Asetek A/S

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome and thank you for joining the Aesthetic Q1 2022 earnings call. Throughout today's presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press the star followed by one on your touchtone telephone. Press the star key followed by zero for operator assistance. I would now like to turn the conference over to Peter Madsen. Please go ahead.

Perfect. Thank you, operator. And to the audience, welcome to this Q1 2022 H2Tech earnings call. My name is Peter Madsen. I'm the CFO and I have with on my side here André Slot Eriksen, who is our CEO and founder. Hello, André. Hello. And then for this week, we are being visited by our CEO, John Hamill, who is also in the room here. Hi, John. Hi. How are you doing? Perfect. So the way we will do this earnings call as usual is that we will go through the presentation, which our board just met a few hours ago and approved. And we launched the numbers also a couple of hours ago via the website and new services. And we go through the presentation. There will be a Q&A session afterwards where you can either follow the instructions by the operator or you can type in your questions as you go on the application that you're following the website on. With that, operator, please forward two slides to the highlight session and then over to you, Andre.

Yes. Good afternoon, everyone. Just on a practical note, I have been sick the last two, three days and I actually still am. So if I start to cough or something like that, then please bear with me. But I'll try to pull it through. So some some headlines from the quarter. First quarter revenue of 14 million dollars compared to 25 million last year. Gross margin of 38 compared to 43. Simsports orders and backlog of roughly one and a half million by right now, essentially end of April, where we started shipments in March and the additional products to come still. We maintain our 22 outlook basically because we don't know better. We don't have a better guess right now or a better estimate given the situation out there. So we have chosen to stock or to stick with what we know. Please change the slide. If we look at the revenue and the margin, I think there's no big surprise. When revenue is high, earnings are high. When revenues are not so high, the earnings are also not so high. I don't think there's anything surprising in that. Please go to the next slide. If we just rewind the tape a little bit, When we gave our 22 growth expectations, we felt they were conservative based on what we knew at the time. And they may still be or they may not. It's simply impossible to tell. What we can say is from the company side, there's hardly nothing that we are not hit by right now of what's going on out there. Of course, we are seeing the shutdowns, the power outages, Going back a little bit in the quarter to the Winter Olympics, of course, the COVID impact, of course, logistics, supply chain, shipping, you name it. Of course, we are hit by all of that and then some. So that's how the world looks right now and we are trying to navigate the best we can. And from an industry perspective, not specific to ACETech, of course, the supply chain challenges is a big, big concern for our customers. And the same with the rising components and not the least, just the ability to get the components. We and they are of course seeing that the shortage of semiconductors, we see that the GPUs, CPUs, hard drives, everything is affecting the PC market. And then of course the US tariffs and the added increasing logistics cost is a big concern. I'm sure Maersk is happy about it. We are not so happy. In terms of the outlook, what we can see right now is that the volatility seems to continue. I don't have any crystal ball that the rest of you do not. I probably see the same as you. Of course, structurally, our 15% growth target year over year has, of course, not changed in the long run. What we see right now, I believe everything we see right now is temporary. There's no structural change in that. Of course, we are uncertain to when things will normalize. And that's that's the world we live in. And from our side, what we try to do, of course, is to continue to focus on strengthening our supply chain capacity and capabilities as well in terms of sourcing, getting the right parts, getting the right book, getting them shipped and all that stuff. We have, of course, also adjusted our prices on the ways. It's always difficult not just to increase prices, but it's also as the world is right now. When you think you have adjusted your price to cover for something, then you wake up next morning and then everything just went up once again. So it's a difficult situation, especially with what we call it. inertia we have in the system. Keep in mind our OEM customers, some of them are building inventory months ahead. So if we change the price today, it will not have effect until three months. And how does the world look in three months? And it's complicated. And we do expect major launches from both Nvidia AMD and Intel in the second half. So it'll be interesting to see if that will be paper tigers or there will actually be products out there. And how the inflation is impacting end users. Difficult to say right now. One positive note is that if you want to turn something negative into something positive, the positive of the shipping rates is that they are so high that it makes sense to assemble our stuff in Denmark, which means that we don't have to pay a US tariff on the same sports parts. Please change the slide. So starting with SIM Sports, I think it's more or less 17 months ago, I said that we're going to enter the SIM Sports market. And here we are, or from the time of shipping, 17 months later, we were shipping. And it has been a very positive launch. I can say that now we have gotten extremely strong feedback, both from sim racers, reviewers, press, influencers and by the hour right now, end user feedback is taking in as well. And it's actually something I'm proud about. It has been even more positive than I had hoped, especially in the situation we are in, because we have the same challenges on the Simsport side with components and getting stuff to the factory and getting it at the right cost. But as it looks right now, We have orders and backlog of roughly one and a half million per right now. And that's, of course, thousands of pedal sets. There is a risk, at least on paper, and I want to mention it because we have taken the stance as a company, and I think it's also legal, by the way, in Denmark, that we do not charge people's credit cards until we actually ship. So when we have, let's say 1000 pre-orders, there is, of course, a conversion rate or the risk of people dropping off. It's not a lot we have seen, but I just want to mention it. On the flip side, we have new products in the pipeline that indicates more will come also in this quarter. I'll get back to that. Please change the slide. Yeah, you can change it again. Thanks. I don't want to spend a lot of time on this slide. I do it more or less systematically every time. So I think I'll skip it this time, other than just noting that in the right hand corner, you can see we now have a spot in Malaysia where we are working on outsourcing some of our manufacturing. And if everything goes well, I think in Q3 this year, we will be able to manufacture in Malaysia and thereby avoid some of the US tariffs. Please change the slide. And one more. So looking at the product release activity, I think the headline of that representing our customers it will be uncertainty. We have four new products that started shipping in the first quarter. One new customer, including two new coolers for graphics cards. We have 11 new products estimated to start their shipping in this quarter. However, we can see the OEMs and the customers, they continue to assess the timing of the new products. And it's, of course, because of shortages in their end, the logistics and the cost associated with the logistics. And there's not much we can do other than observe and listen. It's just how it is. Of course, the sim sports business is really small, but that is one of the advantages we have in that business that we don't have here. We can, if we want, go and sell stuff to end users. We can do campaigns, we can do marketing, where on the OEM side, it's not so easy. We can do the development together with the customer. They make a plan, and if they change the plan, all we can do is pretty much take a note of it. So that's one of the uncertainties. We, of course, continue our investment in product development and in branding towards key customers. And, you know, again, there's no structural change here. So we keep doing what we always do and then wait for the market to pick up. Please change the slide. We are currently shipping to more than 20 OEM customers. And as usual, I will say top five represent most of the sales. That, of course, also means that if one customer is not performing, then it hits us hard. And as you can see to the far right, there is actually quite substantial shift in the distribution between the individual customers. And of course, as always, our ambition is to increase the number of customers over time. Please change the slide. So looking into a top down view on the G&E business, not much has changed. We work on the branding, we work on growing new customers, widening the OEM base. product development, exciting new technologies, bringing them to market. That's the same story as always, I would say. And we focus on delivering what we are good at. We are trying to ramp it up. We are trying to drive out cost. We want to be the performance leader. We have branding agreements in place with several OEMs. We connect with the gamers. We do everything as, let's say, as we used to do and more of the same. And we believe at the end of the day, it will come back. Next slide. And one more. On the same sports business, which, of course, is to a large extent the same type of end users, it's gamers. Our product rollout is progressing to plan. We released our Invicta pedals, as you have probably seen and heard. And it's the Invicta pedals that I just gave you the numbers for. We have just opened the pre-orders for our next tier pedals called Forte, which is a mechanical brake cylinder system. And if everything goes well, if we can get the components, we will actually start shipping those in this quarter. So that's what we plan for. On top of that, we are expanding our line of accessories, pedal plates. As you can see on the picture here, we have also designed our own racing boots for sim racing. And just to give you a flavor of the challenges that we are facing, there's 110 days of delivery time. So even though the boots are done and dusted, I have the golden sample here next to me. It will be 110 days before we can get them. So that just shows you a little bit about why the supply situation is as critical as it is. Next slide, please. in in terms of a full ecosystem which is our ambition for sure things are also more and more or less on track and when i say more or less it's because i know that we could have been out faster if we did not have the supply situation on chips and semiconductors but we are hanging in there and We have done the exclusive agreement with what we believe is the leading manufacturer of servo motors for sim use. Our wheelbases are well underway. We are testing them right now. We are in tooling. They are up and running with our own IP, our own software, and we are still planning to launch them later this year. And for sure, that will make 23 really exciting because then Not only do we have the pedals, then we also have the steering wheel and the wheel base. So then at least we have, let's say, half of what a full ecosystem requires. On the marketing side, I hope to be able to announce soon campaigns within both Formula One and GT3. It doesn't make sense to spend millions and millions on product development if we don't tell the world about what we're doing. So we have some interesting news coming within the racing world. And as I said earlier, our product development is really founded on the deep experience we have in mechatronics in AC Tech. And I know the numbers are not what any of us hope right now. I think there are very good explanations for that. But I also think if you think about it, that in 17 months from having a vision, to launching a product that's already recognized as being market leading. I think that's something I'm very proud about. I'm proud about the team that they've been able to pull that off. And we could not have done that had it not been for the liquid cooling business. So I think one of the things where we saw this right was that our existing capabilities within the organization could be used for other applications. And I think this is really the prime example of that. Next slide. So looking a little bit more strategic on the Sims board, I almost always already said it. The goal, of course, is to become the leader in this market space as well by leveraging what we already are good at. Of course, it's new to us to sell directly to end users. And of course, it's new to us to be actually a branded company. But I think that's going pretty well. And I think it's a strong market opportunity. Of course, it's also affected by everything that's true for other gaming businesses. But so far, so good. And we keep focusing on innovation, bringing new and different products to markets than what our competitors have, bringing real value. Some of the customer feedback we have gotten, which is, I think, the greatest you can achieve. One thing is you can talk about quality and you can talk about price and you can talk about industrial design. But, you know, we went to market with a radical different braking system than anyone else out there. And that was a big bet. But we believed it was the right bet because we wanted to recreate the sensation of a real race car. And some of the customer feedback we now get is really that. After getting our pedals, people drive faster. And as this is like in any other game or any other race, it's about winning. So if our customers can drive faster, we are really giving them substantial value. And by the way, we have an Asetek Sim Sports community group at Facebook that you can join if you want to see some of these end user comments for yourself. So feel welcome to do that. We are, of course, building on the channel strategies. We have a lot of different companies and resellers and distributors and what have we come to us. And of course, we are also chasing some ourselves. And it's typical, you know, electronic outlets to specialist shops, to motorsport shops. And right now we are still working on it as we go. There's no stress because we sell direct on our website. So it's pretty easy to try out different things. The challenge for us, of course, is we want to have the best products, but we also want to have the best price, not necessarily the lowest price, but we want to have the best price. And some of the competitors we are dealing with or fighting with, they don't have resellers. They only sell direct. So for us to make margins, good margins, I would say, and to make sure the customer gets the right price and make sure to have room for a retail outlet as well. It's not an easy task, but I think we can manage. And that's, of course, a huge competitive edge for us. Yeah. Next slide. On the data center side. You would think that with the gas situation we have in Europe that there would be much more focus on reusing waste heat and things like that. And I would say that we are doing as usual. I have meetings with some politicians here at ACETEC next week also. But I would say in general, the interest has not sparked by what's going on out in the world. So we keep doing what we do, and that is to work on the European side of things, and there's not really a lot of new things to report. One thing I can say is that I have heard the news that there is a citizen in Denmark that is going to, I'm not sure how to translate it, but as a citizen in Denmark, you can come up with a proposal, and if you get 50,000 votes, then the parliament actually have to consider it. And I know that this proposal will be launched within the next few days or weeks. We will, of course, link to it on our Facebook page. It has nothing to do with ACETech officially, but at least if you're located in Denmark, I can only encourage you to go and support this. And hopefully we can force the Danish politicians to to at least tell us why, if they are not interested. Yeah, please change the slide into the financials. So one more. Thank you. So I'll head over to you, Peter.

Thank you, sir. Please change the slide once more, operator. Thank you. Starting from the top line on the profit loss, a soft quarter, 44% down compared to the same quarter last year. A $14 million top line, as André mentioned. However, keep in mind that Q1 is always a low quarter compared to the Q4 that we come out of. It's always been the case. Even the $25 million last year was a lower quarter than the Q4 behind it. But still, it is a soft quarter and there's no reason to hide that. We sold 211,000 units in Q4. That's a reduction of 49% compared to last year's. Gross margins I'm coming back to. Total operating expenses on the surface, it looks nice. It's on level with last year and it is nice. It's a shift from data center expenses over to SIM sports expenses. That's what's being reflected here. And then we've been helped by the Danish Krone being a little cheaper compared to US dollars compared to last year. That's given us $100,000, I believe, on the profit and loss here. And then we also see the effect that because the same sports launch has been as positive as it has and the business case have been validated, that means that we need to capitalize a higher amount of R&D costs. And of course, that also helps us on the P&L side for the operating expenses for this quarter. And that will be the case also for the coming quarter. And then we'll start seeing as we start selling the Simsports product and we'll start seeing how those capitalized expenses are being written off. But of course, that comes with revenue and earnings also. Next slide, please, on margins at 38.2% versus 43.3% last year. A reduction, yes, and lower than the stated minimum goal of 40%. Yes. Keep in mind, though, that with lower revenues almost always comes lower margins also. logistics cost, our quality cost, our inventory adjustments, etc., even though they are qualified and classified as variable, then they tend to be fairly fixed. And that means that when the revenue is lower, then also the margin goes low. we still believe that the gross margin should be over 40 as such for for the year but we do see i can just as well repeat it as from andre we we do see higher increase the shipping cost and we do see higher cost of goods also the i think our raw cost of goods was adjusted upwards due to a forex exchange here in in january But again, we aim at above the 40% markup. Next slide, please. Balance sheet, the big thing here is that our cash position has gone from around $25 million that neighborhood to $13 million, I believe. And of course, that's a big amount. We are still fairly cash rich, I would say. The reason for this reduction here is that our accounts payables have been reduced in Q1. If you look back at it, then you will see that our accounts payables have been very, very high for the last few quarters even though the revenue has been at a lower level and that has caught up with us at this this point where the where we had to pay down the account payables to a normal more normal amount and that also means that the accounts payable days have been reduced from i think 150 to 112 or something like that so it's it's quite an impact but it's a it's a one-off Apart from that, we have low interest bearing debt. As always, we still have the flexibility that we need. And from that structural point of view, there's no changes. Change the slide, please. the financial strategy not so much no structural changes in that since last quarter and last many quarters I would say we are more operationally focused these days where we are where we're seeing the the troubles around the world that also impacts us in here in in finance and we've been working diligently on getting our new sim sports business up and running. It's a totally new business for us. And that also means that operationally there are quite a lot of tasks to be dealt with. And that's what we're busy on. With that, André, back to you. Next slide, please.

Yes. One thing I failed to mention, but I think it's worth mentioning is if we look at the quarter and the revenue of the quarter, I would say there is one customer that's probably representing 60 to 80% of our revenue miss. So you can read a lot into that if you want to and interpret it in many ways. The way I read it is that in general terms, the business is not so bad. But when one customer is failing, and we have remember top five, counting for 80% of our revenue, then we hurt big time. so i would say that the miss we have this quarter i would say that it's it's related to all the issues already described but it's on one customer side more than others i don't want to mention who it is or the type but i think that's worth taking into consideration at least and that's also why we are not shaking our hands and that's also why we keep our long-term ambition because We don't see customers abandoning us, but I think it's fairly easy to understand that if you make a living out of selling PCs and you cannot get the other parts in the PC, then of course, what should you use a liquid cooler for? I think that's easy to understand. our 22 growth expectation uh I will put it plain and honest my focus right now is to drive a profitable business and then it will end out as it will end out there is not much we can control right now but we try to control what we can control and and one of them is that we I'm not happy with a quarter that's into the negative numbers. And that's my focus. I don't like that. So that's where we are mentally. And in terms of what levels we can pull, we cannot really pull any levels on the OEM side. It's not a prize game. It's not a competition game. It's the reflection of the world out there. But what we can do at least is on the Simsport side, push as hard as we can, because as long as we have products and the ability to sell there, then of course, of course, it's a brand new business. It cannot make up for our big 20 year old liquid cooling business. But for sure, a dollar on the bottom line is a dollar on the bottom line. So, of course, we are pushing full force ahead there. And yeah, same with development. We are we are really pushing. I think that's what we're going to say for now.

Yeah. Please change the slide, operator. And then we will do the Q&A. We'll start out with oral questions via the phone, but I can see that the web app is also working. There's a couple of questions there. We'll address them afterwards and feel free to type in any questions that you see. But operator, if you could go through the oral session.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on the touchdown telephone. If you wish to remove yourself from the question queue, you may press star followed by two. One moment for the first question, please. The first question is from Mr. Xu from SCB. Please go ahead.

Hi, Andrew and Peter, thank you for taking my question. I have three questions here. Firstly, Rick, you have mentioned the adjusted price for the G&E products. Is it possible for you to give us an indication on what the ASP level was in Q1? I'll do one question at a time.

I'm sorry, I did not really understand the question.

The average selling price for the GEE segment in Q1, is it possible to indicate?

It's completely stable compared to Q4.

Okay, great. And my second question is on the operating expenses. Looking back over the last two years, you had booked some legal costs. Is it possible to give us an indication on the legal cost for this year, for 2022?

Not in total, that's too early, but we have been, there's been some actions or whatever the term should be in Q1, which means that Q1 has been actually not on the higher side, but on the average of last year, which was a high year.

Okay. Okay. And if you compare to last year, which was 4.7 million US dollar, Could you give us a sense, should we look lower than this level?

Andre, do we want to comment on the litigation level this year?

Very briefly, I can say that I expect it to be lower. And we were building up to a lawsuit, but then the court, I don't know how it works in Europe, but in the US at least, and that's where we have the lawsuit, The way it works is if you run a patent case, it has to kind of get out of the way if there's a civil case that's more important. And that's exactly what happened. We should have been in court here essentially now, I think. But the court case got postponed because of a more important civil case. So because of that, I expect the burn rate to go down this year. That's pretty much all. Okay, great.

Great, thanks. And my last question is on the revenue side. $14 million revenue for Q1, is it possible to break down to the division level?

No, we're staying away from that at this point. Okay, fair enough. Thanks.

I'll jump back to the queue.

Sure, thank you.

As a reminder, if you wish to ask a question, please press star followed by one.

That's fine, operator. We'll take it from here. That's the usual level of all questions. So we'll change to the questions that come in via the web here. The first one, I know you forgot your glasses today. Can you read the question?

Yeah, it's actually the other way around. I cannot see things for small. So you did expect some final orders from the HPC data center customers. Do you still think they will place final orders? Yes, and they are and they have been and they will continue to do so throughout the year.

Then, changing gears totally, there's a question on our tax situation, and I take that as a more general question. By the words tax situation, I'm sure the person here is alluding to the fact that we are as a company considered a tax citizen, tax subject of both United States and Denmark. And that happened because the company in 2012 moved back from US to Denmark, where it was originally founded many, many years ago. And at that point, the Americans had decided unilaterally that that would be considered a tax move to a tax haven kind of country. and situation. So they decided that unilaterally. That we are challenging because there's a tax treaty between the two countries saying that you should only be taxed in one place. That sounds like the fair approach. We are working that situation, but it is a really slow process. We have requested the Danish tax authorities to take up the matter with the US tax authorities. And that Yeah, that's a slow process, and it's a process that happens behind the curtains. They make deals, so to speak, with each other. And we are, sorry to say, a small piece of that puzzle, and it's slow. So we are hoping for a situation where we can be a part of a deal. That has not come yet. We are hoping to hear more, aiming to hear more later this year. The asker here is asking about legal costs, other costs. There is no legal cost. There are no other costs related to this. And the situation only, if I may use that word a little liberally, that the situation only pertains to Asetek AS, the parent company, when we pay out dividends to our shareholders. It's not an operational situation that impacts us. That was a long explanation. john or andre revenue miss can you add some color to that and no we are not doing quarterly guidance so i don't want to go into that very good and then there's a question about the one customer who missed the course the miss is it a postponement of orders will they come back blah blah blah

It's impossible to say. In the world we're living in right now, it's not like people are buying a computer one day and then six months later, if it has still not arrived, we cannot say. Sure.

Operationally, are you negatively impacted by the recent lockdowns in China? Yes, very much so. That was a simple question and a simple answer. Again, you mentioned that one of your biggest customers within the D&E had a 68% miss. Do you see that that is a one-off or will the customer come back to the normal volume in short to medium term? And I suppose that's the same answer.

Keep in mind that it would be the same as asking me if Danfoss would come back to their normal business in case it was not. We have no way of telling. What I can say, what we have done on our side is that in our internal forecast, which is, of course, separate from the guidance, we have cut it down heavily just to be on the conservative side, meaning that from our perspective, for us to meet our guidance, we would have to rely on others. So if everything came back, it would be a bonus.

But there's no structural changes anywhere.

saying that they should not come back no but I think everybody in this call understands what's going out on out in the world now if not then please watch the news and uh yeah you know then we cannot speak on behalf of our customers we don't know why they are not shipping we don't know why they cannot cope with the shipping prices I mean it's it's impossible um and

Yeah, it's a frustrating situation indeed. Going to the simsports business, remind us how is how big is the TAM total addressable market for your sim race business if the product rate is completed?

We don't know what it is. What we do know is we have one competitor that is around 100 million euros. And then our earlier assessment have been that the sum of the rest is the same. It's important to say that this does not include Logitech and Frost Master level of products because that's not where we want to play.

Very good. Changing gear again. I assume you're using both for shipping components today. Have you looked into flight transport for the key components that are missing?

Yes, of course. We are looking into everything that can move. And we are not only using both shipping today.

No, we are using everything. It's the mix that we can. actually get our hands on.

After the war, unfortunately, train is no longer an option either because it goes through Russia, but we also use that.

Yeah. And that... Oopsie doopsie. Can you read that? Will there still be a third pedal option or is the Forte the lowest grade?

No, no, there will be a third line as well. We have, of course, focused on the highest end first and then the mid one. can't really say when it will happen but it will not be anytime soon because the the focus right now is on completing the the full more or less full uh let's say product program to have an ecosystem so so next in line is the the steering wheels and the wheel bases and then after that it's the it's the rig and the seats and that stuff but i think one one important thing is uh Pricing is not carved in stone yet on the Forte, but as it looks right now, it will ship at $499. If you compare that to the competition, it's a pretty aggressive price.

And that concluded the questions. One comment from me, we have changed the reporting format this time. That was decided late last year at some point, so we don't release a full-blown financial report at the end of Q1 and at the end of Q3. However, keep in mind that we have on our website, there is a database of data, financial data that you can download and model with. If you, being a professional investor, if you feel there's something number wise that we need to develop more on, then feel free to send me your suggestions. We will evaluate and develop that online tool to the extent that we are comfortable. With that, we are closing down this earnings call. Thank you for your interest in AC Tech.

Thank you.