Embracer Group AB (publ) ($EMBRACB)

Welcome to the Embracer Group Q4 and Full Year Report Conference Call. I'm Laurence, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Phil Rogers. He will now be joined into the conference room.

Good morning, everyone, and thank you for joining our webcast today covering Q4 and full year results. Muge and I welcome you today from Stockholm on voice and also on camera. And as usual, we have a short presentation to cover the main updates for our operating segments, a look at the financial performance and with our news this morning, we'll then spend most of our time looking ahead to cover the next step for Embracer Group before turning over to the Q&A. So with that, let's get going. Overall, our quarterly results reflect another delivery above plan on both the revenue and adjusted EBIT side. Total net sales were SEK 3.9 billion, a 10% organic drop year-over-year, which we'll see comes from PC/Console, which had some tough comps to Q4 last year with the launch of Kingdom Come: Deliverance II. Mobile and entertainment services both delivered growth in Q4. Now as we said in February, we took positivity into Q4, and it shows here on a core IP theme, Kingdom Come continued to deliver. Overall Q4 free cash flow was also strong. For the full year, sales totaled SEK 15.9 billion and adjusted EBIT came in at SEK 0.9 billion, above our guidance. Again we talked in February how this was clearly a transformative time for our group, Coffee Stain successfully completing its separate listing in December 2025 and the group working hard to deliver its plan to the full potential. Now Muge will go deeper on the financials shortly. But from my side, I just emphasize it's good to see the business delivery coming through in these results. It's also good to report here the positivity to the Metro 2039 reveal. That was mid-April and momentum is strong. And that takes us to today with the news of a proposed separation into 2 groups. The separation will be during 2027. So important to convey the focus in the business today. We know the importance of delivering results in parallel with these transformative plans to unlock long-term value. And with that, let's look at the operating segments. And first, PC/Console. Our Q4 net sales were SEK 1.6 billion for PC/Console, a headline 37% organic decline, again, coming off the new release comps. REANIMAL released strong reception from fans and critics and performed well as a new IP. Parcia is a talented team and working with the publishing skills at THQ, where they really have captured the hearts and minds of players, we have something to build for the long term here. New releases in Screamer and Ride 6 were positively received by critics and players and the talented team at Milestone is working hard on these games, getting them into the hands of more players. Our adjusted EBIT margin trend was stable quarter-on-quarter. And I'll keep it simple here and say something similar to how we said in February that 13% is clearly an improvement over Q1 and Q2, but it is not our ambition. We move to ROI. Now again, for consistency, we share this data, but as we move this group forward over this new fiscal year, we're likely to have a different format for sharing ROI information in the future. You'll see this quarter's releases on the far left at 0 quarters. All 3 new releases on their respective paths to breakeven and then to push on above with REANIMAL, the best-performing new title in Q4. It's not a surprise today that few games, ours or others get to breakeven in the first quarter of release. All games need commercial, brand and studio brains to combine to achieve discoverability, drive gamer engagement, fan service and sales. The PC/console segment is more competitive than ever. but it's rewarding too when we do things right. And this ROI chart again shows the importance of our 3 key priorities: investing in our core IP, operational discipline and targeted cost initiatives. And to that, also the importance of our announcement today to sharpen our focus further and report as 2 new business segments and ultimately, the proposal to create 2 clearly defined listed companies. Let's look at pipeline. As of today, we've got 30 announced titles. Gothic dominates our listing here of dated upcoming releases. Gothic 1 Remake is out within a few weeks now. Based on recent previews, it's fair to say that critics really feel what was intended. This is Gothic. The soul of the original game is truly preserved. We're now in that final polish ahead of release on June 5. Our list of to be-dated games is longer. Heading into the summer, both Metro 2039 and Tomb Raider: Legacy of Atlantis have great activity to share with fans. We know that execution discipline will be critical to converting this pipeline into significantly higher profitability and cash generation. Let's move to mobile. For mobile, we delivered SEK 680 million in net sales, 2% organic growth year-on-year, driven by successful and continued scaling of Sled Surfers. When we look sequentially, we see the continuation of the positive revenue growth with intact margins even compared to the seasonally strong third quarter. The teams are focused on user acquisition and live ops. Overall, we're confident in the development ahead. Now we switch to Entertainment & Services. Well, revenue in this segment totaled SEK 1.7 billion. That's a 36% organic growth year-over-year. This came from 2 strong new releases, physical releases at PLAION Partners, and this also led to the positive bump in adjusted EBIT Q4 to Q4. For Middle-earth, we continue to find meaningful licensing partnerships. The next installment of Magic: The Gathering, The Hobbit, arrives this August. Expanded creative discussions with internal studios and select external partners continue to build a robust long-term plan for games. Our teams in this segment finished the year with great momentum. And with that, I'll hand over to Muge.

Thanks, Phil, and good morning, everyone. Once again, a reminder before I start that all comparator figures exclude Coffee Stain, which is treated as discontinued operations since their spin-off back in December. Net sales for the quarter of SEK 3.9 billion were above management expectations and compared to prior year were impacted by divestments, FX translation effects and a very strong comparator. The negative year-on-year divestment impact, primarily from Easybrain and Arc was approximately SEK 400 million, while the FX impact was also approximately SEK 400 million. Now if we exclude these impacts, our organic and pro forma net sales growth stands at minus 10%. Now breaking this down on a segment basis, PC/console was down 37% due to the very strong comparator we mentioned earlier. This was offset by Entertainment Services, which delivered an organic and pro forma growth of 36% and mobile, which was up 2% year-on-year. For the full year, net sales of SEK 15.9 billion were down 25% on a reported basis due to the impact of divestments and FX. Excluding these effects, net sales were only slightly below last year at minus 3% on an organic and pro forma basis. The gross profit percentage for the quarter was 61%, down 14 points year-on-year. While the primary driver is segment mix with a lower proportion of PC/console in Q4 compared to last year as a result of the KCD2 release in the comparator. Now looking at marketing, total marketing spend was SEK 476 million or 12% of net sales, down 4 points year-on-year. Half of this reduction can be attributed to the impact of divestments, while the remainder relates to stronger revenue in mobile relative to UAC spend. Excluding the Easybrain impact, user acquisition costs as a percentage of mobile net sales decreased by around 9 points year-on-year to 52%. Operating expenses, excluding marketing, were SEK 876 million, down SEK 363 million year-on-year. This represents 22% of net sales, a reduction of 2 points year-on-year. Divestments impact the OpEx evolution by SEK 204 million. And on a like-for-like basis, OpEx decreased by around SEK 160 million compared to last year, reflecting our focus on tight cost controls. While this all delivers an adjusted EBIT for the quarter of SEK 360 million, compared to last year, adjusted EBIT is impacted by the strong KCD2 comparator I mentioned earlier. The underlying performance was more positive than what we see here as we also had negative impacts during the quarter of over SEK 200 million from noncash adjustments in active co-publishing and work-for-hire projects as well as impairments of SEK 40 million on noncore IP hitting adjusted EBIT. Divestments had minimal contribution in Q4 last year, but adjusted EBIT was impacted by around SEK 81 million of negative FX effects in the quarter. The mix impact on the gross margin level I mentioned previously led to a minus 10-point impact in adjusted EBIT margin, which was 9% for the quarter. On a full year basis, adjusted EBIT was SEK 905 million, which is ahead of our full year forecast. Now turning now to cash. As you can see, we delivered very strong free cash flow after working capital for the quarter of SEK 883 million. This is an increase of SEK 65 million over the same quarter last year or SEK 155 million when we exclude the contribution from Easybrain in the prior period. The strong Q4 free cash flow generation was driven by both the P&L performance we discussed earlier and by positive net working capital movements of SEK 730 million. This was mainly related to collections of trade and other receivables during the quarter and reflects the unwinding of the receivables increase we saw in Q3. We also benefited from some timing effects towards the end of the quarter, partly due to increased royalty payables from partner published products, which are expected to unwind in Q1. On a full year basis, we delivered a positive free cash flow of SEK 50 million. The full year comparator of SEK 745 million includes a free cash flow contribution of SEK 251 million from divested entities. The rest of the year-on-year evolution is primarily driven by the lower full year P&L contribution, partly offset by reductions in CapEx and improved net working capital movements. Now looking below free cash flow, the cash outflow from financing activities of SEK 930 million for the quarter relates primarily to net repayments of external bank loans. Cash outflow from acquired or divested companies of SEK 209 million for the quarter relates to the net proceeds from divestments of noncore assets. At 31st of March, this results in a net cash position of SEK 3.8 billion and available funds of SEK 6.8 billion. Now as we close out the full year, let's take a few minutes to look in a bit more detail at the evolution of our net cash position over the 12-month period. Net cash at the beginning of the year amounted to SEK 5.4 billion. As I mentioned on the previous slide, we generated a full year free cash flow after net working capital of SEK 50 million. And the largest part of the net cash evolution during the year was thus driven by a number of key strategic and corporate actions. These include cash returned to shareholders via our share buyback program amounting to SEK 500 million, the net cash impact of the Coffee Stain spin-off of SEK 495 million, net cash proceeds of SEK 105 million from divested of noncore assets and the payment of earn-outs in the year amounting to SEK 729 million. It's also worth noting that we now have relatively limited cash settled earn-out obligations of SEK 464 million spread over the coming 5 financial years, of which almost 3/3 are due in FY '26, '27. Net cash at the end of the year thus amounted to SEK 3.8 billion. After the completion of the key strategic and corporate actions I've just mentioned, we thus maintain a strong financial position. Well, I'll talk more later this morning about our plans for capital allocation and capital distribution going forward. Now moving on to the adjusted EBIT bridge. So far this morning, we've discussed the adjusted EBIT, and I want to walk you through here the difference compared to the reported EBIT that we have disclosed in our report today. As you can see, compared to adjusted EBIT of SEK 905 million for the full year, we have a reported EBIT of minus SEK 7 billion. While the difference is primarily related to noncash impairment changes, which have arisen in Q4. Goodwill has been impaired by approximately SEK 5.8 billion at year-end, while intangible assets, primarily IP rights, have been written down by SEK 1.6 billion. The majority of this total, SEK 7.2 billion arose in Q4. The assessment of goodwill takes into account prudent future assumptions on market dynamics as well as structural changes in the group. In terms of segments, SEK 3.8 billion is allocated to PC/Console, SEK 1.8 billion to mobile and around SEK 250 million to entertainment services. We also exclude net gains from divestments of SEK 303 million. The vast majority of these items affecting comparability are noncash. In addition to the IACs, net costs of SEK 523 million related to specific items arising from historical acquisitions. We are also highlighting today a change to our reporting that we will implement from FY '26, '27. As of the next quarterly report, we will add cash EBIT as a key performance metric. We believe this provides a better view of the cash economics of game development and avoids the time distortion associated with cost capitalization and subsequent amortization in future periods. From a management perspective, it also better supports our internal capital allocation process by ensuring that investments in game development are balanced with ongoing revenue generation. Cash EBIT, which for FY '25, '26 amounted to SEK 511 million is very similar to EBITDAC, which we already disclosed. The only difference is that cash EBIT also takes into account lease payments, which are considered to be normal operating items. So cash EBIT will replace EBITDAC as an alternative performance measure in our reporting from Q1. Compared to adjusted EBIT, cash EBIT replaces depreciation and amortization costs with the gross capital expenditure for the relevant period, whereas depreciation and amortization relates to the cost of past investments, gross CapEx relates to the actual game development spend in current period. While we'll continue to disclose adjusted EBIT, cash EBIT will be a core indicator in measuring our performance going forward. Moving on to forecast. Finally, looking ahead to the '26/'27 financial year. At this stage, we are providing guidance at a total group level only, and we'll start from now to guide on cash EBIT rather than adjusted EBIT. We expect to generate cash EBIT of at least SEK 1 billion. This compares to a cash EBIT of SEK 511 million in FY '25, '26 or adjusted EBIT of SEK 905 million. We expect a similar difference in absolute terms between adjusted EBIT and cash EBIT in FY '26, '27. In Q1, we expect a negative cash EBIT similar to Q1 last year with the potential that the catalog, which is delivering strongly can offset this. We have provided a quarterly breakdown for '25, '26 fiscal year in the appendix to this presentation. We expect full year free cash flow to be positive with a heavier weighting towards H2, following a similar trend to what we have seen in FY '25, '26. We will strive throughout the year to deliver upside potential to the forecast, and our ambition is to deliver consistent year-over-year earnings growth going forward. I'll now hand back to Phil.

Thanks, Muge. So that's the full year picture. What we've covered today and in the past few quarters illustrate the progress made over the past year, a year of real change and what that process of transformation made increasingly clear to us as we work through it is how the next path needs to look. And that's what we want to spend time on now because that's what today is really about the future. And with that, I'd like to warmly welcome Lars to today's presentation. Welcome, Lars.

Thank you, Phil. So good morning, everyone, and thank you for joining us today. Over the past decade, Embracer has been built through entrepreneurship, ambition and growth. It has been a long journey and especially for those who have been with us since the IPO in 2016. It has also been a journey with both ups and downs. Not every chapter has been easy, and I'm very aware of that. But it's also important to remember that over time, significant value has, in fact, been created. As you could read In my Chairman letter published this morning, we have learned a great deal along the way. We have learned from periods of strong expansion, from a more difficult market environment and from the changes we have to make within the group. We have also learned from the successful spin-offs of Asmodee and Coffee Stain, both operationally and strategically. Those lessons matter. They shape the decisions we are making today. And from the Board perspective, this is not about reacting to the short term. It's about taking a thoughtful next step that reflects what we believe will create the best long-term conditions for success. We believe we are now ready to move into the next chapter from a stronger and clearer foundation. And that is what today is about. We do not take this step lightly. This decision is the result of a great deal of reflection, discussion and learning over time. But from the Board perspective, we are convinced it's the right one. We believe creating Fellowship Entertainment as a company focused solely on AAA IP development and licensing will enable more and faster shareholder value creation than keeping it in the current structure. The core reason is focus. Greater focus creates better conditions for execution, clearer strategic direction and stronger long-term value creation. And that applies to both businesses. Let me start with Fellowship Entertainment. I strongly believe that the assets held by Fellowship are among the most undervalued in the industry. And that the time has come to advance efforts to realize their full potential. I'm convinced that Fellowship has the potential to reach industry-leading profitability and to deliver healthy long-term organic growth above industry average. That profitable growth will come from several sources, a greater cadence of outstanding AAA products, at least 2 per year starting next year, an increased focus on external licensing revenues through a dedicated business unit, continued adaptation of new technologies and AI and above all, more concentrated management attention on this specific opportunity. The good news is that we already have the assets needed to succeed. What is required now is patience, discipline and a great execution. At the same time, this separation also an opportunity to create a better and stronger future Embracer. This is a unique chance to shape the next Embracer using all the learnings from the past decade. The future Embracer will be different from the one many have known historically. It will move further away from the identity of a growth serial acquirer and develop into more of a compounder focused on cash EBIT and profitable growth. When I look at Embracer assets within the group in the coming years, I still see solid growth in cash flows. The target is clear. All directly reporting groups and companies within Embracer are to deliver positive cash EBIT on a recurring basis. That is an important cultural and financial shift and one we believe will improve both discipline and transparency across the group. Alongside these structural changes, capital allocation remains important. This morning, we also announced another share buyback program. Once the separation has been completed, my clear desire as a large shareholder is that both companies should return capital to shareholders on a regular basis. So to summarize, this is not a step taken lightly, but it is a step we believe is right. It is built on experience, on hard lessons and on conviction about what greater focus can achieve. We believe it gives Fellowship Entertainment the best possible conditions to unlock the value of its extraordinary asset base and gives Embracer the opportunity to move forward as a more focused, disciplined cash-generative company. And with that, we believe we are opening a new chapter for both companies. Let me now hand over to Phil and Muge again to take you through the rationale and the details. Thank you.

Thanks, Lars. So we talked throughout this year about building towards a disciplined IP-first group. What we're going to walk you through now is exactly what that looks like in practice, 2 businesses, their identities, their strategies and why both of them are built for the long term. Starting this fiscal year, we'll report these as 2 segments with the right level of detail to show progress and key performance. We strengthened our management team to ensure execution of our business plan and our goal to spin out Fellowship Entertainment on the NASDAQ main market in Stockholm during 2027. Two segments today, 2 stories, built from the same foundation, the same Embracer DNA, but serving gamers and the entertainment industry in different ways. Fellowship Entertainment, an IP-led company built for growth, built for enduring momentum with some of the world's most beloved franchises at its center. And Embracer, strong market positions, specialist expertise and resilient long-term business models, focused, decentralized and built for sustainable growth. 2 listed companies, 2 compelling investment cases. Let's go through both. Fellowship Entertainment is built around one strategic focus, IP or worlds that fans return to again and again. Here's what that means, game worlds that generate fans, not just customers, ones that compound in value over time through games, film, television, print, merchandise and experiences that extend far beyond any single release. As we develop, as we shape renowned IP, well, Fellowship holds commercial rights to the Lord of the Rings and The Hobbit. We hold commercial rights to Metro. We own Tomb Raider, Kingdom Come, Dead Island, Darksiders, Remnant and a deep catalog of additional owned and controlled IPs. We have a tight group of world-class game studios, more than 1,600 developers internally, large enough to deliver at scale, located internationally to take advantage of global economics and talent, agile enough to coordinate, enhance and share capabilities and technologies. We work as one group. And today, we're announcing the formation of a dedicated IP management and licensing division. a division to sit at the heart of Fellowship, a division that turns franchise ownership into recurring revenue across games, film, consumer products and beyond. This is not a portfolio of assets. It is a platform on which we are going to build one of the great entertainment companies of the next decade and beyond. Fellowship's IP is owned or controlled. We set the creative direction, set the release cadence. We determine the long-term strategy for every franchise in this portfolio. The Lord of the Rings alone represents one of the most valuable entertainment intellectual properties on earth, multigenerational, global and every great game we ship, every licensing deal we close, every adaption we bring to the screen grows the underlying value. This is a compounding business. Let's highlight Metro. We hold the commercial rights to one of the games, the world's most famous post-apocalyptic franchises with recently announced Metro 2039 showing how 4A Games continues to push and imagine what this franchise can be. Tomb Raider, having Crystal Dynamics leading co-development with Flying Wild Hog and Eidos-Montreal continues to develop on a gaming's most iconic protagonist. Tomb Raider: Atlantis is the first major game in 8 years and will release with the power of Amazon Publishing, and Tomb Raider: Catalyst coming soon after that. Fan anticipation and wish lists are at the height of excitement. Kingdom Come, one of the most celebrated open world RPGs of this generation, Warhorse at peak creative form; Dead Island, the next chapter already in active development at Dambuster. We teased Darksiders 4 from Gunfire Games last year. This is a series best. It's a massive action RPG experience with 4-player co-op and sprawling dungeons and fans of Gunfire's 2023 hit Remnant, well, fans will love it. When looking through a Fellowship lens, our last fiscal year showed the approach and the potential, a year without any major releases and yet the continued fan engagement and life cycle marketing brought more and more gamers into the world of Kingdom Come, giving us confidence on the approach for our IP focus, rewarding our confidence in the business as we maintained our margins. And with that, Muge will now talk to how we're seeing Fellowship's business performance on a pro forma basis.

Thanks, Phil. We are providing an overview today of the key pro forma financials for the last 2 financial years for both Fellowship and Embracer, which I'll come back to later in the presentation. Before diving into the numbers, I wanted to mention that as of fiscal Q1, we will be changing the segmental view in our quarterly reporting to align to this new business structure. We will thus move from the current 3 business segments, PC/Console, mobile and Entertainment Services to 2 business segments: Fellowship Entertainment and Embracer. This move will provide early visibility of the performance of the 2 groups ahead of the spin-off. The figures that we are presenting today will be subject to audit and potential refinements and changes as we move through the carve-out and spin-off process. With that said, we can now turn to Fellowship's pro forma financials. Fellowship delivered net sales of SEK 4.4 billion in FY '25/'26 this was a year with no material new release activity and the net sales primarily reflect catalog sales. After its release in FY '24, '25, KCD2 continued with a strong performance again in '25/'26. Revenue from the development of the 2 upcoming games in Tomb Raider series to be published by Amazon, alongside catalog sales of Dead Island 2 and KCD1 also contributed. When comparing the 2 years, the evolution is impacted by negative FX effects and the impact of lapping the release of KCD2 in the comparator. The strong catalog contribution is an illustration of the benefits of Fellowship's IP-centered model, operating durable, profitable franchise revenues. As we develop a higher release cadence in the future, we anticipate continuing to build this revenue engine, generating recurring high-margin sales and licensing revenues that underpin the expected revenue peaks that we typically see from new game releases. As you would expect from a PC/Console-driven business, profitability at the gross margin level is very healthy at over 80% with a gross profit of SEK 3.6 billion in '25, '26. Year-on-year, gross profit has evolved in line with net sales, showing a stable gross margin profitability. Looking forward, variables that may impact gross margins include sales mix between physical and digital sales as well as the proportion of revenue contribution from IPs that may attract royalty and license fees. On the cost base, we've continued to optimize the business with year-on-year OpEx reductions of SEK 100 million. Our objective for Fellowship going forward is to operate as a global integrated group and operations will be set lean in terms of publishing and corporate to ensure margins are returned to the business. The top line and margin evolution gives rise to lower adjusted and cash EBIT of SEK 1.2 billion and SEK 464 million, respectively, in FY '25-'26. The level of CapEx relative to depreciation and amortization costs is the driver of the difference in absolute terms between adjusted and cash EBIT. CapEx for '25/'26 amounted to SEK 1.2 billion, down from SEK 1.3 billion in the prior year. While we invest in the future, we continue to ensure that those investments are as productive as possible, and we aren't afraid to make the tough calls to pause or stop projects when they do not meet our expectations. We see the benefit here of cash EBIT as a metric as it indicates that even as we invest in our future, we're doing it in a responsible and sustainable manner that continues to generate positive cash EBIT margins in the present around 11% that you see here for '25, '26. Now going forward, Cash EBIT margins may be impacted by the level of capital we decide to deploy in growth CapEx relative to the revenue generated in a particular year. In the short term, these margins may be lower as we build the revenue engine I referred to earlier. But as that ramps up and release cadence increases, we can expect a steady improvement in the cash EBIT margins over time. Phil, back to you.

Thanks, Muge. Since I took on my position in August, we've talked about rewiring and refocusing Fellowship Entertainment. We're confident that this will deliver an inflection point in our earnings and cash flow. In today's market, we must strive to do more with less. I'm not saying that as some sort of challenge, it's actually our opportunity. We've talked about some of our key tenets in development or philosophies in development during the past 9 months, smarter, deeper collaboration, increased streamlining, setting up shared services, sharing tech, code and using AI. On that, AI is the latest tool in our developers' arsenal. And as we talked in our last AGM, a power multiplier when wielded by our experts. And to be clear, Fellowship develops in-house where our studios are generally the best in the world for that genre, where external talent brings a stronger fit, we will partner, publish or license. It's about reaching the widest possible audience with the very best experiences. Let's look at studio pipeline. Now capital efficiency, creative focus, better games, those 3 things are connected. And today, Fellowship Studios house more than 1,600 developer talents. Each studio has specialisms in terms of genre and IP experience. We've talked earlier about some of the games being built right now. And here, we also show the studio size and capabilities, their size and shape. In most cases, our teams are managing multiple projects varying from ideation and concepting to full production. You can see that from the icons. Concepting and preproduction work is crucial for our pipeline and future, finding the fun fast. It represents spend and investment today and again, it's one of the reasons why cash EBIT becomes our key performance indicator so that we allocate the spend properly in balance with the business. Our current fiscal year is anchored by Metro 2039 and Tomb Raider: Atlantis. We're heading into summer with great activity around both of these games. Fellowship Games really are in the spotlight. Standing here today, but looking into fiscal '27, '28, we expect to have Darksiders 4 in gamers' hands and have announced Tomb Raider: Catalyst in partnership with Amazon and more. Looking forward further, we have the next mainline Dead Island game from Deal Island 2, we have strong lifetime player engagement, 20 million slayers as we like to call them. And there's something special I'd like to share here and to bring some color to help you read this graphic is what the amazing team at Warhorse is working on, the unannounced production. I'm excited to say it's a new release in the Kingdom Come franchise. This isn't the time to say more than that. There will be later dates and by different people. But I think it's something that fans will love, and it's a game we hope to get into their hands next fiscal year. Now there's something else I want to share, too, something that illustrates better than anything else we could say what Fellowship is for. And again, it's about Warhorse, the team behind Kingdom Come. Warhorse is making a new game set in Middle-earth. The studio celebrated for its extraordinary depth, historical authenticity and storytelling is bringing that craft to the greatest fantasy world ever created, an expansive, deep open-world experience. Warhorse demonstrated with Kingdom Come that they are one of the premier open-world RPG studios on the planet. As we know, Kingdom Come: Deliverance earned PC gamers Game of the Year and just recently, a highly coveted BAFTA Games Award for Best narrative. It surpassed 5 million sold copies within its first year. Middle-earth deserves the game of that ambition and that craft. And this is what Fellowship Entertainment is, not just a holder of valuable IP, an active steward of it, putting the right creators in the right worlds and building experiences that can define a generation of players. More details to come. I'll quickly return to the pipeline. Without squinting too hard, we can see this is an internal pipeline that extends years into the future. It is a pipeline to deliver growth with our release cadence increasing, many games already deep in active development at studios that have shipped great games before. An often overlooked aspect of IP companies is the value of the licensing business itself. At Fellowship, licensing will not be a side business. Once established, it will be a dedicated division sitting alongside development and publishing, structured as a revenue-generating unit with clear accountability for growth. And we approach it with discipline and a keen eye on what fans actually want. We manage the portfolio across 3 tiers, and it matters how we structured it. Firstly, Middle-earth and Tomb Raider are our core tier. Full franchise orchestration, film, TV, consumer products, live events. These are global franchises businesses in their own right. We, of course, own and operate Middle-earth Enterprises, an IP management and licensing company that this year celebrates 50 years of stewarding the Lord of the Rings and The Hobbit, 50 years of considered guardianship. Historically, we have seen extraordinary adaptions of this work on film. As you all know, 2 further films are planned with our partners at Warner Bros. in the coming years. We continue to find meaningful licensing partnerships as we did with the hugely successful Magic: The Gathering set, Tales of Middle-Earth, with the next installment, The Hobbit arriving this August. And we believe there are great opportunities for meaningful expansion ahead in terms of tabletop games, location-based experiences and of course, in video games. Middle-earth Enterprises is a foundation. It is the platform from which we build out our full IP management and licensing strategy. And it shows better than anything, what stewardship of a world-class franchise looks like. Our specialists here covered Metro, Kingdom Come, Dead Island, Darksiders, Remnant and IPs with our Dark Horse business, game-first rhythm, selective category extensions. And then The Vault. I imagine a strong room of IPs, including Deus Ex, Legacy of Kain, Saints Row, TimeSplitters, Red Faction, underleveraged brand equity today that we intend to activate through remasters, new game treatments, reimagining and adaption licensing. I'll just say this on The Vault. The fans waiting for those franchises are real, and they've been patient. We hear that. Activating even a handful of these properties creates meaningful incremental value, and it's something we are actively working on. Our new license division has the potential to build durable high-margin revenue stream alongside games development and publishing. We're searching for leadership to join and build this with us. It is capital-light, supercharges value from our franchises and unlocks value from IP currently under leveraged. For investors, Fellowship Entertainment is the strategy we've been building toward, now operational, now reportable. Premium IP, The Lord of the Rings, Metro commercial rights, Tomb Raider, Kingdom Come, a world-class portfolio, a tight integrated group of creative studios, a new dedicated licensing division with a clear mandate to grow revenues across games, film, television, consumer products. A development model, an organization with capital efficiency built in, sharing, reusing, smart development, a near-term pipeline anchored by Metro 2039, Tomb Raider: Atlantis, a pipeline that extends into the future with announced and unannounced games to delight and build fans and now Warhorse in Middle-earth. An organization we're servicing today, an organization ready to get into its operating stride, segments in place, leadership in place, clean structure, a clear path for growth. It's our intention to host a Capital Markets Day closer to the spin-off date, where we'll spend more time with you on Fellowship's long-term strategy. By focusing on our core IPs, we can both strengthen fan engagement and drive improved financial performance. That is what Fellowship is built to do. Now let me turn to our second business segment, Embracer. As we have evolved the group, what remains a leaner, more focused group of durable businesses, tighter, more predictable and more disciplined than at any point in recent history. Lars' letter this morning talked in great depth about the journey we've been on as a group. What I read in the letter is that Embracer is a collection or an ecosystem and within it sits some of the most respected and resilient businesses in the games and entertainment industries, each with their own identity, their own audience and their own craft. These are not subsidiaries managed from the center. They are independent entrepreneurial businesses that happen to share an ownership structure. The ecosystem provides structured support and the benefit of belonging to something bigger without ever getting in the way of what makes each of them special. Some of the companies within the Embracer business segment have been making games or working with games for 30 years. That is not luck, its culture, craft and community built over decades. We're saying it today, so people are quoting it tomorrow. THQ Nordic and its studios has an extraordinary heritage of building and rebuilding beloved games. Gothic, SpongeBob, Wreckfest, MX versus ATV, they know how to make games that endure. DECA games specialize in mobile titles with long-tail engagement and strong community retention. Milestone is one of the world's leading motorsport video game companies, shaping the history of racing for the past 30 years. Tripwire Interactive creators of Killing Floor bring a dedicated community of co-op action fans. These are not one-hit wonders. These are businesses that have navigated platform transitions, technology shifts and changing player tastes. They will navigate and prosper through the next ones, too. Embracer is, of course, more than a games business segment. Entertainment & Services is a significant revenue contributor in its own right, too. Over the past couple of years, PLAION Partners has deepened its specialism in physical distribution, working alongside console manufacturers and video game companies alike. It generates revenue regardless of our own release slate that provides the kind of recurring noncyclical revenue that makes Embracer more predictable. The same is all true for PLAION Pictures, where a specialist team has built one of Europe's leading film distribution businesses. Today, PLAION Pictures manages partnerships with Hollywood majors across multiple European markets. Alongside this is a deep and profitable catalog of award-winning movies and a highly efficient digital distribution operation. For those of you who know Embracer, well, you'll know the passion for retro and that it runs deep in the veins, Limited Run, Game Outlet, Clear River, Tatsujin, Retro passion also in PLAION Partners and our specialist team replay. Just last month, SNK and Replay announced they've teamed up to bring the NEOGEO home arcade gaming system back for its 35th year anniversary. Fan reaction was sensational, true specialists. Embracer comprises several other niche leaders to mention a few. Aspyr Games, the developer and publisher specializing porting, remastering and publishing classic AAA games for modern platforms. Limited Run Games I've just mentioned for the industry-leading publisher and distributor of award-winning collectors editions, rare video games and merchandise. Vertigo Games, a leading VR developer and publisher. Standing back, strong IP, including long-running franchises such as Gothic, Titan Quest and Killing Floor, along with newer groundbreaking IP such as REANIMAL and Wreckfest. Muge will now take a look at the size and shape of Embracer on a pro forma basis. Muge?

Thanks, Phil. As we look here at the Embracer business segment financials, we should note that these figures include the historic results of divested and closed businesses, mainly Easybrain, primarily impacting FY '24/'25. When we look at the evolution year-on-year, we can thus see a snapshot of the transformation journey Embracer has led over the last years. As we've just seen, Embracer is a collection of many long-standing businesses with a strong heritage and diverse activities. In '25, '26 net sales of SEK 11.6 billion were driven by PLAION Partners and PLAION Pictures in the E&S business area. CrazyLabs, which saw success with Sled Surfers in the mobile business area and THQ Nordic in PC/Console with the successful release of REANIMAL and catalog sales. Year-on-year, net sales was impacted by around SEK 3.7 billion as a result of divestments and closures as well as the negative FX effects that I mentioned during our Q4 presentation, where we saw a roughly 6% impact at group level. With the diversity of activities and stable revenue-generating businesses in the E&S and mobile business areas, in particular, we anticipate Embracer to provide a more steady, predictable revenue profile on a like-for-like basis in the future. Gross profit of SEK 6.2 billion represents a healthy margin percentage, but as you might expect, at lower levels compared to Fellowship. This is primarily due to the mix of activities, which include not only high-margin businesses in PC, console and mobile, but also inherently lower-margin businesses in physical goods and distribution in the Entertainment Services business area. The year-on-year evolution in gross profit can be attributed in particular to the divestment impact of Easybrain, which contributed around SEK 2.7 billion in '24, '25 at a gross margin just under 100%. Going forward, we can expect the revenue mix between business areas to be the primary variable impacting gross margin percentages year-on-year. On an OpEx level, we see once again the extent of transformation with a year-on-year decrease of around SEK 2.7 billion, driven by the divestments, closures and restructuring actions. This provides a strong foundation for improved financial performance in the future, and we'll continue to optimize our cost base as part of our vision of a leaner, more focused business. This results in adjusted EBIT just below 0 and cash EBIT of SEK 269 million for FY '25, '26. The difference between these metrics results from a higher level of D&A costs, partly driven by new releases such as Killing Floor 3 and REANIMAL compared to CapEx for the period. Again, this is one of the reasons for our implementation of cash EBIT as it better represents the underlying economic performance of the business in a given year. It also allows us to better drive our resource allocation internally, ensuring that CapEx levels continue to be optimized in line with current business performance. The lower cash EBIT margin compared to Fellowship is to be expected given the different activity mix. However, looking ahead, we believe that there is still scope for improvement through further efficiency actions and disciplined cost control and capital allocation. Back to you, Phil.

Thanks Muge. As we look ahead, and as Lars mentioned earlier this morning, we can once again see the potential in accretive but opportunistic M&A for Embracer, especially in our already successful and sizable niches in mobile, distribution, retro, films or remakes and remasters. Over the past year, we've also done a range of smaller divestments to different types of buyers. There could be further divestments if it can increase our focus and unlock capital to better deploy at better returns elsewhere. We've taken learnings over the past few years. M&A will be here. If it comes, it will be selective and primarily funded from our cash flow from operations and from divestments. For investors, Embracer is a compelling story, durable businesses with 30-plus years of history proven through multiple cycles in the industry, decentralized and disciplined, entrepreneurial autonomy at the studio level, group level accountability at the top. Broader than just games with service revenues that reduce dependence on the release cycle, predictable growth, a leaner cost structure than we've had in years. Operators with track record running businesses they've built, that catalog depth that continues to generate returns years after release. Listed on NASDAQ Stockholm, clear governance, public accountability, shareholder alignment. The original thesis adjusted for 2026 and beyond. Muge?

Yes. We have shown today that we maintain a strong balance sheet position with net cash at year-end of SEK 3.8 billion. We've also announced a new share buyback program of SEK 750 million. This program will be executed over the remaining period between now and the end of '26, '27 financial year. We anticipate that the buyback will be spread evenly over this period. Now after taking into account the balance of the remaining cash settled earn-out obligations and the total value of the announced share buyback program, we would have net cash of SEK 2.6 billion, and we thus remain in a strong position to continue returning capital to shareholders on a regular basis. Going forward, with the intended separation, we'll analyze the capital needs of each group in advance of the spin-off. It will then be up to the Boards of the 2 groups to resolve on their respective capital allocation and distribution policies. We nevertheless maintain the flexibility for potential further capital distributions ahead of the spin-off date. Now after the successful spin-offs of Asmodee and Coffee Stain, we are well aware of the process that lies ahead of us. There are a number of interim steps to execute ahead of the finalization of separation, including the operational, legal, financial carve-out of Fellowship, the preparation and publishing of an information brochure and prospectus and investor engagement and capital markets events for both companies. More than just executing on a spin-off, we're focused on ensuring that at the end of this process, we have 2 strong stand-alone groups, each with a solid foundation for future success. With regards to the spin-off itself, we anticipate this to be completed during calendar 2027. As we have done with previous processes, we will update you on a regular basis on progress at important milestones and during our quarterly announcements. The future leadership teams of the 2 groups will play a pivotal role in our success. Alongside my current duties as Group CFO, I'll be taking on an expanded role as deputy CEO with the key responsibility to set up an enhanced governance structure for the Embracer business segment. Phil and Lee, our current CEO and COO, will remain in their respective roles with Embracer Group with the key responsibility from today to prepare Fellowship Entertainment for its spin-off. At the time of the spin-off, Phil, Lee and I will then transition to lead Fellowship Entertainment. A recruitment process for a CEO and CFO for Embracer has been initiated with a plan to have appointments in place well ahead of the spin-off of Fellowship Entertainment. While, although there is a lot of hard work ahead of us, we have proven in the last 2 years that we have the right people and processes internally with the support of trusted external advisers to ensure that we successfully execute upon our plans. I'll hand back now to Phil for some closing remarks.

Thanks, Muge. The games industry is more competitive than it has ever been, but it is also more rewarding when we do things right. Fellowship Entertainment and Embracer represent 2 very different answers to the same question. How do you build a durable, valuable business in this industry? Fellowship's answer, own the greatest IP in the world, create the greatest games and build a licensing business as an engine to turn franchise ownership into recurring high-margin revenue across every imaginable category. Embracer's answer, back entrepreneurs, give them the freedom to run their businesses with cost control and trust the great operators in a small, more focused structure will keep building businesses that last. For investors seeking exposure to premium IP and interactive entertainment, Fellowship is a new equity story with a world-class asset base, an exceptional creative pipeline and a licensing business to build up. For investors seeking a durable, entrepreneurially managed group with a deep heritage and disciplined economics, Embracer has done the hard work of restructuring and is now running lean and focused and with purpose. To conclude, this is the direction we've been building towards, an approach that we believe is right for our fans, our businesses, our people and for our shareholders, 2 companies, 2 strategies, one conviction that durable value in this industry is built on focus, discipline and consistent quality delivery. With that, we bring this part of our conference today to a close. We want to thank our fans, our employees, thanks to our partners. And of course, a special thanks to our shareholders for your continued belief. The best is yet to come. So welcome back to our Q&A session. At this time, we'd like to open the lines and there's a moderator to field questions to us. So over to you, the moderator.

[Operator Instructions] The first question comes from the line of Nicolas Langlet from BNP Paribas.

So there are 3 topics I would like to discuss, please, and maybe I will go one by one, if that's okay. The first one is on the full year '27 guidance. Can you help us understand the key building blocks between the different divisions? And you mentioned some upside potential. What could be the main sources of that upside potential. Is it better performance of expected gains? Or there are some unannounced content that might drop in '27?

Could we take the questions one by one?

Definitely.

So the first question was to give some color really on the guidance and the upside potential. I think I'll talk to the upside potential maybe first, and perhaps I'll frame that in a slightly different way and just talk to sort of business momentum. Business doesn't stop on fiscal year ends or month ends. It's continuous. And I think we talked in February about the momentum we had. I think we've got positive momentum coming through we've seen in April, and we feel that in the business now. So there's definitely a sense we have there as we flip from sort of budgeting and planning to really what is going on and what we're seeing. So definitely, we see sort of continued engagement with catalog. I'd say also the key releases. We know that Metro and Tomb Raider are coming out towards the second half of the year. We've got some -- we've got release starting in a few weeks with Gothic and then, of course, Dawn of War. So there's some good beats here that we really feel confident about and we're interested in and they're resonating well. We're also continuously looking at savings, efficiencies. These are all things that perhaps aren't planned, but we have some optionality on. So that is how I would provide some initial color for how we might see the upside. It's all down to hard work. That's what we talked also in -- previously in our guidance, that work is hard, and that's the commitment that we bring.

Don't forget the beauty of the NEOGEO console coming in November.

That's a great example. I mean that, as I said, has really delighted fans. The reaction has been off our scale of excitement and estimations, and it just shows you how that retro blood and passion really runs deep. So yes, that's momentum we're seeing today in April, and that's well ahead of the launch later this calendar year.

Okay. Perfect. Now the second topic on the Metro 2039. So how the fan reception compared with your initial expectations? How should we think about the post-launch content for that game compared to Metro: Exodus? And do you think that's a game which has the potential to generate a return on investment close to the midterm aspiration, which I think is around 3x currently?

Yes, we do. We're very happy. I mean, the team at 4A first, I talked to them. They were really excited to see the reveal and get the fan reaction. Obviously, we've done a big showcase with partners at Xbox. So that was a great platform to really deliver that beat. And I think we referenced the wish list of being on a self-published game of our games, we published probably the fastest wish list to get to over 1 million now. So we're taking a lot of good measures and good sort of confidence from that without, of course, resting on any laurels. It's great to get that reveal. I think we see it as a game of size and shape that definitely scales into that ROI multiple has that potential. And we've built from a team that have delivered games at that scale and depth, including DLC. So we see a lot of great comparators there for us to have a lot of confidence with, including confidence with 4A themselves. So yes, all feels good on that.

Okay. Super. And maybe last question. So on the -- what's the Fellowship cash EBIT contribution you expect within the SEK 1 billion cash EBIT guidance for full year '27. And last, you said ambition is to reach industry best-in-class level for Fellowship. How long it will take to reach that level? And would you say 30% is like the right objective in terms of cash margin?

Great questions, isn't it? Questions we can't really give too much color on. I don't know, Phil, if you want to?

Well, we don't -- we're not going to guide -- we're not going to split our guidance between the business segments. We said that we're going to guide on this cash EBIT measure. I think as we report and we get into the next quarter, next quarter, et cetera, we'll see the trends that are appearing. But we're not guiding particularly on this year.

We do see a solid contribution for both segments within the year. And I love the fact that Embracer is a bit of an underdog here in terms of profitability coming out from a quite weak performance for several reasons, but I think we have taken a lot of actions, and we continue to do that. And I think we will have impact within that business segment. When I look from a Board perspective, I'm quite excited.

The next question comes from the line of Rasmus Engberg from Kepler Cheuvreux.

Thanks for the detailed run-through of the pipeline. Did you say that there is a third Kingdom Come in development at the same time as Lord of the Rings RPG at Warhorse?

Well, we reveal today that as the next installment in Kingdom Come that we showed today. So that would be the third. We're not gating it, not providing any color beyond that. But that's the reveal today, yes.

And will those 2 games will -- do they come one at a time as you reallocate those resources between them? Or are they developed simultaneously by different teams?

I think game development is increasingly a parallelized process. We've talked about smart development in the past, how teams reuse code, systems. In some ways, think of it, Rasmus, DLC is a great example of that, right? We can see very different treatments in DLC. And that's really when we stand back now and look at Studios broadly, that idea, how do we reuse is part of Studio world today. So there's nothing unique about that approach. We think it's smart, and it's really led by the team at Warhorse for this next chapter.

And before...

Yes. I mean, the game, again, it's never a great place to sort of reveal games, but we wanted to mention it. We wanted to give that color on the pipeline. We wanted to show we've got concepts and work that's unannounced that really has meaningful potential. So that would be a fiscal '28 release. This is our plan. This is the rhythm we talk about, about getting the pipeline to deliver. How do we get to 2, how do we then get to 3 major games per annum. And that was a very important data set to share today that how close we are now with -- and I'm really excited by what this next installment could be. I think fans of Kingdom Come will love it.

Yes. I had 2 financial questions for Muge. So when you say a cash EBIT of at least SEK 1 billion, is there anything else in the cash flow that sort of will make it different to standard cash flow? And the second question is, you wrote down a pretty big project. Is that likely to imply closures or significant one-off costs beyond the writing down of the development?

Well, I mean, as we have disclosed today between the adjusted and cash EBIT and the difference being really around depreciation and amortization and the lease payments, we do expect a strong cash flow during the year. And we do not foresee any big swings, unexpected swings. So as we've already announced, it's at least SEK 1 billion of cash EBIT. We expect, therefore, the equivalent translation in terms of cash flow where we expect a real improvement. I did mention in the outlook that it is expected to weigh towards the second part of the year, though.

Could be...

The second question then, this canceled project, does it have further nonrecurring costs coming? Or is this it?

Yes. I mean we have taken the decision. It's a noncash item. And for our reporting purposes, when a project or studio is closed or comes to an end and discontinued, it's how we track it. But we don't comment specifically on what project it is. It's an unannounced project.

But this is all of it, so to say?

Yes.

The next question comes from the line of Erik Larsson from SEB.

A lot of information to digest here this morning. But I wanted to start on RemainCo. You shared some financials there. And I wanted to hear what's the headroom in terms of more cost optimization? What type of margin does this type of business do in the medium term, if that's possible to just give some thoughts maybe.

Yes, for sure. As I mentioned, indeed, when you look at the financials, they're impacted by divestments and disclosures as well. But you see that already second part of last year was stronger. And the divestments closures, some decisions that we have taken, we will be benefiting from the full year effects for already next year, which shall contribute to better margins and better profits already. A lot of work has been done from a cost perspective as well. In terms of releases, it's not expected to be a big, big change. But in terms of underlying business and from an optimized structure, I shall say, the work is done, and we should already capture what we have put in place in the second part of '25, '26.

Okay. And then second question is, generally, when you're making these 2 entities, just my impression from the outside is that it could be, I guess, some collaboration between the 2 units. I guess one studio makes a game, the other one is publishing or licensing an IP or what have you. So what do you think about potential conflicts of interests when sort of forming these 2 companies? If you could just reason around that.

I guess -- I mean, maybe, Lars, you'll come to that. But I guess to the first part -- I mean, of course, where there is danger of conflict of interest, then you have processes and governance that you can avoid it and you can manage it. But to the first point about synergies at an operating level, I absolutely do. I mean, a classic example will be with PLAION Partners. They work with some of the biggest video game companies in the world. And Fellowship as we go down that road will hopefully be one of them. The products that it gets to work with this quarter, Crimson was a big driver for Q4. Resident Evil in certain territories is a big driver for Q4. Middle-earth games will be big drivers of that business because these are real specialist skills. 20 years ago, everyone used to do distribution, but now it's a really specialist skill, but still very, very important in today's industry to get that right. So that's a great example of how I think that will really strengthen as we get these businesses really set up with clarity as independent companies. So there are other examples, of course, but that's the easiest one. So I think it's a great question, and I would confirm that possibility. And anything more on conflict, Lars?

I think we need to go back to the Asmodee and Coffee Stain separation and those collaborations has worked very well at arm's length, we are dealing mainly historically within the group at arm's length between operating groups historically, partly because of tax reason, partly because of external parties such to Middle-earth, for example, we just recently did something with Asmodee. So I understand this could be a question, but I don't feel -- this is a topic that we are aware of, and there is a governance in place and principles. So I'm not expecting this to become messy as such. There's a bit of corporate work to be done to separate this, but the team have done this twice before.

[Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Philip Rogers for any closing remarks.

So thank you for the questions. Thank you for joining us today. We appreciate there's been a lot of news to share, and we really appreciate your time with us this morning. So with that, we wish you well, and goodbye. Thank you.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.