Embracer Group AB

STO:EMBRAC B

Earnings Call Analysis

Stable Market, EBIT Forecast SEK 7-9 billion

The video games market remains stable despite a slight dip in expectations, expected to generate $184 billion in 2023, a 1% year-over-year growth. PC gaming growth stands out at 4%; console follows with 2%, while mobile is expected to face a 2% decline. Full-year sales rose to SEK 42 billion despite a challenging comparable quarter last year. Marketing costs maintain a steady 10% of net sales, while operating expenses settled at SEK 2.7 billion, or 25% of net sales, leading to a quarterly adjusted EBIT of SEK 1.8 billion out of a full-year SEK 6.7 billion. Free cash flow turned positive at SEK 400 million, a stark improvement from a negative SEK 900 million the previous year. Embracer Group is on track to achieve net debt targets of SEK 8 billion by end-March, supported by a strong second half expected from the restructuring program. The company reaffirms its forecast for an adjusted EBIT between SEK 7 billion to SEK 9 billion for the financial year.

Embracer Group's Q2 Performance and Corporate Restructuring

Embracer Group opened the second quarter's earnings call with a note of appreciation to the 900 individuals who departed the company as part of the restructuring aimed to create a leaner and more robust organization. Transformation seems to be a theme, hinting at cost-cutting measures and efficiency improvements.

Growth Amidst Restructuring

The Group's net sales saw a 13% increase year-over-year, reaching SEK 10.8 billion although they experienced a slight 2% dip in organic growth. This minor downturn was attributed to tougher year-over-year comparisons within their PC/Console and Mobile segments. Adjusted EBIT for the quarter came in at SEK 1.8 billion, meeting expectations, with particular strength in Tabletop Games and Entertainment & Services. However, Embracer noted the margin within the PC/Console segment remained below their aspirations, hinting at a future focus area for the company's improvement initiatives.

Subdued Second Half Outlook for Key Segments

While maintaining the adjusted EBIT forecast of SEK 7 billion to SEK 9 billion for fiscal years '23 and '24, Embracer indicated a softer second-half outlook for its PC/Console Games and Mobile segments. Investors should monitor these developments closely, as they could impact future profitability.

Strong IP and Studio Performance

Embracer highlighted the robust performance of key internal intellectual properties (IPs) and studios, with standout successes like Dead Island 2 and Remnant II. Notably, Remnant II sold over 2 million units, contributing significantly to the quarter's sales. Another highlight was the restructuring progress, which is expected to enhance the free cash flow generation and boost profitability—particularly in the Mobile, Tabletop, and Entertainment & Services segments that collectively delivered an adjusted EBITDA less CapEx of over SEK 5 billion over the prior 12 months.

PC/Console Games Facing Challenges

The PC/Console Games segment saw a year-over-year net sales decrease of 5%, with an even sharper 17% drop in organic terms. These figures were mainly affected by challenging comparisons from the prior year, specifically the release of Saints Row and a major platform deal. Embracer also noted the adjusted EBIT margin took a hit from increased games development amortization.

Mixed Results in New Releases and Back Catalog Sales

New game releases generated revenue of SEK 1.4 billion in the quarter, but this represented a 7% decrease year-over-year. The performance was mixed, with titles like Remnant II excelling, while Payday 3 fell short of expectations. Back catalog sales also declined by 14% compared to the previous year, largely due to the extraordinary success of Valheim from the prior year boosted by a platform deal.

Upcoming Game Releases to Watch

Investors should keep an eye on Embracer's upcoming slate, which includes promising titles such as Alone in the Dark, Outcast, and Arizona Sunshine among others. These releases have the potential to influence future earnings and the perceived strength of Embracer's game portfolio.

Game Development Investment and Restructuring Impact

The call highlighted Embracer's ongoing investment into game development, which remains high, totaling SEK 1.7 billion for the quarter. Importantly, the restructuring program is expected to yield financial benefits starting from October 1, and Embracer expressed confidence in improved return on investment (ROI) and quality of titles going forward.

Steady Mobile Games Sales with Strong Catalog Titles

The Mobile Games segment reported sales of SEK 1.5 billion, a slight increase over the previous year. Highlights include a strong catalog of games like Sudoku.com and BlockuDoku and the shift to genres with better retention and monetization strategies. This segment is demonstrating a blend of stability and strategic adjustments vital in the mobile landscape.

Tabletop and Entertainment Segments: Areas of Growth

Highlighting growth areas, the Tabletop segment grew by 25% year-over-year, with net sales of SEK 4.1 billion driven by trading card games and Europe's market performance outshining that of the States. The Entertainment & Services segment enjoyed a dramatic 76% increase over the previous year, with adjusted EBIT margin hitting 16%. The licensing revenue for The Lord of the Rings IP played a notable role in this success.

Earnings Call Transcript 2024-Q2

[Martin Arnell, analyst]

Good morning, everyone, and welcome to Embracer's Q2 results presentation. My name is Martin Arnell, and I'm an analyst with DNB Markets in Stockholm and I'm here to moderate Q&A after management's presentation. [Operator Instructions] With that, I want to hand over to President and CEO, Lars Wingefors, and with him is Johan, as well, Ekstrom, the Deputy CEO and CFO.

[Lars Wingefors, executive]

Thank you, Martin. And hello, and a warm welcome to this Embracer Group's Q2 presentation from Stockholm.

Before we get into the business details of our second quarter, I want to start this conference by saying a personal thank you to the 900 people that whom left Embracer during second quarter. As you'll hear today, we are determined to transform Embracer into a leaner, stronger company. That said, it's painful to me that you need to leave the group, and we have been and are doing everything we can to preserve jobs without changing what we need to achieve.

Our people are what make up the very fabric of Embracer. For me, personally, it's crucial that the program is carried out with compassion, respect and integrity.

Now let's dive into the business highlights for second quarter. In Q2, we delivered a stable performance and improved cash flow with the financial benefits of the restructuring program still mainly ahead of us. In Q2, our net sales grew 13% to SEK 10.8 billion. The organic growth amounted to minus 2%, a result of solid organic growth within Tabletop and Entertainment & Services, but tough year-over-year comparisons for PC/Console and Mobile. Year-to-date, our organic growth is 8%.

Adjusted EBIT came in at SEK 1.8 billion, in line with our expectations for the quarter. The Tabletop Games and Entertainment & Services segment had a strong second quarter, above our expectations. I'm happy to see strength of both Asmodee and the Middle-earth Enterprises. The margin within PC/Console is still below where we want it, mainly as a result of the soft performance of titles released last year, but also few soft releases in the second quarter. This includes Payday 3, which had a positive adjusted EBIT contribution with the investment recouped in second quarter but has performed below management expectations.

Free cash flow amounted to around SEK 400 million, and it's SEK 1 billion improvement compared to first quarter or SEK 1.3 billion improvement year-over-year. We expect free cash flow to materially improve in second half of the year, driven by stronger seasonality for the Tabletop Games segment, as well as notable OpEx and CapEx savings.

For fiscal '23, '24, we reiterate our adjusted EBIT forecast of SEK 7 billion to SEK 9 billion. We remain confident in our forecasted range. The second half outlook for PC/Console Games and Mobile segments has, however, softened somewhat compared to our assessment in the first quarter. Johan will talk more about the forecast later in the presentation.

Our key internal IPs and studios are performing well. This includes highly successful releases of the Dead Island 2 and Remnant II. Remnant II, internally developed by Gunfire Games and published by Gearbox Publishing, was successfully released on July 25 and has now sold more than 2 million units and generated more than SEK 700 million in net sales in second quarter.

I'm glad to also see successful releases in the past week of Risk of Rain Returns selling more than 500 copies in its opening week, Teardown for console including a new DLC for PC being well received by both players and critics, the Satisfactory Update 8 from Skövde, Coffee Stain, The Awakened King, the first DLC for Remnant II, all four products getting very well received by both critics and players. This is encouraging to see for the important holiday season period where players will spend a lot of time and money on games.

We are also making good progress on our restructuring program. Müge and Phil, two of our key people managing the restructuring, will go further details later today. From my point of view, we are making good progress and expect to reach our restructuring targets. A lot of focus is on free cash flow generation. To put some color, our operations within Mobile, Tabletop and Entertainment & Services provide a solid foundation with predictable, profitable and cash-generative businesses. Adjusted EBITDA less CapEx with these three segments is around SEK 4.2 billion on -- during the last 12 months. If you include Coffee Stain, it's over SEK 5 billion.

The soft free cash flow in the past years is more or less only driven by imbalance with PC games and console games, and we are now taking actions on to make sure the PC/Console segment will have a solid free cash flow generation in the years ahead.

In the past month, having opted for agile and proactive approach, we have accelerated processes to divest assets relative to external funding for individual games. This shift is driven primarily by notable inbound interest, but also by market dynamics and reduced levels of platform content investments. As a result, we are now running a few structured divestment processes that give us flexibility and optionality to reach our targets. We are focused on maximizing shareholder value and on delivering on targets in the most efficient way.

Now let's move over to the details of the different segments. Net sales in the quarter for PC/Console Games amounted to SEK 3.9 billion, a decrease by 5% year-over-year or minus 17% organically and 22% pro forma in constant currency. The negative organic growth development is mainly explained by tough comparisons stemming from the release of Saints Row and a notable platform deal in the corresponding quarter last year. Adjusted EBIT amounted to SEK 621 million with a margin of 16%, a decrease year-over-year.

The adjusted EBIT margin remains impacted by games development amortization, combined with the soft performance of the previous year's releases and game delays, impacting back-catalog revenue this year. The results are also impacted by two third-party publishing titles, Payday 3 and Trine 5, underperforming management expectations.

Revenue from new releases amounted to SEK 1.4 billion in the quarter, decreased 7% year-over-year. The main revenue drivers among the new releases in the quarter were Remnant II developed by internal studio Gunfire Games and published by Gearbox Entertainment as well as Payday 3 developed by external studio Starbreeze Studios and published internally through Deep Silver. Remnant II released on July 25, reached a sell-through of 1 million units in 4 days and saw a peak concurrent user count of over 110,000 on Steam. The game has now sold more than 2 million units and generated net sales of more than SEK 700 million.

Payday 3 release on September 21, saw a mixed reception from critics and users. The studio saw an unforeseen error relating to external matchmaking software. The game had a positive adjusted EBIT contribution with investments recouped in second quarter but performed below management expectations. Starbreeze is now hard at work to improve player experience.

Other new releases in the quarter included Jagged Alliance 3 for console, developed by external studio Haemimont Games and published by THQ Nordic. Further new releases included RIDE 5 developed and published by Milestone, and Trine 5 developed by external studio Frozenbyte and published by THQ Nordic.

Now moving to back catalog. We saw the sales of back catalog of SEK 1.6 billion in the quarter, a decrease of 14% year-over-year. Looking at the top 10 back catalog titles, you will recognize many great IPs and games we have in our catalog, such as Dead Island, Saints Row, Deep Rock Galactic, Star Trek Online, Insurgency, SnowRunner, happy to see the new wrestling game there, Welcome to Bloxburg, Neverwinter Online and Valheim. The decrease year-over-year is primarily explained by notable contribution from Valheim in the comparison quarter, driven by a platform deal.

Now looking at the ROI chart. We are not looking at the ROI -- we're looking at the pipeline. And we are excited for the pipeline for the remaining 4.5 months until the end of the year. We have Alone in the Dark from our friends Pieces in Skövde and THQ Nordic. We have our first publishing titles from Ghost Ship, Deep Rock Survivor. We have another game from Skövde. We have many Skövde games. Lightyear Frontier, and one of our the first publishing titles from -- one of the first titles from Amplifier. We have one iconic IP from the '90s coming back, Outcast, developed in internal studio Appeal Studios in Belgium published by THQ.

Moving to Saber and SnowRunner. They have a spin-off called Expeditions, a MudRunner game. SnowRunner is one of Saber's most successful IPs and recurring IPs, and they have high hopes for Expeditions. Homeworld 3, another iconic IP, is coming back to gamers through external studio [indiscernible] Entertainment published by Gearbox and owned IP by the group.

And we have Arizona Sunshine, which I know has actually a new trailer video coming tomorrow that we are very excited about. That game is scheduled to release in December, sequel to one of the most popular VR games out there. And finally, we have Warhammer 40,000: Space Marine 2. So -- and I'm sure there is a lot of other amazing content coming through in this period.

Now look at the ROI chart. So I'm happy to see that our two largest releases have had the highest ROI, with Remnant II being the standout release from an ROI perspective in the quarter. That is very good for the return of investment in this chart because we have also had a number not performing in this quarter, at least, breakeven.

For other releases, PC release of Jagged Alliance 3 as well as RIDE 5 have performed largely in line with management's expectations, while Trine 5 again has underperformed. The weighted average of ROI now stands at around 2.3 as of the end of the quarter compared to around 2.4 in the first quarter. It is lower than we would like due to the underperforming releases last financial year as well as the short period of inclusion of the stronger larger releases in first and second quarter this year.

An interesting data point is that over the past 2 years, our internally developed games have had an ROI over twice as high compared to externally developed games. This speaks to the qualities of our key internal IPs and studios.

Continued execution of the restructuring program will be key to improve the return of investment, profitability and cash flows within PC/Console Games segment. Post the restructuring program, we have an increased confidence in our ability to deliver a general improved quality and ROI in the coming years ahead.

Looking to investments and pipeline. In the PC/Console Games segment, investments in game development remain high. As previously stated, the financial benefits of the program are primarily expected to be visible in the actual financial performing starting October 1, in total, around SEK 1.7 billion was invested during the quarter. The finalized value of the completed and released games during the quarter amounted to SEK 1.1 billion, driven by the release of Remnant II and Payday 3. In comparison period, Saints Row with a notable development and marketing budget was leased.

The ratio of investments to completed games increased from 0.8 to 1.5 with a continued higher pace of ongoing investments into future game releases, then completed investment in released games.

As of second quarter, capitalized development costs for ongoing game development projects in the balance amounted to around SEK 10 billion. In the quarter, we had around SEK 1.1 billion in write-downs related to the restructuring program, which Johan will discuss more later.

Let's head over to Mobile Games. First of all, I would like to say, I'm pleased with the performance of Mobile Games, but it's important that you understand the data points here. Net sales in the quarter for Mobile Games amounted to around SEK 1.5 billion, an increase 2% compared to the same period last year or minus 10% organically and 4% pro forma in constant currency. Underlying market trends and monetization had a stable development in the quarter.

Easybrain continues to shine and had a stable or flat organic growth in second quarter, while DECA Games including Crazy Labs, saw nearly negative organic growth. The number of monthly and daily active users both declined year-over-year, driven by DECA Games, partly driven by a shift to genres with smaller player basis, but with better retention and monetization. This is very important, you understand this, when looking at these numbers, the change of business models.

Adjusted EBIT amounted to SEK 372 billion -- not billion unfortunately, SEK 372 million, I meant, or a 25% adjusted EBIT margin. User acquisitions amounted to SEK 700 million or 48% of net sales. User acquisition investments continued to grow sequentially, but partly moderated in the latter part of the quarter to optimize the long-term profit projections. The strongest catalog titles are a number of classics here, Sudoku.com, BlockuDoku, Number Match, my own favorite game actually, Art Puzzle and Jigsaw Puzzles. Easybrain released the game numbers some globally in the quarter and also had a number of soft launches around the world.

Crazy Labs has shifted a great portion of focus to the hybrid casual segment, which has a mix of ads and in-app purchases monetization and a longer lifetime value than hyper casual games. The company saw a positive early results from Alien Invasion, a hybrid casual game for which the company took over the publishing rights in the quarter. The game is expected to have a very short payback time on the investment and to strengthen profitability.

Moving over to Tabletop. I was very pleased to see this morning that [indiscernible] Tabletop Games became the Christmas present of the year in Sweden. That's big news, if you are a Swedish. And I think it's a fantastic nomination or win that Tabletop Games as a Christmas gift. And I'm also very pleased to report strong numbers from that business segment this quarter. Net sales grew 25% compared to the same period last year or by 15% organic and 13% pro forma in constant currency. Net sales were SEK 4.1 billion. Growth was driven by the trading card games product category with low single-digit growth for board games. From a geographical perspective, growth in Europe outperformed growth in the States.

Adjusted EBIT amounted to SEK 661 million, yielding a 16% adjusted EBIT margin, which is an improvement compared to last year and a notable improvement compared to first quarter. Adjusted grew 47% year-over-year despite the product mix more geared towards trading card games, driven by strong organic growth sales, positive currency exchange rate changes and cost savings.

Asmodee inventory unwinding continued according to the full year plan in the second quarter counter to historical seasonal trends, which typically means significant inventory buildup in the preparation for the peak season. The inventory increase in second quarter this year was notably lower than previous years. This drove a significant improvement in cash generation with Asmodee delivering a positive free cash flow for the quarter compared to a notable outflow in second quarter last year. A significant free cash flow generation is expected in the second half of the fiscal year, as Asmodee enters the seasonally strongest period.

Asmodee released a number of games and novelties during the second quarter, including a new kids game line from Exploding Kittens, other new original titles such as Champions! from Repos Prod and Spellbook from Space Cowboys. Other titles released included new licensed games, such as the Netflix titles Bridgerton and Cobra Kai from Mixlore, and a Disney addition of our evergreen Dixit game from Libellud.

In the coming quarters, new releases will include a new legacy game in the successful Ticket to Ride franchise from Days of Wonder and Marvel Crisis Protocol New Edition from Atomic Mass. And finally, Star Wars Unlimited, Asmodee's eagerly anticipated new trading card game was demoed publicly for the first time at the Gen Con and Essen trade shows to an overwhelmingly positive reaction from the public and press alike. The global launch date was also announced as March 8, 2024. Stay tuned.

Heading over to Entertainment & Services segment. Net sales in the quarter for Entertainment & Services amounted to SEK 1.4 billion, an increase of 76% compared to the same period last year, or 13% organically and 28% pro forma in constant currency. The organic growth was primarily driven by PLAION Partner Publishing and Film. Dark Horse had a negative contribution to organic growth due to a slower backlist publishing sales for graphic novels. The strong inorganic increase in net sales was primarily driven by the acquisitions within Embracer Freemode of Limited Run Games and Middle-earth Enterprises with the latter growing strongly on a pro forma basis.

Adjusted EBIT amounted to SEK 216 million, driving a much improved margin year-over-year of 16%. The higher adjusted EBIT margin is primarily explained by stronger-than-expected licensing revenue for The Lord of the Rings IP within Embracer Freemode. The main driver in this quarter was the Magic: The Gathering trading card game, that The Lord of the Rings: Tales of Middle-earth. The game was released through Middle-earth Enterprises, long-term partnership with Wizards of the Coast, garnering positive acclaim from fans and critics. After the quarter, The Lord of the Rings: Return to Moria, a new PC console survival crafting game from external licensee, North Beach Games and the development studio Free Range Games was released.

The game saw mixed receptions from critics but the title has positive received critics from amongst players for its co-op mode and its story. The game has performed in line with management expectations on Epic Game Store, and is expected to be released for console later this financial year.

After the quarter, Dark Horse was awarded the best international book for their Blacksad: They All Fall Down - Part One at The Harvey Awards. For their work on the Cyberpunk 2077: Big City Dreams, they won the Hugo award for the best graphic story or comic at the 81st World Science Fiction Convention. The Berserk manga book series soon reaches another milestone when closing nearly 3 million of sold books. Further, Dark Horse and Lucasfilm Publishing will be publishing Star Wars Hyperspace Stories, a number of books with stand-alone stories. First out is Star Wars Hyperspace Stories, wow, Qui-Gon in April 2024.

And Clear River Games announced at Tokyo Game Show in September that will be publishing Omega 6 The Video Game based on the manga by ex-Nintendo veteran, Takaya Imamura. And the beat them up of Rushing Beat X based on the classic Jaleco IP. On the same show, the studio Tatsujin announced Snow Bros Wonderland. That's our own studio. And Truxton Extreme, both based on classic Toaplan games. This is really nerdy and amazing.

So market -- I'm soon done, Johan. So the market is stable. So that's good news but saw a bit declining expectations over past quarter. But it's a stable market, underlying market. And it's driven by better console supply, a stronger new release lineup and digital sales generally amongst other things. And the 2023 global video games market is expected to generate USD 184 billion, an increase of 1% year-over-year. PC is now expected to grow by 4%, console is expected to grow by 2%, and mobile is expected to decline by 2%. PC is also the only segment with a higher 2023 market forecast, and it's also estimated to be the fastest-growing segment this year. The longer-term growth prospects remain strong. And total games market is forecast to reach USD 206 billion, 2026, a 5% CAGR between 2019 and 2026.

With that said, I will leave over to Johan for financial comments.

[Johan Ekström, executive]

Thank you very much. Lars, thank you. Yes. So let us take a look at an overview of our financial performance in Q2. Although we were up against tough comps versus last year in the quarter with the release of Saints Row and the platform deal relating to Valheim last year, our full year sales increased in the quarter. So full year sales amounted to approximately SEK 42 billion. We note that marketing expenses in relation to net sales remain at 10%. User acquisition costs increased sequentially, but it's still lower compared to the corresponding period last year.

Marketing expenses outside of the Mobile segment remain at a relatively high level and is mainly due to giving the support to larger releases such as Remnant II and Payday 3 and also supporting the healthy performance that we see in the Tabletop segment in the quarter.

Operating expenses was slightly lower than last quarter. In absolute terms, SEK 2.7 billion. And if we look at it in relation to net sales, it decreased to 25% in the quarter. Adjusted EBIT decreased versus the same period last year, amounting to SEK 1.8 billion in the quarter and SEK 6.7 billion on a full year basis.

As mentioned in June, when we announced the restructuring program, we treat expenses related to the restructuring program as items affecting comparability, thereby excluding them from adjusted EBIT.

Items affecting comparability amounted to SEK 1.4 billion in the quarter, of which SEK 1.1 billion relates to write-downs of game development projects. It is important to note that write-downs of game development are considered as items affecting comparability only when they are related to the restructuring program, where the studio or the team has been discontinued.

Let us take a look at the cash flow for the quarter. First, a reminder, the positive effects from our restructuring program are expected to be in our current trading during the second half of this financial year. However, we have a positive free cash flow in the quarter of approximately SEK 400 million, which is significantly better than the negative SEK 900 million we had last year.

As a result, the full year free cash flow increased to SEK 1.5 billion. Compared to last year, there is a significantly reduced inventory buildup in the Tabletop Games segment, which has a positive effect on the changes in working capital.

Sequentially, operating receivables and liabilities increased mainly driven by the Tabletop Games segment, but also an increase in accrued expenses in the PC/Console segment related to game releases in the quarter. M&A outflow in the quarter amounted to SEK 120 million and relates to payments -- mainly to payments for historical acquisitions. The cash flow effect of items affecting comparability amounts to SEK 146 million, and our cash outflow made under the restructuring program.

Cash flow from financing activities were impacted positively by SEK 2 billion from the share issue made in July and negatively by less utilization of credit facilities in PLAION. At the end of September, our net debt amounted to SEK 14.6 billion and available funds amounted to SEK 6.9 billion. We expect to reach our net debt target for the full year of SEK 8 billion at the end of March with notable positive impacts from the restructuring program during the second half of this fiscal year.

In July, agreements were signed for the parent company's main credit and loan facilities, extending maturity to October 2024. The second stage of this extension is being negotiated and is expected to be concluded during the restructuring program.

Embracer Group has an agreement on covenants in its credit agreements. The terms of these are 2.5x net debt through EBITDA, calculated according to the principles in the loan agreements. And as per the end of September, we have significant headroom versus this covenant.

Looking ahead, as Lars mentioned earlier, we reiterate the forecast for this financial year with an adjusted EBIT between SEK 7 billion and SEK 9 billion. We remain confident in our forecast. The outlook -- the H2 outlook for the PC/Console and Mobile segments have, however, softened somewhat compared to the assessment made in Q1.

For PC/Console, it's due to actual or expected performance of new game releases as well as -- probable shifts in pipeline. For Mobile, it relates to a slightly more conservative view on monetization and organic growth.

In the PC/Console Games segment, we expect a solid earnings growth for the full year, driven by back-catalog revenue from games released during the first half of this year as well as a strong lineup of new releases across our different operatives groups during the second half of this year.

In the Mobile Games segment, we expect a mid- to high single-digit negative organic growth. Underlying market trends are assumed to be stable throughout the rest of the year, and we expect an adjusted EBIT margin that is slightly above what we saw last year.

In the Tabletop Games segment, we expect a mid- to high single-digit organic growth, driven both by board games and trading cards with an adjusted EBIT margin that is slightly below what we saw in fiscal '22, '23.

[Lars Wingefors, executive]

Thank you, Johan.

[Johan Ekström, executive]

Thank you, Lars.

[Lars Wingefors, executive]

With that said, I will hand over to Müge, welcome on stage, who is with us here, and Phil, who is with us online. Welcome, both are deeply involved in managing the restructuring program, Müge as the finance work stream lead, and Phil as a PC/Console lead and Embracer interim Chief Strategy Officer. As you know, they are also active as part of the management for Asmodee and Crystal Dynamics - Eidos respectively. Please?

[Müge Bouillon, executive]

Thank you, Lars. Good morning, everyone. Let me start today by providing a brief overview and a reminder of our structuring program. We'll then provide an update on the progress in each of these focus areas together with Phil.

You will recall the objective of the restructuring program is to deliver a set of operational and financial measures so as to improve efficiency and increase cash flow. Again, this will make us a stronger, more focused, leaner and self-sufficient company.

As you know, in order to achieve this objective, we have laid out a set of targets in different areas of focus. We aim to deliver savings of at least SEK 2.9 billion in CapEx, of at least SEK 0.8 billion in OpEx during the financial -- by the end of the financial year, '23, '24. We also target to nearly half of the net debt position to below SEK 8 billion by the end of financial year '23, '24.

There are 3 main focus areas to achieve these targets: OpEx and CapEx savings, the improvement of our capital allocation as well as efficiency improvements across the group. You would also recall the program is delivered in a phased approach. As we mentioned at the outset of the program, the period between the announcement and the end of Q2 is dedicated to the identification and implementation phase. The majority of OpEx and CapEx savings were planned to come into effect as of October 1. The financial savings were thus expected to contribute in the second half of the period. Capital allocation and efficiency improvements will continue to run through the end of the financial year.

Let's take a look at now the progress that's been made so far. But before we look at the details, overall, I can say we have made good progress on the restructuring program. OpEx savings are ahead of the plan and CapEx savings are expected to contribute in the second half of the year.

With regards to CapEx savings, we have completed the first phase of reductions. Based on a global thorough review of the PC/Console pipeline, we are now deep into the implementation of further reductions of headcount. This review is an essential phase to ensure that our portfolio is positioned for future success and innovation. We expect to reduce our CapEx run-rate by more than 1/3, reaching an around run-rate level of SEK 5 billion in fiscal year '24, '25.

On the OpEx side, as I mentioned earlier, the saving initiatives are well on track. They are delivering both headcount and other overhead savings. We have put in place a comprehensive monitoring, which allows us to track the realization of phased savings. At the same time, we remain agile and flexible to react to any change in circumstances. As I already mentioned, the financial savings will be seen over the second half of the year. However, we can already see some tangible results in the reduction of headcount.

At the end of the quarter, the overall headcount was down by 904 versus Q1. This represents a roughly 5% reduction in the workforce. The reduction was primarily driven by internal headcount, which was down by 713 and this compromise 511 developer and 202 nondeveloper roles. While this is partly business as usual, the majority is driven by the restructuring program that we have put in place.

In this group-wide effort, we're not only discontinuing a number of studios and teams, we have also made headcount reductions and reduced the number of projects in several other studios. This is increasing the efficiency across the group, while also for the first time, we have seen headcount reduction on a quarter-on-quarter basis.

Since the end of Q2, in respect of due process and commercial sensitivity, we will not comment on the specifics, but further restructurings, closures, payouts are in process and that will lead to additional headcount reduction.

Lars mentioned in his opening comments, and let me reiterate here, of course, having to say goodbye to our valued colleagues is an unfortunate consequence of the program. And we will continue to do our utmost to carry out this with respect, integrity, compassion.

With that said, I will now hand over to Phil, who will provide an update on the capital allocation and efficiency initiatives. Phil, the stage is yours.

[Philip Rogers, executive]

Thanks, Müge. [indiscernible] And if you can click to the next slide, please. So what was this slide, is an update on the restructuring. It also begins to look forward to future Embracer and how we transform ourselves into a leaner, stronger, more focused cash self-sufficient company. A company we report today, which is continue to maintain its status amongst the leadership in the games industry and committed to deliver even better experiences for our players.

Now how we allocate capital and set up our organization is of critical importance to these commitments and to cover the capital side first, as a reminder, we said at the outset in June that we're exploring a number of avenues, including sources of external funding and potential divestments.

Now today, comparing those 2 avenues, we are focusing on divestment opportunities, as Lars mentioned, as this shift has really been driven by a notable inbound interest.

Our absolute focus in the restructuring is on getting to the targeted run-rate CapEx levels in the most effective way, and we're working with flexibility and optionality to reach these targets. The structure and how we organize ourselves, we have begun to review and design how Embracer should be set up to enable great teams, to make great games, working within an aligned investment strategy to deliver high-quality hits profitably and predictably.

Now as you've seen today and believe at the heart of Embracer, our team is capable of that delivery. So we must ensure we've got the operating models to drive better execution, ownership and decision-making. Now this may result in consolidation of companies and businesses. The process is ongoing now in Q3 and implementation will accelerate in Q4.

And just to draw an example here, earlier this month, we reset Cryptic in North America to work into DECA. Now Cryptic's focus today is on its evergreen games and live services, which is aligned with the strength of DECA.

On efficiency, to me, this really is all about how we take responsibility to use our size and diverse talent in smart ways to develop and scale services across Embracer, services we need to deliver the best player experiences for the future. So not only how we greenlight and support each game development process, but also how we better leverage solutions to common development problems across studios, not reinventing in isolation, and we can build from each other's success and expertise; and thirdly, the optimal management of franchise development with our global IPs. And to name just one, well, for me, it's Lord of the Rings. But of course, there are so many others.

Now from my experience, now working with an Embracer Group for over a year, by unifying our goals to a common vision of making quality games, we are stronger together and will go further.

To finish, I'll just add to Müge's comments that overall, whilst it has been agonizing to make cuts and reductions to our own Embracer workforce, we are making the positive progress to our necessary new goals, and we will win when we're focused. Of course, we'll provide the update, as Müge has mentioned, each quarter now.

And on that, I think I'll hand back to Lars.

[Lars Wingefors, executive]

Thank you, Phil. Thank you, Müge. Thank you so much. There is some noise here, but hopefully, it goes away.

I would like to conclude, and I would like to say a few more long-term minded verge before we jump into the Q&A. We started this company with a vision to support entrepreneurs, and that is still my firm belief today. When macro and market dynamics have changed, we need to adapt to a new reality.

The Embracer model is getting adjusted and improved, but my long-term vision is still unchanged. We should not lose sight of the fact that Embracer remains one of the leading groups of successful entrepreneurs, creative talents and world-class IPs. While doing the deep analysis of the business, it's apparent there is a great number of business hidden gems and amazing games being built across the group. We have fantastic people and many amazing IPs, and we aim to demonstrate the growing earnings power of this combination over time.

And to shareholders, I want to make clear that we will continue the focus on delivering long-term value and a solid growth of free cash flow per share. I'm in the same boat with you all long-term-minded shareholders. And I will make sure that every step we take is about growing the long-term value. So with that said, I would like to hand over to Martin and the Q&A.

[Martin Arnell, analyst]

Thank you, Lars. Okay. Welcome back to the Q&A, and thanks for those presentations.

I mean, I understand that this is a challenging quarter for you with scaling down and adjusting to the new reality. How challenging is it for you? And when do you think that you can look at this as something new and exciting?

[Lars Wingefors, executive]

Well, I think everyone understand it's more fun and exciting to scale up and to grow. But the journey, being an entrepreneurial journey, you face headwinds and you need to take them on and adapt to it. And it's just painful to let people go. It's just a more human thing.

But I think, I wouldn't say -- in its context, first, I won't say excited, but obviously, we see the shape of the future now. So now we just need to get through this. And I'm confident that we will come out from this as a much stronger and leaner company.

[Martin Arnell, analyst]

And you're halfway into this year and you repeated most of your guidance, for example, the net debt and adjusted EBIT for the full year. How much control do you feel that you have on those items with 2 quarters left on the year?

[Lars Wingefors, executive]

Well, there is a substantial instrument we play on with our own adjustments and cuttings, but then there is a number of other things working with industry players, both with partnering and content as well as potential divestments. And we run a number of structured processes that gives us the flexibility and optionality we need to achieve the targets we set out. So yes, we are confident we will reach those targets by end of March.

[Martin Arnell, analyst]

And then I must ask you on the restructuring program, of course. And maybe Muge you want to share some color on how it's been and what -- any surprises and extra challenges, et cetera?

[Müge Bouillon, executive]

Well, as we said, the first part of the program, which took place during Q1 was really dedicated to the identification and implementation, yes? So we already knew that the initiatives there, financial effects, would come into effect as of the second part of the program starting October 1.

So from that said, there are several areas of focus, levers. We have put in place a comprehensive tracking, monitoring company-wide, which allow us to remain agile and flexible So, so far, we are quite good at tracking that.

[Martin Arnell, analyst]

And -- I mean, you've been with Asmodee for some time. And how do you feel about their delivery in this quarter? Are they performing stronger than you expected if you look back a bit? Or...

[Müge Bouillon, executive]

I am very happy with the performance of Asmodee. And September, itself, is one of an important peak season period for us. And the implementation of restructuring program has started also at Asmodee. So the good performance is a combination of both the current trading, the operational performance and the proper execution of the plan. So it was important for us. We don't take it lightly. So we are on track, and we aim at delivering our fiscal year and run rate targets.

[Martin Arnell, analyst]

And with this extreme focus on the cash flow, do you see any risk that it could impact growth negatively in the coming quarter in Asmodee with the inventory, for example?

[Müge Bouillon, executive]

As Lars mentioned, the unwinding of inventory is on track, is going well, which explains why this quarter -- Q2 cash flow came in positive even if the business model of Asmodee is meant to deliver a cash positive balance on second half and not the first half. We have now entered into our peak season based on the visibility. We feel confident that we will be delivering that.

You are right, the cash flow seasonality-wise driven also is concentrated on H2. And I feel confident with the delivery.

[Martin Arnell, analyst]

And maybe Johan and Lars, you could share some more light on the comments on PC/Console for the second half. You mentioned that you've shifted the outlook a little bit. But you mentioned a couple of reasons there, but is it external and internal factors? Or any light on this would be helpful.

[Lars Wingefors, executive]

No, I think it's mainly driven by our own game releases. For example, we had Payday 3 coming in end of the quarter, a bit weaker than expected. And that will have some impact in the second half of the year. And then we have a number of releases coming through. We already had some releases in October. We have seen the performance of them.

What actually meanwhile, writing or working with the report here, we have four wins. So it's a very -- volatile is wrong, but you don't know the final outcome of all the game releases. But I think the 4 things we released the past week is exactly the type of successes we want and need. And it's just an amazing achievement of those publishers and development teams.

But I think that, in isolation, is perhaps not an enormous impact. But obviously, there is many factors in our overall performance. And I think those wins the last week has an impact.

[Martin Arnell, analyst]

And just a question to you, Johan, before we let the floor and the conference in here. But in your bridge, to take the net debt down to SEK 8 billion, I think you communicated roughly how much of every item. And based on the comments in this report, is it fair to say that we should expect a little bit higher impact from potential divestments and potentially lower impact from potential partnerships going forward?

[Johan Ekström, executive]

Yes. I think that, as said during the presentation, we are confident that we will deliver on the targets set out for the restructuring program in terms of CapEx reduction, OpEx reduction as well as meeting the net debt target by the end of the year.

We won't update specifically the bridge that we showed in June. But from what we see and what Phil explained earlier, there is a focus towards asset divestments as opposed to obtaining external funding for individual game development projects due to inbound interest and shift in market dynamics.

[Martin Arnell, analyst]

Are you both looking at larger and smaller potential divestments?

[Johan Ekström, executive]

I think the color we have given is that there are a few structured processes ongoing, which gives us optionality and flexibility to reach our targets for the year-end.

[Martin Arnell, analyst]

Okay. I think it's time to open up the floor here in the room. I think we have our first question here from Rasmus at Handelsbanken.

[Rasmus Engberg, analyst]

Yes, 2 questions actually. It's Rasmus Engberg with Handelsbanken. Firstly, in terms of the restructuring, you have charged to cash flow roughly 1/3 of what you thought you would charge. Does that mean that there are actually quite significant reductions going forward as well in terms of headcount?

[Müge Bouillon, executive]

Should I take this?

[Lars Wingefors, executive]

Yes.

[Müge Bouillon, executive]

Our targets are set on OpEx and CapEx level. So it is not set at a number of headcount and so on, while that's been a way to get there. So the target isn't a number. It's at an OpEx and CapEx level, which gives us also optionality in several different areas.

Like I said, with what we have put in place, we remain confident that the year to go fiscal year targets will be achieved.

[Rasmus Engberg, analyst]

But it's still the case that in terms of actual savings seen in the numbers, those will come and then there will be further charges with that?

[Müge Bouillon, executive]

Yes.

[Rasmus Engberg, analyst]

And then I had one final question for the businesses -- the business, Lars, that you don't guide for, the Entertainment & Services. I think we're running at something like 16% margin. Is that a sort of a good guess for the full year? Or it should be higher or lower? It seems like a bit of a black box to everyone there.

[Lars Wingefors, executive]

Black box is the wrong word, but there is many different businesses that has a very different margin profile. Obviously, it's very strong margins in Middle-earth Enterprises. And if significant revenues coming in, it definitely improves the margin in the business.

Meanwhile, Partner Publishing, which seasonality in that business is strong now in third quarter. So most likely, it would -- that have an impact on the lower margin in that segment in the third quarter.

[Rasmus Engberg, analyst]

So you're expecting to have that very large contribution to revenues also in this third quarter that you normally have in this business?

[Lars Wingefors, executive]

For example, within PLAION Partner Publishing business, they are, for example, shipping a well-known shooter in the third quarter across Europe. That alone, low margin but high revenues. There is -- in the end of the day, we're here to make an absolute profit in number of dollars or euros. So it contributes.

[Rasmus Engberg, analyst]

It's okay if you talk about the actual profit instead of the margin. I don't think anybody would mind.

[Martin Arnell, analyst]

Okay. Do we have anyone else in the room?

[Unknown Executive]

I think we have three questions from the telco.

[Martin Arnell, analyst]

Yes. Okay. We'll move on to the telco. Please go ahead.

[Operator]

The next question comes from Erik Larsson from SEB.

[Erik Larsson, analyst]

I have two questions. So first off, on divestments and/or public deals, I guess, that you have commented on. I think the market is pretty eager to see progress here. And I'm just curious if you can comment whether there are any specific things holding deals back or holding deals back being made, so to speak?

And also if -- you comment that you have received inbound interest so I guess the natural question would be, could you be more outbound?

[Lars Wingefors, executive]

Well, it's -- yes, there is a lot of industry, but the industry is fairly small, and it's a good transaction market with a lot of active players. As we mentioned, there is a structured process. And if you're running structured processes, they take some time if you include leading global advisers and so on.

So perhaps I should not guide on the time to run a global structured process, but that is not done overnight. So that, we are talking not years but obviously, we're talking months and quarters to process them through, in the end of the day, to have a very professional process with data room and different bidders and auction processes and ultimately, to make sure the Board has the right material to make a decision in the end of the day, yes or no, if this is the right decision for shareholders.

It gives us a good optionality. But we are not running those processes out from our office here in Sweden. This is run by leading global banking teams and advisers across the world.

[Erik Larsson, analyst]

Okay. And final question for Johan on the debt that matures in October '24. You've commented on this, but possibly extending this further so in August, you said you expected these negotiations to conclude during the fall and now you expect them to conclude during the fiscal year essentially. So my question is just if you could shed any color on what's behind this postponement? And I guess also if you could comment on how discussions are going in general, that would be appreciated.

[Johan Ekström, executive]

I think to start with, we can say that we have a very good relation with our relationship banking group. Obviously, it is negotiations. And if you look at restructuring program, we have said that it should be finalized by the end of March. We expect the stage 2 of the extension to be finalized within that time frame.

[Operator]

The next question comes from Simon Jönsson from ABG Sundal Collier.

[Simon Jönsson, analyst]

Just one question from me, it's on restructuring. Headcount has been reduced by 5% so far compared to last quarter at least. You said back in June that you target SEK 6 billion CapEx this year. So my question is if this still is the goal? And if so, how do you expect to close that gap given SEK 2 billion CapEx here in Q2?

[Müge Bouillon, executive]

As I mentioned earlier, when we announced the program, we have said that the financial outcomes of the plan were meant to come into effect as of October 1. So we knew that the contribution would take place in the second half of the year.

So in the numbers that we commit, we had already communicated and factored the fact that the effects would fall into the second half. So from that aspect, like I said, we are tracking against our OpEx and CapEx targets, and we remain committed in delivering the SEK 8 billion net debt target.

[Operator]

The next question comes from Ali Naqvi from HSBC.

[Ali Naqvi, analyst]

Just on the point regarding select interest in parts of your business. How much of this would you say suggests the restart of M&A in the sector versus these external parties being relatively opportunistic? And given where valuations are, do you have a view on impairments or things like that should these deals complete?

Secondly, on the Mobile gaming segment, how much of a sequential improvement are you improving -- sorry, expecting on organic growth? And how much of this is a function of either the underlying market improving or things that are in your control to improve, please? And when does this start to come in? Is it Q3 or Q4?

[Lars Wingefors, executive]

Well, to start with the last question on Mobile. I think the businesses we have are ads driven. So I don't think you should look at the general market dynamics for enough purchase mobile games industry. And there is a number of factors and dynamics in that market, ad prices being one of them.

For Embracer, again, we have changed the business model within Crazy Labs to more a hybrid casual model, which gives a lower top line, but a longer -- a higher value of each player and a stronger profitability. So that is kind of changing our organic growth KPI on the top line. And these changes are -- we saw that change already now in the second quarter, and that change will continue and that will impact our Embracer organic growth going forward.

Now the profitability, I think, is very stable now in the second quarter. And we expect the profitability to be stable going forward. So I'm very pleased with our Mobile game businesses and that are adapting to the dynamics of the market. And they are successful of bringing new products to the market, which I think is obviously one important KPI, for example, Easybrain launching new successful games into the global market this quarter.

I think on the first question regarding divestments, again, it's -- obviously, there is a number of players that are active in the marketplace. I don't want to give too much color on that, but I would say it's still a general -- a good transaction market with a lot of industry players. And there's still a lot of financial sponsors in the world that are very interested into -- in the gaming industry that are watching and learning. And it remains to be seen whether any of them are entering into this space or not, now talking PC/Console.

So it's a dynamic market from that perspective. And I would like to highlight that this is according to the restructuring program and potentially one or a few divestments is also solving the situation with CapEx where there is companies with negative cash flows, investing aggressively into the future that could potentially be one of those divestments objects under consideration.

[Unknown Executive]

No more questions from the...

[Martin Arnell, analyst]

Understood thanks. Okay. I have a couple of questions from the web and -- before we close this up. This one is from Tom Singlehurst with Citi. And he is asking, I know you touched upon it, but I think it's a good question. A key concern for many peers is that the performance in Entertainment & Services could be a nonrecurring or a one-off. Can you talk about the pipeline for smaller licensing arrangements?

[Lars Wingefors, executive]

I think Middle-earth Enterprises has a very strong lineup for the future. Now they had some good momentum with Magic: The Gathering licensing revenues coming in this year. But there is, I would say, a very strong business plan that will generate significant licensing revenues, both -- this year, but especially the years thereafter.

And on top of that, obviously, we will bring potentially more products to the market throughout our own channels of Embracer in the coming years. Again, Middle-earth is a very long-term investment, and I think is one of our absolute greatest assets. But I wouldn't define the second quarter performance as a one-off, but it would be a volatile business because of the nature of the business.

[Martin Arnell, analyst]

Okay. Just one more from Tom here is with regard to potential divestment processes, you talk about optionality. Should we infer that these processes are insurance in case operational cash flow falls short?

[Lars Wingefors, executive]

No, I think you could read in a lot of things into that word of optionality. You can also read in that we are thinking about maximizing shareholder value. So that we have enough processes that are kind of competing to each other and the Board are able to make the right decision in the end of the day that are the right for the company and its shareholders.

If you just run one process, you run the problem of just having one process. If you have many more -- so I think this goes without saying why we do this.

[Martin Arnell, analyst]

And maybe a question for you, Johan, from Nick Dempsey, Barclays. He's asking, as part of the group acquisitions announced in August last year, you pointed to a payment that would be delayed by 12 months of SEK 1.3 billion. Has that been paid in October?

[Johan Ekström, executive]

Yes.

[Martin Arnell, analyst]

Okay. Clear answer, thanks. Another one from Nick. Investments in tangible assets has not really changed in Q2 versus Q1. Going disposals, are there clear reasons why this will step down in Q3 and Q4?

[Johan Ekström, executive]

Sorry, once again, there.

[Martin Arnell, analyst]

The investments in intangible assets, not really changed in Q2 over Q1. And are there clear reasons why it should go down in Q3 and Q4?

[Johan Ekström, executive]

Yes, I think the reason is what we have talked about is that the restructuring program. We expect to see the effects of that during the second half of this fiscal year. .

[Martin Arnell, analyst]

Okay. Two more before we close down here. It's a bit longer one, but this is from Mark from Valuation Matters Research. And the question for Lars. Currently, you have a lot of short-term challenges on the table. However, I would like to know where you see the company in the long term and the company's strategy, let's say, in 5 years. Also considering everything that has happened, what's the main learning lessons you draw from them?

[Lars Wingefors, executive]

Well, 2 quite long questions potentially. Obviously, we have communicating that we will have a Capital Market Day. Post the restructuring program, I will give a very detailed answer to this question. There is an ongoing work as we speak about the future and the structure but I see it -- I see the future as bright and I see the future that we are more thinking as one group with obviously much leaner and more profitable cash generative business, focusing around really bringing the absolute best products that engage consumers both on time and money in the future. I think that's what it's all about.

And I think that perhaps is sometimes more important than any other factor because that is really driving the business in the end of the day, that you are able to bring this product to the market. And I think we see in these dynamics that if you do not so good products, there is no market for it. People doesn't have neither the time or money to engage in those games or products anymore. So I think the strategy in the future will be even more focused on bringing those things to the market, and that will be driving all our businesses.

[Martin Arnell, analyst]

Okay. Thanks. And we have a final one here from [ Klaus ]. He's asking, how are you feeling about the Star Wars Knights of the Old Republic - Remake? I know it's a favorite question.

[Lars Wingefors, executive]

I noticed that anything I say to this becomes a headline. So that is my only comment. .

[Martin Arnell, analyst]

Okay. To be continued then, I guess. Okay. Thanks for the presentation, and thanks, everyone, in the room and online and on the telephone conference.

[Lars Wingefors, executive]

Thank you. Thanks so much.

[Johan Ekström, executive]

Thank you.

[Müge Bouillon, executive]

Thanks.