Thunderful Group AB

STO:THUNDR

Earnings Call Transcript

[Dennis Berggren, analyst]

Please welcome to today's report presentation with Thunderful. I'm here with acting CEO, [indiscernible]; and CFO, Lennart Sparud. My name is Dennis Berggren, and I'm an analyst with Carnegie, and I will moderate the Q&A session held after the presentation. Please feel free to submit questions using the message box below the stream and I will make sure to read them afterwards. With that said, time to kick off the presentation.

[Anders Maiqvist, executive]

Thank you, Dennis. And good day, everyone, and welcome to today's presentation of Thunderful Group's financial results for Q2 2023. My name is Anders Maiqvist and with me today is Thunderful Group's, CFO, Lennart Sparud.

Last week, it was announced that Thunderful's incoming CEO, Martin Walfisz, next week on August 28. Me and Martin have had handover meetings for a few months, and I'm delighted to be handing over to an experienced gaming veteran, and I wish Martin, the best of luck leading Thunderful in the future growth journey.

As for investor meetings this week, Martin will be joining me and Lennart here in Stockholm today. And later this week, at Gamescom, Martin will also be participating in Thunderful events at Gamescom. As for today's agenda, I will start with the key highlights in Q2. Some background on Thunderful Group and our 2 segments with updates of each segment's performance here in Q2. And lastly, CFO, Lennart will guide you through the financial section.

Thunderful Games delivered net sales of SEK 107 million with EBITDA of SEK 38 million. In this quarter, we had net sales contribution from new releases of SEK 42 million. Thunderful released 5 games in the second quarter, including the beautiful hand-painted puzzle adventure game Planet of Lana, also visible on the screen behind me and Lennart. Net sales contribution from new releases included revenues from two platform deals.

In Thunderful Distribution, we had 31% organic net sales growth and 258% organic EBITDA growth. This was driven by Bergsala's successful release of the Legend of Zelda: Tears of the Kingdom. The Distribution segment reaches SEK 27 million in EBITDA despite the fact that Bergsala had minus SEK 8 million in negative EBITDA impact from FX effects.

The group's cash flow from operating activities in Q2 was negative at minus SEK 30 million. The key driver for this was the inventory buildup of SEK 56 million. But this inventory buildup includes prepayments and goods in transit of SEK 65 million. And for seasonality reasons, Q2 is always the quarter where two of our companies do prepayments ahead of the peak season.

For the two companies where we suffered from inventory buildup challenges in 2022, that being Nordic Game Supply and Amo Toys, the inventory reduction for goods in stock continued in Q2. So we achieved another SEK 42 million in inventory reduction to these two companies here in Q2, leading to an accumulated inventory reduction of SEK 119 million year-to-date in those two companies combined.

And both of these two companies have their peak season ahead of them here in Q3 and Q4, and we expect to continue delivering on our plan with further inventory reductions in these two companies. For the consolidated group, an overview of the financial performance in Q2 showed that we had net sales growth of 23%. Games was negative at minus 7%, while distribution was positive at 31%.

Adjusted EBITDA was plus 19% and adjusted EBITDA was plus 56%, both profitability metrics saw a significant positive impact from the distribution segment. For Thunderful Games, the negative growth of minus 7% comes even though we had major net sales contribution from new releases. This is explained by weak development in the revenue streams, Co-Development and Partners. The main driver behind this is the end of a major agreement in the revenue stream Partners.

And in addition to this, both revenue streams, Co-Development and Partners have revenue share agreements for some global Indie successes. And as gaming market for Indie AA games continue to face challenges, these revenue share agreements are also contributing less than in the comparison quarter. Development of net sales and adjusted EBITDA per quarter in the last 5 quarters shows in the red bars, our Games segment, where this quarter's net sales is in line with the previous quarter 1, but 7% lower than the comparison quarter Q2 '22.

The EBITDA in Games of SEK 38 million is slightly better than in the comparison quarter, but slightly lower than in the previous quarter. The decline in net sales year-over-year is, as I explained on the previous slide, mainly driven by the weaker development in the revenue streams, Co-Development and Partners. The bar's for distribution visualizes the second best quarter of the 5 last quarters, for both net sales and adjusted EBITDA. There are some significant mix effects within distribution in this quarter.

And together with Lennart, we will try to get you through these mix effects later on. In the next section I will guide you through our two segments. Thunderful Group operates in two segments: Games and Distribution. While the distribution business covers the Nordics, the games business is global. We are now 506 employees. We have 14 internal games in development and 12 games from external developers in our pipeline up until 2024 releases. Across the segments, we managed a portfolio of around 100 brands, and we've kept our famous Nintendo partnership for more than 40 years.

Thunderful distribution consists of 3 company groups. Bergsala is selling Nintendo products in Nordics and in the Baltic states, Bergsala's business has been stable in the last years and has a clear seasonalization towards the end of the year. and Bergsala also has clear margin mix where software sales have higher margins than hardware sales. Amo Toys is our Nordic toy distribution company and is currently distributing around 70 brands, including some of the most popular toys on the market.

Amo Toys business has had a stable topline over the last 4 years. Nordic Game Supply is a Nordic distributor of gaming accessories, gaming merchandise and boxed video games. Nordic Game Supply's business saw revenues growing fast during the pandemic, but the company has seen significant negative growth post the pandemic. Over time this company group has had the lowest margins of the 3 distribution companies. The graph on this page shows that Bergsala's adjusted EBITDA is higher in the rolling 12 months period until Q2 this year than what it was in both full year '22 and also full year '21.

For Amo Toys, we clearly see that we are moving in the right direction with rolling 12 months EBITDA growth between end of full year '22 and Q2 this year. And for Nordic Game Supply, we see continued negative EBITDA growth even though we completed several cost initiatives. The decline in net sales continues also in this quarter and end consumer demand is still very low for our distributed products, especially in the higher price categories.

Breaking down our distribution companies and comparing financial performance in Q2 this year to Q2 in the previous years. Bergsala's Q2 is solid with higher organic net sales growth and improved margins. The delivered EBITDA of SEK 35 million is negatively impacted by an FX loss of not less than minus SEK 8 million. For Amo Toys, Q2 sees EBITDA growth of SEK 5 million year-over-year despite minus 3% in net sales year-over-year. The main reason why we are not delivering the same margins as in 2020 and in 2021 is because Q2 '23 had negative margin impact from closeout sales of spring/summer items that we've kept in the warehouse since the spring/summer season last year.

This product category was not possible to sell in the major closeout that we performed during Q3 and Q4 last year. But now finally, we have come to a point where we are back at normal closeout sales list in Amo Toys, similar to what we had in the more profitable years, 2020 and 2021.

In Nordic Games Supply, net sales continues to decline this time with minus 30%. The general market demand is still significantly lower than in the comparison quarter. With less than SEK 100 million in net sales, it's difficult for Nordic Games Supply to deliver positive EBITDA in Q2. And we also had some additional costs from the closure of the German business in Q1.

This is affecting EBITDA here in Q2 with minus SEK 2 million. The inventory levels are lower in Q2 '23 compared to both 2021 and 2022. The inventory reduction has continued in Nordic Game Supply and Amo Toys. And if we are looking at the goods in stock, disregarding the goods in transit and prepayment ahead of the peak season, the combined inventory reduction is SEK 42 million here in Q2. This means that we have achieved SEK 119 million combined inventory reduction year-to-date in these two companies.

Moving over to the segment Thunderful Games. Thunderful Games is structured around our four revenue pillars our Co-Development pillar currently includes two of the studios, primarily developing games based on IPs from external licensees. Our partners' activities is where we are helping external game development studios to self publish their games.

The IP building pillar is represented by all of our internal studios focusing on our own IPs, and this is also where we do publishing, both of our own IPs, but also when we publish external games and help external studios building up their IPs. The investment pillar ranges from investments in early prototype game projects to acquisitions of larger companies.

Herein Q2, the IP building revenue pillars saw net sales contribution from new releases of SEK 42 million. This includes two platform deals and transactional sales from five releases. Despite this, net sales development year-over-year in Thunderful Games is negative, and this is explained by a weaker development in the revenue streams, Co-Development and Partners.

In Partners, the end of a major agreement is the main explanation to the negative net sales growth year-over-year. As mentioned earlier, both of these two revenue streams, Co-Development and Partners, have revenue share agreements for some global Indie successes and as the gaming market for Indie AA game continues to face challenges, these revenue share agreements are also contributing less than in the comparison quarter.

Now let's have a look at Thunderful's releases in the second quarter. So we released 5 games in this quarter, 2 of these came from our internal studios and 3 games were developed by external studios. Total net sales contribution in Q2 from releases was SEK 42 million, and this includes two platform deals for both Planet of Lana and also for Viewfinder. Viewfinder was released in July and has no transactional sales in Q2, but the game was submitted and approved by the platform in Q2, which means that Thunderful had to recognize the platform revenue in Q2 due to revenue recognition rules.

So these two games, Planet of Lana, Viewfinder, have both received great reviews and feedback from gamers, scoring above 80 in open critic score, with very high percentages in both critics recommended from Open Critic and in Steam user reviews. For the Planet of Lana release in Q2, Thunderful had the highest wishlist numbers we've ever had ahead of a release and user ratings and critic reviews have been excellent.

Despite these facts, transactional sales numbers in Q2 was not as good as we were hoping for ahead of the release. We've seen peers reporting that the market has been more challenging for Indie and AA games recently, and Thunderful has experienced the same challenging market conditions. Based on this, we have made some adjustments in our release planning ahead of our coming releases here in 2023.

And looking forward, we are very pleased with the positive user ratings and reviews and we strongly believe that we can continue to attract new players and continue converting wishlists over a long time period, and we expect Planet of Lana to be one of Thunderful's key long-tail titles, similar to our successful franchise SteamWorld.

For the games we currently have in development, we start with this list of games from our internal studios. We currently have 14 titles in development, of which 4 are planned to be released in 2023. This does not include games planned for release after 2024, and it does not include additional SKUs to games that have already been released.

One of these examples is Summerville that will be released on PlayStation PS4 and PS5 at the last day of August. The highlights from the internal tracker includes our next SteamWorld game, which is SteamWorld Build. In the second quarter, we have kept our -- building up our wishlist's awareness and momentum. And later this week at Gamescom, there will be some exciting news for SteamWorld Build. For our externally developed games, we now have a pipeline of 12 games, 6 of those games are currently planned to be released in 2023. As with the internal pipeline, this does not include games planned for release after 2024 or additional SKUs.

So of the 6 games planned to be released here in 2023, two of them have been announced up until today. This means that we are still planning to both announce and release four additional games from our external studios in our publishing outfits. And now I'm handing over to CFO, Lennart Sparud, who will guide you through the financial section. Thank you.

[Lennart Sparud, executive]

Thank you, Anders, and hello, everyone. I will now guide you through some more detailed financial slides. The second quarter is affected by the strong sales development in the distribution segment, all related to Bergsala. To guide you through the details, net sales are up 23% quarter-over-quarter, reaching SEK 750 million in the quarter.

The Games segment has a growth of minus 7%, and the distribution segment has a growth of 31%. For adjusted EBITDA, the growth is SEK 20 million or 56%, reaching SEK 50 million in the quarter. Adjusted EBITDA in the Games segment amounted to SEK 38 million, which is 9% above the comparison quarter. The Distribution segment showed an adjusted EBITDA growth of SEK 90 million or 762%.

We reached a negative cash flow from operating activities of minus SEK 29 million compared to minus SEK 40 million in the comparison quarter. And I will come back to you -- to this part later in the presentation. Looking on segment level, for Thunderful Games, we have seen a growth in net sales quarter-over-quarter of minus 7%, reaching SEK 107 million in the quarter.

Game releases contributed with SEK 42 million, while weak development in the crew development and partner streams explains the lower net revenue figure. Contribution from new releases includes platform deals worth SEK 38 million, hence, only SEK 4 million from digital sales. Organic growth in games is minus 8% and growth from companies acquired in the last 12 months is 1%.

In the organic companies, it's mainly Coatsink, Thunderful Development and Robot Teddy driving the net sales and EBITDA contribution in the quarter. The acquisition-driven growth in net sales and EBITDA is related to the acquisitions of Jumpship, which was acquired in November last year and Studio Fizbin acquired in February this year.

For investments in games, we reached total net investments of SEK 64 million in the quarter. During the second quarter, an external game developer repaid SEK 32 million related to a game project in which Thunderful invested SEK 31 million in the first quarter. For development CapEx, we reached SEK 69 million. This is mainly because we have more developers employed compared to the year before, and we are now approximately 350 developers in the group compared to less than 300 developers at the same time last year.

In the Distribution segment, we see an overall net sales growth of 31% quarter-over-quarter. Breaking it down in the subgroups, we see that Bergsala is up with 84%. The main reasons are the successful release of the game, The Legend of Zelda: Tears of the Kingdom, continued good access to hardware and strong underlying demand from Nintendo's successful release of the Super Mario Bros movie.

NGS is decreasing with 30% or SEK 41 million due to a continued general lower market demand for game accessories. Amo Toys is decreasing with 3% quarter-over-quarter. For profitability, measured in EBITDA in distribution, it is pleasing to see that the segment has an overall growth of SEK 20 million or 252%. EBITDA in Bergsala is up with SEK 20 million, driven by the above mentioned sales increase. And I also need to bear in mind that revaluation of accounts receivables and accounts payables affecting EBITDA with minus SEK 8 million in unrealized FX losses in the quarter.

In NGS, EBITDA is down SEK 8 million compared to the same quarter last year. With less than SEK 100 million in quarterly revenue, it's hard to be profitable despite major cost reductions year-over-year. Amo Toys EBITDA is up SEK 5 million compared to Q2 '22, despite minus 3% in net sales and minus SEK 3 million in operational FX losses.

EBITDA still plus SEK 5 million year-over-year due to cost reduction initiatives. Total net sales in the quarter are up 23%, as I mentioned before, compared to the comparison quarter. Thunderful Games segment has an organic growth of minus 8% and an acquisition-driven growth of 1%. As mentioned before, Coatsink, Robot Teddy and Thunderful Development is the main driving factor to the organic net sales in the quarter.

The net sales growth in the Distribution segment was SEK 142 million or 31%. Also, as mentioned earlier in this financial section, we reached a negative cash flow from operating activities of minus SEK 29 million compared to minus SEK 40 million in the comparison quarter. The development and cash flow can be explained by a change in total inventories during the quarter of minus SEK 56 million, although during Q2, Amo Toys made purchases ahead of the peak season, for which advanced payments and goods in transit totaled SEK 65 million.

By the end of June, we have SEK 700 million tied up in net working capital compared to SEK 930 million by the end of June '22. By the end of the quarter, we had SEK 285 million in total available cash if we include our unutilized credit facilities compared to SEK 335 million by the end of June '22. Net debt by the end of the quarter is SEK 365 million compared to a net debt of SEK 252 million by the end of June '22.

The net debt over EBITDA ratio for the last 12 months was 0.9x. And that was the end of the financial section, and we now hand over to Dennis Berggren for the Q&A.

[Dennis Berggren, analyst]

Should we start with just a follow-up question on the performance of the game segment and more specifically on the recent releases. I mean, obviously, you mentioned that the market hasn't been as strong as previously specific then for Indie and AA games. With regards to Planet of Lana, what do you think is sort of the main reason for not meeting expectations? How much is market-driven versus...

[Anders Maiqvist, executive]

I think specifically for Planet of Lana, the game received really good both user critics and also overall critics from press. I think we mentioned on the presentation that open critic score as of now is around 81. So it's been really good. Most players have been -- really like the game and I think the kind of similar to what we've seen from some of the peers, it is more -- it is kind of more difficult to reach out with an Indie and AA game nowadays than what it was in the good at least 1, 2, 3 years ago. But it's also -- it could be driven by the fact that the release window Zelda and Diablo and there were a few other games that really -- there are many other players played.

So that one is a bit more difficult to think about. But kind of what we see is that we had, as I said in the presentation, the highest wishlist numbers that we've ever had ahead of a release ever in Thunderful's history. And that means that we have, for us, a really big wish list that we can continue to attract new players, and we can continue to kind of convert the existing wish list over quite some time. And this is also a beautiful game that will not really become old fashioned in the next years. So we really believe that this is a typical Thunderful long-tail game similar to the SteamWorld franchise.

[Dennis Berggren, analyst]

And what happens now what's the plan with Planet of Lana? I mean what makes you think of Planet of Lana as one of the better sort of long-tail games?

[Anders Maiqvist, executive]

It's kind of based on the -- I mean, sometimes when we release a game, we have a bit of a spike at the release date and a few days later, and then you can see that it quickly reaches a lower level. For Planet of Lana, it's been pretty stable and on the same level since release and over summer, up until this 1.5 months that we've had in this quarter. So I think the characteristics of the sales is so far proven that it most likely will become a long-tail game.

[Dennis Berggren, analyst]

And I mean, obviously, we saw quite some hefty impact from the platform deals this quarter. But you mentioned that with regards to Co-Development and Partners, you are seeing a drop year-over-year, right? What is the main explanation for the drop in Co-Development and -- I mean what's the outlook like for the second half of this year? And how good is the visibility for Co-Development as of right now?

[Anders Maiqvist, executive]

Yes. year-over-year comparing to Q2 2022, the main driver of those two revenue streams is Partners and Partners has slowly been decreasing quarter-over-quarter during these 4 quarters. But comparing it to the previous quarter, Q1 '23, it's primarily Co-Development driving the kind of negative growth that those two revenue streams has for the overall segment. And the second quarter was not as good as we had hoped for in Co-Development, not as good as the first quarter. But then in Q3 and Q4, we see some signs of them being more similar to the first quarter than to this second quarter.

[Dennis Berggren, analyst]

Okay. And how should one think about Partners? I mean, given that the phasing out of this previous deal that you had?

[Anders Maiqvist, executive]

So where we are now and what we have kind of announced so far, Q3 and Q4 will most likely be similar to the second quarter. rather than to comparing it to previous quarters.

[Dennis Berggren, analyst]

Okay. Could you please comment on the higher CapEx in Q2 compared to last quarter? And also how should we think about this going forward?

[Anders Maiqvist, executive]

Yes. This quarter is very special for Thunderful based on the FX effects. We have FX effects across many different items in both the P&L statement and in the balance sheet. For investments in intangible assets, that's all the gaming investments. We have quite a few of them in British pounds and euros. That means that we have a revaluation effect of those somewhere between 15 and 20, Lennart, for the specific quarter. So SEK 15 million to SEK 20 million. So that is basically -- that is -- the FX -- the revaluation effect of those balance sheet items is driving the majority of the increase from Q1 to Q2.

[Lennart Sparud, executive]

Okay. Also the positive currency effect of that is not visible in the P&L, just below net profit or net result in other comprehensive income. That's where the positive FX effect from this is visible.

[Dennis Berggren, analyst]

Yes. All right. And then we also received some follow-up questions on your comments regarding SteamWorld Build. How do you think about the release window for the title? And also, have you made any adjustments in relation to the market outlook?

[Anders Maiqvist, executive]

Yes, it's a bit premature to talk about SteamWorld Build. As I kind of teased today, SteamWorld Build will be, of course, featured by Thunderful at Gamescom starting tomorrow or for real starting on Wednesday. So there will be some updates, but kind of the adjustments that I was writing about in the CEO comments are mostly related to timing of the actual release based on all the announcements that we had from major AAA publishers in June. So timing and also kind of the -- how we release the game. But there will be more news about this later this week.

[Dennis Berggren, analyst]

All right. And then also a question on game investments. I think you saw this reversal of an investment that you made was in Q1?

[Anders Maiqvist, executive]

Yes.

[Dennis Berggren, analyst]

Is that related to the same project. I don't know whether you mentioned it before I did you?

[Anders Maiqvist, executive]

Yes. I think we mentioned that in Q1.

[Dennis Berggren, analyst]

By name the specific title?

[Anders Maiqvist, executive]

No, we did not.

[Dennis Berggren, analyst]

But it's the same title?

[Anders Maiqvist, executive]

Yes. Okay.

[Dennis Berggren, analyst]

What's your plan to sort of turn the development positive and yes?

[Anders Maiqvist, executive]

Q2 is typically always the slowest quarter of the season. So I mean -- first of all, I think we had SEK 98 million in net sales in Nordic Game Supply this quarter. And then it's very difficult, of course, to deliver a positive EBITDA. We had an effect with the minus SEK 2 million coming from Q1 when it closed the business in Germany. But Q3 and Q4 are always better in Nordic Game Supply than Q2 from a seasonality perspective. And that means that, I mean, adjusted for the effect from Germany, we were minus SEK 3 million this quarter, but if sales will come in higher in Q3 and Q4 than we should at least be able to deliver neutral EBITDA.

[Dennis Berggren, analyst]

Okay. Jumping a bit back and forth there. Based on the question that is coming in also a question on investments in publishing over the recent quarters. What kind of projects are these related to? And how should these investments develop over the coming quarters?

[Anders Maiqvist, executive]

In the publishing pipeline, we've been pretty stable around SEK 20 million per quarter for quite some time. I think it's actually a little bit lower this quarter compared to previous quarters. but it's basically related to the -- all the games that we have in the external pipeline that we presented today. It's only two of those games to be released this year that have been formally announced so far. So there are 6 releases for this year, 4 additional releases that we have not yet named kind of announced or mentioned in the release date. But those SEK 20 million per quarter now being, I think, of SEK 18 million this quarter is all related to that external pipeline.

[Dennis Berggren, analyst]

Are there any changes like with regards to specific types of games or investment sizes by game or...

[Lennart Sparud, executive]

I think, as I said before, I mean, we've been pretty stable quarter-over-quarter, around SEK 20 million. Sometimes it's SEK 21 million, SEK 22 million, sometimes it's SEK 18 million, SEK 19 million. It's mostly related to the actual milestone payments to give this pipeline alive. And before the games have been released, there won't be any reductions because we need to pay up until the games are being released. But then for the future, of course, we have some investments also for games planned to be released in 2025 that are not visible on any other pipelines yet. But I mean, those are also covered within those SEK 20 million per quarter.

[Dennis Berggren, analyst]

Got it. And have you started to sort of adopt that figure based on what you're seeing on the market development side? Or what's the plan now? I mean, given that...

[Anders Maiqvist, executive]

Yes, I think we've I think most kind of Indian AA publishers these days receive more kind of opportunistic proposals that can be game developers, Indie and AA game developers that are facing challenges that they might have been financed by someone else, and they no longer can they cannot finance the entire project anymore. So we have more inbound requests kind of related to that than we've had before. But we have so far not signed any of the more opportunistic cases. So we keep -- yes, since the investment pace is basically the same, we keep continuing investing in the pipeline we have.

[Dennis Berggren, analyst]

Okay. And then a question on the pipeline of new Co-Development and partner projects. What does that look like?

[Anders Maiqvist, executive]

For Co-Development, we signed a few new contracts second half of last year. I mean, there haven't been any major changes in terms of number of FTEs working on internal projects and external projects, like Co-Development game developers versus IP building game developers. So, so far, we haven't really had the capacity, and we haven't really signed any new contracts, but most of those contracts that we signed last year are lasting for a long time period ahead.

[Dennis Berggren, analyst]

Okay. And then also a question on sales performance of new games, obviously, we saw this large impact from the platform deals. If you would sort of disregard that impact, how sort of the transaction are doing? I mean, obviously, you had this negative comment on the overall market development, outside Planet of Lana this quarter.

[Anders Maiqvist, executive]

Yes. I mean outside of Planet of Lana, for the other kind of 4 games that we released within the quarter, sales numbers have been fairly low, to be honest. There are a couple of those kind of mobile-only games and so on, but it's still I mean the market is challenging. And even though we've been creating -- working hard to create more hype before the releases, we've -- we haven't really seen that kind of initial sales spike come from high initial conversion rate. But as I said before, on the other hand, especially for Planet of Lana, it keeps converting and it looks like a typical long-tail game in the sales characteristics.

[Dennis Berggren, analyst]

And with regards to Viewfinder released late July. I mean what's the outlook? Or let me rephrase it, when we sort of end this year, how much do you expect in terms of contribution from platform deal versus transactional sales for such a title?

[Anders Maiqvist, executive]

Specifically for Viewfinder?

[Dennis Berggren, analyst]

Yes.

[Anders Maiqvist, executive]

By the end of this year, I'd hope that transactional sales is above the platform deal.

[Dennis Berggren, analyst]

Yes. And then also, I mean, sort of mid longer-term question with regards to Partners. I mean, what should we expect? I think you sort of signaled that we shouldn't expect any sort of re-acceleration of revenue growth over the coming quarters, but sort of beyond that, how are you working to sign new contracts? Do you have like any visibility on the longer-term outlook?

[Anders Maiqvist, executive]

Yes. I mean, you mentioned before we had this repayment of an investment in a game project. I think last quarter, we mentioned that we made this investment and that it's short term. We expected a repayment very soon coming here in the following quarter in Q2. But that also means that we have -- when we are doing these type of deals that could also be so that we are selling in this business consultancy services and trying to get the typical deal structure that I've been talking about before that we have these kind of business consultancy agreements, which is just consultancy fees and then trying to get a smaller web share on the different titles, right? So that's something we've been trying to work with and onboard new clients, but it's also difficult to talk about new clients when we -- yes, when we haven't specifically talked about it, but that kind of project being invested in Q1 and then receiving money back in Q2 is one of those projects that will potentially become interesting once the game has been released.

[Dennis Berggren, analyst]

Got it. And then we've got a question on the phrasing of end of a major agreement in Partners. Is that due to the agreement ending due to the terms of the contract? Or was it due to a termination from the Partner?

[Anders Maiqvist, executive]

Well contract ends and before a contract ends, there is always this notice period up for renegotiation. And then this specific case that is the Partner that has been using that.

[Dennis Berggren, analyst]

Okay. And also turning to distribution. What's your view of the development in Bergsala? Obviously, we had some significant effects from Zelda, also mentioning positive effects from the Super Mario movie. Still negative effect on the profitability from exchange rates. But I mean, excluding that effect, are you sort of satisfied with the margin development given the sales step-up that we saw?

[Anders Maiqvist, executive]

Yes, the margin is a little bit higher. If we would have added back those SEK 8 million in FX adjustment, it would have been even higher, like a step-up in adjusted EBITDA margin for Bergsala specifically. So I mean, we are happy with the performance in Bergsala in the second quarter. It's been a good quarter, not only with the release of Zelda, which is, of course, the majority -- and driving the majority of the net sales increase year-over-year, but there's also been a good demand from Nintendo hardware in general. And also kind of as Lennart mentioned in the financial section, we still have good access to hardware something we started having for the first time in the last quarter and then also the hype around the Super Mario Bros movie and so on. So it's been a good development in general also for the Evergreens and the hardware.

[Dennis Berggren, analyst]

So what about the outlook for the second half of this year?

[Anders Maiqvist, executive]

Yes, now, Nintendo has released kind of the pipeline for the second half. And it looks -- I mean, comparing to last year, we had the big Pokemon launch in Q4. But Q3 and Q4, except for that Pokemon release, we still have pretty positive thoughts about Bergsala also for the future, this second half of the year.

[Dennis Berggren, analyst]

And then with regards to -- I mean, we touched on NGS before. We have the profitability, obviously, affected by lower sales volumes. But just demand picture, how is demand trending right now? I mean what's sort of the midterm -- when do we actually see sort of some solid profitability in these entities again?

[Anders Maiqvist, executive]

Yes. It's, I think, now for 3 or 4 quarters -- consecutive quarters, we've been guiding for that is still difficult to short term kind of forecast any consumer demand. I mean, we continue to see that. We were minus 30% year-over-year in this quarter. I think it was 40% in Q4 and then 20% -- 25% in Q1. So it's major declines year-over-year still every quarter, and it's end consumer demand for these products, especially in the higher price categories. I think we will need to see a Q3, Q4 where -- which is typically the high season. But yes, it is difficult still to forecast what people will be buying this Q4 in our -- in the portfolio that we have in that company.

[Dennis Berggren, analyst]

And obviously, you've spent a lot of time and effort on reducing inventories over the past year. Where are we currently at in sort of that development working, which is producing?

[Anders Maiqvist, executive]

I mean even though sales has been very low, this first half especially in Nordic Game Supply, I mean they've been keen okay in Amo Toys, also comparing year-over-year for the first half. But I mean, as I said in the presentation, we have an accumulated inventory reduction of SEK 190 million in those two companies for the 6 months period. That is slightly above our original inventory reduction plan, even though net sales in the special Nordic Game Supply have been low. So I mean, we -- there are some tweaks that we can do also for the second half, especially in Nordic Game Supply. But for Amo Toys, I think you should you should kind of think of this as we did all the close up sales for the non-spring summer items second half last year. And then we've done all of them for spring/summer items first half this year. So there's not much more to do in Amo Toys, but there's still some tweaks to be made in Nordic Game Supply.

[Dennis Berggren, analyst]

And in terms of magnitude in Nordic Game Supply, I mean, versus what we've seen given the sort of drop in sales?

[Anders Maiqvist, executive]

Yes. But also, I mean, we've done the inventory reduction plan for the first half of this year, even though we had a drop in net sales. So I mean, we are, of course, adjusting all of our repurchases according to the net sales development. So I'd say that it will continue and kind of as we try to say today that we will see some effects also in the second half of this year.

[Dennis Berggren, analyst]

Okay. And so just finally, because I think we are actually out of questions. What's on top of the agenda now. I mean, what's most important to sort of see in the second half of this year?

[Anders Maiqvist, executive]

I think from my personal perspective, it's that we continue to deliver in -- especially in Amo Toys. Entire period, first half has been okay. But I mean, we should be back at the historical levels in -- that we had from 2021 and 2020. For Bergsala, I think we should just continue to deliver according to plan. And then when it comes to Nordic Game supply, keep having the costs slimmed as they are right now so that we can reach neutral or slightly positive EBITDA for the second half. And then for the most important segment here, Thunderful Games that we can again deliver on Co-Development as we've done before. And then also when it comes to the releases, of course, we have a SteamWorld Build being featured at Gamescom this week, and that release will be important for us, but also that our fantastic sales and marketing team keep working on the titles, especially Planet of Lana and Viewfinder, so that we keep the momentum for those 2 titles across the second half.

[Dennis Berggren, analyst]

Right. So well, as I said, I think we're now out of question. So I'd like to thank you for the presentation. And thanks to all of you that have listened in and also submitted questions.

[Lennart Sparud, executive]

Thank you.