Asetek A/S

hello and welcome to the azotech q1 2023 earnings call my name is alex i'll be coordinating the call today if you'd like to ask a question at the end of the presentation you can press star followed by one on your telephone keypad i'll now hand over to your host ethan madsen cfo to begin please go ahead thanks alex and thank you everybody and welcome to this azotech q1 2023 earnings call sorry about the slight delay

My name is Peter Madsen, I'm the CFO. We have on another location, Andre Slot Erikson. Also, Andre, can we hear you?

Yes, good morning.

Perfect, good morning. So we are about to start this call. As you will know, if you've been following us, we pre-announced the figures on April 18, and the figures as such are not changed significantly. But of course, there's always some news. With that, Andre, I'll hand it over to you.

Thank you. so we're looking into our first quarter revenue of just shy of 15 million dollars of 16 percent from last year where it was just around 14. our gross margins increased to 44 percent as of 38 last year we have a q1 ebitda adjusted of just shy of three million dollars compared with an EBITDA loss of $1 million in the same quarter last year. SimSport's revenue of $1.3 million, essentially reflecting that we have started shipping, and in this case, eight new products. And we also had 23 new liquid coolers that began shipping in Q1. As a surprise to no one, I guess, we laid off a significant portion of people last year. We are now seeing the Full effect of that, the same as we put our litigation efforts to rest. So we have actually seen an OPEX reduction of 25%. Last week, we completed a successful listing at the NASDAQ Copenhagen after completing our rights issue and yeah, raising $20 million in gross proceeds. We maintain our 23 outlook with a revenue growth of between 5% and 15% compared to last year. with an operating income between two and four. And of course, we will get back to that also. Next slide, please. So if we look a little bit into what does the world look like for Acetec right now, we see a good interest and a lot of positive feedback, both for liquid cooling as well as our SimSport products. We do see signs of the liquid cooling market improving with for sure increased order activities and our customers are reinstating and executing on previous product launch plans. And it seems as the recent forecast we're receiving indicates that they have burned through their inventories and things are normalizing a little bit. Some of you may already then wonder and say, why are we then sticking to the forecast? without spoiling all the fun in the end, I can say that it's because we have low visibility as always. So right now, for example, the first half looks really good. Second half does not look bad, but we just don't have visibility. And it's not 100% clear to us yet that our customers, so our OEM customers, that they have actually seen a pickup. So for now, Q3, Q4, still low visibility. We are executing on our Simsports product rollout plan for sure. The situation is clearing up there as well in terms of the supply side. And that's what we've been basically doing and is basically doing, basically shipping against the order backlogs that was created during Q4 and Q1 last year. essentially continue where we started. We continue all the time looking at new product developments, launching more products, executing. That's really what we do. We focus on, of course, efficiency, supply chain capacity and capabilities. Needless to say, with 25% of the company laid off and we were already running fast and now we're running even faster. So Instead of always running faster, we, of course, also always trying to see where we can improve. We strengthened our balance sheet with the rights issue, of course, and we have been warning for a while that we would start shipping out of Malaysia, mainly because of customer delays. It had not really happened in volume, but I'm pleased to say that right now we are shipping in volume out of Malaysia. basically during our existing contract manufacturers just having sites in Malaysia. On the market backdrop, of course, the war is still going on. We are not seeing the same amount of supply chain issues, but what we are seeing is that we always had a super strong supply chain that could scale and was very flexible. And we are seeing that in China that sub suppliers are not able to scale as fast as they used to be. So there's still a lag there. Of course, we know there's reduced consumer spending. And as I just mentioned, we do see limited visibility. That is not new, though. It's always been like that. So Because we come from, let's say, a low place with last year, then, of course, we're a little bit careful. But the sense that we don't have visibility into Q3 and Q4 at this point in time is nothing new. That's business as usual. So as I just alluded to last week, we did open up for trading in Nasdaq Copenhagen. And that followed our fully underwritten rights issue where we raised 214 million Norwegian or roughly $20 million in gross proceeds, strengthening our balance sheet and liquidity. And we at the same time issued roughly 71 million new shares. We did receive strong support from our shareholders in the sense that 99.3% of our shareholders actually subscribe to their share of the new round. We are only the third company to join the Danish main list so far in 2023. The initial trading will be in the form of entitlements because we at the moment are dual listed. We also listed in Oslo, of course. And shareholders who wish to trade their shares on NASDAQ, they have to transfer their shares. They have to go to the bank and let them know that they want to transfer the shares to the Danish registry instead of the Norwegian. We have started the delisting process from Oslo. And as a company, we do encourage shareholders to move their shares from Oslo to Copenhagen. If you are in doubt on how to do that at our IR pages, our investor relation pages, there is an FAQ on how to do that. So just very briefly, our current focus is on the gaming equipment. So liquid cooling for enthusiasts and gaming PCs. And let me just remind you, that before Simsport, that segment was referred to as gaming and enthusiast. Now we call it only what it is. It's liquid cooling for two types of customers. One of them is as a standalone liquid cooling product, and that is meant for end users who are building their own PCs or upgrading their own PCs with a liquid cooler. And then there's the OEM side. where we are selling, let's say in brown boxes, our liquid coolers to an OEM, where the OEM is then billing it into their product. And their product is typically a gaming PC. And then on the right hand side, we obviously have the same sport business where we are selling steering wheel, pedals, wheelbases, etc. So not much new to report on this slide. We are a global company. At least that's what we like to call ourselves with sales and product management and management in the U.S. on the West Coast. We are represented in Texas, in Aalborg, where I reside. We have product management, R&D, quality management, finance, branding and so forth. And now in Malaysia, we do have a Let's call it a substantial manufacturing site and of course, also quality. And just to remind everyone, why are we in Malaysia? First of all, to, let's say, get more robustness than just being in China, but also because and mainly because of the situation, the tax situation between the US and China. where there is a penalty on products manufactured in China imported into the US. So what we'll try to do now is to build our US-bound products in Malaysia. And then in Xiamen, in China, we still have, of course, the vast majority of our supply chain. And then in Taipei, in Taiwan, we have sales and product management still. So if we start with our main business, the liquid cooling business, for sure we have seen an increase in release activity. We had 23 new products starting shipping in the quarter, four of them with our latest eighth generation technology, our most advanced technology to date with higher performance, less power consumption and less noise also. We have 16 new products that we plan on shipping in Q2. So it's everything from our OEM customers to SIs, system integrators, as well as we're rolling in a new customer. And as always, we are investing in product development and our branding to expand with the key customers and get new ones, of course. And if you look at the slide a little bit, I think what it does say is that we are remarkably higher in new product launches compared to the last two years. And that in itself is a mix of what I believe the market coming back, customers coming back, not that we lost them, but in the sense that they have started to invest again. But it's also for some customers, it's just product refreshes, etc. So it's a little bit of everything, but for sure a good signal and much more fun than last year for sure. Next slide. So when we look on our customers, we are currently shipping to more than 20 customers. This year, in 23, so far, 92% of our revenue goes to our big top five customers. Our ambition, of course, is always to increase diversification. And as such, I'm happy that this year we are, as it's planned for right now, we are expecting to launch with a new customer. And when I say expecting, that's, of course, because we have not started shipping yet, but just to be clear, we are building the products as we speak. So I don't see a big risk there. And in my opinion, this customer will enter right into the top five list right away. So I think that's a good sign of what we've been saying all along, that there are still plenty of opportunities in our liquid cooling business. Next slide, please. Just staying with our liquid cooling business, I think it's important to remind ourselves and also remind you guys that we do have a very robust and solid liquid cooling business. We have, as we all know, spent some money on the data center business. We have invested heavily in that. We have started up the sim sports business. We have started up the headquarter construction. But if we just look at the liquid cooling business, It actually produced almost 75 million dollars of EBITDA during the last four years. So it's a pretty strong business, I would say. Next slide. On the liquid cooling side, not much has changed in how we are approaching things. Of course, we want to be the best. We want to be the biggest. That's what we're focusing on. And the way we do that is making sure we have the best products. And when I say the best, I mean, not necessarily in terms of pricing, but in terms of performance, in terms of quality, in terms of customer support, in terms of branding and marketing. And it seems to be working really nice. And as I just said before, we have landed a new customer that we're going to tell you the name of a little bit later this year. So that's a nice position. And from my perspective, I'm pretty happy with how the business looks right now. Just a little bit of Simsport as well. We have been and we are super busy on the Simsport side also because we had eight new products that started shipping. And if you compare that to the liquid cooling, this is a very different ballgame in the sense that liquid cooling we have been doing for 20 years. And when we have 23 new products, for example, I mean, the core technology is the same. The technology behind it is the same. We have a huge experience base. where if we say eight new products on the simsport side that could be anything from pedals to steering wheels to components to wheel bases so that's truly different products and with zero experience base that is that's kind of interesting let me put it like that and just like on the the liquid cooling side our manufacturing strategy And that's always what's worked for us is that as long as something is new. So when we are launching, as long as something is, let's say complex and difficult, we do actually roll out the first manufacturing in Denmark. And then when all processes are like we want them to be, then we outsource and then we transfer the mass manufacturing to a contract manufacturer. And we are. We have done that partly with the pedals. And we are engaged and working on right now effectively manufacturing the steering wheels in Malaysia. But for now, pretty much everything is made in Denmark. We have three new products that set to start here in the Q2. And one of the things that I'm excited about, I'm actually going to shoot a video about it tomorrow that will be launched soon. is our quick release system where we enable our wheelbase to be used with a lot of different steering wheel brands from competitors of course but it's really what the market needs it's what the end user needs and to me i don't see it as a lost sale when i sell a quick release i see it as a sold wheelbase because people will be using our wheelbase and especially on steering wheels There are so many steering wheels, you cannot please everyone. And it will be impossible for us to make 50 different steering wheels. So that will be an industry enabler for sure. And we are quite excited about seeing how that will be received. We have a design win with a major US retailer. I'm not going to talk a lot about it right now. We will tell you more later. It's for sure a I would not say a shift in strategy, but I would say it's a new opportunity that came up that we are now pursuing and see how that will turn out. We have nothing against retail as such, but retail is a different animal. you know, we have competitors who are selling direct to end users. So competing through a retail challenge is really tough in terms of the margin stack. But I think we have found a way through and now for sure we're going to try it out. We have worked hard actually since Q4 last year on a deal with I would say a very well-known racing car driver where we will launch a complete series with his name and branding on it. So that's also exciting. I can say it's not Kevin Magnussen for those of you who thought it would be. In terms of revenue, our Q1 revenue was $1.3 million. We currently have a backlog in excess of $1 million. And for sure, our gross margins, they are in the late 30s somewhere. and don't read anything into that. As I just said, I don't think we can manufacture anywhere more expensive than in Denmark. So the fact that we can reach these margins with low volume, let's say high panic manufacturing and still be in the late 30s is actually pretty good in my opinion. Next slide. So I'm not going to spend a lot of time on this slide. We are executing on our strategy in the sim sport by delivering a lot of new products that sets themselves apart from the competition, we believe. And our focus is to have a full ecosystem as soon as possible. And I would say by the end of this year, we are close in the sense that we then have few different pedal sets, few different wheelbases. and a few different wheels. So we're getting there for sure. Next slide. Yeah, that's over to you now.

Yeah, thank you. And we'll start out with an overview of revenue and our EBITDA margins, how they reflect market volatility. It's important to remember that our numbers go up and down for a reason, and that reason is most often the revenue. You can see the revenue has increased lately. It's still a low number at just about $15 million, but it has increased. And you can also see that the EBITDA market has gone up correspondingly. And that actually started already in Q4 last year, reflecting our cost savings program as we initiated last year. And the P&L starting at the top line revenue at $14.8 million versus $13.9 million the same quarter last year, 6% up or $900,000. And that number is a combination, most of all, of course, of the liquid cooling revenue, but also then this year of SIM sports. This year does not include any any data center revenue, whereas last year there was more than a million dollars of data center numbers, revenue in the numbers. Unit sales almost flat, a little bit of a decline, 4% of decline in the unit sales quarter over quarter. And that means that something else must have gone up, and that's the ASP, the average sales price, which is now at $60 versus $53 of the same quarter last year. And that is a change in product mix going to higher performance products, more complex products. Be careful, though, not to confuse higher sales prices, the ASP, with also leading to higher gross margins. That does not always lead to that, but it often does, of course. Simsport revenues $1.3 million versus $200,000 last year in three major product groups. Andre also alluded to that. And of course, we still see the number, the revenue number as low being impacted by some of the things that we have seen going on, the inventory destocking and potentially also the lower end user demand, which Andre also alluded to. Gross profits of $6.5 million this year versus $5.3 million last year. That's $1.2 million coming in from that line. I'll come back to the gross margin in a second. Overhead expenses down to $5.4 million versus $7.2 million the year before. That's $1.8 million reduction. We've been talking a lot about this because it was hurtful. It was a reduction in staff. a significant reduction in staff and then also a reduction in litigation activity. Litigation is down by 1.2 million dollars pretty much it's pretty much all gone he was saying q1 i think we spend less than a hundred thousand dollars in litigation in q1 where we spent 1.2 million dollars the year before and then the rest of the reduction is uh is well i call it staff because that's pretty much what it is it's it's a reduction in head count and all associated costs there with That leads us to an operating income of $1.1 million versus a loss of $1.9 million last year. And an EBITDA, I should also mention, that of $2.8 million this year versus a loss of $900,000 last year. Income before tax, $750,000 versus a loss of $1.9 million last year. So it's all pointing in the same direction here. Gross margins. It's always an interesting topic. We are at a high point this year and this quarter at 44%. It's the highest we've seen for a while. It is. And granted, we are comparing with a very low 38% gross market in the same quarter of last year, which it was low due to shipping and other factors. But mainly shipping was high last year and surprisingly high last year. The increase this year is a change in yes asp sales prices we spoke about that but actually more the impact from product mix where we are selling more complex products they tend to get more expensive yes but they also tend to get more margin rich for us so it's the complexity of the product they should be looking for not only the the sales price of it As Andre alluded to, the sim sports gross margin is a little bit lower than the average here, but it's not pulling it down significantly. It was in the high 30s, he said, which is true. And then gross margins, other impactors like shipping and stuff like that is more on a normal level this year than it was the year before. And then you can see the yellow lines here. This is just to put a little bit of emphasis on the impact on the gross margins from foreign exchange rates. We do all we can, of course, to If there is an increase of price due to foreign exchange, if there's an increase of cost prices, then we turn around and transfer that over to the customers as much as we can. That's just the nature of doing business. However, there's a lag in that function and that lag in time turns out with the effect that if we see a lower cost of the Chinese renminbi, then that turns into a higher gross margin for us. That's just the system of it. It's a systemic relation here. It's not one-to-one. It's not quarter-to-quarter. But over time, we have seen that if the cost price in the foreign exchange rates are lower, then that turns into a better gross margin. We pay our bills in US dollars. However, there is a built in system so that if the renminbi is changing, then our cost price in US dollars is also changing. It's it's built on. There's a time lag built in, so it's not again month to month or quarter to quarter. And there's a threshold system built in so that we don't see all the spikes in either up or down what direction direction. But as you can see here with the link, there is a link between forex and the gross market. Balance sheet and this balance sheet you're looking at here. is from March 31st, meaning it's before the capital raise that we did here in May. That's an important measurement here. We had $5.3 million in the bank at the end of March, which is down approximately $2 million versus December 22. We are still investing in our balance sheet here. We've invested $5 million in Q1 in the headquarter and we invested roughly $1 million in R&D. And we will continue to invest in both. You can see our current assets from there. I just report that our measurements on the current assets, meaning our inventories and accounts receivables are stable. Inventory is a little bit higher here at the end of March than they were at the end of December by roughly $2 million. I believe that's only natural because we have changed or we are shifting into the into the SIM sports segment, which is a segment where we need inventories on our own. And again, this is before the capital raise, $20 million gross, $17 million net, which are flowing into our accounts as we speak. And of course, they will have an impact on the balance sheet. Financial strategies, not so much change here. We are in a period now where our margins are high, at least at the higher end of what we've seen before. We're adding customers. As Andre said, we have right sized the organization. It's slimmed down and we are performing well on our balance sheet measurements, meaning that what we need now is top line growth. And that's what we're working on. And with that, Andre, I'm sending it back to you for a summary.

Thank you. So just to sum up what we talked about the last 30 minutes, we are at the moment seeing a good end user interest in both liquid cooling as well as sim sports. We are seeing signs of stabilization in the sense that we can see our customers are keeping us busy again. As always, we do not have a long visibility. And of course, coming from, let's say, a low place in terms of revenue, we are, of course, more conservative than we used to be. So we need to see and hopefully we will see this carrying on into Q3 and Q4. And we can, let's say, rightfully claim that the business is back to where it should be. But for now, at least it looks good. We focus on scaling the Simsport business, both in terms of products as well as end-user connection points, so resellers, distributors, etc. We now have the rights issue under our belt, providing the needed liquidity to complete our headquarter. We optimized our cost base. Well, that's actually almost a year ago, but now we're seeing the full effect. And we focus on being even stronger and nimbler and efficient than we were before. We for now maintain our guidance, which is five to 15% top line growth and an operating income between two and $4 million. We still believe that our long-term average growth expectation should be around 15% when the markets normalize and We don't see why we should not be able to at least maintain that for the years to come. So with those words, that was the Q1 presentation, and I think we'll go into a Q&A now.

Yeah, let's do that. And Alex, the operator, if you can handle if there are any verbal questions for us.

Thank you. As a reminder, if you'd like to ask a question, you can press star followed by one on your telephone keypad. If you'd like to withdraw your question, you may press start followed by two. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Yiwei Zhu of SEB. Your line is now open. Please go ahead.

Hi, good morning. Thank you for taking my question. I have two questions here. and firstly you mentioned a new sales strategy for simsports would you please elaborate a bit on this and secondly the expectation for a long-term growth margin of simsports and do you see any margin potential when the business is getting more scale so on the first topic i'm not going to elaborate more on it as i said during the presentation we will get back to that and

In terms of margin for the simsport, it's still too early to say. As I just explained, we're doing all manufacturing in Denmark at the moment, and at least I don't know of any more expensive place to do it. So I would say, and as I've said before, I think that we should be able to be at least the same place as we are with liquid cooling. It's still a very new business for us in the sense that we are still trying to figure out where is the sweet spot in terms of margins. When you have resellers, do we have one reseller link only? Do we have retail in between? How much do we sell online ourselves, etc.? So it's still very much, let's say, in motion where we should be. But as I said before, to me, being in the high 30s is a good start considering Yeah, considering everything I would say.

Okay, is it possible to say the manufacturing pattern for team sports, where they are located?

So, as I said on the call in Malaysia.

Okay, great. Thank you. I'll jump back to the queue.

Thank you. As a reminder, if you'd like to ask a question, you can press Start followed by 1 on your telephone keypad.

All right. OK, Alan, do we have any further verbal questions? Yeah. Let's move on with the written ones.

Sure. And Andre, for your benefit, there's a refresh button open, right? I see. Can you take question number one, maybe?

Yeah. So there's actually three questions in number one. Number one, how much of a threat to the long term value creation of AC tech is the expiry of key patents slash IP in the coming years? I don't really think it means anything because first of all, the reason why we why we initiated these lawsuits was because especially a couple of competitors pretty much did as they pleased. And they have been copying us, I would say, for the last 20 years. So I don't think it makes any difference. And that's also why we, of course, put the cases to rest. If we had won the cases, we would have gotten some money, yes. But in terms of the competitive landscape, I don't really see any major difference at all. I think our IP, so our patents, in the beginning, they were super important to us. But right now, I would say our key IP is our supply chain, our manufacturing, our relationship with our customers and for sure our quality. It doesn't take a lot of Google searching to figure out that several of our competitors have done field recalls because of quality issues, etc. And I don't want to exaggerate, but I don't think we in the 20 years of our liquid cooling business ever did a product recall. So I think our our customers are willing and able and happy to pay for the quality. In terms of SimSport, it's simply too early to say anything. And we for sure have not seen a slowdown. As I just said in the presentation, we are still working on fulfilling the backlogs. So we are not at a point yet where we can say we have fulfilled all orders and now we need to see what happens. So it's simply too early. um in terms of what measures does the board take to put the future focus rather on shareholder value creation than maximizing non equity salary i don't understand the question number one and number two i cannot speak on behalf of the board i believe so that's something you have to talk to the board about um Then we can sort the questions, Peter. There's one about litigation costs you can take us, but in terms of order intake, I don't really understand the question. We had a revenue of $1.3 million in the quarter. Then there is number four, congratulations on adding the new significant customers with shipping from Q3. Have you lost any customers in the quarter? No, we have not. There appears to be a lot of moving parts in the gross margins. If you assume stable currency, do you see any material change in gross margin going forward? It's an impossible question to answer. Number one, the currency is not stable. Number two, Our bill of material is huge and there are parts from more or less all over the world in the product. So, you know, no, I don't see any change. But there are a lot of wheels in motion all the time. And I think going 15 years back, our margin has hovered above or just below 40. And that is our goal. And that's still our goal. Then there is around the new headquarter sale and lease back. Right now, as I think everyone knows, the sale and lease back market is not attractive at all because of the high interest. And I have no intention whatsoever to commit to a 20 year old lease or a 20 year lease with an inflated interest. Why would I do that? The point is, We are talking 16, 18 months out in time here. It's very difficult. At least I'm not able to predict what's going to happen 18 months out in time. What we will do is we will look at the options. You know, will we do a sale on these bags? Will we do a mortgage? If we do a mortgage, we will also free up a lot of cash. So it's too early to speculate one and a half year down the road and We could do the opposite exercise, just look 18 months back and see where we were compared to right now. So I'm not going to speculate in that. We will do what we think is best at the moment. And if we commit to something that involves two or three decades of commitment, then for sure we will not do it until we are 100% sure that it's the right way to go. Then... So there's a new question on the headquarter. If we've had any valuation upon completion, I think there is a misunderstanding. The whole point is it's not complete. It's complete in 18 months from now. So yeah, the question does not make sense. Peter, then there's one on OPEX and there's one on litigation costs.

I have them, yes. And I said during the presentation the litigation in this quarter was below $100,000 and I just looked it up. It's actually below $50,000 for the quarter, so much lower than what we've seen for a long time. And then there was a question about should we expect the Q1 OPEX as the new average level going forward? And there are a number of impactors to our OPEX. And we have mentioned them earlier today also. One is litigation. We don't have any current plans of going into litigation again. So that would indicate a flat line on that. And the other one is headcount. Two thirds of our costs apart from litigation, is headcount related. So we can just look at the number of new heads coming through the door to see how the OPEX is going up and down. And we don't have any plans of adding or laying off, for that matter, staff at this point. So in totality, yes, I expect that the current level of OPEX is the one we'll see in at least the near future. And then I just hit the refresh button Question number nine, Andre.

It's whether we see any risk in the completion of the headquarter being bankruptcy of the construction company, legal matters with the authorities and so on. No, I think the best way to guide you is there is a prospectus that has just been signed by half the lawyers of Denmark. where we include the risks and everything around the business. But if you don't want to spend your time on that, then the short answer is no. Of course, I cannot predict the future or the future, but no, I don't see that.

I agree. I have been hitting the refresh button for a number of times now. And nothing else is coming up. That means that this ends the Q1 presentation of ACETech. Thank you for now and thank you for your interest in ACTING.

Thank you. Thank you for joining today's call. You may now disconnect your lines.

Thank you for your interest in ACTING.

Thank you.