Embracer Group AB (publ) (EMBRACB) Earnings Call Transcript & Summary

Welcome to Embracer press conference on occasion of this morning's press release. [Operator Instructions]. Now I will hand the conference over to CEO, Lars Wingefors. Please go ahead.

Thank you, Einar, and welcome, everyone, to this morning's press conference or conference. I'm very pleased today to announce the divestments of certain assets within Saber Interactive, which makes us to cease all operations in Russia. The divestments of selected assets are done with a purchase price of USD 247 million, which includes assumed earn-out liability of USD 44 million. The buyer is a company controlled of Matthew Karch, which is the company -- CEO, Founder of Saber Interactive and a major shareholder of Embracer through his entity, Beacon Interactive. Looking at why we are making this transaction and the strategic rationale for it. It reduces our geopolitical risk that has been a major issue for us in the past years. We increased our focus around the retained key projects, development projects, key IPs and key studios that remain within Embracer. The transaction reduces our CapEx, OpEx and the business risk relating to the overall PC console games pipeline. I've to say, it's a win-win solution for both parties, safeguarding, many, many developer jobs. Because of the cash flow is immediately improved, it yields additional headroom to amortize debt, which improves financial flexibility. This is an important step in our journey to transform Embracer into the future. Looking at the key components of the transaction. Again, the purchase price of USD 247 million, which is made up of a promissory note of USD 203 million, whereof $65 million will be paid up until September and the balance latest end of December 2024. The purchase price also consists of the absorbed earn-out debt obligations of $44 million. Then we have agreed additional consideration of up to $94 million if Matt would sell the business to certain conditions and certain time period. We have also given Matt option right to acquire 4A Games and Zen Studios within a limited time period. Worth highlighting that the booked value is including the earn-out liabilities $112 million. And the option price is significantly higher than that. Also, important to highlight that the license of Metro game series, the back catalog and the current games and all the royalties are within PLAION or some of the royalties goes to 4A, but the absolute majority of the economic upside of Metro remains within Embracer regardless of this option is exercised a lot. Looking at the financials. The net sales representing of the divested assets represents 4% of the overall net sales of the group, and it represents 1% of the adjusted EBIT last year or SEK 47 million. The EBITDA minus CapEx is -- were -- the last 12 months SEK 1.156 billion in the divested assets compared to a positive SEK 204 million (sic) [ SEK 214 million ] in the retained assets. Looking at the CapEx number, it was 1.4 -- over SEK 1.4 billion in the divested assets and about SEK 400 million in the retained assets. All in all, there is about 3,000 people being embraced in the divested assets and 800 people remains. The financial impact of the transaction. So net debt is reduced to around -- net debt is reduced by around SEK 2.1 billion upon full payment of the promissory notes. And cash earn-out obligations will be reduced by SEK 500 million. Most importantly -- or very importantly, CapEx will be reduced by around SEK 1.2 billion at annualized run rate. This includes the current or the agreed ongoing projects that we would have with the buyer. This means that we will be reaching the target of SEK 5 billion in annualized CapEx next -- in next financial year, starting April. But very important, even with these divestments, we are expecting a growth CapEx compared to the completion value of the releases we had in the last 12 months that were SEK 3.2 billion of the release games, including the divested -- games coming from the divested assets. And now we are looking at the forecast to complete the games. Next financial year, we see a significant growth post transaction. At closing, the transaction is expected to create a noncash net expense of approximately SEK 6 billion or representing approximately 9% of our equity on a pro forma adjusted basis end of December. The absolute chunk of that noncash net expense is driven out of the goodwill that were generated by the acquisitions of Saber Interactive 2020. That is the absolute majority of it. And we are mentioning this in the press release today that we believe that the connection -- the geopolitical issues relating to Saber Interactive have significantly affected the realized value of that goodwill in this transaction. Also, worth highlighting or mentioning that remaining goodwill of the retained companies is SEK 6.1 billion, which I feel very strongly about -- which is Tripwire, Aspyr, 4A Games, Tuxedo Labs and Demiurge. So looking at the studios. We are retaining many -- very important companies. 34 Big Things in Italy, Aspyr in Texas, Beamdog in Canada, Demiurge in U.S.A., Shiver in U.S., Snapshot in Bulgaria, Tripwire in the U.S., Tuxedo Labs in Malmo, Sweden and 4A Games and Zen Studios studios. However, they're being under the option with the buyer. And looking at the retained projects. It's including 2 notable joint projects with the buyer. If you look at the full list of the retained projects, we see the next AAA game from 4A Games. We see also an announced AAA games that are early in concept phase and not being yet in full development. We see a previously announced AAA game based on a very major license. We see a new AAA multiplayer shooter based on a controlled IP that is the full development since some time. We see a new AA game based on an Asmodee IP. We see a new AA game from 34 Big Things based on -- with controversial and iconic IP that we own. We see Killing Floor 3 from Tripwire. We see continued development of the very successful Teardown game in Malmo, Tuxedo Labs. And on top of that, we see the full upcoming pipeline and back catalog from Zen Studios, Aspyr and Tripwire. Worth highlighting, for example, from Aspyr, I was very pleased last night to see that the New Star Wars Battlefront Classic, they are releasing today seem to be well received by critics and also the team. So with that said, I would like to hand back to Einar for Q&A questions.

Thank you, Lars. The first question comes from the line of Erik Larsson.

Thank you. So my first question is that on the Saber assets that are remaining part of Embracer, we know some of these upcoming releases and franchises that you just mentioned. But how would you describe them in general or the earnings we saw in 2023, were they driven by catalog? What are the growth prospects going forward and so on, would be helpful to get some color there.

Well, obviously, we are retaining a good pipeline of games that I highly believe will continue to perform. For example, looking at Aspyr, I think they just recently had a successful release of Tomb Raider. The Tomb Raider First games. Today, they have Star Wars. They have a very interesting pipeline for the future that play to their own strength. Looking at Tripwire, they are in the end of their development on Killing Floor 3, a very competent, sizable development team, alongside with a very strong publishing team. And Tuxedo Labs obviously also had a good success bringing Tripwire -- not, bringing Teardown, sorry, to consoles end of last year. Zen Studios, I think, one of the leading companies in the field of pinball games in the world. They have also a very interesting strategy for the future that they will continue capturing that market. So in general, I feel very confident about the assets we are keeping.

Okay. And then my second and final question is just wondering if you -- I guess, you keep your ambition of getting down the net debt to SEK 8 billion.

Well, I think we talked enough about that, Erik, on the last quarterly call, but my mission is to reduce the net debt. And I think this transaction would obviously, in the course of next year, reduce the debt -- the net debt a bit. But I think most importantly, it will immediately improve the cash flow of the operations that would give more headroom in our amortizations and more -- improve our financial flexibility. So I think that's very positive. As mentioned in the last quarterly call, we had a number of ongoing structured processes. This is the first transaction that is announced and different processes might solve different things. I think this morning's transaction is a very important step into the journey, into the future.

The next question is from Simon Jönsson.

Lars, you said that you expect to reach the target CapEx with this transaction. Do you think you can be on that run rate, meaning around SEK 1.2 SEK 1.3 billion as soon as the transaction closes? Or will it take some time before you eventually get there? Or how should we view that?

I think we would be there quite immediately at closing. I see. Obviously, the SEK 1.2 billion is an annualized number, but on -- at closing, we would immediately reduce our CapEx. And then we have a number of joint projects with them. But I see that balance coming in balance quite straight away, I would say, in this instance.

The next question is from Ali Naqvi from HSBC.

Could you just understand the rationale in not selling the remaining parts of Saber Interactive? Or why are Beacon not buying it, putting it another way? And then in terms of the timing of the deal, why is the cash phased so far out? Is there a specific reason for that? And then finally, first of all, when is closing expected? And will Mr. Karch still be involved in the wider Embracer restructuring process?

So why aren't we selling the rest of Saber? Well, why would we. My business continue operating, Embracer and our companies very successfully. And the companies who are retaining are cash flow positive, very successful. So as I've been talking about in the course of -- the last 12 months, it is important for us to focus on making divestments that both solves the -- our need to reduce CapEx and partially net debt in combination. We could have been solving our net debt situation way before this by selling our most cash flow-generative assets. But that is not what we have done. We have been working very hard to get certain transactions through, and I'm very pleased to have this first announcement today. So that's why we're not selling all the assets. Now the cash payment, obviously, Matt is a very skilled negotiator. So it's been a commercial negotiation between many parties, including me. I think the solution with the promissory note is acceptable to us. It would, in the course of the next 9 months, generate $203 million, whereof $65 million will come in installments up until September. So everything in this morning's transaction has been negotiated on and off, and I think it's well balanced, and I'm very pleased with that transaction. Now Matt would obviously run this business that he is now buying. He will remain a significant shareholder of Embracer and we have a few joint projects between us. Now those projects are managed with other people between our groups. But that would obviously not have any management positions at Embracer. Neither do he have any Board position at Embracer.

And sorry, when did you say closing was going to be expected?

Sorry. Well, we didn't say there's a few closing conditions, but I expect closing to be fairly soon, but I don't want to give full -- I can't give full color on that.

The next question is from Rasmus Engberg, Handelsbanken.

I heard briefly in the Swedish interview where you talked about how you have secured the promissory notes exposure. Can you repeat that? I didn't pick all of that up.

Yes. I feel very confident about the security we have on the promissory note. Obviously, we have 43 million Embracer B shares to start with. But then we also have a very good negotiated full security package or all the assets that the buyer is buying. So I feel good about the security for the promissory notes.

And you said that Matt was expected to remain a long-term shareholder, he's not selling all his shares to fund this deal or...

Well, that's his own words, and that's what he has been telling me.

Fair enough. The other question, just a detailed question. The previously announced AAA game based on a major license. Is that something that is quite far into the future? Or is it something that is for the coming 12 months that you have retained?

No, I think that kind of game needs some deep love and respect. So without giving full color, I think it's some time left until that is released.

The next question is from Nicolas Langlet from BNP Paribas.

So maybe the first question on the Beacon funding, do you know if it's secured or not? So you said you feel very good about it, but is it secured already or not? Second question, so to come back on this comment on the AAA game based on major franchise. I think it's fair to say the KOTOR Remake, is that right? And if that's the case, who will be in charge of the project now because I think it was transferred to Saber. And finally, I'm quite surprised to see that the book value of the 14 games, you retained is only SEK 500 million, while it includes some major games. So any comment on that?

So on the security note, I don't know if I fully understood your question, but again, we have full security or the assets that he is acquiring. And on top of that, we have 43 million shares as a security. And so in general, I feel confident about the security over the promissory notes. But also, Matt's -- I think most importantly, I feel good about Matt's ability to manage these assets. He's been a good entrepreneur for well over 20 years. And well, knows his assets very well. So I hope and I'm sure he will be successful operating them. Now on your second question on -- you mentioned a license name there, and I'm sorry, but I have no further comments to that on the value of the gains. Well, the buyer has been acquiring the rights to a number of games. We could still remain in a few instances, publisher and continue to invest slightly into those projects, but the actual rights will be with the buyer of the games, and that's what -- hence we are moving a lot of capitalized game development to the buyer.

The next question is from Nick Dempsey from Barclays.

So for those combined assets, although the combined projects between the divested assets and the retained assets, is there a risk that you could need to pay away a material amount to the divested business in relation to those 2 projects, something that would be material in the context of this deal? Second question, are there any one-off cash charges related to separating off this business that Embracer will have to bear that we haven't mentioned there? And third question, you talked about other interest in acquiring these assets. Can you give us any indication of the types of potential buyer that showed interest in Saber before you went for this deal?

So on your first question, I think we had 2 projects -- joint projects post closing. The investment into those projects are I would not say significant, and they lie within the annualized SEK 1.2 billion CapEx. Remember, we had SEK 1.443 billion (sic) [ 1.448 ] CapEx in the divested assets. On the one-off -- sorry, and then we are now saying that we are saving or we're reducing CapEx with SEK 1.2 billion. So I think a bit of your answer could lie in between. On the third question on one-offs. Well, obviously, we are disclosing the noncash expense, SEK 6 billion in the press release. And according to my understanding, that will be the -- that would be the expense to this transaction.

And just on other interest in the assets, that was third question.

Sorry, other interests in -- sorry, could you repeat that question?

You mentioned, I think, that there were some other potential buyers, but this was the one that...

Sorry, sorry. Yes.

And can you give us...

We initiated this process last summer and been running with one of the Global Leader Advisors, a company in London, been talking to the industry. We've been talking to a lot of private equity. It's been a lot of interest, especially from -- on the private equity side. At the same time, it's a very complex business, especially the geopolitical issues really that were connected to the business, I think, limited valuation of it. And in the end of the day, when Matt put forward a proposal to us, that was actually, I think, the proposal that created the most shareholder value. So from that perspective, I'm pleased with this.

Okay. So just going back to my first question, sorry, I was interested in when the 2 combined projects between the divested and retained assets come to market gone to fruition, will you have to pay away a significant amount of the economics of those to the divested assets? Do we need to consider that when we're thinking about the...

Well, on -- I think on project #1, I'm thinking about, we would have the most of the economic upside. On the project #2, I'm thinking about I think the buyer would have most of the economic ups -- or not most, but more -- the majority of the economic upside even though we might recoup our investment earlier. It's also about managing the business risks. So this transaction has been negotiating between my senior management and the buyer on arm's length. So I would say they are to industry standard. But obviously, this kind of negotiations are it's a lot of details, and it's a very extensive contracts and processes and milestones to have this kind of agreement between parties.

There are no more questions at this time. So I hand the word back to you, Lars.

Thank you, Einar. Thank everyone for tuning in this morning, and thank you for the support from all the shareholders in a very difficult past 12 months, but now I'm really pleased to look forward into the future and this morning's transaction is a very important first step for us. Thank you, Einar.

Thanks a lot. This concludes today's call. You may disconnect your lines.