Embracer Group AB

STO:EMBRAC B

Earnings Call Analysis

Embracer Group Hits Milestone Despite Challenges

Embracer Group reported a significant milestone in Q1 fiscal '24-'25, with net sales nearing SEK 8 billion and free cash flow improving by SEK 650 million. Despite a 24% year-over-year drop in net sales primarily due to fewer PC console releases, segments like tabletop and mobile saw strong performance. The company confirmed the release of Kingdom Come Deliverance on February 11, 2025. Embracer also made headway separating into three standalone entities, enhancing strategic focus. Asmodee's net sales met expectations, although overall net debt remains a concern at SEK 14.3 billion. Embracer forecasts stable annual sales and a promising game development pipeline valued at SEK 3.9 billion.

Strong Start Despite Year-over-Year Decline

Embracer Group kickstarted its fiscal year 2024-25 with a net sales figure approaching SEK 8 billion, although this represents a 24% decline compared to the previous year. The decrease is primarily attributed to fewer notable game releases in the PC console and Entertainment & Services segments. However, adjusted EBIT was recorded at SEK 828 million, with free cash flow showing a significant year-over-year improvement of SEK 650 million, totaling SEK 47 million for the quarter.

Segment Analysis: Mobile and Tabletop Shine

The mobile gaming segment flourished, producing SEK 1.4 billion in sales and achieving an impressive adjusted EBIT margin of 37%, up from 29% year-over-year. This performance was driven by an effective product mix and lower user acquisition costs. Meanwhile, the tabletop gaming segment, particularly through the 'Star Wars Unlimited' franchise, continued to show solid results, although there were pockets of weaker performance in Central Europe and the U.K.

PC Console Challenges and Upcoming Releases

The PC console segment saw a pronounced decline, with net sales down 34% year-over-year, totaling SEK 2.7 billion. This was expected due to a lack of standout new releases. However, one notable recent title, 'MotoGP 24', has received favorable reviews and met its return on investment targets. Embracer anticipates a stable pipeline for upcoming fiscal quarters, expecting a total game development value of SEK 3.9 billion for the year.

Entertainment and Services: Tough Comparisons

The Entertainment & Services segment reported SEK 848 million in sales, marking it as one of the weakest quarters in recent history, with negative EBIT of SEK 29 million. This underperformance is attributed to fewer major releases compared to the previous year and a lack of royalties from notable deals, like the previous agreement with Amazon regarding Middle-earth Enterprises. Future quarters are expected to show improvement as new contracts and products are rolled out.

Restructuring and Spinoff Plans

Embracer is moving forward with plans to spin off into three distinct publicly listed entities, aiming for sharper strategic focuses and distinct equity stories. The first entity, Asmodee, is set to host a Capital Markets Day in the upcoming third fiscal quarter as part of this transition. This restructuring is anticipated to yield better management of resources and potentially improve profitability.

Financial Health and Debt Management

As of June, Embracer's net debt stood at SEK 14.3 billion, which does not factor in an interest-bearing receivable of SEK 2.1 billion from the Saber transaction. The company is working to manage this debt efficiently. Following recent refinancing efforts, the available liquid funds increased from SEK 5.2 billion to SEK 6.8 billion by the end of July, strengthening their financial position.

Future Outlook: Cautiously Optimistic

Looking ahead, Embracer Group is not providing hard guidance but suggests it aims for a similar adjusted EBIT to the previous year, around SEK 7 billion, including consideration of Saber and Gearbox. The company emphasizes a focus on its own intellectual properties and enhancing product quality as integral to future profitability improvements in the PC console segment.

Earnings Call Transcript 2025-Q1

[Operator]

Good morning, everyone, and welcome to Embracer's Q1 2024, '25 Results Conference. My name is Rasmus Engberg, gaming analyst with Kepler Cheuvreux, and I will be your host for today and lead the Q&A. Today, we have Lars as usual and Johan and also a special guest from France. So I'll leave it to that, and thank you.

[Lars Wingefors, executive]

Thank you, Rasmus, and welcome, everyone, to Embracer's Group Q1 presentation from here in Stockholm. I'm pleased to share our performance of our first quarter fiscal '24, '25 and provide an update to our strategic progress. We began this year in line with our management expectation, generating close to SEK 8 billion in net sales, and our adjusted EBIT stood at SEK 828 million, and our free cash flow amounted to SEK 47 million.



Our Q1 performance was driven by a strong quarter from our tabletop and mobile segments. As anticipated, our PC console and Entertainment & Services segments faced a softer year-over-year performance due to fewer new releases. Overall, as a group, our Q1 net sales were down 24% year-over-year. Cash flow continues to be a major focus, and we have reported a significant year-over-year improvement in free cash flow of SEK 650 million.



When we look at our trailing 12-month basis, our free cash flow exceeded SEK 2 billion, a milestone for us. That cash flow generation, coupled with our divestment processes, enabled us to lower our debt. Our transformation of our PC console segment continues, and we are optimistic about our pipeline. I'm excited that earlier this morning, we confirmed the global release date for Kingdom Come Deliverance to be released on 11th of February 2025. And it's great to get this date confirmed for gamers and to feel the launched excitement continue to build. We are eager to share more updates around our pipeline to gamers at the biggest trade show and consumer event in the industry, Gamescom next week.



Overall, we still expect the value of completed game development for the year to be around SEK 3.9 billion, which is a step up versus last year. We are making good progress on our plan to separate into 3 stand-alone publicly listed entities. This move will allow each entity to sharpen its strategic focus and to offer a distinct equity story to our shareholders. Asmodee, the first spin-off will host the Capital Market Day in our third fiscal quarter ahead of its listing. And Thomas Kegler, the Asmodee Deputy COO, is joining us today to share more about our Q1 performance. So let's jump into the segments.



And just to say, the image you see here is taken from the Netflix upcoming an EMEA serious Tomb Raider, the legend of Laracraft scheduled to be premiered on Netflix in October 2024. And we will start with PC console. Here, net sales in the quarter amounted to SEK 2.7 billion, a decrease of 34% compared to the same period last year. The decrease were anticipated due to lack of notable new releases and a tough comparison given the successful release of Dead Island 2 in the corresponding quarter last year.



Just to call out one of the new releases, MotoGP 24, this got off to a good start with favorable reviews and already achieving its ROI targets. Looking at the adjusted EBIT margin, which you shouldn't really do in a separate quarter in our industry. But now we are in the quarter, and we're looking at it, it's low and it's dragged down by lower ROI from releases in the past 24 months. This will improve in the course of the year.



However, new content that came out in Q1 for Deep Rock Galactic remnant 2 and Dead Island 2 performed well in line with our expectations. Gamers continue to enjoy our deep, rich catalog of games. And we actually saw engagement increase year-over-year. If you look at the catalog titles, you will see it's topped by Remnant to Dead Island to Star Trek, Deep Rock Galactic and Neverwinter.



Games being served with fresh content to deepen player engagement. And for Deep Rock Galactic, with the launch of Season 5 this quarter, we actually hit an all-time high of player activity with over 50,000 concurrent gamers. A fantastic achievement from our family friends at Ghost Ship in Denmark. Games released this past quarter are shown on the far left, and you can see it was a mixed result with 2 titles immediately got to break even, but one small title struggled from launch on the ROI short here.



This chart you see here is clean from divested assets. Our average ROI stands at 2.1%. The challenge we have highlighted in the past, remain in focus, and we have a clear plan to improve profitability within PC console. First, our resources are increasingly focused on our owned and controlled IPs. Secondly, with improved capital allocation and process to help us achieve better quality and stronger margins. And to be clear, we are expecting our ROI to improve over the coming years as our pipeline matures post our past year restructuring progress.



We believe our studios and creative talents are best-in-class and believe our outlook for the long term is bright. Now looking at the investments and the complete game development. As you see here, release late was the smallest quarter over the past 2 financial years, just SEK 336 million in value of new games were released. Looking at the investments and pipeline spend in game development tracked down to SEK 900 million. This was expected given our past efforts to reduce and better control our CapEx. It's in line with the annual run rate targets we have previously communicated. We believe in our games pipeline through focus on owned IPs and better development processes. We believe we are laying the foundation for strong organic growth going forward.



Now looking at some of our most important releases for the year. Here, you see 8 of them, Kingdom Come Deliverance 2, coming out now on February 11 in our fourth quarter. This quarter, we will have also Epic Mickey being released from our family friends at Purple Lamp, in Vienna in the end of the second quarter. We are expecting a Hyper Light Breaker published by ARC, our family members at ARC Games being shipped this year. In this quarter, we're expecting Monster Jam show down from our friends at Milestone. Ghostic remake and other iconic RPG that are being remade in at Alkemia in Barcelona, being published by THQ coming out during this financial year as well as Killing for Tree from Tripwire, a highly anticipated AAA Sequel.



And finally, from our friends at Coffee Stain and Force Field, we are expecting the full release of satisfactory after many years of development. We're also expecting that game to be shipped on consoles later in the year. Also, we are expecting the first gamers to get the hands on -- gamers get hands on Titan Quest 2 from our friends at Grimlore Games and THQ Nordic in the course of the year. And this is just a selection of the pipeline for this financial year.



Now let's look at Mobile. As we covered right at the top, mobile delivered another strong quarter with sales of SEK 1.4 billion and adjusted EBIT of SEK 500 million. The adjusted EBIT margin increased to 37% from 29% year-over-year. This was driven by a product mix shift and lower user acquisition costs. This is according to the management plan. If you look at the strongest performance titles, you could recognize many titles from before sudocu.com, Blockade, Alien invasion, Arcus and GigoPazzls.



Worth mentioning is the continued success from Easybrain to in-house create new global successes that drive growth. Recently, they have released Crossword masters that are showing very promising KPIs. I really admired the talents and people we have within our mobile segments and the skills they have demonstrated to navigate the complexities in the business, constantly performing and delivering strong results. We believe the market is stabilizing and saw a condition to scale user acquisition and top line growth improved towards the end of the quarter. Now let's welcome Thomas Koegler to the stage to talk about Asmodee.

[Thomas Koegler, executive]

[indiscernible] Asmodee with Embracer with the advisers, the teams are fully working on the proposed spinoff as a management. We remain focused on delivering the business. In Q1, we have delivered net sales of SEK 3 billion, in line with our expectations. Reported net sales were down minus 5% year-on-year, impacted by the divestment at the end of the last fiscal year of miniature market from our direct-to-consumer business in the U.S.



On an organic and pro forma basis at constant currency, net sales were down 3% year-over-year. We saw growth in the U.S., continued strong global performance of Star Wars Unlimited, although sales were impacted by a softer performance of distributed products in Central Europe and in the U.K.



On a profit level, the adjusted EBIT margin improved by 2 percentage points versus last year, same quarter. The improvement was driven by better product mix supported by Star Wars Unlimited, lesser inventory clearances actions this quarter and the benefit of run rate savings from the group's restructuring program. On the commercial side, we were delighted to announce last week an exciting multiyear partnership with the LEGO Group. Monkipalas, the first new game will be released in fiscal Q3. We are very excited about this and will be followed next year by another new game currently in development called Brick Like This.



These games join the strong existing pipeline of upcoming new releases, which also include Star Wars the Mandalorian, Fanbelt of Character, Lord of the Rings, Duals for Miller or Altered the highly anticipated and innovative TCG. All of those games were showcased last week at Gen Con or 2 weeks ago at Gen Con, the largest U.S. consumer show that again broke its attendance record with over 71,000 daily attendees. Talking of new releases, Star Wars Unlimited continues to show very strong performance in the quarter. It's trending above our expectations.



Set 3, we'll be releasing in Q3 fiscal year. We, at Asmodee are investing a lot on this product. We have a multiyear development program. Several sets are already finished. We have announced the names of the Sets 4, 5 and 6 at Gen Con at the in-flight report of our studio FFG. It's an event that was long awaited by the fans because we haven't had -- we hadn't held it since 5 years. So it was the first time we held the in-flight report. And the event was completely sold out with 1,000 attendees from the Board Game fans.



In the digital board game space, we are extremely happy also to announce that Board Game Arena, our online board gaming platform has breached its 10th million members. It's a huge success. Its 5 million hours that are played every month on the platform.



Finally, during the quarter, we also saw the release of the new Netflix trailer for Wells of Miners Holo based on Asmodee, a movie that will be released in October 2024. Netflix also released the Exploding Kittens TV show in 90 countries and localized in 38 languages. Overall, as a management, we were satisfied with the business performance in fiscal Q1, which is generally one of our seasonally quieter quarters. Thank you very much.

[Lars Wingefors, executive]

Very happy with the execution from you and the Asmodee team. So let's look at the entertainment and services business, which is a mixed business group reported under one roof here. And we had the weakest quarter for quite some time with SEK 848 million in sales. EBIT actually came in negative of SEK 29 million in the quarter.



However, it's definitely worth pointing out this performance. It was really a quarter without any notable big releases in the distribution business. And if you compare it to last year, they had a few notable releases, and that gives very difficult comps. Also on the profit side, last year, we had a significant contribution from a major deal we made with Amazon within Middle-earth Enterprises. And for accounting reasons, this quarter, we did not have any profits or royalties booked from that deal, but obviously, it's a multiyear deal, there will be more royalties coming through.



We are expecting the coming quarters of the year to have more products, contracts and things coming through entertainment and services. We are giving some further color in our reporting this morning, and I'm very pleased that to the progress that we are making on the Middle-earth Enterprises. It's now 2 years since we made that investment. And I think it's a fantastic asset with such so much rich content to be developed on multiple formats.



And obviously, games are close to our heart, and we are working on multiple new game concepts, some that we have been working on for quite some time, both with some of our best internal studios as well as external studios. So this gives me confidence looking over the coming decade, how we could explore and deliver things to the communities of Middle-earth.



Moving from Middle-earth to the other businesses. We see improvement in the Dark Horse business that had a bit of hangover from COVID. They had a great performance, a better performance this quarter with some notable highlights. For example, now after the quarter here, they premiered the fourth season of the Umbrella Academy. And the management team of Dark Horse has a very strong business plan to improve their business and improve their profitability going forward.



Looking at the overall market, we are in a fantastic industry. And if you deliver the right content to consumers, you have a fantastic business. And looking into the segments, we see that when I look at the business, really, PC goes from strength to strength. We are expecting PC to be one of the best growth drivers in the market this year. But we also expect Mobile to grow as well as Tabletop.



Console will have a more muted year, but still, it's a fantastic Console market if you bring out the right content to consumers. Overall, we're expecting the market to grow 2% to SEK 188 billion this calendar year. And this is numbers by the external party [Nusa].

[Johan Ekström, executive]

Let's have a look at the overview of our financial development. As expected, sales are significantly lower than last year, mainly due to that there were fewer larger releases in the quarter. The lower top line were mitigated by lower cost of goods, marketing and operating expenses, but reduced the EBIT to SEK 0.8 billion. It is worth noting that last year included the successful release of the Dying Light 2 and a licensing deal in Middle-earth Enterprises that jointly generated net sales of SEK 1.8 billion and adjusted EBIT of SEK 1.1 billion in the corresponding quarter last year.



We note that overall marketing as a percent of net sales amounts to 10%. And Marketing expenses outside of the mobile segment are clearly lower compared to last year as a result of fewer releases to support. In Mobile, we note less user acquisition costs in the quarter, which is in line with the increased focus on profitability in the segment. Operating expenses remained at a lower level of SEK 2.4 billion, which is 12% below the corresponding period last year.



Full year sales reached SEK 39.7 billion with an adjusted EBIT of SEK 6.2 billion or 16%. The divested Saber and Gearbox contributes negatively on an annual basis with SEK 0.3 billion. If we turn to the cash flow for the period. As I said, free cash flow amounted to SEK 47 million, which is SEK 650 million better than last year. It's also worth noting that the lower EBITDA is more than compensated by reduced CapEx in the quarter, a testament to the achievements of making Embracer a more efficient and cash-generative company.



Cash flow from financing activities includes the refinancing of Asmodee, SEK 10.5 billion related debt repayment at Embracer, SEK 9 billion, dividend to minority owners of Asmodee, SEK 0.5 billion and additional debt repayment of SEK 3.2 billion following the closing of Gearbox. Net cash flow from divested companies was SEK 2.7 billion in the quarter were SEK 3.1 billion relates to net cash inflow after payment of relevant accelerated earn outs and SEK 0.4 billion concerns scheduled earn-out payments. Cash flow effect of items affecting comparability relates to payments made on the restructuring program, which ended 31st of March.



Looking at the full year free cash flow generation, we see a solid growth in the period, reaching SEK 2.1 billion on an annual basis, driven by reduced CapEx and working capital. At the end of June, the net debt amounted to SEK 14.3 billion. This is not including the interest-bearing receivable of SEK 2.1 billion that we have towards the buyers of Saber. In April, Embracer secured a financing agreement at Asmodee level. The financing amounted to approximately SEK 10.5 billion with a maturity of up to 18 months. The loan is secured by Asmodee assets alone and ring-fenced with no recourse to Embracer.



In the beginning of July, we announced that we had completed the refinancing of our revolving credit facility at EUR 600 million, with a 2-year maturity and an extension option for 1 year. Later in July, we announced that we had signed a SEK 500 million loan with the Swedish Export Credit Corporation at similar terms and maturity. Embrace Group has leveraged covenant Citi's credit agreements and has substantial headroom to it.



At the end of June, available funds amounted to SEK 5.2 billion. This increased to SEK 6.8 billion at the end of July. Looking at pro forma financials. Here, we see Embracer's performance, excluding the divested assets related to Saber and Gearbox for the last 2 fiscal years as well as the trailing 12 months per Q1 '24, '25. And they are also split by the 3 new entities following the announced separation.



As mentioned earlier, this shows a slight positive effect on profitability, but more importantly, a large positive effect on cash flow generation here measured as EBITDA. Where EBITDA would have been SEK 1.8 billion higher for the full year if the divested companies were excluded for the period. Turning to the liability side. There are 3 important areas: net debt, cash earn out obligations and number of shares. As we saw earlier, net debt amounted to approximately SEK 14.3 billion at the end of June. If we include the SEK 2.1 billion for divested assets still to be received, net debt would amount to approximately SEK 12.2 billion. Where SEK 9.4 billion is related to the ring-fenced Asmodee structure.



Earn-out obligations to be settled in cash has been reduced by SEK 1.4 billion in the quarter and amounts to SEK 4 billion at the end of June. Of the SEK 4 billion, approximately SEK 600 million is to be paid until the end of March this fiscal year and SEK 500 million in the next fiscal year. The estimated number of shares to be issued in order to settle earn out obligations amounted to SEK 10 million by the end of June. And if you look at quarter end, there are approximately 1,350 million shares outstanding and adding the estimated shares to be issued, the number of shares would be 1,360 million. Over to you, Lars.

[Lars Wingefors, executive]

Just to give a bit more color on the planned spin-off processes, and I'm pleased to say it's proceeding according to plan. And just to remind everyone of the rationale, unlocking the value in the high-quality assets of Embracer Group, enabling each entity to better focus on the core strategies and to drive long-term value creation. Looking at Asmodee, the first planned spin-off. It has been a very active 3 months since the last quarterly report.



Several things have happened and several things are planned to happen in the short term. We have appointed a new CFO that previously were head of M&A that really have contributed well into this process. We had our introductory meetings with Nasdaq and the listed auditor. We are planning the formal kickoff with Nasdaq now in September. We have a very detailed time plan and all the advisers are appointed, and there is a large group working on this on a daily basis.



Most importantly, we today are announcing that we are planning to hold a Capital Market Day in our third quarter in the time period, October to December, and we are planning to announce that date in not too far distant future. So you would all be very welcome to take part, to meet the management and to hear more about the business. And it's a fantastic business to dig deeper into.



The plan of the reminder spin-offs and new entities, Coffee Stain France and Middle-earth in France are proceeding according to plan, but that is earlier in the process. And we are expecting to spin off Coffee stain in France during the calendar 2025. So that sorts it from the management. So I would like to hand over to Rasmus.

[Operator]

Yes. So we will host the Q&A with questions from the room, from the telephone conference and also from the chat. So you can post your questions either way you want to.



[Presentation]



[Audio Gap]



Okay. Welcome to the Q&A. And as said, we will take questions first here in the room and then on the telephone conference and then on the chat after that. That said, I think I will take this opportunity I have to put the first questions out here. So starting with you Lars. Kingdom Come and Killing floor 3, are they both now scheduled for the fourth quarter?

[Lars Wingefors, executive]

Kingdom Come 2 are scheduled for the fourth quarter. Killing Floor 3 scheduled for the second half of the year.

[Operator]

I read somewhere that they said early 2025?

[Lars Wingefors, executive]

The thing is that it's difficult sometimes to be a public company and talk about products. And first, it's the consumer, it's the fans, it's the communities we are talking to. And we need to let our companies and publishers talk to them first. We had a bit of a difficult situation with Kingdom Come this morning, but now we are globally announcing this release date. But in general, we're letting the publisher talk first, and then if needed, we will talk.

[Operator]

Yes. And I guess it's important for people to understand the scope of these products. So if we look at the predecessors, I saw that Kingdom Come has sold 6 million copies, something like that. Is there a figure for Killing Floor 2 somewhere?

[Lars Wingefors, executive]

No, I don't have it on the top of my head, but it's millions. And there is a huge fan base of that product and happy to see that we had a lot of consumers engaging again now in Killing Floor 2 when it was heavily promoted and discounted during the spring. So there is so many fans for these products out there. And next week, we will have 500 square meters behemium, 1,400 exhibition stand where fans could really explore and engage with Kingdom Come Deliverance to -- at the Gamescom.

[Operator]

And we must take the opportunity to talk to Thomas when he's here. So you have your first launch really big launch since becoming part of Embracer with Star Wars Unlimited. And on the heels of that, almost you're already going to launch games with LEGO already in Q3, you said?

[Thomas Koegler, executive]

Exactly.

[Operator]

Yes. Fantastic. And how -- but how do you think about the magnitude of these potentials without giving us any numbers?

[Thomas Koegler, executive]

It's always quiet difficult to predict, but what we do at Asmodee is that we launched games for them to last, what's the most important things. And Tabletop games, I mean, if you take the example of Cataract right, they last for decades. Stars Wars Unlimited, for instance, it's something we're here for long.



We have, I think, 9 sets of which the development is complete. So that's 3 years of product releases. We know the fans will have a huge commitment and have already started to show a very huge commitment to the game. They're investing a lot of their time, their energy, their passion. And what we want is to give them an experience that will last for decades. So hard to give numbers. What we try to do is make sure that the entire ecosystem is there for this to last for if not ever, at least as long as possible.

[Operator]

And the Asmodee business, it's bigger in Europe than in the U.S. It's been a couple of really difficult years for European consumers, and Asmodee has been growing. Do you think about it that way that consumers are having a hard time? It's difficult to grow?

[Thomas Koegler, executive]

It's true that consumers might have a hard time, but what consumers found out during the pandemic, especially is that actually playing Board Games, Tabletop games, Card games, all of those games creates the opportunity for us to spend time together. And second, they realize that it's actually a fairly cheap leisure because if you buy your EUR 50 game, it's a big game, you can entertain 3, 4, 5 friends for hours and hours and hours. So actually, it's a good way of putting your money and having very good time for some time.

[Operator]

And just one final question, which has been talked about quite a lot by people that think about this, and that is that the SEK 9 billion rough debt, is that something that sort of would restrict you to go out and buy companies in the pace that you would want to do it? Or I know it's not finalized that it's going to be at that level. But it seems anyway to be a fairly high debt level.

[Thomas Koegler, executive]

The only answer I can make is we've been operating under private equity before joining Embracer with higher leverages, and it has never prevented us from being successful.

[Operator]

I think we'll leave it to the telephone conference or the room first, of course. Questions in the room. So the first question on teleconference from Simon Jonsson from ABG Sundal Collier.

[Simon Jönsson, analyst]

So first, I want to come back to Kingdom Come Deliverance 2 that you have shared is expected to release in February. You said before, Lars, that you expect, at least I believe you said that Q3 was supposed to be the biggest release quarter this year. Is that still true? Or should we think that the mix has changed more towards Q4 now? Or Yes. Can you give us some color on that?

[Lars Wingefors, executive]

Yes. So obviously, there is some shift, obviously, by now confirming Kingdom Come Deliverance to shifting from third quarter to February. However, I would like to point out it's in this industry, it's hard to exactly say on forehand how much that will impact the numbers. The game would be a few months more polished and better to the fans with potentially a more optimized time window for release. So I wouldn't necessarily that is financially heavily impacting the year or impacting the year at all. But yes, there is a delay and a bit of shift from the completed games value from Q3 to Q4.

[Simon Jönsson, analyst]

And that shift is that, especially for Kingdome Come. What is the reason for that? You mentioned competition like the main reason or?

[Lars Wingefors, executive]

Well, I think the main reason is that we obviously, we look at all the data points. To start with, I think I believe November is, in general, a very competitive, difficult time period. You could succeed very well in November, but it's more expensive to globally market the product.



The competition from some very big game releasers are always tougher in November. So you can say that February, it's a more optimal time window. It's still a fantastic period for fans to engage with games. And we had successes, great success releasing games in February before. That's on the release window.



On the quality side, Kingdom Come, the team has been working on this for many years, over 5 years, and it's an enormous fantastic product, but it's very complex. And now we are in the final stages to complete the product. And we decided together with the team and the management side of the team that the product needed that extra time to secure the absolute best quality when hitting the market. I think the expectations of the game has increased from the initial release of the first Kingdom Come back in the day. And we just need to make sure that the game is optimized when shipping.

[Simon Jönsson, analyst]

Got it. And comparing Q3 and Q4 in terms of releases, is it fair to assume that -- to assume then that Q3 will be more sort of a quarter of many smaller releases and Q4 more of big titles heavy quarter?

[Lars Wingefors, executive]

I can say that Kingdom Cam delivers to would be, by far, our biggest release of the year. That's the color I can give you.

[Simon Jönsson, analyst]

All right. And one more from me on the cost base or CapEx levels here. You have continued to close down some studios during this quarter? And how should we think about the CapEx in coming quarters here? And when do you think we could see a bottoming out and maybe potentially an increase in the underlying CapEx levels?

[Lars Wingefors, executive]

I think we provided a more firm guidance on the run rate CapEx at SEK 4.3 billion in the last quarterly. We didn't repeat this in the communication this morning. We're trying to move away from this very specific forecast every quarter and look more long term on the business.



But in general, I don't see any major deviations from the previous quarter. We will have some, especially external studios completing the games in the course of the year and next year's, that would lower the CapEx levels, potentially not all of that will be replaced. But it's too early to start to talk about growth in CapEx. We are still in the process of optimizing the PC console business and to have a rigorous cost control and control of all our processes within that business.

[Simon Jönsson, analyst]

Let's rephrase it this way. So I assume at least you had CapEx impact from Gearbox as well this quarter. So I mean what can we read into that?

[Lars Wingefors, executive]

Not too much, Johan. Do you have any further color on the reported CapEx level in this first quarter? How much was Gearbox?

[Johan Ekström, executive]

Yes. So there was some in the quarter, approximately SEK 80 million.

[Thomas Koegler, executive]

The next question is from Martin Arnell from DNB Markets.

[Martin Arnell, analyst]

My first question is, Lars, can you elaborate what the 14% organic growth, excluding that Island was mainly driven by in the quarter?

[Lars Wingefors, executive]

Well, first of all, we saw a growth in the catalog --in the catalog business. The catalog business are stable and it's been growing year-over-year. And then obviously, we had a number of releases in the quarter. We were pointing out Moto GP, for example. We also had a quite solid quarter within other revenues, contracted revenues, development revenues with business partners of more than SEK 800 million in the quarter.

[Martin Arnell, analyst]

And then I have a question to Thomas. I think you mentioned that there's a slow performance for distribution in parts of Europe. Could you elaborate on that comment, please?

[Thomas Koegler, executive]

Well, actually, we do not comment on specific, especially partner IPs. So I will just keep to what has been put in the report.

[Martin Arnell, analyst]

Okay. But there was some kind of slowdown there that offset the growth from your Star Wars game. And are you able to say anything on why the performance was slower in parts of Europe?

[Thomas Koegler, executive]

No, I think it's more related to the fact that we have a very deep portfolio of products. And sometimes in certain areas, you have products that go up and down. But the chance we have is that we have hundreds of products. We are present in 22 countries. So when there is a slowdown somewhere, usually, it picks up somewhere else. And it's the case with our limited that's performing great. Other very strong launches like harmonies or others. So it's just the nature of the business and the nature of consumer consumption in various countries.

[Martin Arnell, analyst]

Okay. And one long-term question to you. What do you think the growth for the Board Games market could be in a long-term perspective, say, 5 years from here?

[Thomas Koegler, executive]

It's a very good question. And unfortunately, in our industry, we do not have the likes of [indiscernible]. So your job is quite difficult in trying to find relevant information on the market dynamics. What we see and with the help of external consulting firms, is that our expectation for the long term is to have somewhere around the mid-single-digit growth of the market.

[Martin Arnell, analyst]

And my final question is to you, Johan. On the cash flow improvement, there's quite a big delta in your alternative measures where you show the payment personnel costs related to acquisitions, it's a SEK 1 billion delta that is supporting the free cash flow after working capital, this SEK 650 million increase year-on-year. Why is it such a big delta?

[Johan Ekström, executive]

I think when you look at first of all, when you look at our operational P&L measures like adjusted EBIT or EBITDA, we exclude the effects of M&A activities. And as highlighted, within or related to the Gearbox transaction, there are cash. It's a net contribution after cash earn out payments. So from an operational perspective, that is renewing the funds in from the sale of Gearbox as opposed to EBITDA.

[Thomas Koegler, executive]

The next question is from it Galil from Barclays.

[Galil, analyst]

So I have 3. So first is, can we know what is the adjusted EBIT for PC Console in Q1, assuming no contribution from the sport businesses? And the second is, can we get any update on progress on the financing for the Saber disposal? And by that, I mean, for the funding for the FY acquired. And finally, so for FY '25, guidance at FY '24, you said that we -- we should expect a similar performance compared to the actual adjusted EBIT in FY '24? And by that, we think we should compare it to around SEK 7 billion in FY '24, including Saber and Gearbox. Are you still happy with this number or not?

[Lars Wingefors, executive]

So to start with your first question was the reported adjusted EBIT on PC Console in the first quarter I want a specific question impacted from the divestments?

[Galil, analyst]

So adjusted EBIT, but if basically, we didn't have any contribution from the Saber or Gearbox in Q1?

[Johan Ekström, executive]

Yes. So Sabre -- Sabre is excluded as it's not part at all of Q1, but Gearbox contributed negatively with around SEK 30 million in the quarter.

[Lars Wingefors, executive]

And on your second question, the payment for Saber -- from the buyers. I'm confident that the buyer will be able to pay according to plan. Obviously, I am involved with the buyer on almost a daily basis because we have ongoing projects together post the divestments a few development projects. And I'm confident in the buyer's ability to get actually top-ranking investors into his business if needed. So there is no change from my previous communication around this matter. This will be paid this calendar year.



On your last question, I would like to come back to the fact that we are not providing guidance anymore. We previously just going back in history, we previously had a 2 years guidance. And being in this industry, it was sometimes a bit painful to have that every quarter. So we decided to move out from having a hard guidance every quarter because there is a bit of lumpiness in the PC Console business.



And however, we decided to give some color and not a guidance, just to give some color in our first reporting how investors should look at this year. And we said we see a similar adjusted EBIT this financial year. That was our statement in last quarterly reporting.



Now I think businesses are performing according to expectations. There might be some shifts within the year. But in general, we see around the same amount of products being shipped this financial year. It's still SEK 3.9 billion of PC Console games that we are expecting to release within the year, the same number we provided in last quarterly. So that's kind of the color I can give you.



In the end of the day, as Asmodee is fantastic businesses to own from the perspective, you always are very stable in your deliverance of your numbers and the mobile business being the same. The PC Console guy is the bad guy because it's a bit volatile. But I'm very confident and excited about the future outlook of that business as well, especially now post the restructuring

[Thomas Koegler, executive]

No more questions from the telecom.

[Operator]

Let's say, if we have something here. Yes. There is a question here, which I found quite interesting. 4A Games is a business that the buyer of Saber has an option to buy. How do you manage that business now? Do you see it as a part of Embracer or is it something that is…?

[Johan Ekström, executive]

Yes, it's a great question. To start with, [indiscernible] by Dean, it's a fantastic company that's been around for many, many years, very experienced developers, both based in the multi and Ukraine. And they are working hard on their next big game to be shipped in the not-too-distant future. And we are in regular contact, obviously, from Embracer side with Dean -- in general, our companies are fairly independent. They are founded by entrepreneurs, they're used to run their businesses.



Financially and legally, we are owning that business fully. Yes, the buyer of Saber has an option to acquire that business. But we need to wait and see in the end what the final conclusion is, I think, for is a fantastic company. But regardless, if it's owned by us or the buyer Embracer holds the rights to Metro, we will be the publisher of any future game without confirming the name of that game. So I'm confident in our ability to capture the great output, the hard work the developers are doing.

[Operator]

Yes. I think we have been through most of the questions here. There are, of course, many questions relating to the similar performance guidance in the previous report. It wasn't there this morning.

[Johan Ekström, executive]

I understand the market love to hear a hard guidance, and it makes life easier. But it makes our life sometimes more difficult when there is shifts in release slates and other things.

[Operator]

And how do you think about the non-SMD business. Is it volatile? Should it be run without that? Or are you going to work down the debt? Or how do you think about that?

[Johan Ekström, executive]

Yes. So now looking at the pro forma debt post payment from the Saber buyer, we have fairly little debt relating to the overall profitability left within the business. So let's see how much debt we actually will have in the end of the year. In general, I'm not a big debt guy. However, a business like Asmodee, I think, could carry some debt. But in general, I don't think we should have a high leverage within the business.

[Operator]

And then just one question. I guess, it's more of a household thing, but we have seen cash flow improve materially now. Is that going to be lumpy? Or should we sort of expect it to continue to improve going forward?

[Johan Ekström, executive]

Generally, it would improve, but lump is the wrong word. There is a seasonality in the industry, and there is the impact from releases and the working capital tying to that. So if you release a game in the end of the quarter, you actually would have that cash flow in the next quarter. So yes, there is some up and downs. But if you are a long-term investor and shareholder as myself that is not a problem it's a problem for a specific quarter.

[Operator]

Very good. I think we'll round off there unless we have any more questions. Thanks, everyone, for attending.

[Johan Ekström, executive]

Thank you very much.