Fractal Gaming Group AB (publ) (FRACTL) Earnings Call Transcript & Summary

Welcome to the Fractal Gaming Group Q1 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to the speakers CEO, Hannes Wallin; and CFO, Karin Ingemarson. Please go ahead.

Hello, everyone, and welcome to today's presentation of our Q1 report. We are very excited today to update you about the latest development in our company and share the details of our report. Looking first at some highlights from our Q1 report. Our sales increased by an incredible 66% year-over-year measured in Swedish krona and increased by 49% measured in U.S. dollars. And we are, of course, very satisfied with this development, and we will talk more later in this presentation about specific dynamics of the market turnaround and also our revenue development. Our sales in revenue increased by 32% year-over-year, which is also a very positive sign of the market turnaround. The difference in sales in increase and sales out increase is explained by the channel stock filling dynamics, where our sales partners need to also increase their stock levels to match the higher run rates. And the recovery in the markets, which we saw started already in the second half of 2022, has further strengthened during the quarter and clearly shows that there has been a pent-up demand that we have talked about in previous presentations. The increase in sales out is, however, also explained by a very positive market reception of our new case series launched in 2022, which were the new models of the Torrent series and the new case families of Pop and North. The North especially, launched in December 2022, has been a monumental success for us and is one of our best-selling cases in our history. As a result of our strong product lineup, we also see that we are gaining market shares in key markets. Our EBITDA increased to SEK 42 million compared to SEK 11 million a year ago. Our product margin is slightly higher year-over-year. We had 40.4% compared with 40.2% last year with a positive impact from lower shipping rates but offset by a less favorable product mix. Looking at the general market development and trends. We saw in Q1 that the leading gaming platforms team set another record with 33 million concurrent players, which is a testament of the still strong gaming interest and activity. There's also been some strong game releases in the quarter, especially the best-selling Harry Potter franchise, Hogwarts Legacy, which have further boosted gaming activity. And it is predicted that the popularity of cross-platform games will continue to rise, where PCs remain the platform of choice for the majority of the gaming developers. We think that this year will be a busy year with many major game releases, also paired with lower prices and additional options within the graphics card category, which can fuel increased demand. And also, as we have discussed in previous reports, the gaming industry has proven to be relatively recession resilient in the past. And we believe it's likely that gaming will continue to be strong in coming years despite macro economical headwinds. I mentioned previously that the North case launched in 2022 has been a big success for us with a tremendous reception from both media and customers, followed by very strong sales numbers. Now we are also very proud to report that the North has won the prestigious Red Dot Product Design Award for 2023. And our focus has always been on creating products that combine exceptional functionality with remarkable design, and this recognition from the Red Dot Design Award is a testament of that endeavor. And with that, I'll leave over to you, Karin, to continue.

Thank you. So moving on to net sales and sales out. The graph at the top shows the development in net sales. The first quarter started strong with a net sales of SEK 196 million and a growth of 66% compared to the first quarter last year. We also measure our sales in U.S. dollar as we sell exclusively in dollars regardless of the end markets, and the organic increase in the first quarter was 49%. The recovery in the market, which started already in the second half of 2022, has further strengthened during the first quarter 2023, which has led to our retailers having to increase their inventory levels to meet the increased demand. So when sales to end customers increase, retailers need to increase purchases to cover for the increased sales run rates but also to maintain a certain stock level, which gives a temporary boost effect to be able to adapt to the higher run rate. And of course, vice versa, if the run rate goes down, then the effect -- then the retailers reduce purchases for reduced run rates as well as to reduce stock levels. In the past 2 years, we have made many successful product launches, as Hannes just talked about, and we now have the strongest product portfolio ever, which has contributed to increased sales but also increased market shares. Case series Torrent, Pop and North were among the best-selling products during the quarter. The strong sales in recent quarters clearly shows that there is a pent-up demand as many gamers have waited to upgrade their equipment. We now have a significantly improved market with good access to graphics cards, lower prices, while new generations of graphics cards have been launched, which increases interest in Fractal's products. In the graph at the bottom, you can see our quarterly development in sales out to end customers that distributors and resellers report to us measured in dollars. Sales out is an important measure that shows the underlying commercial development. In the first quarter of 2023, sales out increased by 32% organically compared to last year with an increase in the case category of 36%, which shows increased demand and great interest in our products. Sales out has been on a high level during the last 2 quarters and in the first quarter 2023, it was USD 17 million and the strongest quarter since Q4 2020. Moving on to the next slide and segment development. The strongest region in the quarter was EU with net sales of SEK 98 million, corresponding to 50% of total net sales compared to 42% last year. The increase was mainly driven by increased demand from end customers, successful launches and low inventory level at retailers. Americas net sales amounted to $71 million (sic) [ SEK 71 million ], which is 37% of total net sales; and APAC and other amounted to SEK 26 million, which is 13% of total net sales. Sales of cases was 91% of total net sales compared to 89% last year. Moving on to the next slide and product margin. In the first quarter, product margin was 40.4%, which is 0.2 percentage points higher year-over-year. Factors affecting the margin were lower shipping costs which positively affected the product margin by approximately 5 percentage points as shipping prices were even lower than before the pandemic. The comparative numbers in the first quarter of 2022 were historically high as freight prices peaked in the fourth quarter of 2021 and the first quarter of 2022. And we have the currency effect, which had a positive effect on the product margin by approximately 2 percentage points attributable to inventory that was purchased at a lower rate and sold at a higher rate. The product mix effect affected the product margin negatively by approximately 8 percentage points and was mainly attributable to lower gross margins within the product groups. Let's have a look at the next slide and earnings. In the first quarter 2023, EBITDA was strong and amounted to SEK 42 million, and the margin was 21% compared to SEK 11 million and 10% margin last year. The increase in EBITDA was mainly due to increased sales and higher product results and lower warehouse costs due to decreased stock. Looking at operating cash flow, which was strengthened to SEK 59 million compared to SEK 7 million last year, positively impacted by higher EBITDA. The positive change in net working capital was mainly related to lower inventory and increased accounts payables. The cash flow from investing activities amounted to SEK 10 million and in line with last year. The bank overdraft facility was SEK 18 million compared to SEK 123 million last year and was mainly related to purchases of products in stock. Lower utilization of the overdraft facility is mainly due to increased sales. Total credit facility amounted to SEK 120 million. Moving on to the next slide and the income statement. As previously presented, we had a net sales increase of 66%, mainly due to retailers having to increase their inventory levels to meet the increased demand, successful product launches and good access to graphics cards with lower prices. Lower shipping costs as well as positive currency effect improved the product results. Warehouse costs was lower due to lower inventory level, but some variable costs were higher because of increased sales. Fractal is in many ways a dollar company with 100% in dollars down to product margin. Fractal's reporting currency is SEK and the numbers are affected by fluctuating exchange rates in currencies other than SEK. The first quarter had an average U.S. dollar-SEK rate at 10.4 compared to 9.3 last year, which is positive on our results. The financial net is mainly affected by interest expenses related to the overdraft facility and FX translation effects. With that, I hand over to Hannes again.

Thank you, Karin. So a summary of our presentation here today in the quarterly report, including net outlook. The recovery in the markets that we reported already in the Q4 report strengthened further during the quarter, and we saw net sales growth of an amazing 66%. And we can also proudly say that our product portfolio is now more attractive than ever, which have contributed significantly to the sales growth and growing our market shares. Our product margin continues to be on a very solid level of 40.4% and EBITDA margin was, in this quarter, very strong at 21.3%. Furthermore, as also mentioned by Karin before, our cash flow was very strong in the quarter, which have reduced our debt significantly, which we're very satisfied and happy about. And the market turnaround we see currently is, of course, very encouraging. But it's still too early to judge, of course, the length and strength of it, but we continue to see a strong momentum in the start of Q2, which gives us confidence in our ability to drive profitable growth in this year and beyond. So with that, we have finished our presentation, and we would like to open up for any questions.

[Operator Instructions] The next question comes from Amar Galijasevic from Carnegie.

A couple of questions here. First one on the regional performance here. We see Europe standing out very well from the rest of the regions and you talked about increasing inventory levels at the resellers and stuff, but is there any particular reason why it's not the same effect in the other regions?

Yes. I mean, we have seen now in the first quarter that the return to growth has been particularly strong in Europe. And I think there are several reasons to that. And one reason is that the comparable numbers of Europe last year was quite weak. So therefore, the growth becomes stronger. We had relatively decent market still in the U.S. and Asia last year. But in general, the channel stock dynamics is something that is mainly affecting our European and Asian markets, whereas in the U.S., we have our own inventory. There is some channel stock, of course, but it's more limited.