Asetek A/S (A31.F) Earnings Call Transcript & Summary

A/S Half Year 2024 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. At this time, I would like to turn the call over to Peter Madsen, CFO.

Thank you. And yes, welcome to this Asetek earnings call. Our Board, they met earlier today and they discussed obviously and then approved the second half year -- first half year 2024 report, which is the basis for the presentation here. As the presenter said, or you will be able to ask questions verbally later in the call, but also you can find on your application here, you can find a place where you can actually type in questions that will then address later at the same time as the verbal questions. With that, just saying that my name is Peter Madsen, I'm the CFO. I have here in the room also Andre Eriksen, who is our CEO, Andre and he will actually take over the floor right away, starting out with the Q2 2024 highlights.

Yes. Good afternoon. Diving right into the highlights of the second quarter. The Q2 group gross margin landed at 45%, same as the last same quarter last year. We have seen a weaker-than-anticipated market rebound and an increased price pressure is also impacting our liquid cooling market at the moment. SimSports business is growing according to plan. And our updated group revenue from first of July is still what we stick to. Next slide. There are multiple factors that is impacting us at the moment. In the Liquid Cooling we do still expect a decreased revenue in percentage between 35% and 40%, which corresponds to between $42 million and $44 million revenue for the year. As I just mentioned, that's because we see a weaker than anticipated market rebound. We have a customer who is leaving the market altogether. And then we also have a customer who's having liquidity constraints, which is basically affecting their ability to place orders with us. So all in all, that's what we are seeing. As it is right now, and that it's always been we have seen big volatility and, let's say, a very weak ability to look long term and of course, at this point, that also means that in '25, we also entered the year we expect to enter the year with an increased uncertainty. And on top of what I just said, we also have a customer, at least that has told us that they're going to introduce dual sourcing. And while that's, of course, annoying to be a part of, there's not really a lot we can say about it in the sense that obviously, we have at least the resources on our entire supply chain as well. So I guess it's not an unreasonable thing to do. But of course, it's coming at a bad time. We also see, of course, gross margin impact from low-cost competitors in China. And although I believe that nobody can manufacture a cool achiever than we can then for sure, as we have the majority of our cost base in the western part of the world, then of course, we will need to have higher margins and thereby, also higher prices. We do expect growth to be back in '26 and onwards. And again, this is with big uncertainty. It could be sooner, it could be later. But this is what we're looking at right now. And that's based on -- after all, we do have a couple of new customers, and we know from history that no matter the size of the customer, it will take them a year or 2 to get up to speed. We do expect the liquid cooling segment on its own to be profitable for this year for sure and also beyond this year. On the SimSports side, we maintain our expectation of a revenue between $10 million and $11 million for the year, which corresponds to somewhere between 40% and 60% growth. And that is, of course -- and when I say, of course, that's because that's the reason why we're investing in this, that we expect the growth trend to continue way beyond '25. I believe at this point, we have an attractive product range. I dare to say we have a superior customer service. And I also believe in the high end, we have a well-established brand by now. We are continuing our investments into the development of new product, sales, marketing, branding essentially to capitalize on whatever opportunity there might be out there. And the group margin expectations that I just mentioned, I just want to highlight that, of course, SimSports is embedded daring. Just very brief on the guidance. We maintain our guidance from early last month. I don't want to repeat it. But on a group level, it's between $52 million and $55 million and adjusted EBITDA margin of between 1% and 4%. Because of that update to our guidance or because of the reason of it, we initiated some cost reductions that we also talked about at our earlier guidance. And we expect it will take full effect from around Q1 next year. And it will have, we expect around $3 million of impact and it has been rightsizing the organization on all levels and in all geographies, but especially in the U.S., we are scaling down. On the bank financing of basically the new headquarter, we have been in a good dialogue with the bank, and we have gotten a new and updated covenant that kind of reflects the new business situation. If we look at the world map here, that is as of how it looked in Q2, but there will be changes mainly after the changes, we are down to 105 roughly employees where we were 130 before that. And on the U.S. side, we are dialing down most of what you see on this map. And the main reason is that the main part of our OEM customers have moved to Asia in one capacity or the other, and therefore, our U.S. operation is of less relevant than it used to be. Yes. If we dial into the liquid cooling segment in its own, then we continuously try to be the main innovator and the main performance guy when it comes to liquid cooling. And what you see on the page 8 here, it's also been out in the press release is our newest gold plate technology, which is based on 3D preprinted metal and it is optimized by AI and that sound so fancy, but what it really means is that when you can 3D print something you have a much better ability to be creative in your design than when it's something that's done with traditional machining. So therefore, AI in this complex geometry has been quite helpful. And we have done it in partnership with Farbic8Labs who is a leader on the metal 3D printing side. It was shown to customers first. Computex earlier this year, we got a lot of interest from it and we expect the first products to be ready in December this year. If we look at the profitability of the liquid cooling business, as I said before, it's something we expect to continue to see that although it's shrinking, we still believe that the legal cooling business will be a solid money maker. We started shipping one new product in the quarter. We expect to have 6 new products starting to ship this quarter. And at the end of Q2, we were shipping to more than 20 OEMs. And our top 5 customers represented 92% of the liquid cooling revenue. So yes, we have reliance. We are relying on a few customers for sure. Nothing new in that other than, of course, now when we see the impact, it would have been nice to have 500 customers. But that's the situation. Diving into the sales part. Although the numbers may look different, we actually believe that we are scaling up according to our plan and I'll get back to my little comment before. But the revenue in Q2 was $1.7 million versus $2.4 million the same quarter last year. And the first half revenue is $3.9 million versus $3.7 million Then the speedy investor will, of course, ask the question, how can that be a 40% growth? As always, it's very difficult to judge us by the quarters because small things can impact them. And what in fact, happened in the same quarter last year was we shipped our biggest order to date of, I believe, $1.2 million to fulfill a channel and it had to be done in one because it was a shipping container. So therefore, it actually had a very big impact that should have been spread across the year. So that's just an example that we cannot really compare the quarters to judge whether we are on track for growth or not. And we are also getting closer to profitability by the day. Of course, our gross margins are still reflecting a scale-up phase. And to remind people who don't understand what that means. When we launch new products, typically, they are built in Denmark to begin with because that's here where we have our engineering, and that's where we have the resources to fix all, let's say, dealing problems with new products. Denmark is not exactly a cheap country to manufacture in. So therefore, until we move everything out, we are seeing lower margins. So that's to be expected. Our margins are improving. We see it. We feel that in the speed as we are able to outsource the products to China and Malaysia. We started shipping a bunch of new accessories here in Q2. A few of them just to mention a few of them, LMP handles, LeMans Prototype Handles, Formula Suede handles, steering wheel button color kit, we had huge software upgrade for our customers. And all those software is something our customers get for free together with the product, it's something we invest heavily in. And for those of you who have followed our reviews, our software have been a little bit behind the rest. That's just the nature of being the newest kid on the block but I would claim by now that we have the best and best looking software out there. So I believe that's a big competitive ads actually. We have a new accessory shipping in this quarter as well. And then if everything goes according to plan, we will release our Invicta flagship steering wheel, which will complete our highest Invicta product line for now. And that's, of course, also where we have some comfort in the increase in revenue that we are waiting to get this high steering wheel into the channel. So yes, full year guidance unchanged for now with the growth trend expected to continue. A little bit more on the SimSports side, going forward, meaning from next year, hopefully early next year, but it can also be later next year. It's still not decided. We are actually on track on a project we've been working on for a long time which is a more mass market simulator product lineup. And what that means is that it's priced much, much lower than our current price points, but still with I believe our quality and feature set and of course, our brand on it. So that's something we're excited about. We have engaged a commercial lead the management team to basically support this mass market product launch and also to establish and execute on a go-to-market strategy for the mass market because that will be different than our current channels. And as such, I mean this is a segment we believe in. So as I already said, we are continuing to invest in it. At this point in time, we have 2 main sales channels. It's our resellers, global niche resellers. So that's basically online stores, selling nothing but sim equipment. And then we have our own webshop and it's powering a little bit back and forth between where the biggest sale is. But I would say in rough terms, it's half and half. So we are selling half our gear to resellers. And have our staff through our own webshop. As I just said, on the more mass market opportunity, we will be adding new and exciting sales channels to make sure we look into a higher volume opportunity. And by that, I'm going to pass the stick to Peter to talk about the financials.

Yes. Thank you, Andre. And I'll start looking at the income statement, I'll top down pretty much by talking about revenues. Revenues in this last quarter was $12.7 million, which was a little bit of an increase compared to Q1, which was $12.2 million. but of course, a significant reduction compared to the same quarter of 2023. However, keep in mind that Q2 2023 was the third highest revenue quarter ever in the history of Asetek and the second highest earnings quarter ever. So it's a little bit of a steep comparison that we are having here. The reduction is a combination of, of course, a solid reduction in the number of products sold and then the product mix. The product mix means that our ASP, our average sales price has decreased a little bit from around $60 to $57 this quarter. $57 is lower, yes, but it's absolutely still in the range of what we have seen in earlier years if we just go a couple of years, 2, 3 years ago, then the ASP was around 55%, I believe it was. Gross margins all arrive at those -- talk about those in a later slide. Operating expenses at $7 million this quarter compared to the same level as same quarter last year. However, of course, the composition is vastly different the special items last year was the cost associated with moving our listing from Norway to Denmark. As Andre mentioned, then we have taken measures to reduce the operating expenses by $3 million on an annual basis. That's mainly headcount related and the number of persons leaving us is around 25. Some have left already, some will be leaving here in August, and some will be terminating leaving later in the year. All in all, [indiscernible] like this, of course, has costs associated with it, severance costs, et cetera. All in all, we see that the full effect and the yes, the effect will take effect from January next year or Q1 of next year. That takes us to the operating income, which was a loss in this quarter of $1.2 million versus almost record number of $4 million same quarter last year. Continuing down to the line called income tax, which is a rather large amount this quarter, where we have made a noncash adjustment of deferred income taxes of $2 million. And maybe I should just explain the concept here, when a company like ours, like any company, when we build up taxable losses over the course of the years, which we have done in the past, then you can deduct those tax losses in future income taxes. And that future deduction of course, has a value, and that is called deferred taxes on our balance sheet. And what we have done here or what we always do is that we evaluate the cash flows in the future and put a risk assessment on it and say how much can we actually use of those income -- those deductibles and losses, the past losses. And because we are now here on July 1, told the world that we are looking into 2024 with reduced income prospects and the same for 2026, then it would take longer time to 2025, sorry, to actually use those future losses. So in order to derisk the balance sheet, you could say the Board has decided to reduce the deferred tax income -- tax asset by $2 million. It's a noncash adjustment, and that's what's showing up here in the income tax line as a cost. And that means that the income for the period after tax is minus $2.3 million versus $3.2 million as a positive income in the year before. Andre has been talking about the volatility that continues. I just want to point out here on this slide here I'll show you that the comparison in Q2 of 2023 was indeed an unusual quarter of $24.5 million. I promised you a couple of comments on the this gross margins. Gross margin for the quarter was about 45%. That's the same as last year. However, please note that this year is the same. We maintained 45% gross margin, but on a lower revenue base. We often see that with lower revenues come lower gross margins, but that's actually not the case here. The gross margin consists of different build off of different components. One of them is the exchange rate. And we are trying to show you down here the exchange rate between our major component that's between U.S. dollars and Chinese RMB when we are buying products out China. It has been fairly stable for the last long time, and that means that the changes in the gross margin is not actually coming from foreign exchange rates, but from product mix instead. We saw in Q1 this year, a slight reduction to 44% thereabout in gross margins, and then it's come up to 45%. The reduction in Q4 or Q1 was based on a lower portion of liquid cooling sales versus a higher portion of SimSports sales in that quarter. That has then reversed. We in this quarter, we have sold a higher portion of liquid cooling, which has a higher gross margin and a little bit lesser portion of SimSports with a lower gross margin. So there are different factors affecting the gross margins. Overall, the message here is that we're happy that it's stable year-over-year. Balance sheet. At the end of June, we had $6.8 million in the bank. And of course, as we had to release the notice about the reduced income estimate for this year. Of course, that means that we have to closely review the liquidity. That's just the nature of the [indiscernible] A big portion of our balance sheet is the HQ, the new domicile which is a total of $53.9 million at the end of June. We put $2.6 million into the HQ headquarters here in the second quarter, and we are nearing completion. We have about $1 million to $2 million left to go. We are expecting to take over the building in late September. As part of the balance sheet on the liability side is the construction loan, which was $21 million. At the end of June, we grew, I think, $2.1 million on the construction lines during the second quarter. In July, just after we finalized June we set up new construction aligns with our bank, which we had or have maturity date in April 26, meaning that we can now go forward reclassify the whole thing to become long-term debt and instead of short-term debt. And the new lines have a long-term repayment profile meaning that they mimic at this point, very most normal mortgage notes. With that, Andre, I'll turn it over to you for a summary and outlook.

Yes. So weaker than anticipated rebound increased price pressure, et cetera, is impacting the little cooling mark right now. It is expected to remain profitable for this year and beyond. We expect growth to resume in '26. SimSports, we believe, is on track. Maintain our guidance. And overall, we have initiated cost reductions worth $3 million. And perhaps a side note here that those $3 million is affecting both areas. So it's both in SimSports and liquid cool

Very good. With that, operator, if you can initiate the Q&A session on the phones.

[Operator Instructions] As of right now, we have no phone questions.

Not to worry, people have found their ways to the keyboard instead operator. So we'll just hand it from here and take the written questions. And one of them -- if I can read out, Andre and you can talk to it. Question number 1 here, is it reasonable to assume that your gross margin from SimStore is around 65%.

It's not really a number we can comment on because it also depends a lot about whether it's sold by a reseller or it's sold direct our website. And if it's all direct on our website, then of course, there's a debate about should marketing cost be in or not. So no, I cannot really comment on that.

And then we continue our 2 largest liquid cooling customers account for 35% and 20%, respectively. In your report, you provide issues with some customers leaving the market, reduce order volumes, introduced dual sourcing if any is any of your 2 largest customers you're referring to in this report.

I can unfortunately not talk about the names on our customers.

And number 3 here, please elaborate on your thoughts regarding H2. Are you considering a sale and leaseback? And how is the sublease arrangement progressing?

Yes. So on the sale and leaseback, I mean, everything is on the table in terms of financing the building, of course, but the sale and lease back market is just attractive right now. Essentially because of the interest rate. So if we were to do and say and lease back right now, we would just need to commit ourselves to very extreme, I would say, leasing terms very expensive and long term, and I don't think that's in the interest of anyone. But for sure, when the market rebounds in terms of sale and leaseback, then for sure, it's something we will consider.

And number four, you disclosed that you are really negotiating the terms of your credit line, but you do not disclose the details of those renegotiated terms. Can you elaborate on the renegotiated terms?

That's the thing between us and the banks, and we also did not elaborate on them before [indiscernible].

Very good. Four or 5, sorry, do you still expect to move into the new domicile in Q3 of 2024.

Yes, by the end of September. Yes.

How many employees are you in Denmark after your latest announced redundancy round?

I don't know about 80. Yes. I just realized I forgot to answer about the softies. That's going very well. I don't -- with the exception of a few square meters, I would say everything is now leased out.

Yes. How do you expect [ Cosera ] acquisition of [ Fanatec ] to impact the development of SimSports?

Well, as always, I'm not keen to talk about other than Asetek. But just a few comments. As far as I understand, they have not acquired an at this point in time. So it's all speculation at this point in time. What I'm familiar with is that [indiscernible] filed for bankruptcy. That's the latest that I know -- so it's pure speculation. Very high level, we know of [indiscernible] entering the market. So that's a new competitor. If they, in fact, acquire [indiscernible] then it's not a loom competitor, then it's just one competitor. So that's the difference between whether they acquire them or not, as I see it.

Very good. Here is a couple of thanks, guys for your continuous efforts. One, did you reconsider a sale and leaseback market in regards to the new HQ and liquidity situation. 1b, how do you estimate the current value of HQ versus the book value and two, do banks still push for more equity capital under the new credit facility terms. And three, would you actually reach out to larger shareholders in case of more equity would be needed.

So I'll take whatever I can answer then you can take the rest. Yes, the sale and leaseback, we already addressed that. It is something I can disclose that. It is something we look into in detail, and we came to the same conclusion as I just said. In terms of the book value, let's get back to pillar. But what I can say is that we have hit the projected costs very closely. And today, the same domicile would be roughly $50 million more expensive to build than we have paid for it. So in my view, at least, the building is holding its own value for sure. In terms of whether we would reach out to larger shareholders in case more equity would be needed, yes, of course, that would be the obvious thing to do if it ever came to that. Then in terms of the credit facility terms and the book value, Pete, I think it was for you.

Yes, the book value is about $53 million, of which also includes an extra plot of land that we are actively marketing for sale. As to the current value, the actual market value of the building out there. Of course, that is very much affected on interest rates and market demands, et cetera. So it would -- I don't think it would be prudent for me to comment on the actual market value on the unit out there. Number 9, it goes back to further tenants. We have answered that. Also, can you elaborate on your cash position going forward.

Can you please elaborate? Yes, I don't know what to say. I don't really understand what the question is.

We had $6.8 million in the bank at the end of June. And I think we have laid out the land as a ton comments about the rest of the year and early next year, also returns on our profitability, et cetera. Number 11, with endo in financial distress in Asetek, have you not seen any positive impact in Sims in that respect?

Yes, we do. And we know it for a fact because the way we have seen it is that we have these deals with influencers and reviews, et cetera, that they have their own code. So if an end customer is led to our website through this influence, they get a kickback. So actually, very recently, one of them reached out to me and said exactly that, but he can see that in the higher end of the market that our sales has gone up, one of theirs has come down. So for sure, we are seeing that. But I do believe that the vast majority of that business is going to some of the Chinese companies that are in the same price range as fanatic products are. And of course, I don't wish anything bad for our competitors. But should the distress continue into next year where we have the more mainstream lower-priced products, we would see a much bigger impact, I'm sure.

And then a total different topic here, in water cooler data centers is moving. [ TransForce ] expects now that all data centers will be so soon it would Asetek become and you go back in here.

Yes. So just to the benefit of newer people on the call, it's now more than 10 years ago, we entered the data center market. And already back then, we saw reports like that. And yes, there is a lot of hype around let's call it, water cool in data centers at the moment, and that's driven by AI. And it's, of course, driven by NVIDIA putting chips in the market that requires liquid cooling. The issue is that where we are strong on liquid cooling in the data center is when you look at the energy efficiency, when you look at the reuse of waste heat and all the environmental aspect of it. And as of right now, the demand in the market is cover blocks with water running through them very, very commoditized type of product that they do not come to Asetek and ask for. So whether we would reconsider. I can repeat myself that, yes, if and when we see a demand, then of course, we would no reason not to we have all the IP, we have all the know-how to do it. But I would say the silent group of data center people right now are the ones who are actually paying the bills. So until that changes, I think our position is the same.

Number 13, can you talk about the yield on the subletting you made? And given that there's only 1 tenant in that new building. I don't think it would be prudent for us to say here and discuss the final details of that contract. But we believe that we are renting out at a level cost level, price level that is attractive and reflects the high level of the building. And then a quite practical questions here at the end here. How many square meters in the new facilities related to production and I don't have the numbers right. I don't have the draw for you, but I believe it's about 1/3, so.

It's difficult to answer in the sense that Asetek looked a little bit differently when we projected this. So at that time, when we projected is, for sure, we had a lot of square meters for production. and they are not needed to the same degree. But then in return, we need hopping and shipping facilities. So it's perhaps turned more into a warehouse than into production. But yes, I also believe that it's 5,000.

That concluded the list of questions. And that also concludes this webcast. And we thank you for your interest in Asetek. Thank you.

Thank you. That does conclude today's conference. Have a pleasant day.