Asetek A/S

Ladies and gentlemen, thank you for standing by. Welcome everyone to the ACETEC ASQ4 2023 financial report and earnings conference call. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. You can also submit questions via the Q&A tool on the webcast located on the bottom right hand corner of the interface. Thank you. I would now like to hand the call over to Peter Madsen, Chief Financial Officer. You may begin your conference.

Very good, sir. Thank you, operator, for handing over the microphone to me. And thank you all for coming to this ASQ4 2023 financial report and earnings call. We're going to cover the fourth quarter of last year, yes, and the annual report for 2023 also. My name is Peter Madsen. I'm the CFO. I have here with me Andre Slot-Eriksen, who is our CEO. Good morning, Andre. Hello. and we'll be covering this whole material here. Our board, they met yesterday and then again this morning, and they approved the messages we sent out earlier today at the report. I will soon hand over the microphone to André, but before I do so, I just have a matter of general housekeeping here. As you all know, we were setting up the delisting from the Oslo Stock Exchange early in the year, and all those approvals and assessment that was related to that have been approved. And we will delist this year in Oslo in early April and have the last trading day in Oslo on March 26th, 2024. And for most of the shareholders, that doesn't mean much because they are already registered in Copenhagen. It's fine. However, there are still a number of there is still a number of shareholders who have not yet moved their shares from Oslo to Norway. And we understand that there is some understanding between some shareholders that this transfer of shares from Oslo to Copenhagen will happen automatically. That misunderstanding typically comes if a minor shareholder calls his own bank advisor in the local bank, typically in Norway, and then the bank advisor doesn't know the full details of the transaction. So it's just important to be aware that the transfer from Oslo to Copenhagen will not happen automatically. And if you do decide to transfer while it's easy, that means before April 3rd, then contact your bank advisor. Let them know that you want to transfer from Oslo to Copenhagen. Let them know that if they believe that the understanding is that it will happen automatically, then that that belief is wrong and be maybe a little bit more insisting that you would normally be with your bank advisor. What you need to do is to tell them to transfer. You will need an account here in Denmark. That happens to the bank. It's not dangerous per se. It's just having a foreign depository account, which is outside of Norway, for example, just like any other foreign shares that you may have already. It should happen automatically. If they start talking about a fee to the VP authorities, let them know that up until April 3rd, ACETEC is paying that fee. It's 1,000 Danish kroner. We'll pay it for you if it happens before April 3rd. And that should drastically reduce the fees that the bank is levying on this whole thing. If you do not move your shares, then, of course, the share is still yours. You can still vote. You still own a part of Asetek. Nothing is changed in that respect. However, you cannot sell or transact the share in a stock exchange after that date in early April. So it's going to be more cumbersome and you will most likely, I would anticipate more to move the share at some point later if you're not doing it now where it's easy. later on you would need to contact your bank and again or your broker and insist that this happens or if you are a shareholder with that is registered in name then we can see your name on our shareholder list and then you need to you can contact us and we can help you the problem is that many shareholders are owned many shares are owned through nominee accounts if your bank you hold it in your bank and your bank holds it in another bank and and up the chain it goes uh and we can only see the top level of that chain so in short if you're confused and you still haven't done anything either look at our website or call our investor relations people and they can help you that was the housekeeping and then we change gear to something more interesting and that's the highlights

Yes. So talking about Q4, the revenue was roughly $16.5 million, up 75% compared to the same quarter, 22. Gross margin of 47% compared to 41 in Q4, 22. Adjusted EBITDA just north of $2 million compared to a loss of $0.6 million, same quarter, 22. SIM Sports revenue $2.2 million in the quarter compared to 0.2 comparable year. And then our current look at guidance looks like a minus five to plus five compared to last year with an adjusted EBITDA margin of 12 to 17%. We will, of course, get back to that. If we look at the full year last year, it was a very strong year, our second highest year ever with $76 million revenue up 51% from 22. And a full year EBITDA of $16 million versus a loss of 0.8 in 22. We launched 54 new liquid cooling products and 37 new sim sports products. That's a lot. We passed 11 million units liquid coolers since the foundation in 2004. It is actually since 2006 because that's where we started to ship these products. But of course, it's also since 2002 where the company was founded. We also listed on NASDAQ Copenhagen earlier in the year last year. and swapping to this year um we are broadening our view a little bit we'll get back to this in a second also with a value offering in the liquid cooling market and on the sim racing side we are basically uh continue the journey we on by expanding the products and our ecosystem If we look a little bit on the growth, it's basically both the liquid cooling as well as the SimSport product range. And I would say that roughly 10% of our revenue is now from SimSport. I think that's quite important and a quite impressive milestone to reach only in the second year of operation. If we look at the quarterly volatility, I would say business as usual, the quarters go up and down. And that's also why we need to assess on an annual basis, because diving too much into each individual quarter for our business, at least at this point in time, simply does not make any sense. If we look at the 24 guidance, traditionally, for those of you who've been with us for many years, what we say in Q1 rarely ends up being the way we end the year, for good or for worse. But that's simply because of the low visibility we have, and we get the visibility from our customers, obviously. So it only reflects their visibility as well. So therefore, at this point in time, we are guiding what we see from our customers. But as the slide I just showed you, the quarterly volatility is high. So bear this in mind. But we do see some signs of improvement. But we also see very mixed regional pictures where in some regions sales are strong, some regions it's weak. And I would say another way of saying what's in text here is that some of the large quarters we had last year, if I could pick and choose, which I cannot and I can also not influence it, Then, of course, I would rather have seen some of this spill over in 24 because for sure some customers bought more than they have sold. So there are elevated inventories with some customers. So the guidance is actually not necessarily a reflection of end user demand, but more a reflection of what some of our customers have in inventory. Therefore, the entire picture for the year, we are looking at minus five to plus five at this point in time. The liquid cooling revenue, for the reasons I just said, it looks to it could decline. It could also be flat. Of course, it could also grow. But this is what we see at this point in time on the same sport side. Again, it's a very small business. So, of course, that's unpredictable as well. But at this point in time, we believe in 40 to 60% growth. And then for the full year, we expect an EBITDA margin ranging between 12 and 17%. And the reason there is a range is, of course, that's highly dependent on revenue. We have a long-term growth ambition of roughly 15% per year, and that is still our goal. Next slide. So what we do is essentially gaming hardware. On one side, we supply liquid cooling to people who are building their own PCs and to gaming PC OEMs. And then on the other side of the table, if I could put it like that, We are selling sim sports products, which is for sim racers, enthusiasts, car enthusiasts, casual gamers, etc. We sell to all kinds of segments that are interested in racing. We have a more or less typical setup in the way we are spread out over the world. We are on the West Coast in the US. where we have sales, product management and some management. And that's, of course, because still a lot of our customers are there. We don't have that much engineering. We basically have no engineering left in Silicon Valley, basically because all our big OEM customers move their R&D to Taipei or to China. We have my CEO, John, in Austin, Texas, close to HP and Dell. And here in Aalborg, Denmark, where I reside, we have uh yeah that's a long list product management r d of course we have some manufacturing quality order execution branding marketing finance and management peter is here as well and then in shaman in china we also have a high degree of product management we also have some engineering there sourcing of course um our outsourced manufacturing quality order management and finance and then in taipei We have sales and product management and some level of engineering capabilities as well. And the reason why Taipei is interesting here is that I don't dare to say all, but I would say more or less all of our current customers on the liquid cooling side has a big presence in Taiwan. Jumping into the liquid cooling, what we can see here on this graph, is that, again, we have a strong quarter. We can also see that the liquid cooling business has been profitable, highly profitable for many, many years. And for the last four years, we have accumulated $81 million from that business. Going into the year, three years, Yeah, four years. Thank you. Going into 24. We are in 24. But looking a little bit about the product release, and the interest in our products are as they have been for a long time, our customers are launching new products. So in the fourth quarter, we were shipping 12 new products And basically in this quarter that we are in, we are executing on shipping 10 new products as well. We are also investing still in product development and of course branding, but also product development. There's still a lot that we can extract from these technologies. So for sure, there's still a very high activity going on with our various customers. We have a stable customer base. We are currently shipping to more than 20 OEMs, top 5% at roughly 90% of our revenue in 23 versus 85 in 22. And there's of course a lot you can read into that statistic. And our ambition, of course, is to increase a number of customers and diversification. But we can just say that our big customers are just executing very well. So even though we have a lot of customers, the big ones just shine. A new thing that is coming up. A new thing that's coming up is that we have a lot of also our largest customers, basically asking for value products, and they have done so for many years. We've always been of the opinion, and we still are, that we cannot compete with low-end Chinese copycats. So therefore we had said no, but what we can see from our customers is that they are actually willing to pay more for our quality products. um needless to say we cannot charge a higher gross margin than the cost of the product that makes no sense um so we have had to look very hard on what we can do and we have done so and we believe there is a business opportunity here towards the let's say more value-oriented markets it could be china it could be india but it's also to some extent the us where we have you know, a low end segment that we have never touched. And what our customers are letting us know is that we are losing a lot of business by not being willing to look at it. And to some extent, we may actually also ending up losing customers if we don't react to it. So that's what we have decided to do. It's still very much work in progress, of course. We expect the full effect next year. It's not really any reflection of price pressure at all because our high end product will keep costing what they always cost. That's not true, of course, because we have many different variants, but it has nothing to do with that. And there's also no cannibalization because it is indeed different segments. That is something that is brand new for us and we're looking forward to executing on and of course, keeping you informed about. Next slide. Just to sum up what I basically just said in less a word. We are of course always looking to extend our leadership and ship more products and increase our revenue. That's of course the goal. And the strategy is also unchanged, actually, in the sense that we keep focusing on a high quality and high customer service level of customer service. And by focusing on these two, we can also charge a good price for products that our customers are willing to pay. And then on top of that, we are entering this more value-oriented market. I think I should perhaps stress that although it's a value-oriented market for us, it's still the higher end of that market. Moving over to SimSport, we released eight new products just in Q4, two button boxes and six different rims. There has been a very high level of execution in 2023 on the Sims 4 side. We released 21 new products. And by 20 new products, I don't mean screws and washers. It's real products. And we keep the pace up. We have a lot of accessories coming here in Q1 2024. The revenue last year was $2.2 million, basically $2 million. Sorry, the revenue for the quarter was $2.2 million versus $0.2. So that was a nice growth to have, of course. But I would also say in 22, there was a lot of execution problems. So not so much demand, I would say. It's more a question about we having products available. And then the full year revenue of 7.2, I think that's a pretty decent number in our only second year of revenue. From my perspective, the strategy of focusing on quality and performance and a good customer service over price, that is, has paid off. And our lifelike approach to how a real race car feels is also paying off. And we see that. So that's nice to see the reward for that. Our ambition, of course, is to take pole position in this market and keep building market share based on our open ecosystem. I would say something that has changed or it has not changed, but something that changed relative to when we decided to go into this market is that we had especially two Chinese companies entering and they're actually doing pretty good. I'm not too concerned about them because their strategy is, I would say typically Chinese, their focus is more on price and perhaps on the expense of lower performance and lower customer service. So to me, I don't see it as a threat, but I do see it as an opportunity and a little bit change of our strategic focus in the sense that Our La Prima product series two, three years ago, the cost of what we are selling at now, let's say around $1,000. That was a steal at the time. If we had that bank, then it was a really, really good value where because of these Chinese, primarily Chinese companies entering, I would say that The prices have gone much lower than that, which have led us to, let's say, develop product for that segment because we are fully capable of doing that. And we believe we can still compete. So that is something we are looking at as well. Pretty much the same as on the liquid cooling side. Actually, we have a high end business that is paving the way. for our brand. And then we will get hopefully a much higher volume business in the lower end of the market. And that is basically what we're focusing on right now on the sim racing side. There is a slide here, but I basically said everything that's on it. So I suggest we move on to the financials, Peter.

Yep. Thanks, André. Interesting stuff. Financials, let me start with the income statement, as we always do, starting from the top. $17 million almost revenue in Q4 2023, over $9.5 million the same quarter last year. That's 75% up, and obviously that's an impressive increase. However, let's not put too much emphasis on quarter over quarter, at least on the top line here, because as Andre also said, There is a great deal of volatility between the quarters and Q2 2022 was a very weak quarter. $76 million for the year's total over 51 last year. That's 50% upwards. Gross profit $7.7 million in this quarter versus four last year approximately and 35 almost for the years as a whole. versus 21 for 2022. I'll come back to the actual percentage on the next slide. Operating expenses of $7.6 million in this quarter versus 5.8 last year. That is an increase of certain significance. We have been super busy with a lot of good stuff in Q4, extraordinarily busy, I would say, both in terms of product development, but also market development, trade shows, for example, what have you, all kinds of interesting stuff for building future opportunity for revenue. However, also our supply chain has been fairly expensive in the sense that we've been moving some of the manufacturing capabilities from Denmark to other places. And that has been all adding to this quarter being significantly more expensive than we have seen in recent quarters. Again, here we are comparing with the Q4 of 2022, which was really low. We had just come out of a significant cost cutting exercise at that point. So we had cut everything to the bone at the end of 2022. If we take a look at OPEX for the full year, then, and we allow ourselves to take the special items related to the rights, not to the move of the share from Norway to Oslo, if we take that out, then we actually see it at decline in the OPEX of 7% between 22 and then over to 23. So we are happy about that. That brings us to an operating income of just about a million dollars in the positive for Q4 this year versus pretty much $2 million in the loss for the same quarter of the year before. And $9.4 million for the full year of 2023 versus the loss of 5.4 the year before. 9.4 is a tad bit over what we had guided to. Of course, we are happy about that. And then that brings us to the income lines below the operating income. I just want to make a quick note on the foreign exchange loss, which was $1.3 million in the last quarter. and $1.8 million in the same quarter the year before. That comes from a mechanism on the balance sheet where our investment in the property, the new domicile, is not adjusted for foreign exchange changes, whereas the construction loans, which are monetary loans, they are adjusted for foreign exchange rate adjustment. And it just so be that the dollar versus the Danish kroner took a nosedive just at the end of both 2022 and 2023. And that is what you can see here. Since New Year, the dollar has come up somewhere somewhat again. That brings us down to income before tax. Let me just look at the year as a half nine and eight and a half million dollars in the positive. for 2023 versus $5.9 million as a loss in 2022. The income tax is relatively high. We can thank our American friends for that. They have imposed what they call a guilty tax. And it's just so be that that calculation this year is not to our advantage. And that brings the effective tax rate for this year up towards almost, I think it's 29% or something like that. Income for the year, $6 million for 2023 versus 4.3 in the negative a year before. I promised you a comment on the gross margins. They are continuing to climb upwards for the full year. In 2023, we saw combined margins of 45.5 versus 41 a year before. increase has not you can see the increase the year before was even more was even more clear And that was the year before in 2022. It was driven by foreign exchange rates. You can see we're trying on the yellow line in the bottom here. We're trying to indicate the trailing three quarters of interest on foreign exchange rates between US dollars and CNY. We are buying our products primarily in China and we're selling them in US dollars. That's why we're showing you that in foreign exchange we crossed there. And they have sort of flattened out, but they're still working to our advantage. And that does help our gross margins. Apart from the impact from the foreign exchange rates, we have seen better cost prices and we have optimized our products simply out of component from a component point of view to optimize the cost price there. Yes. SimSports is still not showing impressive growth margins, I have to say, but we are working on that. It's a new market. It's a new product. There's a lot of challenges there, but we have, I believe, light at the end of the tunnel. So we continue our work there.

I can associate a comment with that because to me, it's actually impressive since everything is built in Denmark. And I think that's the biggest reason why the growth margins are like they are. And I addressed it before, that for as long as we build products in Denmark, for as long will the gross margin also be lower. On the flip side, as long as we build them in Denmark, we make sure the quality is where we want it to be before we outsource it. And basically these days, and in Q4, the system is we start building everything here. It serves two purposes, to get the quality right, to get the manufacturing flow right. but also to be able to get to market sooner. Because if we build everything, all new products in Asia, then we have to wait several months before they have been on a boat to ship them out. Whereas if we have the components here, we can start shipping the day we are ready. So that's the two purposes. And then the third thing we do is when the technology is mature, then we transfer production to China or to Malaysia. And that is obviously an ongoing effort because we have new products coming all the time. But for example, our pedals are now fully outsourced to Malaysia, I believe, which means that the cost price is an absolutely known quantity and not something that varies because we are building in small quantities here in Denmark. And then next up are the steering wheels, the wheelbases, etc. So I'm pretty confident on the gross margins, actually.

Thanks for assisting here. On the balance sheet, a couple of comments. We had $9 million in the bank at the end of the year, which was significantly helped by quite good performance on our operating, on our working capital. In Q4 alone, we had income from operating income, not some cash flow from operations of $4 million. We then invested $2 million primarily in the new domicile. uh and we also took up a little bit of loans from the construction load for the year as as such we we took in 16 million dollars in cash from the operations we spent 27 million dollars of which around 23 is on the on the construction and then of course we took in you know new capital of 16 million dollars and the net financing uh cash flow was was 12 mean that we net for the year could pay down four million dollars on on on the loan on the construction loans um we have a solid booked equity at the end of the year 66 million dollars and then we have current liabilities which is primarily construction loans and those construction loans then then over summer, fall timeframe, we will refinance that and it will become standard mortgage loans as the plan is for now. Quick word on the Development Center HQ domicile. It's all progressing on schedule and on budget. So we're happy to move up there fairly soon. We are starting all the practicalities around the moving fairly soon. That means that we can move in over summer. The official date, I believe, is September 1st. It's going according to plans. As you know, we have excessive space out there. We have rented out about 20% at a fairly good rate the area here so we're happy about that we still have a little bit of room uh that we are then considering whether to uh it's a balance act whether to rent it out and have more people or to keep it for our own growth opportunities we will see how that goes when the building is done when the mortgage is done then of course we will continuously re-evaluate whether to sell it and lease it back or to keep it on our own books that is that is an ongoing discussion Financial strategies, no big changes here. We are continuing our work to optimize. When, as Andre also alluded to, when the quarters are fluctuating up and down on the top line as they do, then of course that comes with some work and some challenges on the working capital. But I actually believe we are fairly good at managing that. So, but general optimization, balance sheet optimization is going to be a big thing this year when we see the effects of the refinancing and the mortgage and all that good stuff. And then Andre, back to you for a summary and outlook again.

Yes. So the summary for the year, we saw a strong end user interest in both our product lines. If you put it like that, we are looking into a year where we are at this point in time guiding between minus five to plus five or flat if you want, based on the customer feedback we get right now. We expect an EBITDA margin between 12 and 17. We are expanding our liquid cooling market to look at more value oriented markets, not to be confused with price pressure. And then we are continuing, of course, growing our simsports business and think just the one note a common investor question i get actually i don't get it so much i typically read it somewhere else that people are worried whether the sim sports business is just another data center adventure that took us 10 years and where we lost a lot of money I think at least I take some comfort in the fact that in 24 months from pushing the start button, we have matched or exceeded the best year ever that we ever managed to do in the data center business. So at least I'm comfortable that this will turn out to be a great additional business to the liquid cooling business.

right thanks andre and then we'll go back to the operator to see if there are any questions on the phones i just want to make sure that you are aware that if you want to place a question and you don't want to call in then you can type in a question on the actual web that you're watching operator over to you thank you at this time i would like to remind our participants in order to ask a question please press the star followed by the number one on your cell phone keypad

You can also submit questions via the Q&A tool located on the bottom right hand corner of the webcast console. We'll pause for just a moment to compile the Q&A roster. There appear to be no teleconference questions at this time. Mr. Peter Madsen, Chief Financial Officer, I'll turn the call back over to you.

Yeah, thank you. All right, we will turn our attention to the questions that come in through the web. Andre, can you read yourself?

Yes. So the first question is, do the recent SIMSport price adjustments signal lower demand or lower margins going forward? Or is this offset by increased quantities and rather increased demand? And then there's a second part of the question that relates to your shares only. We will reach out to you and hook you up with a solution. But to answer the question, we've had a recent price adjustment, especially in the US, so downwards. It has absolutely nothing with demand or lower margins to do. It's simply an effect that we now have hops worldwide. It's a big word, but we have hops in Asia and in the US, et cetera, that have been, that's made it possible to, let's say, equalize, harmonize pricing a little bit better across the continents. Then the next question is what the gross margin is on our paddles. Pedals, yes. We also have paddle shifter pedals, but I assume it means pedals. After the production has been transferred to Malaysia, we cannot talk about that for several reasons. One of them I simply don't know. And number two is that we have not seen the effect of it yet. So it's all theory. But for sure, our prices are set accordingly. So, yes, I am happy with it. And if I end up not being happy with it, we will just adjust sales prices. I don't see anything. a big price pressure on the simsport side. It's an interesting question because what we are trying to do is, of course, we look at the competitive landscape, we look at the performance of our products, We look at their availability and then we try to set a price that we believe is competitive enough at the same time as making, let's say, our usual growth margins. But of course, we cannot set prices according to what it costs to build them in Denmark. So we have to anticipate something. But I would say we've been doing this for 20 years, manufacturing in Asia, that is. So I'm pretty happy with it. Yes. And then, yeah, I think that's a question for you.

Yeah. The question is whether we can comment on the expected decline in adjusted EBITDA in 2024. We did an EBITDA in 2023 of just around 20%. And now we are guiding 12 to 17% for the future year. And that decline is a combined effect of many factors. One of them is that the top line is seemingly flattening out. One is that the gross margins with this new approach with the value products may be squeezed a little bit. The gross margins may at least we'll see that needs to develop over time, that whole business concept there.

And then, of course, it's the addition of... It will have a negative effect on gross margins. It would be naive to think anything else. And the reason is that, as you can see, in the last quarter, we extracted almost 47% of gross margin and of course we cannot do that in a value segment so we will have to see the long-term effect because in reality this should be additional revenue not instead of so so what the mixed is going to be we just have to wait and see i have to wait to see that and then in 2024 of course we continue our investments but in the in the in the operating side of things um

And since what the plans we're looking at right now, that means that the development efforts we do this year, that's more market development, at least percentage-wise, than it is product development. And when it's market development, then we cannot capitalize it on the books. That means that the capitalized amount is being less and our objects are growing. So that all those things together do push our EBITDA margins at least temporarily under pressure. Andre?

Yeah, there are many small competitors in the sim sports market. Do you forecast a consolidation in the market? And are you actively looking at M&A? So that's two questions. So the first one, yes, there will be a consolidation, no doubt about it. And I think that the Chinese competitors I mentioned before, they are going to take out some of these smaller players, that's for sure. In terms of M&A, I think technology-wise, we are doing pretty well. We have some very smart people, and we have taken out a lot of new patents, actually, on the Simsport side. So for us to do any M&A, it would be, now let me rewind the tape. Three years ago, I think it was, we bought a small company, and we bought some IP of another company, and that was to get a head start. But it was not a business we bought. So I would say that if we should be looking at more M&A in the same side, it would be to expand the business, not to acquire any technology, because I think we are doing pretty well in that area.

Very well, that seems to exhaust the list of questions. and as always should you have any further questions then write to us at investor.relations at acetech.com we have actually beefed up our investor relations capabilities in-house so we should be even more ready to to answer your questions with that thank you for your interest have a nice day thank you thank you this concludes today's conference call thank you for participating you may now disconnect