fourth quarter was a very strong financial quarter for the game segment, but yet another weak quarter for the distribution segment from a profitability perspective. To guide you through the details, starting with net sales development, where we had seen a growth of minus 9% quarter over quarter, reaching 1.2 billion SEC in the quarter. The game segment has a growth of 96% and the distribution segment a growth of minus 18%. For adjusted EBITDA, the growth is 48 million SEC or 41%, reaching 166 million SEC in the quarter. Adjusted EBITDA in the game segment amounted to 92 million SEC, which is 283% above the comparison quarter. On the other hand, the distribution segment showed an adjusted EBITDA growth of minus 41 million SEC or minus 44%. The cash flow from operating activities was far better in the quarter versus the comparison quarter. We reached a positive cash flow from operating activities of 406 million SEC compared to 19 million SEC in the comparison quarter. I will come back to this part later in the presentation. Looking on segment level, for Thunderful Games, we have seen a growth in net sales quarter over quarter of 96%, reaching almost 200 million SEC in the quarter, which by far is the highest net sales in the games segment in a single quarter so far. Organic growth in games is 23%, and growth from companies acquired in the last 12 months is 73%. Breaking down the organic growth, it's mainly CodeSync, RoboTurdy, and HeadUp driving the organic net sales growth in the quarter. And the acquisition-driven growth in net sales and EBITDA is related to the acquisition of Jump Ship in mid-November. For investments in games, we reached total investments of 133 million SEK in the quarter, of which 60% is related to the acquisition of Jump Ship. For development CapEx, we reached 37 million SEK. This is mainly because we have more developers employed compared to the year before, and we are now more than 300 developers in the group. In the distribution segment, we have seen an overall net sales growth of minus 18% quarter over quarter. Breaking down in the subgroups, we see that BergSolar is decreasing with 5%, driven by less availability of hardware compared to the comparison quarter, This is due to lack of components and not logistic obstacles. And yes, it's decreasing with 41% or 160 million sec due to a general lower market demand for game accessories, particularly in higher price categories. Amatois is decreasing with 14%, quarter over quarter, and the decrease for Amatois was driven by better access to products in the third quarter 2022, when the net sales increased by 19% compared to Q3 2021. For profitability measured in EBTA distribution, the segment has an overall growth of minus 39 million SEC, or minus 41%. Verksalas EBITDA delta is up 4 million SEK despite the fall in net sales, and this is primarily due to a high proportion of sales of games, which have a higher gross margin than hardware. In NGS, the EBITDA delta of minus 39 million SEK is primarily explained by lower gross profit and higher logistic costs. And the lower gross profit comes from a lower net sales, but also a lower gross margin as an effect of the structured clearance sales in the quarter. OMO Toys EBITDA Delta is down 4 million SEK, and this is explained by pressure on margins from clearance sales of inventories and continued high logistics overhead. Our short-term view of the demand in distribution indicates continued strong demand for distributed Nintendo products and toys, but far lower demand for game accessories. We have continued to work hard on reducing the inventories levels and we'll continue to do this through this year. The inventory level is 210 million SEK lower than the end of Q3. So total net sales in the quarter are down 9.2% compared to the comparison quarter. The Thunderfall game segment has an organic growth of 23% and an acquisition-driven growth of 73%. As mentioned before, code single robot head and head up is the main driving factor to the organic growth. And the net sales growth in the distribution segment was minus 220 million sec or minus 18%. Net sales in all three companies in distribution was less than in the comparison quarter. As mentioned earlier in this financial section, the cash flow from operating activities was far better in the quarter versus the comparison quarter. We reached a positive cash flow from operating activities of 406 million SEC compared to 90 million SEC in the comparison quarter. Less inventory buildup in distribution contributes with cash flow of 208 million SEC in the quarter. Changes mainly in the distribution segment have produced desired results, but work still remains to optimize stock levels and adapt operations to prevailing market conditions. Even so, it's pleasing that the group once again is reporting positive cash flow. We have just above 700 million SEC tied up in net working capital as per end of December 2022, compared to almost 1.1 billion SEC by the end of 2021. The key driver behind the strong improvement in the cash flow is the net effect in core working capital in the distribution segment, with a net contribution of almost 340 million SEK. By the end of the quarter we had 0.5 billion SEK in total available cash if we include our unutilized credit facilities, compared to 122 million SEK by the end of 2021. Net debt by the end of the year is 118 million SEK compared to a net debt of 377 million SEK by the end of September 2022. The net debt over EBITDA ratio for 2022 was 0.3 times. And that was the end of the financial section.