Asetek Half-Year 2024 earnings conference call. All participants are currently in a listen-only mode. Later, we will conduct a question- and- answer session. To ask a question, if you are dialed in, please press star followed by one on your telephone keypad. A s a reminder, this conference is being recorded. At this time, I would like to turn the call over to Peter Madsen, CFO. Please go ahead. Thank you. Yes, welcome to this Asetek earnings call. Our board, they met earlier today, and they discussed, obviously, and then approved the second half year, first half year 2024 report, which is the basis for the presentation here. As the presenter said, you will be able to ask questions verbally later in the call, but also you can find on your application here a place where you can actually type in questions that we'll then address later at the same time as the verbal questions. With that, just saying that my name is Peter Madsen, I'm the CFO. I have here in the room also André Eriksen, who's our CEO. Hi, André. Hello. He will actually take over the floor right away, starting out with the Q2 2024 highlights. Yes, good afternoon. Diving right into the highlights of the second quarter, the Q2 group gross margin landed at 45%, same as the last, same quarter last year. We have seen a weaker than anticipated market rebound, and an increased price pressure is also impacting our liquid cooling market at the moment. SimSport business is growing according to plan, and our updated group revenue from first of July is still what we stick to. Next slide. There are multiple factors that is impacting us at the moment. In the liquid cooling, we do still expect a decreased revenue in percentage between 35% - 40%, which corresponds to between $42 million and $44 million revenue for the year. As I just mentioned, that's because we see a weaker than an anticipated market rebound. We have a customer who's leaving the market altogether, and then we also have a customer who's having liquidity constraints, which is basically affecting their ability to place orders with us. So all in all, that's, that's what we are seeing. As it is right now, and, and it's always been, we have seen big volatility and, and let's say, a, a very weak ability to, to look long term a nd of course, at this point, that also means that in 2025, we also enter the year, we expect to enter the year with an increased uncertainty. O n top of what I just said, we also have a customer at least that has told us that they're going to introduce dual sourcing. W hile that's of course annoying to be a part of, there's not really a lot we can say about it, in the sense that obviously we have at least dual sources on our entire supply chain as well. So I guess it's not an unreasonable thing to do, but of course, it's coming at a bad time. We also see, of course, a gross margin impact from low-cost competitors in China. A lthough I believe that nobody can manufacture a cooler cheaper than we can, then for sure, as we have the majority of our cost base in the western part of the world, then of course, it will, we will need to have higher margins and thereby also higher prices. We do expect growth to be back in 2026 and onwards, and again, this is with big uncertainty. It could be sooner, it could be later, but this is what we're looking at right now, and that's based on... After all, we do have a couple of new customers, and we know from history that no matter the size of the customer, it will take them a year or two to get up to speed. We do expect the liquid cooling segment on its own to be profitable for this year for sure, and also beyond this year. On the SimSport side, we maintain our expectation of a revenue between $10 million-$11 million for the year, which corresponds to somewhere between 40%-60% growth. That is, of course, and when I say of course, that's because that's the reason why we're investing in this, that we expect the growth trend to continue way beyond 25. I believe at this point, we have an attractive product range. I dare to say we have a superior customer service, and I also believe in the high end, we have a well-established brand by now. We are continuing our investments into the development of new product sales, marketing, branding, essentially to capitalize on whatever opportunity there may be out there. I n the group margin expectations that I just mentioned, I just want to highlight that, of course, SimSports is embedded therein. Just very brief on the guidance. We maintain our guidance from early last month. I don't want to repeat it, but on a group level, it's between 52 - 55, and adjusted EBITDA margin of between 1% - 4%, b ecause of that update to our guidance, or because of the reason of it, we initiated some cost reductions that we also talked about at our earlier guidance. We expect it will take full effect from around Q1 next year. It will have, we expect, around $3 million of impact, and it has been the right sizing the organization on all levels and in all geographies, but especially in the U.S., we are scaling down. On the bank financing of basically the new headquarters, we have been in a good dialogue with the bank, and we have gotten a new and updated covenant that kind of reflects the new business situation. If we look at the world map here, that is as of how it looked in Q2, but there will be changes. Mainly, after the changes, we are down to, roughly, 105 employees, where we were 130 before that a nd, on the U.S. side, we are dialing down most of what you see on this map a nd, the main reason is that the main part of our OEM customers have moved to Asia in one capacity or the other, and therefore, our U.S. operation is of less relevance than it used to be. Yes. If we dive into the liquid cooling segment in its own, then we continue to try to be the main innovator and the main performance guy when it comes to liquid cooling a nd what you see on the picture here, it's also been out in the press release, is our newest cold plate technology, which is based on 3D printed metal. I t is optimized by AI, and that sounds so fancy, but what it really means is that when you can 3D print something, you have a much better ability to be creative in your design than when it's something that's done with traditional machining. So therefore, AI in this complex geometry has been quite helpful. We have done it in partnership with Fabric8Labs, who is a leader on the metal 3D printing side. It was shown to customers first at Computex earlier this year. We got a lot of interest from it, and we expect the first products to be ready in December this year. If we look at the profitability of the liquid cooling business, as I said before, it's something we expect to continue to see, that although it's shrinking, we still believe that the liquid cooling business will be a solid money maker. We started shipping one new product in the quarter. We expect to have six new products starting to ship this quarter. A t the end of Q2, we were shipping to more than 20 OEMs. Our top 5 customers represented 92% of the liquid cooling revenue. So yes, we have reliance - we are relying on a few customers, for sure. Nothing new in that, other than, of course, now when we see the impact, it would have been nice to have 500 customers b ut that's the situation. Diving into the SimSports, although the numbers may look different, we actually believe that we are scaling up according to our plan, and I'll get back to my little comment before. But the revenue in Q2 was $1.7 million versus $2.4 million the same quarter last year. The first half revenue is 3.9 versus 3.7. Then the speedy investor will, of course, ask the question, "How can that be, 40% growth?" As always, it's very difficult to judge us by the quarters because small things can impact them. W hat, in fact, happened in the same quarter last year was we shipped our biggest order to- date of, I believe, $1.2 million, to fulfill a channel, and it had to be done in one because it was a shipping container. So therefore, it actually had a very big impact that should have been spread across the year. So that's just an example that you cannot really compare the quarters to judge whether we are on track for growth or not. We are also getting closer to profitability by the day. Of course, our growth margins are still reflecting a scale-up phase a nd to remind people who don't understand what that means, when we launch new products, typically, they are built in Denmark to begin with, because that's here where we have our engineering, and that's where we have the resources to fix all, let's say, teething problems with new products. Denmark is not exactly a cheap country to manufacture in, so therefore, until we move everything out, we are seeing lower margins. So that's, that's to be expected. Our margins are improving. We see it, and we feel it in the speed as we are able to outsource the products to China and Malaysia. We started shipping a bunch of new accessories here in Q2. A few of them, just to mention, a few of them, LMP handles, Le Mans Prototype handles, Formula suede handles, steering wheel button kits. We have a huge software upgrade for our customers, and although software is something our customers get for free, together with the product, it's something we invest heavily in. For those of you who have followed our reviews, you know, our software have been a little bit behind the rest. That's just the nature of being the newest kid on the block, b ut I would claim by now that we have the best, and best looking, software out there. So I believe that's a big competitive edge, actually. We have a new accessory shipping in this quarter as well, and then if everything goes according to plan, we will release our Invicta flagship steering wheel, which will complete our highest end Invicta product line for now a nd that's, of course, also where we have some comfort in the increase in revenue that we are waiting to get this high-end steering wheel into the channel. So yeah, full year guidance unchanged for now with the growth trend expected to continue. A little bit more on the sim sport side. Going forward, meaning from next year, hopefully early next year, but it can also be later next year, it's still not decided. We are actually on track on a project we've been working on for a long time, which is a more mass-market simulator product lineup a nd what that means is that it's priced much, much lower than our current price points, but still with, I believe, our quality and feature set and, and of course, our, our brand on it. So that's something we're excited about. We have engaged a commercial lead in the management team to basically support this mass-market product launch and also to establish and execute on a go-to-market strategy for the mass-market, because that will be different than our current channels. A s such, we also, I mean, this is a segment we believe in, so as I already said, we are continuing to invest in it. At this point in time, we have two main sales channels. It's our resellers, global niche resellers, so that's basically online stores selling nothing but sim equipment. T hen we have our own web shop, and it's hovering a little bit back and forth between where the biggest sale is b ut I would say in rough terms, it's half and half. So we are selling half our gear through resellers and half our stuff through our own web shop. As I just said, on the more mass market opportunity, we will be adding new and exciting sales channels to make sure we look into a higher volume opportunity. B y that, I'm going to pass the stick to Peter to talk about the financials. Yes, thank you, André, and I'll start looking at the income statement. I'll start top down pretty much by talking about revenues. Revenues in this last quarter was $12.7 million, which was a little bit of an increase compared to Q1, which was $12.2 million b ut of course, a significant reduction compared to the same quarter of 2023. However, keep in mind that Q2 2023 was the third highest revenue quarter ever in the history of Asetek and the second highest earnings quarter ever. So it's a little bit of a steep comparison that we are having here. The reduction is a combination of, of course, a solid reduction in the number of products sold and then the product mix. The product mix means that we are that our ASP, our average sales price, has decreased a little bit from around $60 - $57 this quarter. 57 is lower, yes, but it's absolutely still in the range of what we have seen in earlier years. If we just go a couple of years, two, three years ago, then the ASP was around $50- $55, I believe it was. Gross margins, I'll arrive at those, talk about those at a later slide. Operating expenses at $7 million this quarter, compared to the same level, same quarter last year. However, of course, the composition is vastly different. The special items last year was the cost associated with moving our listing from Norway to Denmark. As André mentioned, we have taken measures to reduce the operating expenses by $3 million on an annual basis. That's mainly headcount related, and the number of persons leaving us is around 25. Some have left already, some will be leaving here in August, and some will be terminating, leaving later in the year. All in all, because a rundown like this, of course, has costs associated with it, severance costs, et cetera. All in all, we see that the full effect and the effect will take effect from January next year, or Q1 of next year. That takes us to the operating income, which was a loss in this quarter of $1.2 million, versus an almost record number of $4 million same quarter last year. Continuing down to the line called income tax, which is a rather large amount this quarter, where we have made a non-cash adjustment of deferred income taxes of $2 million. M aybe I should just explain the concept here. When a company like ours, like any company, when we build up taxable losses over the course of the years, which we have done in the past, then you can deduct those tax losses in future income taxes a nd that future deduction, of course, has a value, and that is called deferred taxes on our balance sheet. What we have done here, or what we always do, is that we evaluate the cash flows in the future and put a risk assessment on it and say, "How much can we actually use of those income deductibles and losses, the past losses?" Because we have now here on July first told the world that we are looking into a 2024 with reduced income prospects and the same for 2026, then it will take longer time to 2025, sorry, to actually use those future losses. In order to de-risk the balance sheet, you could say the board has decided to reduce the deferred tax asset by $2 million. It's a non-cash adjustment, and that's what's showing up here in the income tax line as a cost. T hat means that the income for the period after tax is minus $2.3 million, versus $3.2 million as a positive income in the year before. We are talking - André has been talking about the volatility, that continues. I just want to point out here on this slide here to show you that the comparison of Q2 of 2023 was indeed an unusual year, a quarter of $24.5 million. I promised you a couple of comments on this gross margins. Gross margin for the quarter was about 45%. That was the same as last year. However, please note that this year is the same, maintained 45% gross margin, but on a lower revenue base. We often see that with lower revenues come lower gross margins, but that's actually not the case here. The gross margin consists of different, it's built up of different components. One of them is the exchange rate, and we are trying to show you down here the exchange rate between our major currencies, that's between U.S. dollars and Chinese renminbi when we are buying products out of China. It has been fairly stable for the last long time, and that means that the changes in the gross margin is not actually coming from foreign exchange rates, but from product mix instead. We saw in Q1 this year a slight reduction to 44%, thereabout, in gross margins, and then it's come up to 45% again. The reduction in Q4, or Q1 was based on a lower portion of liquid cooling sales versus a higher portion of SimSports sales in that quarter. That has then reversed. We, in this quarter, we have sold a higher portion of liquid cooling, which has a higher gross margin, and a little bit lesser portion of SimSports with a lower gross margin. So there are different factors affecting the gross margins. Overall, the message here is that we are happy that it's stable year-over-year. Balance sheet. At the end of June, we had $6.8 million in the bank, and of course, as we have had to release the notice about the reduced income estimate for this year, of course, that means that we have to closely review the liquidity, and that's just the nature of the beast. A big portion of our balance sheet is the HQ, the new domicile, which is a total of $53.9 million at the end of June. We put $2.6 million into the HQ headquarters here in the second quarter, and we are nearing completion. We have about $1-$2 million left to go. We are expecting to take over the building in late September. A part of the balance sheet on the liability side is the construction loan, which was $21 million at the end of June. We drew, I think, $2.1 million on the construction lines during the second quarter. In July, just after we finalized June, we set up new construction lines with our bank, which we had or have a maturity date in April 2026, meaning that we can now, going forward, reclassify the whole thing to become long-term debt instead of short-term debt. The new lines have a long-term repayment profile, meaning that they mimic, at this point, very much normal mortgage notes. With that, André, I'll turn over to you for a summary and outlook. Yep. So weaker than anticipated rebound, increased price pressure, et cetera, is impacting the liquid cooling market right now. It is expected to remain profitable for this year and beyond. We expect growth to resume in 2026. SimSports, we believe, is on track. Maintain our guidance. O verall, we have initiated cost reductions worth $3 million. And perhaps, a side note here, that those $3 million is affecting both areas, so it's both SimSports and liquid cooling. Very good. With that, operator, if you can initiate the Q&A session on the phones. Yes, of course. If you would like to ask a question on the phone line, please press star, followed by the number one on your telephone keypad. As of right now, we have no phone questions. Not to worry, people have found their way to the keyboard instead, operator, so we'll just hand it from here and take the written questions. O ne of them, if I can read it out. Sure. André you can talk to. Question number one here: Is it reasonable to assume that your gross margin from SimSports is around 65%? It's not really a number we can comment on, because it also depends a lot about whether it's sold by a reseller or it's sold direct on our website a nd if it's sold direct on our website, then of course, there's a debate about should marketing costs be in or not. So no, I cannot really comment on that. Then we continue. Your two largest liquid cooling customers account for 35% and 20% respectively. In your report, you provide issues with some customers leaving the market, reduced order volumes, introduced dual sourcing. Is it any of your two largest customers you're referring to in this report? I can unfortunately not talk about the names on our customers. Number three here, please elaborate, elaborate on your thoughts regarding the HQ. Are you considering a sale and leaseback, and how is the sublease arrangements progressing? Yeah, so on the sale and leaseback, I mean, everything is on the table in terms of financing the building, of course, but the sale and leaseback market is just not attractive right now, essentially because of the interest rates. So if we were to do a sale and leaseback right now, we would just need to commit ourselves to a very extreme, I would say, leasing terms and, you know, very expensive and long-term, and I don't think that's in the interest of anyone, b ut for sure, when the market rebounds in terms of sale and leaseback, then for sure it's something we'll consider. Number four, you disclosed that you're negotiating the terms of your credit line, but you do not disclose the details of those renegotiated terms. Can you elaborate on the renegotiated terms? No. That's a thing between us and the banks, and we also did not elaborate on them before we changed them. Very good. Do you still expect to move into the new domicile in Q3 of 2024? Yes, by the end of September. Yes. How many employees are you in Denmark after your latest announced redundancy round? I don't know off the top of my head. About 80. Yeah. I just realized I forgot to answer about the sublease. That's going very well. With the exception of a few square meters, I would say everything is now leased out. Yeah. How do you expect Corsair, the Corsair acquisition of Fanatec to impact the development of SimSports? Well, as always, I'm not keen to talk about others than Asetek, but just a few comments. As far as I understand, they have not acquired Fanatec at this point in time, so it's all speculation at this point in time. What I'm familiar with is that Fanatec has filed for bankruptcy. That's the latest that I know. So it's pure speculation. Very high level, we know Corsair is entering the market, so that's a new competitor. If they, in fact, acquire Fanatec, then it's not a new competitor, then it's just one competitor. So that's the difference between whether they acquire them or not, as I see it. Very good. Here is a couple: "Thanks, guys, for your continuous efforts." one, did you reconsider a sale and leaseback matter in regards to the new HQ and liquidity situation? 1B, how do you estimate the current value of the HQ versus the book value? Two, do banks still push for more equity capital under the new credit facility terms? Three, would you actually reach out to larger shareholders in case more equity would be needed? Yeah. So I'll take whatever I can answer, then you can get the rest. Yeah, the sale and lease back, we already addressed that. It is something I can disclose that it is something we looked into in detail, and we came to the same conclusion as I just said. In terms of the book value, let's get back to Peter, but what I can say is that we have hit the projected cost very closely, and today the same domicile would be roughly DKK 50 million, more expensive to build than we have paid for it. So in my view, at least, the building is holding its own value for sure. In terms of whether we would reach out to larger shareholders in case more equity would be needed, yes, of course, that would be the obvious thing to do if it ever came to that. Then in terms of the credit facility terms and the book value, Peter, I think those are for you. Yeah, the book value is about $53 million, of whic h also includes an extra plot of land that we, that we are actively marketing for sale. As to the current value, the actual, market value of, of the, of, of the building out there, of course, that, that is very much affected on interest rates and, and, and market demands, etc. So it would- I don't think it would be prudent for me to, to comment on the actual market value of the, of the, of the unit out there. Number nine, it goes back to further tenants. We have answered that. Also, can you elaborate on your cash position going forward? Here, sorry. So can you please elaborate on. Yeah, I don't know what to say. I don't really understand what the question is. We had $6.8 billion in the bank at the end of June, and I think we have laid out the land, as the term comes, about the rest of the year and early next year also in terms of our profitability, et cetera. Number eleven, with Endor in financial distress, Endor, that's Fanatec, have you not seen any positive impact in SimSports in that respect? Yes, we do, and we know it for a fact because the way we have seen it is that, you know, we have these deals with influencers and reviewers, et cetera, that they have their own code. So if an end customer is led to our website through this influencer, they get a kickback. So actually, very recently, one of them reached out to me and said exactly that, that he can see that in the higher end of the market, that our sales have gone up while theirs has gone down. So for sure, we are seeing that, but I do believe that the vast majority of that business is going to some of the Chinese companies that are in the same price range as Fanatec products are. Of course, I don't wish anything bad for our competitors, but should the distress continue into next year, where we have the more mainstream, lower-priced products, we would see a much bigger impact, I'm sure. Then a total different topic here. Water cooling in water-cooled data centers is booming. TrendForce expects now that at 10%, all data centers will be so soon, liquid cooling, at least. Would Asetek become a new, go back in here? Yeah. So just to the benefit of newer people on the call, it's now more than 10 years ago, we entered the data center market and already back then, we saw reports like that, a nd yes, there is a lot of hype around, let's call it water cooling in data centers at the moment, and that's driven by AI, and it's of course driven by NVIDIA putting chips in the market that requires liquid cooling. The issue is that where we are strong on liquid cooling in the data center is when you look at the energy efficiency, when you look at the reuse of waste heat and all the environmental aspect of it. A s of right now, the demand in the market is copper blocks with water running through them, very, very commoditized type of product that they do not come to Asetek and ask for. So whether we would reconsider, I can repeat myself that, yes, if and when we see a demand, then of course we would. No reason not to. We have all the IP, we have all the know-how to do it, b ut I would say the silent group of data center people right now are the ones who are actually paying the bills. So until that changes, I think our position is the same. Number 13, can you talk about the yield on the subletting you made? G iven that there's only one tenant in that new building, I don't think it would be prudent for us to sit here and discuss the finer details of that contract, b ut we believe that we are renting out at a level, cost level, price level that is attractive- Yeah, for sure. ... and reflects the, the high level of the building. T hen a quite practical question here at the end here. How many square meters in the new facility is related, related to production? I don't have the numbers right. I don't have the drawings right here, but I believe it's around a third, so a third or fourth. I t's difficult to answer in the sense that Asetek looked a little bit differently when we projected this. So at that time, when we projected this, for sure, we had a lot of square meters for production, and they are not needed to the same degree, but then in return, we need a packing and shipping facility. So it's perhaps turned more into a warehouse than into production b ut yes, I also believe that it's 5,000. Yeah. That concluded the list of questions, and that also concludes this webcast, and we thank you for your interest in Asetek. Thank you. Thank you. That does conclude today's conference. Have a pleasant day.