Thunderful Group AB

Hi and welcome to today's Q1 report presentation with Thunderfall Group, represented by CEO Anders Markqvist and CFO Lennart Sparud. My name is Dennis Bergin. I'm an analyst from Carnegie and I will host the Q&A session that will be held after the presentation. I would like to remind our viewers of the opportunities to submit questions and I'll make sure to read them during the Q&A session. With that said, feel free to kick off your presentation.

Thank you, Dennis. Good morning, everyone, and welcome to today's presentation of Thunderfall Group's financial results for Q1 2023. My name is Anders Meyerqvist, and with me today is Thunderfall Group's CFO, Lennart Sparud. Today's beautiful background is from the game Planet Atlanta. We are releasing Planet Alana exactly one week from today on the 23rd of May. So Planet Alana is the first significant release from Thunderfugames here in 2023. But there is more coming up and I will give you an update of our release pipeline later on in this presentation. In today's agenda, I will start with the key highlights in Q1, some background on Thunderfall Group and our two segments. And lastly, CFO Lennart will guide you through the financial section. Thunderfall Games delivered net sales of 107 million SEK with EBITDA of 44 million SEK. We reached organic growth of not less than 28%. 28% is even higher than in the last quarter when we had 23% organic growth in Thunderfall Games. Throughout the year 2022, net sales from new releases kept growing and growing each quarter. The first quarter here in 23 has been a silent quarter in terms of releases, where Thunderful Games had not more than 4 million SEK in net sales from new releases. So despite the limited contribution from new releases in this quarter, Thunderful Games delivers a solid 44 million SEK in EBITDA, and that is 110% higher than in the comparison quarter. In Thunderfall distribution, both Bergsala and Amatoys had good performance here in Q1, delivering all of the segments EBITDA in this quarter. For the two companies where we suffered from challenges last year, that's Amatoys and Nordic Game Supply, both of those companies experienced better profitability year over year here in the first quarter. And this is a result of the cost initiatives last year and the warehouse move for Amatoys here in the first quarter. The end result for the distribution segment is a minor negative growth in net sales of minus 3%, but improved EBITDA reaching 19 million SEK this quarter, and that is a 32% growth year-over-year. Cashflow from operating activities in Q1 was positive at 64 million SEK. It's been negatively impacted by a short-term inventory buildup in Burgsala of as much as 100 million SEK. Bergsala was building up inventory at the end of Q1 to be ready for the release of the new Zelda game, Tears of the Kingdom. The Legend of Zelda Tears of the Kingdom was released Friday last week, and it has been the biggest day one release ever in Bergsala's history. And there will surely be a little something to be looking out for in the next quarterly update in August. An overview of the entire group's financial performance in Q1 showed that we had net sales growth of 2%, games was plus 30%, while distribution was negative with minus 3%. Adjusted EBITDA was plus 63% and adjusted EBITDA was plus 87%. Both profitability metrics saw significant positive impact from games, but also around 30% growth from the distribution segment. In the recent quarters, our distribution segment has been struggling. Year-over-year EBITDA development has been negative for several quarters. Turning this trend here in the first quarter is the start of a new era for Thunderfall distribution segment. We achieved significant profitability improvement, even though net sales growth is negative. And again, this is the result from the cost initiatives implemented last year and the fact that we've now moved the last of the three distribution companies to our own warehouse in Jönköping. The graph to the right shows that the group's EBITDA here in the first quarter is significantly higher than what we achieved in both Q1 and Q2 last year. And it's actually not far from what we achieved in Q3 2022. Q3 is typically a seasonally much stronger quarter in distribution. Development of net sales and adjusted EBITDA per quarter in the last 12 months show in the red bars our game segment, where this quarter's net sales is 30% stronger than in the comparison quarters, but not as strong as in the last three quarters. In relation to this, the achieved EBITDA of 44 million SEK is strong and is driven by our stable revenue streams co-development and partners. Our IP building revenue stream does not deliver positive EBITDA this quarter, mainly driven by the limited contribution of new releases and a seasonal slow quarter for back catalog sales. Black bars for distribution visualizes the improved profitability where sales has been lower than in all of the other four quarters, but adjusted EBITDA is just as high as in the seasonal strong quarter Q3 and higher than both Q1 and Q2 last year. So let's have a look at Thunderful Group and our two segments. Thunderful Group operates in two segments, games and distribution. While the distribution business covers the Nordics, the games business is global. We are now 490 employees. We have 15 internal games in development and 14 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. Thunderfall Distribution consists of three company groups. BergSolar is selling Nintendo products in the Nordics and in the Baltic states. Berg Sala's business has been stable in the last years and has a clear seasonalization towards the end of the year. And Berg Sala also has a clear margin mix where software sales have higher margins than hardware sales. Armo Toys is our Nordic toy distribution group and is currently distributing around 70 brands, including some of the most popular toys on the market. Armo Toys business has had a stable top line over the last four years. Nordic Game Supply is a Nordic distributor of gaming accessories, gaming merchandise, and boxed video games. Nordic Game Supply's business saw revenues growing fast during the pandemic, but the company has seen significant negative growth post the pandemic. Over time, this company group has had the lowest margins of the three distribution companies. So breaking down our distribution companies and comparing financial performance in Q1 this year to Q1 in the previous years. Berkshire is having stable net sales in the last three years. Profitability is a little lower this year since we've sold a higher share of consoles compared to previous year's first quarters. This quarter marks the first quarter in three years where we have not experienced supply chain issues for inbound consoles. For Amatois, the achieved EBITDA is back to levels we saw two, three years ago. Those years gave us around 30 million SEK in full year EBITDA. With the warehouse move completed here in the first quarter, we are on track to reach these historical EBITDA levels again. In Nordic Games Supply, net sales continues to decline, this time with minus 21%. It's not as much as the minus 41% we saw in the previous quarter, but market demand is still significantly lower than in the comparison quarter. On the positive side, the cost initiatives implemented last year gave us a neutral EBITDA in this quarter, which is perfectly in line with the comparison quarter, even though sales is down with minus 21%. So that being said, we've now managed to gear the organization and the fixed costs to better match the new market conditions. As for our inventory levels, Bergsala has increased inventory levels with as much as 100 million SEK here in Q1, but this is a positive sign ahead of the Zelda release in Q2. As I said before, the Legend of Zelda, Tears of the Kingdom, has been the biggest day one release ever in Bergsala's history. The inventory reduction has continued in both of the other two distribution companies here in Q1. The combined inventory reduction is minus 77 million SEK in Armo Toys and Nordic Game Supply. We are very pleased with this performance in relation to the combined net sales of 244 million SEK in these two companies. Thunder for Games is structured around our four revenue pillars. Our co-development pillar currently includes two other studios, primarily developing games based on IPs from external licensees. This revenue stream contributes with predictable revenues with solid and high margins, but it also contributes with rev shares from the developed games. And there is no need for investments in this revenue stream. Our partners activities 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 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. 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 in to sell our partners activities. So here in the first quarter, co-development and partners have together delivered higher EBITDA than all of the games segments EBITDA. That means that IP building has been loss making in this quarter, but it's marginal. And with more significant releases coming up in the next quarters, our IP building revenue stream is on good track to start delivering profits and cash flows in the three coming quarters this year. So before we are looking at the pipeline in IP building, let's start by showing what we have released in and after this first quarter. So we released two games from our internal studios in this quarter. The mobile game Vendir, Plague of Lies from Early Morning Studio and two ports of Jurassic World Aftermath Collection for VR. This time released on PlayStation VR 2 and Pico. The released games have contributed with 4 million SEK in net sales, which is slightly higher than the comparison quarter, but lower than all other quarters in 2022. After the end of the quarter, we have released two more mobile games, both coming from our publishing activities and developed by external studios. Super Meat Boy Forever is a mobile port of the old Indie Darling and has been released on mobile here in April. And LEGO Brick Tales, originally released on PC consoles in Q4, was released also on mobile platforms in April. As for the games we currently have in development, we start with this list of games from internal studios. We currently have 15 titles in development, of which five are planned to be released in 2023. Some key highlights from this internal tracker are, of course, SteamWorld Build. The announcement back in January was the most successful announcement in Thunderful's history. We have continued to see increased wish lists and demo downloads, and the release planning progresses just as expected. HeadUp's internal dev team is releasing two indie games on June 22. Tinkertown is leaving Early Access for a full PC release, and for everyone who loves the Super Meat Boy IP, you are going to love the hardcore puzzle game Dr. Fetus Mean Meat Machine. It's genuinely fun and will push your skills to the limit. HeadUp has also been involved in a number of prototype projects for some months, both using the internal dev team, but also in cooperation with existing studio partners. The first of those prototypes, the up to eight-player co-op game Torn Apart, is being released on Monday next week. So check it out if you enjoy really fun co-op gameplay with your friends. For our externally developed games, we now have a pipeline of 14 games. Eight of those games are currently planned to be released in 2023. On top of this, we are also porting some of the games released last year to additional platforms in this year, but none of those ports are visible in this list. So key highlights from the external pipeline includes Planet of Lana, We are releasing the game exactly one week from today, May 23, and this marks the first significant release from Thunderfall here in 2023. But there are more releases to come. I mentioned the progress going all according to plan for Steam World Build in the internal pipeline. And in addition to Planet Alana, the next game in this pipeline, Viewfinder, has seen a demo published here in April. I mentioned in the last quarterly update that the original announcement in December last year went very well and the reception now has been amazing and the game won even more awards at the game conference reboot here in April in Croatia. And now I'm handing over to CFO Lennart Sparud who will guide you through the financial section.

Thank you, Anders, and hello, everyone. I will now guide you through some more detailed financial slides. The first quarter was a stable financial quarter for both segments, from a sales and profitability perspective. To guide you through the details, starting with net sales development, where we have seen a growth of... Sorry, net sales are up 2% quarter over quarter, reaching 555 million SEC in the quarter. The game segment has a growth of 30%, and the distribution segment is in line with the comparison quarter, though minus 3%. For adjusted EBITDA, the growth is 24 million SEC, or 87%, reaching 53 million SEC in the quarter. Adjusted EBITDA in the game segment amounted to 44 million SEC, which is 110% above the comparison quarter. The distribution segment showed an adjusted EBITDA growth of 3 million SEC, or 28%. and we reached a positive cash flow from operating activities of 64 million SEK compared to 203 million SEK in the comparison quarter. And I will come back to this part later on in this presentation. Looking on segment level for Thunderfall Games, we have seen a growth in net sales quarter of quarter of 30%, reaching 107 million SEK in this quarter. Organic growth in games is 28% and growth from companies acquired in the last 12 months is 2%. Breaking down the organic growth, it's mainly CoSync, Thunderfall Development and Robot Teddy driving the positive net sales and EBITDA contribution in the quarter. The acquisition driven growth in net sales and EBITDA is related to the acquisitions of Jump Ship acquired in November 22 and Fitspin Studio acquired in February 23. For investments in games, we have reached total investments of 124 million SEK in the quarter. For development CapEx, we reached 47 million SEK. And this is mainly because we have more developers employed compared to the year before. We are now approximately 340 developers in the group compared to 280 developers at the same time last year. In the distribution segment, we see an overall net sales growth of minus 3%, quarter over quarter. Breaking it down in the subgroups, we see that BergSolar is up with 12%, and this was the first quarter in three years with no disruptions in hardware deliveries. NGS is decreasing with 21%, or 34 million sec, due to a continued general overmarket demand for game accessories. ArmoToys is decreasing with 2%, quarter over quarter. For profitability measured in EBTA in distribution, it's pleasing to see that the segment has an overall growth of 5 million SEC or 32%, which actually is a trend break against all quarters in 2022. Even though net sales in Bergshala are up 22 million SEC, the EBTA is only up 1.3 million SEC. The unlimited access to hardware with lower gross margin affects the gross profit negatively in relation to the comparison quarter. The demand for Nintendo products remains strong, driven by the successful release of the game The Legend of Zelda, Tears of the Kingdom, and a strong underlying demand from Nintendo's successful release of the Super Mario Bros. movie. In NGS, EBITDA is in line with Q1 2022, despite the 34 million SEK decrease in net sales, and this is, as Anders mentioned before, due to the cost initiatives implemented last year. Demand for the company's distributed products remains low, and our assessment is that the future demand will remain low in the short term. Omotoys EBITDA is up 4 million SEK. This is due to positive sales mix, FX effects and also reduced logistics overhead after the move of the warehouse to the group wide distribution center in Torsvik. Tuto net sales in the quarter are up almost 2% compared to the comparison quarter. Thunderfall game segment, as I mentioned before, has an organic growth of 28% and an acquisition-driven growth of 2%. CodeSync Robotech and Thunderfall Development is the main driving factor to the organic net sales growth in the quarter. And the distribution segment has a net sales growth of minus 50 million SEC or minus 3%. As mentioned earlier in this financial section, we reached a positive cash flow from operating activities of 64 million SEK compared to 203 million SEK in the comparison quarter. During the first quarter, the cash flow has been negatively affected by strong inventory build-up in Burgsala, ahead of the company's biggest game release of all time in May. At the same time, we are very satisfied that the other distribution companies have continued to reduce inventory value by 77 million SEK when the combined net sales of the two companies amounted to 244 million SEK. By the end of March, we had 643 million SEK tied up in net working capital compared to 877 million SEK by the end of March 22. By the end of the quarter, we had almost 330 million SEK in total available cash if we include our unused utilized credit facilities compared to 410 million SEK by the end of March 22. Net debt by the end of the quarter is 291 million SEK compared to a net debt of 158 million SEK by the end of March 22. The net debt over EBITDA ratio for the last 12 months was 0.7 times. And that was the end of the financial section. And we now hand over to Dennis Berggren from Carnegie for the Q&A.