Hello, and welcome to the Fractal Gaming Group Audiocast for Teleconference Q4 2021. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Today I'm pleased to present CEO Hannes Wallin and CFO Karin Ingemarson. Speakers, please begin.
Hi, everyone, and welcome to today's presentation of our quarterly report. We can go to next slide, please. We will start with some highlights from our Q4 report. Our net sales in Q4 increased by 6% year-over-year to SEK 121 million, and an increase by 2% organically, meaning revenues measured in U.S. dollars. The graphics card shortage has continued to hamper the demand for PC components that are usually purchased at the same time, such as PC gaming cases. The prices of graphics cards have increased by about 2x-3x in this period, and this has caused gamers to wait and postpone the upgrades of their PCs, which have had a negative effect on our product categories as well as the whole PC component industry.
The graphics card shortage is expected to continue during the year but to gradually improve, especially in the second half of 2022. Due to many gamers waiting with upgrades, it is believed that there is a strong and pent-up demand for upgrades among gamers, which can lead to a strong sales comeback when graphics cards becomes more available again. While the current market situation is challenging, it is important to understand that this is something that affects the whole market and is not specific to Fractal. During 2021, we have kept or increased our market shares in our key markets. In the fourth quarter, we have improved our margins by 3 percentage points, which we're especially happy about considering the current challenging situation with extremely high freight prices and reintroduced tariffs in the U.S.
The improvement is driven by implemented price increases as well as favorable product mix together with a higher share of sales of cases and with good contribution from the new Torrent series. Adjusted EBITDA declined slightly year- over- year due to currency adjustments and slightly increased operational expenses. The interest in high-performance gaming and esports continues to be very high. Hours viewed on Twitch continued to increase during Q4, with a total increase of 31% for the full year of 2021. Next slide, please. As mentioned, we see that, the interest for gaming continues to be very strong, and right now there are about 1.4 billion active PC gamers. New hardware have lately been introduced by Intel, NVIDIA, and AMD. Especially noteworthy is Intel's comeback to the gaming graphics card market, where NVIDIA and AMD have long been the only players.
Intel's first graphics card is expected to be released in Q1 and will hopefully spur further competition in the segment. Next slide, please. During 2021, we've had several successful product launches, the most notable the new Torrent case series and the new water cooling series Lumen. We remain committed to continue to release award-winning products, and we have in the last years heavily increased our investments in R&D to expand our product range, both within existing categories but also into new adjacent categories. We have many exciting launches in 2022, and yesterday we, for example, launched expansion models to the Torrent series, which have been very well received. Next slide, please.
Moving on to the financials, the graph at the top shows the development in net sales. Net sales in the quarter increased by 6% to SEK 121 million compared to Q4 2020. We also measure our sales in U.S. dollar as we sell exclusively in dollars regardless of the end markets, and the organic increase in dollars in Q4 was 2%. Looking at 2021 full year numbers, there was instead a decline of 25% in Swedish krona and 19% organically, explained by high comparative numbers with 62% organic growth in 2020. Q2 and Q3 in 2020 were our highest selling quarters to date with a growth of over 100%, driven by lockdowns around the world as a result of the pandemic.
However, net sales in Q4 2021 grew by 6%, and the sales was weaker last year due to slightly high stock in the sales channels. As Hannes mentioned, the shortage of graphics cards continues to impact demand of cases in the market and affect our sales, but also sales for the entire industry. The limited availability of graphics cards, which is the heart of gaming computers and the most important factors for performance, means that many gamers are waiting to upgrade their equipment. The price of graphics cards are also still high, 2x-3x higher than normal.
However, what is important to say is that we see a continued strong underlying demand for our products, which will lead to a strong sales development when there are availability of graphics cards and normalized prices in the market. In Q4, the logistical situation in sea freight from China remained challenging with long and uncertain delivery times, in some cases five to eight weeks longer than normal. We had a reasonably good inventory situation in the sales channels, which means that sales to end customers were not materially affected by the logistical situation. In the graph at the bottom, you can see our quarterly development in sales out to end customers that our distributors and resellers report to us measured in dollars. Sales out is an important measure that shows the underlying commercial development.
In Q4, sales out decreased by 35% organically compared to Q4 last year, which was an all-time high sales out quarter. Shortage of graphics cards explains the decrease in sales out, and as mentioned before, we believe there is a pent-up demand in the market which will have a positive effect in our sales when the graphics card situation normalize. Moving on to the next slide and segment development, we can see that we have the strongest sales in EU with 49% of total net sales, followed by Americas with 30% and APAC and other with 21%. Sales of cases increased by 26% in EU and by 54% in APAC and other compared to Q4 2020. In America, sales of cases decreased by 11%. Sales of other products decreased by 25%. Americas showed a decline of 57% and EU of 23%.
APAC and other increased sales of other products by 25%. Cases stands for 85% of the total net sales in Q4 and other products for 15%. Moving on to next slide and product margin development. In Q4, product margin was 33%, which is 3 percentage points better than last year. For the full year, product margin was also 33%, which is 5 percentage points worse than last year, mainly due to higher freight cost and U.S. tariffs. The deviation of 3 percentage points between Q4 and Q4 last year is mainly due to less discounts, improved product mix, but on the negative side, high freight cost and U.S. tariffs. Less discounts increased product margin by 3 percentage points in the quarter. Last year, the stock and the sales channels were slightly high in Q4, and therefore, more money was spent on discounts and campaigns to reduce the stock level.
We also had an all-time high sales at that time. In 2021, the lack of graphics cards meant that there was no reason to spend money on discounts and campaigns as it would not lead to any material additional sales. The higher margin was also affected by product mix with a higher proportion of cases sold compared to other products. Even the mix within the case category was advantageous with increased sales of cases with higher margins, like the Torrent case that was launched in August. However, the freight cost continues to be on a high level and affect our product margin negative by 2 percentage points. The increased cost for freight affect our P&L when we sell the goods, which means some time lag before impacting the margin.
U.S. tariffs on cases were reintroduced from January 1st, 2021 and decreased product margin by 1 percentage point in Q4. As we have explained earlier, we have mitigation plans in place which will reduce the impact of tariffs by working with our suppliers to move some assembly for the U.S. market outside China. Due to continued traveling restrictions, it will not be possible to start the project until end of Q2 2022 at the earliest. However, in 2020, Fractal was granted an exemption from U.S. tariffs, and during fall 2021, the U.S. Department of Commerce has opened up for application for a new exemption. Only companies that have previously been granted an exemption for tariffs can apply. It is difficult to assess the probability of being granted an exemption, and it will probably take more time before a decision is announced.
We don't take anything for granted, but we are cautiously optimistic about a positive result. Let's have a look at the next slide and earnings. Q4 adjusted EBITDA was SEK 3 million, and the margin was 2.1%, which is 4.7 percentage points lower than last year. Full year adjusted EBITDA was SEK 34 million, and the margin was 7% compared to 21.8% in 2020. The gap in Q4 versus last year has mainly to do with favorable currency effect 2020 and higher OpEx and personnel cost in 2021. As previously said, high freight cost and imposed tariff affect the margins negative. Due to the logistical situation, inventory levels in our central warehouse in China has been higher than normal, and cost for warehousing has increased.
Personnel cost is according to plan, and during 2021, we have hired new employees, mainly within marketing and product development departments to enable long-term profitable growth. To mitigate the increased costs, price increases have been implemented during the year. Possibility of additional price adjustments is also investigated. We have good opportunities to largely compensate for the long-term external factors, both by increasing prices but also by moving assembly from China to third country for the U.S. market to minimize the tariff costs.
However, as the freight cost is expected to be temporary, prices have not been raised to accommodate for them, and that also seems to be the general consensus in the industry. If freight costs normalize at a higher level, there are possibilities to compensate by increasing prices for that too. During the year, we continued to execute our strategic growth agenda to create profitable growth in the coming years.
We have chosen to pursue our growth-promoting initiatives even during a turbulent period when external factors dampen demand to take advantage of the great opportunities we see in the markets in the near future. Moving on to the next slide. Operating cash flow is mainly affected by low EBITDA. The change in net working capital is related to increased accounts receivable and slightly higher inventory due to continued difficult logistical situation and issues with shipment from China, refill of new products, and graphics cards situation. Investing activities amounted to SEK 4.8 million and is related to development of new products. For the full year, operating cash flow is mainly affected by lower EBITDA.
Change in net working capital mainly related to lower operating liabilities and cash flow from investing activities amounted to SEK 25.7 million, which is SEK 4.6 million higher than last year. Moving on to the next slide and the income statement. As previously presented, we had a net sales increase of 6% and 2% organically. For the full year 2021, we had a decrease of 25% and 19% organically. The main explanation is tough comparable numbers with all-time high sales in Q2 and Q3 2020 and continued effects from the shortage of graphics cards. We only sell in U.S. dollar regardless the end market, and the same goes for COGS. That is also 100% in dollars, which gives a certain currency hedging.
Fractal is in many ways a dollar company with 100% in dollars down to product margin, and OpEx and personnel costs are 42% denominated in dollars. Fractal's reporting currency is Swedish krona, and the numbers are affected by fluctuating exchange rates in currency other than Swedish krona. However, Q4 had an average U.S. dollar Swedish krona rate of 8.8 compared to 8.5, and the full year had an average U.S. dollar Swedish krona rate of 8.5 compared to 9.2 in 2020. Goods for resale and product margin are, as previously said, mainly affected by higher costs for freight and imposed tariffs. Other external expenses are affected by higher warehouse costs and also costs related to more employees. Personnel cost is according to plan, but higher than last year due to investment in more people.
The financial net is affected by interest expenses related to the overdraft facility and FX translation effect. With that, we move to the next slide, and I hand over to Hannes again.
Thank you, Karin. As mentioned before, we've had several successful product launches in 2021. The new Torrent series was a big success for us, and the sales of that have exceeded our estimates and forecasts and have contributed to a higher product margin. We're very excited about our very strong pipeline and roadmap of new products for the coming quarters. We're also continuing to work hard to manage the cost impact from the high freights and tariffs. The freight cost remains on a very high level, but we're hopeful they can start to trend down significantly during the year. As for tariffs, we are working on plans to relocate final assembly, as Karin mentioned before. At the same time, we also have a chance to get an exemption, and we applied for that in Q4 2021, and we're cautiously optimistic that we can get this exemption.
In order to mitigate the cost of freight costs, tariffs, and increases in raw materials and FX impact, we have raised prices on most of our products during 2021. As for the more long-term and strategic initiatives, we're working with several very exciting ways to continue our growth journey. We want to continue doing what we do today and what we have done since inception, which is to deliver best-in-class products in our categories and be one of the leading brands. We can continue to grow in our current categories, and we will launch a lot of new products in these categories in the coming year and expand our product portfolio into new categories. We have worked hard to identify several adjacent product categories that are interesting for us to expand into and which fits well with our brand and with strong margin profiles.
We're currently in the process of developing such products. We also want to diversify and improve our marketing efforts, primarily with more visibility in streaming. We recently have introduced a lot of partnerships with different streamers on Twitch. Last but not least, we aim to make geographical expansion in Asia, primarily succeeding in China, but also Southeast Asia is an interesting market in coming years. Next slide, please. A brief summary of the quarter report and our outlook for 2022. Our net sales was negatively impacted in the quarter and the full year by the massive shortages of graphics cards, leading to a soft demand in the market. We saw strong demand in the market until about mid-May, from which then the demand softened significantly.
Adjusted EBITDA was also lower in the quarter and the full year due to the negative impact in net sales, but also because of negative impact to gross margins due to higher freight costs and reintroduced U.S. tariffs. Despite continued uncertainty regarding demand and supply chain, we expect to return to growth again in 2022. We anticipate a continued low demand during the first half of this year, but with a stronger development during the second half of the year as access to graphics cards and prices improves. Our view of the market and our financial goals in the medium and long term are intact, with a net sales growth of at least 10% and an adjusted EBITDA margin of 20%. I want to repeat that the underlying demand and market for high-performance gaming products remains very strong. Next slide, please.
With that, we have reached the end of our presentation, and we'll open up for questions.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. We have a question from the line of Oscar Erixon from Carnegie. Please go ahead.
Thank you, and good morning, Hannes. Good morning, Karin. Couple questions from me. Starting here with the outlook for the year. You don't give a full year outlook, but you reiterate your long-term targets, and also highlighting a back-end loaded sort of phasing in the year. What do you see for the second half of the year? Do you retain the view that it will be a strong sort of sales and demand recovery?
Yes. Yes, we see that there's basically two reasons why we believe that the second half will be stronger than the first half. The main reason is, of course, the demand, which we think will recover during the year. That is based on our own readings of the market, but more importantly, what industry players and analysts are saying. Second, we also believe that the new products that we're now going to introduce in the first half of the year will also help the sales in the second half of the year. A combination of a recovered demand situation and our new products.
Excellent. Just to be clear, the new product is not Torrent. It's a new series entirely in the cases segment?
Yeah. During the year, we will launch several new series or families in the case category. We have launched a Torrent now. Yesterday, we launched two additional models in that family. Apart from that, we will also launch more products in the case category with several new models and families.
Very good. Then on the Torrent series, very happy to see positive reception and also performance above expectations here in Q4. You announced the Compact and Nano products yesterday in the Torrent series. How do they fit into the series? Should we expect more Torrent products coming, or is this it for the Torrent for now? Thank you.
These two models, they complete the original Torrent quite well since they are significantly smaller. The original Torrent that we launched in August last year was very well received and received several awards. As mentioned, it also exceeded our own sales estimates. But there were some users thinking that it was a bit too big. As a response to that, we have launched smaller versions, which we launched yesterday. What's also interesting with the Torrent is that it is a new family of cases that does not cannibalize on existing products since it's priced in a different segment. It's a healthy addition to our lineup in many aspects.
Excellent. Thank you. Just a couple of more questions from me here. Looking at the cost structure in Q4, obviously OpEx a bit higher than that I expected at least. Is it mainly freight costs not really coming down as much as one could have expected? Or are there any other sort of unexpected effects in Q4, would you say?
I mean, the OpEx is only a slight increase against Q4 in 2020, but there are different factors in that, and maybe you can elaborate a bit on this, Karin, on the cost side. I think you're muted, Karin.
Sure. Sorry for that. As you said, Hannes, it's slightly higher than 2020. It has to do with several things. One is that we have invested in more employees during the year, so we have a little bit higher personnel costs. Looking at OpEx, we also had higher costs for warehousing. The logistical situation and the issues with getting products out and also the graphics card situation makes the inventory higher than normal. So that also impacts OpEx a bit. I would say that these two together are the ones that deviate versus last year the most.
I think that's also an important point to make here that despite this very soft market in the second half of 2021, we have continued to invest in the future in Fractal, invest in R&D, invest in marketing, and we have not slowed down at all that much. We think that is the right choice since we strongly believe that this softer situation in the market is temporary and transitory, and that the market will recover quite soon. We could have chosen to reduce our costs significantly, but that would've slowed our mid- to long-term growth outlook.
Perfect. That's very helpful. You mentioned the price increases across your product lines. Are you sort of done with the cost price increases as the situation looks now, and were the full effects in the numbers already in Q4?
Our price increases to our customers are for now completed, and we made the last price increases in early Q4 for the American market. We don't see any more price increases right now planned, unless we would see a changed situation with even higher freight prices or an increase in raw materials. When it comes to raw materials, we have seen an improved situation in the last couple of months when it comes to steel and plastic, and if that continues, there is a possibility for us to claw back some of the price increases we suffered from our suppliers and manufacturers in early 2021.
That remains to be seen, of course, t here is an opportunity there for us to claw back some margin if the steel and plastic, and other raw materials remain on lower level.
Understood. Thank you very much. That's it for me for now.
Thank you, Oscar.
Just as a final reminder, if you do wish to ask a question, please press zero one on your telephone keypad. We have one more question from the line of Simon Granath from ABG. Please go ahead.
Thank you, operator. Good morning, Hannes and Karin. Hope all is well with you. I'd like to just touch upon the GPU shortage topic one more time. It sounds like it should be better in H2. Could you talk a little bit about the supporting factors for why this should be the case? Is it about less cryptocurrency miners, higher production capabilities from suppliers, increased amount of GPU models on the markets, et cetera?
Yeah. I think it's a combination of different factors than the ones you mentioned. We have seen now the crypto prices have gone down a bit. There are changes expected during the year from the second biggest cryptocurrency, Ethereum, that they will move away from mining being possible. Once you see that turn in the crypto market, a lot of miners will be putting up their cards for sale in secondhand markets, which in turn will drive down the firsthand market, the prices in that. Also, we believe that the output of NVIDIA and AMD is going to increase during the year. At least that's what they have said themselves. We also see now that Intel is coming into play. They are planning to launch their first graphics cards for 20 years now in Q1.
We have three players instead of two, which will also create extra competition and also hopefully a bit more supply. I think it's a combination of these different factors that makes us believe that it will improve during the year.
Very clear. Thank you for that. Could we see a scenario where your resellers are starting to build up inventories of your products already before the GPU shortage starts to ease? Or should this come relatively hand in hand?
I think it will come hand in hand. I think it's a trigger for the whole PC gaming component industry right now to see the graphics cards' prices come down and then inventories and sales will build. That's also I think a thing to point out, the mechanics with our sales channels' inventories that when the demand slows, then it becomes a double negative for us for a period of time since then they will have to eat off their inventories before they purchase more from us. Oppositely, when the demand increases, then it becomes a double positive since they will then have to buy more products to accommodate for the higher run rates they have, but also to recover their stock levels.
That's a dynamic that we see in with the inventories in our sales channel.
Thank you. That was also very clear. Geographically it looks like EMEA performed well in this quarter while America sales were at similar levels as in the preceding quarters. Is there any particular reason for this development? Therefore could you elaborate a little bit on the geographical development here in Q4 and perhaps also a comment going forward?
Yeah. Do you want to comment that, Karin, the regional-
Yeah
Differences?
Yes, absolutely. It is hard to say exactly why, for example, Americas decreased as they did, but we had an all-time high sales in Americas during 2020, so there are very tough comparables. That's one reason. It's nothing strange. Normally, historically, Americas is one third of sales and has been previously as well. We expect Americas to be one third of our total sales. It's nothing strange this quarter, so to speak. What we can see is, as I mentioned, is that cases stands for 85% of total net sales when it comes to products, and other products for 15%. That mix has changed a little bit in Q4, and that was also expected.
That also help our margins as I also described previously. The product mix has improved. We sell more cases in Q4 and also we sell more cases with higher margins. For example, we have the new Torrent series, as Hannes talked about with a better margin. That's that.
Thank you. That was all for me. Thank you both for the answers.
Thank you.
As there are no further questions, I'll hand it back to the speakers.
All right. I would like to thank everyone for your time today and hope you have a nice day. Thank you.
This concludes our conference call. Thank you all for attending. You may now disconnect your lines.