Thunderful Group AB

Please welcome to today's report presentation with Thunderful. I'm here with the acting CEO, Anders Maikvist, and CFO, Lennart Sparud. My name is Dennis Bergen, and I'm an analyst with Carnegie, and I will moderate the Q&A session held after the presentation. Please feel free to submit questions using the message box below the stream, and I'll make sure to read them afterwards. With that said, time to kick off the presentation.

Thank you, Dennis. And good day, everyone, and welcome to today's presentation of Thunderful Group's financial results for Q2 2023. My name is Anders Mykvist, and with me today is Thunderfall Group's CFO, Lennart Spadud. Last week, it was announced that Thunderfall's incoming CEO, Martin Wallfisch, starts next week on August 28th. Me and Martin have had handover meetings for a few months, and I'm delighted to be handing over to an experienced gaming veteran, and I wish Martin the best of luck leading Thunderfall in the future growth journey. As for investor meetings this week, Martin will be joining me and Lennart here in Stockholm today. And later this week at Gamescom, Martin will also be participating in Thunderfall events at Gamescom. As for today's agenda, I will start with the key highlights in Q2. Some background on Thunderfall Group and our two segments, with updates of each segment's performance here in Q2. And lastly, CFO Lennart will guide you through the financial section. Thunderfall Games delivered net sales of 107 million SEK with EBITDA of 38 million SEK. In this quarter, we had net sales contribution from new releases of 42 million SEK. Thunderfall released five games in the second quarter, including the beautiful hand-painted puzzle adventure game Planet of Lana, also visible on the screen behind me and Lennart. And net sales contribution from new releases included revenues from two platform deals. In Thunderfall distribution, we had 31% organic net sales growth and 250% organic EBITDA growth. This was driven by Bergsala's successful release of The Legend of Zelda Tears of the Kingdom. The distribution segment reaches 27 million SEK in EBITDA, despite the fact that Bergsala had minus 8 million SEK in negative EBITDA impact from FX effects. The group's cash flow from operating activities in Q2 was negative at minus 30 million SEK. The key driver for this was the inventory build-up of 56 million SEK. But this inventory build-up includes prepayments and goods in transit of 65 million SEK. And for seasonality reasons, Q2 is always the quarter where two of our companies do prepayments ahead of the peak season. For the two companies where we suffered from inventory build-up challenges in 2022, that being Nordic Games Supply and Amotoys, the inventory reduction for goods in stock continued in Q2. So we achieved another 42 million SEK in inventory reduction to these two companies here in Q2, leading to an accumulated inventory reduction of 119 million SEK year-to-date in those two companies combined. And both of these two companies have their peak season ahead of them here in Q3 and Q4. And we expect to continue delivering on our plan with the further inventory reductions in these two companies. For the consolidated group, an overview of the financial performance in Q2 showed that we had net sales growth of 23%, games was negative at minus 7%, while distribution was positive at 31%. Adjusted EBITDA was plus 19% and adjusted EBITDA was plus 56%. Both profitability metrics saw significant positive impact from the distribution segment. For Thunderfall games, the negative growth of minus 7% comes even though we had major net sales contribution from new releases. This is explained by weak development in the revenue streams co-development and partners. The main driver behind this is the end of a major agreement in the revenue stream partners. And in addition to this, both revenue streams, co-development and partners have revenue share agreements for some global indie successes. And as the gaming market for indie and double A games continue to face challenges, these revenue share agreements are also contributing less than in the comparison quarter. Development of net sales and adjusted EBITDA per quarter in the last five quarters shows in the red bars our game segment where this quarter's net sales is in line with the previous quarter, Q1, but 7% lower than the comparison quarter, Q2, 22. The EBITDA in games of 38 million SEK is slightly better than in the comparison quarter, but slightly lower than in the previous quarter. The decline in net sales year over year is, as I explained on the previous slide, mainly driven by the weaker development in the revenue streams, co-development and partners. The black bars for distribution visualizes the second best quarter of the five last quarters for both net sales and adjusted EBITDA. There are some significant mix effects within distribution in this quarter, and together with Lennart, we will try to guide you through these mix effects later on. In the next section, I will guide you through our two 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 506 employees. We have 14 internal games in development and 12 games from external developers in our pipeline up until 2024 releases. 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. Bergsala is selling Nintendo products in the Nordics and in the Baltic States. Bergsala's business has been stable in the last years and has a clear seasonalization towards the end of the year. And Bergsala also has clear margin mix where software sales have higher margins than hardware sales. Amotoys is our Nordic toy distribution company and is currently distributing around 70 brands, including some of the most popular toys on the market. Amatoys business has had a stable top line over the last four years. Nordic Games Supply is a Nordic distributor of gaming accessories, gaming merchandise and boxed video games. Nordic Games 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. The graph on this page shows that Bergseller suggested EBITDA is higher in the rolling 12 months period up until Q2 this year than what it was in both full year 22 and also full year 21. For all motorists, we clearly see that we are moving in the right direction with rolling 12 months EBITDA growth between end of full year 22 and Q2 this year. And for Nordic Games Supply, we see continued negative EBITDA growth, even though we've completed several cost initiatives. The decline in net sales continues also in this quarter, and end consumer demand is still very low for our distributed products, especially in the higher price categories. Breaking down our distribution companies and comparing financial performance in Q2 this year to Q2 in the previous years. Bergsala's Q2 is solid with high organic net sales growth and improved margins. The delivered EBITDA of 35 million SEK is negatively impacted by an FX loss of not less than minus 8 million SEK. For Amatoys, Q2 sees EBITDA growth of 5 million SEK year over year, despite minus 3% in net sales year over year. The main reason why we are not delivering the same margins as in 2020 and in 2021 is because Q2 23 had negative margin impact from closeout sales of spring summer items that we've kept in the warehouse since the spring summer season last year. This product category was not possible to sell in the major closeout that we performed during Q3 and Q4 last year. But now finally, we have come to a point where we are back at normal closeout sales lists in Amatoys, similar to what we had in the more profitable years 2020 and 2021. In Nordic Game Supply, net sales continues to decline, this time with minus 30%. The general market demand is still significantly lower than in the comparison quarter. With less than 100 million SEK in net sales, it's difficult for Nordic Games Supply to deliver positive EBITDA in Q2. And we also had some additional costs from the closure of the German business in Q1. This is affecting EBITDA here in Q2 with minus 2 million SEK. The inventory levels are lower in Q2-23 compared to both 2021 and 2022. The inventory reduction has continued in Nordic Game Supply and Amatoys. And if we are looking at the goods in stock, disregarding the goods in transit and prepayment ahead of the peak season, the combined inventory reduction is 42 million SEK here in Q2. This means that we have achieved 119 million SEK combined inventory reduction year to date in these two companies. Moving over to the segment Thunderful Games. Thunderful 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. Our partners activities is where we are helping external game development studios to self-publish their games. The IP building pillar is represented by all of our internal 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. The investment pillar ranges from investments in early prototype game projects to acquisitions of larger companies. Here in Q2, the IP building revenue pillars saw net sales contribution from new releases of 42 million SEK. This includes two platform deals and transactional sales from five releases. Despite this, net sales development year over year in Thunderful Games is negative, and this is explained by weaker development in the revenue streams co-development and partners. In partners, the end of a major agreement is the main explanation to the negative net sales growth year over year. As mentioned earlier, both of these two revenue streams, co-development and partners have revenue share agreements for some global indie successes. And as the gaming market for indie and double A game continues to face challenges, these revenue share agreements are also contributing less than in the comparison quarter. Now let's have a look at Thunderfall's releases in the second quarter. So we released five games in this quarter. Two of these came from our internal studios and three games were developed by external studios. Total net sales contribution in Q2 from releases was 42 million SEK and this includes two platform deals for both Planet Alarna and also for Viewfinder. Viewfinder was released in July and has no transactional sales in Q2, but the game was submitted and approved by the platform in Q2, which means that Thunderfall had to recognize the platform revenue in Q2 due to revenue recognition rules. So these two games, Planet of Lana and Viewfinder, have both received great reviews and feedback from gamers, scoring above 80 in OpenCritic score, with very high percentages in both critics recommended from OpenCritic and in Steam user reviews. For the Planet of Lana release in Q2, Thunderfall had the highest wishlist numbers we've ever had ahead of a release in user ratings and critic reviews have been excellent. Despite these facts, transactional sales numbers in Q2 was not as good as we were hoping for ahead of the release. We've seen peers reporting that the market has been more challenging for indie and AA games recently, and Thunderfall has experienced the same challenging market conditions. Based on this, we have made some adjustments in our release planning ahead of our coming releases here in 2023. And looking forward, we are very pleased with the positive user ratings and reviews, and we strongly believe that we can continue to attract new players and continue converting wish lists over a long time period. And we expect Planet of Lana to be one of Thunderfall's key long-tail titles, similar to our successful franchise SteamWorld. For the games we currently have in development, we start with this list of games from our internal studios. We currently have 14 titles in development, of which four are planned to be released in 2023. This does not include games planned for release after 2024, and it does not include additional SKUs to games that have already been released. One of these examples is Somerville that will be released on PlayStation PS4 and PS5 at the last day of August. The highlights from the internal tracker includes our next SteamWorld game, which is SteamWorld Build. In the second quarter, we have kept building up our wish lists, awareness and momentum. And later this week at Gamescom, there will be some exciting news for SteamWorld Build. For our externally developed games, we now have a pipeline of 12 games. Six of those games are currently planned to be released in 2023. As with the internal pipeline, this does not include games planned for release after 2024 or additional SKUs. So of the six games planned to be released here in 2023, two of them have been announced up until today. This means that we are still planning to both announce and release four additional games from our external studios in our publishing outfits. And now I'm handing over to CFO Lennart Sparud, who will guide you through the financial section. Thank you.

Thank you, Anders, and hello, everyone. I will now guide you through some more detailed financial slides. The second quarter is affected by the strong sales development in the distribution segment, all related to Bergshala. To guide you through the details, net sales are up 23% quarter over quarter, reaching 750 million SEK in the quarter. The game segment has a growth of minus 7%, and the distribution segment has a growth of 31%. For adjusted EBITDA, the growth is 20 million SEC or 56% reaching 50 million SEC in the quarter. Adjusted EBITDA in the game segment amounted to 38 million SEC, which is 9% above the comparison quarter. The distribution segment showed an adjusted EBITDA growth of 90 million SEC or 762%. We reached a negative cash flow from operating activities of minus 29 million SEC compared to minus 40 million SEC in the comparison quarter. And I will come back to you to this part later in the presentation. Looking on segment level, for Thunderfall Games, we have seen a growth in net sales quarter of quarter of minus 7%, reaching 107 million SEC in the quarter. Game releases contributed with 42 million SEC, while weak development in the co-development and partner streams explains the lower net revenue figure. Contribution from new releases includes platform deals worth 38 million SEC, hence only 4 million SEC from digital sales. Organic growth in games is minus 8%, and growth from companies acquired in the last 12 months is 1%. In the organic companies, it's mainly CodeSync, Thunderfall Development, and RobotoD, driving the 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, which was acquired in November last year, and Studio Fish Spin, acquired in February this year. For investments in games, we reached total net investments of 64 million SEK in the quarter. During the second quarter, an external game developer repaid 32 million SEK related to a game project in which Thunderfall invested 31 million SEK in the first quarter. For development CapEx, we reached 69 million SEC. This is mainly because we have more developers employed compared to the year before. And we are now approximately 350 developers in the group compared to less than 300 developers at the same time last year. In the distribution segment, we see an overall net sales growth of 31% quarter over quarter. Breaking it down in the subgroups, we see that Burgsola is up with 84%. The main reasons are the successful release of the game The Legend of Zelda Tears of the Kingdom, continued good access to hardware, and strong underlying demand from Nintendo's successful release of the Super Mario Bros. movie. NGS is decreasing with 30% or 41 million SEK due to a continued general lower market demand for game accessories. Anmo Toys is decreasing with 3% quarter over quarter. For profitability measured in EBTA in distribution, it is pleasing to see that the segment has an overall growth of 20 million SEK or 252%. EBTA in Burgsala is up with 20 million SEK driven by the above mentioned sales increase. Also, we need to bear in mind that revaluation of accounts receivables and accounts payables affecting EBTA with minus 8 million SEK in unrealized FX losses in the quarter. In NGS, EBTA is down 8 million SEK compared to the same quarter last year. With less than 100 million SEK in quarterly revenue, it's hard to be profitable despite major cost reductions year over year. Omotoys EBITDA is up 5 million SEC compared to Q2 2022. Despite minus 3% in net sales and minus 3 million SEC in operational FX losses, EBITDA is still plus 5 million SEC year over year due to cost reduction initiatives. Total net sales in the quarter are up 23%, as I mentioned before, compared to the comparison quarter. Thunderfall games segment has an organic growth of minus 8% and an acquisition driven growth of 1%. As mentioned before, CodeSync, RoboTeddy and Thunderfall development is the main driving factor to the organic net sales in the quarter. The net sales growth in the distribution segment was 142 million SEC or 31%. Also, as mentioned earlier in this financial section, we reached a negative cash flow from operating activities of minus 29 million SEK compared to minus 40 million SEK in the comparison quarter. The development in cash flow can be explained by a change in total inventories during the quarter of minus 56 million SEK, although during Q2, Armo Toys made purchases ahead of the peak season for which advanced payments and goods in transit totaled 65 million SEK. By the end of June, we have SEK 700 million tied up in net working capital compared to SEK 930 million by the end of June 2022. By the end of the quarter, we had SEK 285 million in total available cash if we include our unutilized credit facilities compared to SEK 335 million by the end of June 2022. Net debt by the end of the quarter is 365 million SEK compared to a net debt of 252 million SEK by the end of June 22. The net debt over EBITDA ratio for the last 12 months was 0.9 times. And that was the end of the financial section. And we now hand over to Dennis Bergerin for the Q&A.