Welcome to the Fractal Gaming Group Q2 2023 report presentation. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to the speakers, CEO Hannes Wallin, and CFO Karin Ingemarsson. Please go ahead.
Hello, everyone, and welcome to today's presentation of our Q2 report. We're going to walk you through the latest developments in our company and industry and share and discuss all the relevant details of our report. We will start with some highlights from Q2. Our sales increased by a staggering 157% year-over-year, measured in Swedish krona, and increased by 139%, measured in US dollars. This means that our revenue increased by more than 2.5x . We are, of course, incredibly happy and proud of this development, and we will explain more in detail in this presentation about specific dynamics of our revenue development. Sales out revenue increased by 49% year-over-year, which is a testament to the very strong demand for our products.
The difference in revenue increase, which was 139% in US dollars, and sales increase, is explained by channel stock filling dynamics, where our sales channel partners needed to also increase their stock levels to match the higher run rates. We now believe that this stock filling is completed for now, and that revenue in coming quarters will be more in tune with our sales out. Our market share has increased significantly in the quarter, which was driven by our very successful product releases, but also from our expanded efforts in sales and marketing. The market overall is back to a healthy growth, but it's clear that we're growing much faster than the market. In the quarter, we launched a new case called Terra, with a very positive market reception, further establishing our design-first driven product strategy.
EBITDA increased to SEK 48 million, compared to SEK -3 million a year ago. Our product margin has improved significantly year-over-year to 40.2%, compared with 30.7% last year, primarily driven by a positive impact from shipping rates coming back to normal. The overall PC market has been declining for several quarters, but the PC gaming part of it is remaining strong and is now back to growth. During the pandemic in 2020 and 2021, there was a surge of new gamers and upgrades, it is expected that those consumers will need to upgrade sometime between 2023 and 2025, further driving growth. Starting in Q2 and leading into Q3 and Q4, we see several strong games releases, the most noteworthy being Diablo IV, Baldur's Gate 3, and Counter-Strike 2.
A new games content is an important driver for the general gaming interest and consequently, hardware upgrades. In new data released from Newzoo, we can see that more than 50% of gamers and viewers of gaming are discovering new brands while engaging with gaming. Also, 42% of gamers say that they bought a product or service recommended or used by their favorite streamer, which leads us into our next slide, where we're going to talk a bit about the launch of the Fractal Creator Program in Q2. Fractal has partnered with more than 150 streamers to be able to engage with the fast-growing gaming streaming community. We have decided to target small to medium-sized creators and instead work with a larger number of them.
We have seen that small to mid-sized streamers are typically having a more engaged and a tight-knit community with higher engagement per viewer than the bigger streamers. We strongly believe that this initiative will help us to reach new audiences and further strengthen our brand and position. As briefly mentioned before, we launched a new case called Terra during Q2. Terra is a smaller form factor case, a format that is quickly gaining ground. The striking yet elegant design of the Terra, using premium materials such as aluminum and real wood, is yet another testament to the success of Fractal's unique design-driven product strategy. The reception from the market has been extraordinarily positive, and the product quickly sold out in major markets. Leaving over to you, Karin.
Thank you very much. Net sales in second quarter was the strongest in Fractal's history, both in Swedish krona and in US dollar. Net sales increased by 157% to $245 million. All our sales are in US dollar, regardless of the end market, and the organic increase was 139% and amounted to $23 million. The USD/SEK rate was 10.5 in second quarter, compared to 9.8 in the same period last year. The strong net sales growth can mainly be explained by strong demand for Fractal's products. We have made several successful product launches in the past two years, and we now have the strongest product portfolio ever, which has contributed to increased sales. K-Series North, Pop and Torrent were among the best-selling products during second quarter.
As Hannes mentioned earlier, a clear proof of the successful releases is that we have taken market shares. The low levels of stock in the sales channels is another explanation for the net sales growth. The increased demand from end customers has led to retailers replenishing their stock to be able to meet the increased sales growth. We believe that the stock buildup at our retailers is now at healthy levels, and that the net sales in the coming quarters likely will be at the same level as sales out. Good access to graphics cards and new GPUs on the market are also contributing to increased sales. In the graph at the bottom, you can see our quarterly development in sales out that distributors and resellers report to us, measured in $.
In the second quarter of 2023, sales out increased by 49% organically compared to last year, with an increase in the case category of 60%. This shows an increased demand and great interest in our products. As Hannes mentioned earlier in the presentation, the difference between net sales and sales out is explained by channel stock filling dynamics. Going forward, we expect net sales and sales out to be more at the same level. Sales out has been on a high level during the last three quarters, and in the second quarter, it amounted to $17 million, the same level as in Q1. This is the highest level in over two years. Moving on to the next slide and segment development.
The strongest region in the quarter was EU, with net sales of SEK 153 million, corresponding to 62% of total net sales, compared to 31% last year. The growth was mainly driven by a pent-up demand, successful product launches, increased demand from end customers, and also low inventory levels at retailers. Americas net sales amounted to SEK 60 million, which is 25% of total net sales, and APAC and other amounted to SEK 32 million, which is 13% of total net sales. Sales of cases was 92% of total net sales, compared to 87% in the same period last year. Moving on to the next slide and product margin development. In the second quarter, product margin was 40.2%, which is 9.5 percentage points higher year-over-year.
The factor that mainly affected the margin was primarily lower shipping costs by 8.9 percentage points due to lower shipping prices. Current prices remained at around $2,000 per container, compared to the peak of prices in late 2021 and early 2022 of approximately $20,000 per container. Furthermore, Americas percentage of total net sales was lower, 25%, compared to 41% in Q2 2022, which also leads to lower freight costs. During the period, margin strengthening initiatives have been taken, and we see good potential to have a positive effect on the margin during the coming quarters. Let's have a look at the next slide and earnings. In the second quarter 2023, EBITDA was strong and amounted to SEK 48 million, and the margin was 20% compared to SEK -3 million and - 3% margin last year.
The increase in EBITDA was due to increased sales and strong product results. As expected, sales and marketing-related variable costs increased due to the sales growth. Warehouse costs continued to be at a lower level compared to the previous year due to lower inventory. Personnel costs increased due to the yearly salary review, new hirings, primarily within the product development department, and increased bonus provision due to the strong results. Operating cash flow was strong and amounted to SEK 64 million, compared to SEK -8 million in the same period last year, positively impacted by higher EBITDA. We are very satisfied with the development of the cash flow, which is a receipt of hard efforts. The strong cash flow will enable us to invest in our continued growth. The change in net working capital was mainly related to increased accounts payable, inventory, and accounts receivable due to stronger sales.
When closing the second quarter, the bank overdraft facility amounted to zero, compared to SEK 132 million year-over-year. We had net cash of SEK 13 million compared to net debt of SEK 127 million last year. Moving on to the next slide and the income statement. As previously presented, we had an all-time high net sales in Q2, with an increase by 157%, mainly due to increased demand in the market and low channel stock. The product margin was positively affected by lower shipping costs, which has normalized compared to last year. Other external expenses increased mainly due to variable costs related to sales and marketing. Variable cost in percentage of sales was in line with expectations and last year. However, warehouse cost was lower due to lower inventory level.
Financial net was in line with last year and positively affected by FX. We had a lower utilization of the overdraft facility, but higher interest rates. With that, I hand over to Hannes again.
Thank you, Karin. We are reaching the summary here of the Q2 presentation. We continue to grab market shares, which is thanks to our very attractive product portfolio. It's very clear that we're growing much faster than the market. Our net sales in SEK grew by an astounding 157%. We have a solid product margin of 40.2%. EBITDA margin come in at a healthy 20%, and as Karin just mentioned, we had a very strong cash flow development, leading to a net cash position, which is very encouraging and will assist our future growth. The exceptional growth was driven by high demand and a significantly increased sales out growth and build up of channel stock to reflect increased demand.
As mentioned, we now consider the stock build up to be completed and expect sales in and sales out to harmonize in coming quarters. The continued success of our newly launched products, combined with our expanded sales and marketing efforts, gives us confidence in our ability to drive profitable growth in 2023 and beyond. This year will most certainly be our most successful year ever. With that, we have reached the end of the presentation. We thank you for your time, and we go over to questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Simon Granath, from ABG Sundal Collier. Please go ahead.
Thank you. Hi, Hannes and Karin, and congrats on the strong execution. Initially, I think the topic on the PC refresh cycle from the surge in 2020 of new gamers is particularly interesting. Did you see any impact from that in Q2? Also, could you remind us on the average replacement cycle for your products? Thanks.
Right. No, that's a good question. Well, we see that the market has come back to a healthy growth. The overall market is, is, has not yet really seen the bigger growth. We estimate that the overall market is growing in the single digits still, which means that we are grabbing significant market shares. So we still believe that a big part of this, this upgrade cycle from the pandemic in surge new gamers, is still ahead of us. To answer your second question about upgrade life cycle, we typically see about two years-three years as the average upgrade life cycle for, for our cases, primarily, case system.
That's very clear. Thank you for that. You mentioned that the inventory levels have normalized. Could it be that they are even on the conservative side, given the reseller... The fact that resellers come from a weak period in, in terms of demand, hence, they would unlikely want to build excessive inventories at the current situation? I, I know you gave some wording on this, but I want to understand the risk of inventory levels being excessive or not. Thanks.
Right. Yeah, that's a good question. Yeah. I mean, we started the year with, with actually much too low inventory levels in, in our sales channels. so there was a need to, you know, get them back up to a bit normal level. As the run rates have increased, all our channel partners need to increase their inventories to match this higher run rates. We believe now that they have quite healthy inventory levels compared to the run rates. Should the run rates increase even more, of course, they would need to stock even more. As you also mentioned, most of our channel partners have had issues with overstock during 2021, 2022, so they're naturally a bit hesitant to building up too much stock.
For that reason and the numbers we are seeing, we don't believe that our sales channels are in a overstock situation.
That makes perfect sense. Thank you. Given the very strong H1 here, which is not only about an improving market, but also you, also you performing well as you've emphasized. Do you assess that most of the pent-up demand from the weak 2021 to 2022 has now been utilized, or do you see more effect on that going forward?
Well, we actually believe that the majority of the pent-up demand, the market overall is still ahead of us. The overall market is, is, is back to growth, but it's in only single-digit levels. We see this, all these new gamers that came in during 2020 and 2021 and upgraded their systems, they will likely need to upgrade in the coming years. The big growth that we are seeing is, is not something we're seeing in the market overall.
Interesting. Just finally, on OpEx, you, you said that the increase here mainly stemmed from variable costs. I know you also made some comments on, on personnel costs, et cetera, but on, on the other growth initiatives, could you mention or, or comment on how they have developed in Q2 and also the trajectory to expect, looking ahead?
Well, our growth initiatives, we work on various things. We have launched a Fractal Creator Program here in Q2. It was actually silently launched last year, but we launched it publicly in Q2. That is a relatively cost-efficient program. We're also working with expanding our, our sales network. We see significant growth on, on Amazon, for example, which is very positive, which is a sales channel that we have not been very well represented in over the years. Another very important growth initiative for us is, is entering new product categories, something we have been working on for quite a while, and we have interesting new products in new categories that are coming up, and we are seeing that we can launch them next year.
Thank you so much. You mentioned that the You see them being launched next year. Any, any color to add on that, whether it could be in H1 or H2, or do you keep that for yourself? Thanks.
Well, we see that H1 has been exceptionally strong. As we mentioned, we see now that the stock build-up is, is complete, and we believe sales out and sales in to be better in tune in the coming quarters. We're still seeing a significant sales out growth in, in the market. We believe H2 to be strong. We will not see this channel filling dynamics that we saw in, in H1.
Thank you so much for having my questions, and, congrats again on the strong results.
Thank you, Simon.
The next question comes from Amar Galijasevic from Carnegie. Please go ahead.
Good morning, guys. I hope you can hear me. I have a couple of questions here, but I'll start with one thing you didn't talk too much about in this presentation, the new partnership with iBUYPOWER. Would it be possible for you, for you to give us any more comments on this partnership and when it will be visible in, in the numbers? Also, how large is the integration segment for you today, and, and what could it be over time? Thank you.
Right. Yeah, that's, that's an interesting topic. We signed this deal with iBUYPOWER recently. iBUYPOWER is the largest local system integrator, and there is potential for us to have significant business with them. It's still early days and hard to say and hard to quantify how big that would be, so I would like to refrain from that. Our system integration business is currently a fairly small share of our sales, but we see a quite strong demand in the system integration area, and believe that it will be a growing part of our case business going forward.
Our newly launched product, such as the North, for example, has sparked a lot of interest among system integrators, and Fractal is planning to also be more active in the system integration area and allocate resources for that.
Okay, great. That's super helpful. Just a follow-on question on gross margins on your product that you sell through iBUYPOWER, are they significantly lower than, you know, what you sell through resellers?
It is typically quite similar. Sometimes system integration margins can be a bit lower than retail, but it's not a big difference.
Okay. Thank you. Another completely different topic, I was wondering if you could give us any update on the current tariff situation for you guys, and what the effect would be if you don't get an extension past September this year?
Right. Yeah, we have a tariff exemption for cases that is expiring on 30th of September. We have received the tariff exemption now three times since 2020. So we're quite hopeful and confident that it will be renewed another time. However, however, the visibility in that process is very poor, and that's also been so in the last couple of times it has been renewed, and we would likely know about renewal very close to the expiration date. If the exemption would not be renewed for some reason, which again, we believe is unlikely, it would be a negative effect on our profitability, as we would have to pay tariffs on all the cases that are shipped to, at the U.S. market.
We do have however, have some backup plans in case that would happen, which would involve moving certain production out of China into adjacent production countries such as Vietnam and Thailand. That would take some time until that's executed, and, and since we now believe that there is a good chance we can get this exemption renewed, it's not something that we're working actively on. We have those plans laid up, and we can execute on them if needed.
Okay, thank you. That's very helpful. Just a final question from me here on the OpEx in Q2, just to be completely clear here, should we view this as a new base level for personnel expenses, or was it a big one-time bonus here? Also for the other external here, is, is the Fractal Creator Program a big cost in that bucket, or just how should we think about that going forward?
Right. Yeah, the personnel costs are increasing slightly, and, and that is a result of that we are in need of expanding our team. We are investing in several different areas, both sales and marketing and, and also especially the new product categories that we, we want to launch, which we believe can contribute to significant growth to Fractal. A lot of those personnel-related expenses are, of course, coming in, in advance of revenues. In terms of the other, other costs, we see in this quarter that sales and marketing-related expenses is, is bigger, and that is as a result of our increased efforts, which also includes the Fractal Creator program that you, that you mentioned.
We also had, had some costs related to a product rework that we had to conduct in the quarter, which is more of a one-off characteristics.
Okay. Thank you very much, Hannes. That's all for me.
Thank you, Amar. All right, we move on to the written questions we have received.
Yes. The first question we have says: "Hi, Hannes and Karin. Congratulations on a very strong quarter. Our questions are below. Your sales growth were very elevated, above the also high sales outgrowth. Do you have any insight into a normalized inventory level for resellers, where inventory is low and now normalized, or where inventory is normalized and now high?" This is something Hannes previously discussed, and the situation was that the inventories were low and are now normalized. The next question was: "In 2023 Q1, you mentioned that product mix had a negative effect compared with previous quarters of 8%, and that you expected this to disappear over time. What is the effect of product mix in Q2 2023?" In Q2 2023, the net effect of product mix is more or less zero.
We had more sales of cases. 92% of total net sales was cases compared to 87% last year, so that helped our margin. However, we still have some lower margins within the case category. As we talked about last quarter, this is something that we are working on, and we are improving the margins on those products. Of course, that is a lag effect, and we need to sell-out from stock older products before we can see the effect, but initiatives are... We have taken initiatives to improve the margin. Next question: "External cost increased by some 50% in the quarter. Could you expand on what the major driver behind this is?" This is what Hannes just described, so I hope the question is answered.
What is the status on launches on new adjacent product categories?" Hannes also answered that, so I hope that is satisfied. The last one, same there, the US tariff situation. We have asked, answered that question, too. Moving on to next question: "How come the gross margin was slightly lower this quarter compared to Q1?" In Q2, we had a product margin of 40.2, and in Q1, a product margin of 40.4. There are several reasons to that. I mean, within product margin, we have a lot of different drivers, such as product mix, sales discount, we have freight, FX, tariffs, and other things. What we can see, in Q1, for example, we had a positive effect of FX of 2 percentage points.
That was a driver then, which we don't have now. It's a little bit mix of everything, actually, but FX could be one of them. Next question: Could you elaborate on the potential to increase product margin? What are the drivers and what are the risks? When we see the product margin now, as I said, we have, we see good possibilities to improve our purchase prices. Of course, given continued low raw material prices and also positive currency effects. So, renegotiated purchase prices will give a positive effect. However, before we see the improvements in the numbers, we need to sell out products from stock, with higher purchasing prices, which I talked about before, so there is a lag effect.
We have also been able to make some price increases for many of our products, mainly due to lower freight costs. For the main part of these price increases, they doesn't affect the end customers anything. The freight cost has gone down, so we've been able to increase prices to our customers. These two are the main drivers. Mm-hmm.
Just to chime in there a little bit, Karin, also, on the risk side, I would say there are two main areas which is a bit out of our control, and that is the currency risk. We buy stock in US dollars and sell it in US dollars, but when it's purchased, it's being converted into SEK. Right now, the currency level USD/SEK is relatively high. Would that go down very fast? It could have a negative impact on our margin. The other area is the freight costs, which was extremely elevated in 2021 and 2022, and they have now come back down to normal levels.
We don't see that as a big risk of them going up significantly again, because if you look long term, historically, they have typically been at the levels where we are right now. We believe this is the normal level, and the kind of crazy high shipping costs we saw in 2021, 2022, we believe, and I think most believe that that is an anomaly.
Yes. Thank you, Hannes. Moving on to the next question: How will increased sales on Amazon impact your gross and EBIT margin? I don't know if you will answer that, Hannes.
Yeah, I can take that. Well, the sales to Amazon, is not having a negative impact on, on our gross and EBIT margin. It will be fairly similar to the margin we see through other sales channels. The potential here is rather on the upside. We see by being properly represented and active on Amazon, we add a very important sales channel, which could potentially increase our sales over time.
Thank you. The last question we have is: If possible, I would like a little more color on the potential launch of a adjacent product categories. I think we, we talked about that before, Hannes, I don't know if you want to add something to that discussion.
Yeah. Yeah, we are not public exactly which categories we are, we are going into. We have mentioned that, that we plan to launch them next year. It is, as discussed, adjacent categories, which mean that it's, it's related to our current categories, and it's something that, that, we believe, have a very similar, a very similar customer group. We have developed this now for, for quite some time, and we are eagerly looking forward to entering into new categories. We see this, this as the most significant mid to long-term possibility to Fractal to grow substantially by entering new categories. We believe that the categories that we have chosen matches the Fractal strategy and identity very well, and that we also have the capability of offering innovation into, into these categories.
Of course, at the same time, we are humble that it's challenged to enter new categories, but we will work hard to make those a success. Furthermore, as we've also mentioned in previous presentations, we are actively looking into M&A, the possibility of acquiring another company that is active in, in adjacent product categories to further accelerate our entry into new categories. Our overall strategy is to enter new categories, both organically, which we worked on for quite a while, and also to try to find non-organic opportunities.
Good. Thank you. That was the last question.
All right. Thank you all for your time today, and I wish you a great day and talk to you soon. Thank you.
Thank you.