Good day and welcome to the Asetek T hird Quarter 2024 Earnings Call. 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. For those on the webcast, please submit your questions online. For those on the phones, to join the queue and ask a question, simply press star followed by the number one on your telephone keypad. To withdraw your question, press the star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Peter Madsen, CFO, to begin the conference. Peter, over to you. Thanks, Paulie. Welcome all to this Asetek Q3 2024 Earnings Call. It is the 7th of November today. Our board they met last night and confirmed this morning their resolution to approve this earnings update that we sent out earlier today. I'm Peter Madsen. I'm the CFO. I'm in the room here with André Sloth Eriksen, who's our CEO. Good morning. Good morning. With that, I think we should get started. You heard the instructions from the operator on how to submit your questions. I think we are all good to go. We skip over the disclaimer and then we go to the financial highlight slide. Thanks. So jumping right into it, the SimSports business is essentially growing as we had hoped for and as we had planned for this year. Liquid cooling revenue remains impacted by the rapidly changed market dynamics that we have seen this year. Our Q3 gross margins came in lower than normal, mainly due to a one-off supply chain quality issue. Our net income for the quarter is impacted by a non-cash write-down and, I would say, an unexpected U.S. tax cost. As you have probably seen already, we are seeking to strengthen the financial position of the company through a rights issue expectedly this year or early next year. We are maintaining the revenue expectation that we laid out earlier in the year. So just a short headline from SimSports. As announced, we have now signed an Xbox partnership agreement allowing us to enter the console market. I'll get back to that. We have closed a couple of distribution agreements that will come to effect revenue-wise in this quarter, so Q4. I have appointed a new VP, Branding and Digital. Should be no surprise that it's a former board member that has stepped out of the board and into the management team instead. As I just said, we are maintaining our revenue projections for the year. We expect growth to continue into the next year and beyond, supported by an attractive product range, our great customer service, and of course, also and not the least, our brand name. Investments are obviously required going forward to capitalize on the big opportunity that we believe we have in front of us right now. In terms of the liquid cooling, at this point in time, it should be no surprise that we have early in the year faced an unexpected and very rapid situation or decrease in demand this year, and of course, that has resulted in a lower than expected cash flow. The segment as a whole is still expected to remain profitable for now and for the future, but nevertheless, much lower than we had expected. We already have and we already reported that we've taken measures to increase the profitability and also strengthen the position longer term, and also here, we have appointed a new management team member, Henrik, as our new VP of Sales, and he will be here in Denmark reporting directly to me. The target, of course, the target is, of course, revenue, but the more strategic target is to have an even closer dialogue with our key customers at the same time as we are, of course, building on our brand. Also here, we expect to maintain our previous guidance. Then I can take over regarding the contemplated rights issue. There's a whole workstream around that going on, and you will be able to follow a series of stock exchange releases, et cetera, coming out on that issue in the near future. The background for the rights issue is that we, a year and a half ago, raised money in the market in the same way with the purpose of financing the headquarters investment that we have been pursuing for the last few years and paying down some debt related to that investment also. So when we had raised the money last year, we had $22 million in the bank. We spent $11, almost $12 on that, on repaying debt. And then we had the second best annual performance, both top line and bottom line and cash flow-wise during 2023. That yielded us $20 million in operating cash flow last year. We went into 2024 this year with a solid expectation on the top line and earnings. We had expected to do plus minus $5 million, 5%, sorry, on the top line from 2023 into 2024. It just didn't turn out that way. That means that up until Q3 2024, our operating income cash flow, sorry, was minus $900,000. You see there's a huge delta between the plus $20 million in the same period last year and then a minus $900,000 up until now this year. That has created a situation where we will be needing cash. We have initiated a cost savings program, as you know about, and we have tried to mitigate the situation in various forms. We are pursuing other ways of strengthening the balance sheet on a loan-based basis, et cetera, et cetera. But we believe, and our board believes, that the right thing now is to raise money via a rights issue, both to strengthen the balance sheet, but also to pursue the very attractive market opportunity in the SimSports segment. And that's where we are right now. And we can continue also with regards to all this rights issue, et cetera. We saw a need to update our medium-term guidance. Medium-term here is that two to four years out in the future. And when you look at this slide here, then you can see that the 2024 guidance, which is on the left-hand side of this slide, is unchanged. But let's focus on the medium-term ambitions, where we see that the liquid cooling business will be strengthening, regaining strength again over time. We see a revenue level around $50 million to be obtained in the medium term. On the SimSports, we see a plus $50 million range to be obtained or reached also here in the medium term. When it comes to our EBITDA margins on the liquid cooling business, historically, in recent years, we have been around 30 points level thereabout. We believe that we can consistently achieve 25% EBITDA margin in the liquid cooling market segment in the medium term. Over on the SimSports side of things, we believe that we can reach positive single-digit margin towards the end of the medium-term scenarios. Then we change over to more day-to-day business in the liquid cooling segment, André. Yes. I don't want to dwell a lot on this slide because, yes, we have a one-off impacting our margin, but elsewise, our EBITDA margin would have been 32% in the quarter. So from that perspective, I would say business as usual. In terms of activity, we have five new liquid coolers started shipping in the quarter. We estimate 13 of new products starting to ship in the fourth quarter, so right now. And at the end of Q3, we were shipping to more than 20 OEMs, but also business as usual. Our top five customers represented pretty much the entire revenue, or at least 89%. Going into the SimSports, again, $1.5 million of revenue versus $1.2 million in the same quarter last year. As I used to say, don't put too much into the specific quarters because at this stage, it's very much a coincidence whether revenue is booked in one or the other quarter. I and we consider the Xbox license agreement a key milestone in this business opportunity simply because we will be able to reach a different audience and a larger audience, as you'll see in a second. We also closed, as earlier mentioned, two distributor agreements with a US-based and with an Australia-based or New Zealand-based distributor. Very short background for that is it's much easier for us to handle one customer than to handle 20 or more smaller customers. We completed our Invicta. The line is not complete. It'll never be complete because there'll be new products as we go, of course. But for now, we completed the Invicta product line, which is our top of the line with the Invicta steering wheel. It's a very expensive steering wheel retailing from, I think, around EUR 1,000-EUR 1,500, perhaps even more euros. So it's an expensive wheel. We basically just launched it, and we've seen a good interest in it. People are ordering, so that's nice. We have two main sales channels. We have right now roughly 35 niche resellers. And when I say niche resellers, it's because they are super high-end selling, for example, $1,500 steering wheels. Going forward, we will, of course, continue these channels. We also have our online shop. And I know it states here that in Q3, resellers were the biggest with 55%, but it is typically 50/50 or a little bit like that. But going out with a mass market offering, needless to say, we also need new channels or other channels, additional channels. And that's where we have brought in Maja, our VP of Branding and Digital, of course, is to pursue the channels where the mass market is actually trading. So looking at the slide here to the right, according to Newzoo, there are roughly 60 million what's called lifetime players of sim racing worldwide. And you can see the segment that we are currently serving, and only in the high end, I would say, is 16% of the market. Xbox is roughly 47%, and Sony PlayStation 37%. So needless to say, right now, we are scraping the surface of the PC segment, and we are tapping into a much bigger segment here. We would not be able to do that with the current product program. In anticipation of signing a deal with a console player, we already have been working for a year on a more mass market product. That's good timing because now we get the license, or we've gotten the license. What remains from here is roughly half a year of coding because to make something work with a console, you need to design in a verification chip. Of course, we need to make console versions of our software. That's the remainder of that. Yeah. Then we shift to the financials, and there's quite a lot to cover today. The way we're going to do it is, as usual, we start from the top, talk about primarily the quarter, and then we can dive into some of the details. Revenues this quarter came in, or third quarter came in at $12.2 million. That's a 40% down compared to the same quarter last year, but quite similar to most recent quarters. The overall, the annual year to date, decline in revenues was 38%. So that pretty much corresponds to the 40% for the quarter. Gross profits at $4.4 million, that's 36%, which is lower than what we normally see. André, you talked about the quality issue in the supply chain. We basically stopped the product before it reached the consumers and had to replace those products and pay for some expedited shipping, et cetera, to get back to good standing. I can just elaborate further on it because I didn't mean to just sweep it over like it didn't happen. Of course. We have a very good quality, and the reason why I don't pay a lot of attention to it is that other than the timing, of course, that's terrible. But other than that, we have years and years in between we have any quality issues of some sort. So that's why I dare to say that, yes, it was bad timing, but it's a one-timer, and it's very rare that it happens to us. Very good. I'm going to show in a while just a couple of slides, an overview of gross margins. We're going to see a big dip for this quarter, obviously. But otherwise, on the revenue and the gross profit, that one-off charge here is the reason why the gross margin is down. The ASP, our average sales price, is $54 versus $59 last year, and that is simply an expression of a change in the product mix rather than it is a reduction in earnings. That brings us to the total operating expenses, sorry. And let's address, first of all, the big elephant in the room here, which is the special item of $14 million this quarter. That's an impairment charge, as the technical term is. And let me develop a little bit on that. We do, as a part of our quarterly closing procedure, impairment tests, where we are basically each quarter periodically testing if the value of our booked equity is in line with the underlying cash flows, and then what happens is that when the business contracts, and remember that our business is down 40%, then a challenge occurs because the business is simply smaller than what needs to be where needs to be to sustain the equity, and our auditors and stakeholders that impairment indicators occur, and when impairment indicators occur, we need to dive further into this, and the ultimate test of all this is to look at the market cap, the share price versus the booked equity, and one could argue that it's sort of a circular reference here because you as an investor probably don't like us to have charges like this. That will ultimately drive down the share price, and then we will have the same discussion as we just had with the auditors once again, but at this point, and I don't foresee any further impairment write-downs, but the auditors, how should I put it? Heavily inspired by the auditors, our board has arrived at the conclusion that we need to write down $18 million on $8 million, and what we then do is that we take a look at the balance sheet, and we select where to write off $18 million. The first asset that comes into mind is our deferred tax asset. We'll see that on the balance sheet in a while, but there were $4 million as deferred tax asset, and a deferred tax asset by nature is speculative, you could argue, and that's why that was the first to be written off. Then we had 18, that's four, that's $14 million that we had to write off somewhere else. And the big ticket item here on the balance sheet, of course, is the building. So that's why we have then written down $14 million on the building, and that is what occurs here as a special item. And let me stress, by the way, that this write-down here, it's accounting/audit. It's a technical exercise. It has nothing to do with the underlying business. The fact that we are writing down the tax asset does not change the way we are turning in our tax returns or does not change that we can deduct past losses, et cetera, et cetera. Business totally as usual. And the fact that we are writing down $14 million does not change our perception of the market value or any other values associated with the building. It’s purely accounting, purely audit, no cash effect, no business effect. That was a long story on why we are taking a charge of $14 million on the profit and loss here. In other comments on the operating expenses, we spent 20 minus 14, $6 million, $6.2 million on research and development, selling, general, and administrative, as we normally do, and that was on par with what we spent last year. We have initiated a cost savings program. The effect of it will be roughly $3 million on an annual basis, and we will see the effect starting fully in Q1 of 2025. Many good people have left us over the fall period here. Of course, of course, they needed to be paid until they left, and in some cases, in some jurisdictions, there are also severance payments and compensations, et cetera. And that's why we haven't seen the full effect of it yet. That brings us down to the operating income, which is $15.7 million in the negative for the quarter, coming down to the foreign exchange loss, which is a significant loss of $1.4 million. You may recall that our balance sheet is reported and built up in US dollars, whereas our loans are denominated in Danish krone, the bank loans. And that's why when the US dollars versus Danish krone on September 30 took a significant dip, I cannot remember the exact rate, but I think it was 660 or something like that, then that turns into a significant currency loss here. Over the year, we have had positive quarters in Q1 and Q2, and net for the year, the loss here reported is $500,000. And subsequently, the U.S. dollar has come back up again, especially after the election yesterday. It appears, I think we are at 690 again, which is on par with what we saw June 30. A note on that, by the way, is that starting January 1st, we have made changes. We've been able to make changes to our currency setup, meaning that the functional currency is now changed over to Danish krone, meaning that we should not see these kinds of adjustments anymore. So that brings us to an income before tax of -$17 million for the quarter. And then you see a very significant tax charge. You will recall back a few minutes that we had to write down $18 million from impairment, 14 of which was as a special item related to the building. $4 million was related to taxes. That's why we see $5 million here, for which are related to this deferred tax asset write-down. Then there's $1 million left, and that is an effect of, how should I put it nicely? Our advisors in the U.S. doing our tax returns and doing our tax provisions, which is the whole note apparatus that goes into our annual report, simply misread some new rules related to GILTI, you know, these U.S. tax where they put a tax on foreign countries. And according to those new rules, we are not allowed in the same way as we do elsewhere to deduct R&D cost, and we have to postpone the deduction for those R&D costs. And they had misread those rules. They just re-read the rules when they had to turn in the tax return now, and that means that we are now facing a bill of $800,000 in actual taxes to be paid for 2023. and that is the difference between the $4 million and the $5 million here. so income for the period minus $22 million, which then we are compensated a little bit in the line that is down here with currency translation adjustments, meaning that the total comprehensive income is minus $21 million for the quarter. I remind you that if we do a little bit of simple math here, then the one-off effects sum up to about $20 million. so minus $21 in total, of which $20 million are one-off effects. We always show the quarterly revenue development, and we talk about how volatile it is. It has not been that volatile recently, but there are, from my perspective, no reasons to believe that it will be less volatile in the near future than it has been over time. Gross margins, I promised you a comment on that or a graph on that. You can see how it dips, and that is, we're down to 36 points for the quarter, six of which is from this one-off quality issue. So that means that brings us up to 41 barring this one-off, and that means that we are pretty much within the band of 40-45 that we have seen for the longest time. Sorry, the year-to-date gross margin this year is 41.8, 42-ish. If we correct for this or adjust for this one-off thing, then it would have been 44% for the year versus 45-46% same period last year. Balance sheet, these numbers that you look on the left, if you compare them with the one you saw a quarter ago, then yes, they are down by $18 million, which is this impairment write-down that we spoke about. Mandatory non-cash write-downs of $18 million, basically to evaluate, to match, seek to match the booked equity towards the model where it's the stock price that is a guiding star here. $3.4 million in the bank at the end of the year, end of the period, sorry, of big line items, of course, is the building. The total investment was $55 million. We then take out 14, and that means that it's going to be booked at $41 million October 1 going forward. The good thing here, you could argue, is that the future depreciation is going to be lower also, but that is, of course, a drop in the ocean. We have moved into the facility here recently, so that means that the construction, the investment is completed. We spent $1.3 million in Q3 on finalizing the investment, and on the liability side of things, the big ticket items here are our loans, which are bank loans. Yes, they are mortgage-like in nature. They are maturing in April 2026, and we are, one could argue, as expected, in breach of an earnings-related covenant at the end of September, and we are in close dialogues with our bank, and we expect to resolve this issue going forward. With that, André, over to you. Yep. Yeah, so basically the summary of everything we just said, we maintain the outlook for the year. We have a contemplated rights issue coming up. We will continue to build on the commercial success and progress we have done on the SimSports side. On the liquid cooling side, we are stating here a growth from 2026, and the reason why it's 2026 and not 2025, there are a couple of reasons. Number one, I was out recently meeting with all our customers face-to-face, and pretty much all of them are hit, or not pretty much, all of them are hit in the high end, in the premium end where we are, so first of all, we need the market to rebound there. It's more or less impossible to predict when that will happen. That's macro-level financials, and then number two, as we are talking OEM, getting new design wins and getting meaningful revenue just takes time, but you can rest assured that I have stepped one step closer to the liquid cooling business, and it has my full focus and attention. Our new VP of sales that just started has already hit the ground running. So it's full focus for us. And instead of just waiting for the macroeconomics to level themselves out, we are, of course, focused on getting more design win with the customers we have, also outside the premium products. So yeah, that pretty much sums it up, and I'll leave it back to you again, Peter. Thanks. And that means that we turn it over to operator Paulie to see if there are any verbal questions. Thank you, Peter. And as mentioned, we are now open for questions. For those on the webcast, please submit your questions via the Q&A module on your screen. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press the star one again, and we'll pause for a moment for any phone questions. There are no questions on the phone. I would like to hand back over to management for any written questions. Thank you. I'm in that very peculiar situation that there are no questions coming up on my screen here, and I have refreshed, and I've asked the technician to check if there are any questions. Paulie, Kyle, operators, can you please check again if there's something that we don't see? Of course, checking for you now. And while we wait, if you do have any questions on the phone, please also press star one, and we'll be back with you in a moment. We are being told that there are no questions. If there's a technical glitch, well, of course, we trust in the system here. It's not a complaint. If there's a technical question, there you go. We have a question now, so the system works. Are there any options to share dilution? I'm actually not certain what that question means. If the question means that if there are any other options than a rights issue. We can say that we are pursuing all other options than we can, and it's too early to say because it's not fully exhausted, but of course, we are looking into all sorts of financing options. The most obvious one, of course, is actually the building and to take out a mortgage on that. And the story is that mortgaging the building is not a problem. The problem or the challenge is that the mortgage nowadays is closely tied to the business performance. When the business performance is down, then the likelihood of getting a mortgage you would like is also slim. Why it is like that is a question for the banks, unfortunately. Yes. And there's one further question around the same issues, so I'll allow myself to jump over that. It is the same question. And then we've been asked when will this be voted about. Today, we will send out an invitation for an extraordinary general meeting to take place in three weeks from now, very early December. And of course, there people will be able to vote yes or no. And by the way, I'm quite certain that we are contemplating to have a presentation, a meeting, a webcast in whatever way, shape, form is decided on the actual capital raise at a later point in time. With that, having pressed the refresh button a number of times, one came up here. Can you elaborate on the potential rental of part of the building to externals? We are today renting out a significant portion of the building. It does not make how should I put it? It's going to be impractical to rent out more at this point, but of course, it's something we will keep in mind. Do you want to elaborate further on that, André? Yes, we have rented out all the space there is to rent out, so that's already in place, and there is an individual here that states, "Please keep the shareholders' interests in mind." Of course, we do that. I would like to remind that I'm a big shareholder myself, not just because I'm the founder, but I actually have purchased a significant amount of shares over time. So trust me, we are doing what we can. But I think it's also important to realize that we need the funding to pursue the SimSports opportunity because if there's not funding for that, we cannot pursue it. And I very much believe that's an attractive opportunity. And the banks just have the position, and that's been all the banks I've known for my entire career, that when you're pursuing a new business venture, that's an ownership financing task and not a bank financing task. Where I'm completely aligned with you is that the building in itself should obviously be able to have a much stronger mortgage financing. And what should we call it? The interesting thing is that if and when a capital raise is done, then our balance sheet looks healthy again, and then we will be able to get a more attractive mortgage on the loan. Then you can argue from an investor's perspective, that's a bit late. I can only agree, but that's unfortunately the position they have. And then there's a question about on the special item. Can you please circle back on the special item and elaborate? I know it's a difficult topic, and I'm trying to explain as well as I can. In total, we have special items of the $14 million and then $4 million related to tax, meaning $18 million in total. And the reason for that is that we have been asked by our auditors to evaluate, okay, the value of Asetek, is that really the value that you have in your equity, the booked equity? And we are comparing up against the share price. The logic is that if the share price is low, meaning that the shareholders look at Asetek as having a low value, then we also in the accounting should reflect a low value. And that calculation of the difference comes up to $18 million. And that is what is being added as two special items on the expense side of things. Again, it's an accounting audit exercise. It's non-cash. It's basically, I hate to say it, but it's a spreadsheet exercise. All right. Then there's a question about whether we could do a sale and lease back. And please, of course, we have been looking at sale and lease back. We've been looking into that for two years. It's not something that's unknown to us. But the sale and lease back is no different than the mortgage. When you do a sale and lease back, they look at the current business. They assess the risk, and if we did a sale and lease back now, the interest would be horrendous. The rent would be horrendous for the next 20 years, and I actually do not believe that's. I don't even think it's a feasible thing to do in the situation we are in. Let's also remind ourselves, we just moved into ownership just very recently. We actually don't have still the final approval of use of the building, and you need that to obtain mortgage loans, so we've been talking about this a long time. I certainly agree, but it is only recently that we've been able to really effectuate transactions, and then a final comment on the building from my side. That building was decided on four or five years ago. The world looked very different in terms of pandemics, wars, material crisis, etc. It is as it is. The problem is not the building. The problem is that our liquid cooling business is down, and that's what we need to fix. Yeah. And then there was a calculation question here at the end about value per share. I'm not able to sit here and calculate on the fly, but we have $98 million, sorry, shares. So please take our balance sheet and divide by $98 million. I don't want to be rude, but I cannot do it here on the fly. And then there's a question more on the building. Yes, of course, we have considered selling it. And I think you know that, Lars. I know you know that. Selling a building unless you want to give it away is not something you do in five minutes. Good that concludes the list of questions here. Again, you know our email address, investor.relations@asetek.com. And we will come back to you in due course related to extraordinary general assembly, etc., etc., and all that coming up. With that, we conclude the session here. Thank you for your interest in Asetek. Thank you. Thank you. This does conclude today's webcast and phone conference. Enjoy the rest of your day. You may now disconnect.