Asetek A/S (A31.F) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Asetek Half Year 2022 Financial Report and Earnings Call. [Operator Instructions] I would now like to turn the conference over to Peter Madsen. Please go ahead.

Perfect. Thank you, operator. Yes, thank you to this Asetek half year 2022 presentation. Our Board met yesterday and again this morning and where they discussed and then approved the report that we're going to give you now and the report that we released this morning, where the numbers, I should add, are very much in line -- very much in with the release that we sent out on August 3. So at least on the top and the bottom line, there should be no surprises. And we, in this case, it's me, Peter Madsen, I'm the CFO. I'm here with Andre Sloth Eriksen, who is the CEO. Hello, Andre.

Hello.

And then we're joined today by John Hamill, who is our COO. He's coming in from Texas, United States this week and we thought he could have some color to the various figures and updates we're going to give you here today. Hello, John.

Hello.

John is from Texas, as you can hear on his heavy accent, almost as Scotland. We will figure it out. Questions, yes, the operator told you that you could type -- key on your phone and then ask questions verbally. Should you feel more for that you can also type your questions in on the web app that you're probably following us on right now. With that operator, please change the slides through the disclaimer slide that you can read at your leisure to the highlight slide which you will cover, Andre.

Yes. So the highlights of the quarter revenue of just shy of $17 million compared to $23 million same quarter last year. Gross margin of 42%, level on last year. EBITDA of $1.3 million compared with $3.2 million in the same quarter last year. And the first half year revenue just shy of $31 million and EBITDA adjusted of $0.4 million. SimSports revenue of $1 million in the first full quarter of sales. We have -- all these are, as it said, obviously highlights, so we will get back to them in more detail. We have reduced the organization quite substantially, obviously to scale the cost according to how the market situation is. We have made a temporary shift of some development resources to drive the SimSports business further. And then we have temporarily suspended our guidance, simply because our visibility. And those of you who are following us regularly will know that we already have limited visibility and now we just think it's at a level where we have nothing intelligent to say until the market recovers. So hopefully that won't be long. But for now, that's how it is. Please change the slide. So I don't think any of -- what's in most of the slides is a surprise to any of you, but still I'm going through it. What we see is the market challenging continue, and I would say as a company, there's not much of what's going around -- or going on around that we are not hit by. Whether rates inflation or interest rates or whether it's the war, whether it's COVID, whether it's supply chain, it's tariffs, it's -- so it's the perfect storm. That's how we see it. And on top of that, as we all know, consumer spending and obviously in high-end electronics and in gaming is kind of weak as well. The result of all that is that if -- I swapped the last 2 points -- that we do expect an operating loss for the year and that's not necessarily new, because our previous guidance was quite wide and said from minus 1 to plus 5. But since we have sent out what we have, that's obviously because we expect to lose more than the $1 million. As soon as we know something more intelligent we will of course let you know. As a small anecdote, within 1-week the current forecasts can easily change in the millions of dollars range. So because of that it is actually impossible for us right now to tell where we are going to settle. Please change the slide. So we have looked at what can we actually do, what can we influence. And what we can influence is of course, the organization and our cost associated with that. 52 full-time employees is obviously rather dramatic when you look at it, but do also keep in mind it does include the Data center business that we shut down last year. And although that was a tough decision, I think now more than ever does it show that it was the right decision. Then we have looked at some consolidation as well and we have closed down our London sales office. And then when we pull all of this together, we expect to be able to reduce our costs by $4 million - $5 million, quite substantial, with a full effect somehow during the last quarter, I would say in last half, last quarter. I would also say that I think we have cut to the bone now. And we have reacted fast. But I don't see us do another round of layoffs. We've done 3 layoff rounds now within a year and I think for the good of the employees and for everyone to say that this is it. Then we have shifted some resources from the G&E business to the SimSports. I think it's important to understand why that is. And the reason is that customers we have on the G&E side are very large corporations. For example like Dell Alienware. We just don't call them up and say we have a good offer, if you buy something more. That's not how OEM business works. Or in other words, we have very little impact on our OEM business. So while that business is recovering -- well, perhaps I could also add that we have done a lot of product development over the last years, so we are ready with new product launches, new technologies, et cetera. So there's little we can do on that business rather than wait it out. But where I believe we can make a positive difference is on the SimSports side. Although demand has hit there as well, then I don't think it takes a magician to figure out that the more products we have in the market, the sooner we have them in the market, the sooner we will get revenue. So that's why we have decided to do this. Say okay, where can we influence things, we believe we can influence them. Yes, so let's put some resources there. That being said, it's not a massive shift of resources, but because even in the SimSports bases we have laid off people. So we're only talking a few head count here. Then, of course, we are looking continuously strengthening our supply chain, both the capacity and our skills. And I would say that the one positive news that I can share is that we are actually starting to see shipping rates going down and that's a massive thing for us. And so there is at least one spot where there's light at the end of the tunnel. Then we are working with some of our existing contract manufacturers in China who have factories outside China to look into that and we now expect to be able to ship out of Malaysia in Q1 2023. For those of you with a good memory, will say, well, you said that before and that's correct, and we are ready and we have been ready. But right now we are waiting for customers to empty their inventories before they are ready, but we are ready. And of course for the SimSports products that's also something we have in mind so that we can leverage the fact that we don't have to pay you as tariffs. As of today, all SimSports products are assembled, and to some extent also manufactured in Denmark, which is impressive in itself that, that can be done. But I think we can, longer term, can get too much better pricing if we also outsource that. Please change the slide. I think it's also important to remind ourselves that although everybody is struggling right now, the way we see it is that the long-term potential is absolutely unchanged. People will start game again and they still do. But there's also sunshine outside and most people have not been able to travel for 2 years. So again, I think, long term we'll be back on track. I think gaming will be back in track, both on the G&E side and on SimSports as w0ell. And as such, we just maintain our focus keep doing what we're good at. And when the end-user demand will kind of come back then the market will also normalize. And yes, again, as I said before, we are trying to take this opportunity now to get more products out sooner than we had anticipated. Please change the slide. And then just a small business overview for those of you who may be new, what we call the G&E business that I referred to a couple of times, Gaming and Enthusiast, that is a gaming, but PC component gaming. Meaning, that it's people who assemble their own computers, that's what we call the enthusiast. And then we have the OEM business customers like Dell, for example, who are selling pre-built gaming machines, and then they use us as the liquid cooling supplier. And we have the Data center space, where it's, I will say, more or less the same technology but focusing on enterprises and data centers. And then we have the SimSports which is also gaming, but in this case, and at the moment, specifically for sim racing. Please change the slide. And then the next slide showing our global organization. I don't want to go through everything again, because I always do that. But what you can see is that our U.K. office has now -- or is no longer part of it. If you study in detail, you will see we have reduced some of the functions, some of the places and consolidated more in Denmark. We have now past the 10 million units marked of liquid cooling, that's quite substantial. And then perhaps the most remarkable on this slide is that we are now 115 employees instead of 170 something. Please change the slide. And then I will hand over the words briefly to John talking about our business areas and then I'll be back little bit later.

All right. So I'll start with a Gaming and Enthusiast, if you could just flip to Slide 10, please. All right then, here we're just reviewing new product shipments. And I think it's fair to say that new product shipments have been affected by the market. You'll note we did ship 4 new products in Q2. We expect to ship 6 in Q3. You also note in Q3 and prior years, we had shipped a lot more. And the conclusion is, for example, that new shipments have been affected by the marketplace, by the market uncertainties, specifically, excess channel inventories are almost forcing our customers to delay their plans whilst they try and bond off those excess channel inventories. That's also -- I'll just add this as an addendum. Andre referenced our plans to ramp production in Malaysia. That delay is directly related to delays in ramping new products. So the delay in ramping production in Malaysia is part of the same story. And next slide, please. I'm looking at where we're shipping. Fairly familiar story on the left-hand side of this slide, and that is the top 5 customers continue to represent in excess of 80% of our business. A couple of interest and things to note. You'll note that Razer has sneaked on to the list as one of our top 5 customers. I'll be very honest with you here. That has more to do with one of our more traditional top 5 customers underperforming and some miraculous growth by Razer, and I just wanted to emphasize that. The other point to note on this slide is on the bar chart, looking at the right-hand side, the split between customers is probably as good as it's been since we started tracking this data. So just a little bit of evidence that we can get there. So anyway, next slide, please. Not much to report on this slide. Our strategy hasn't changed and frankly, the tactics that support our strategy haven't changed either. But I think the third bullet on the right-hand side is we're focusing on. I do want to stress that we are continuing to develop new products. We are continuing to develop new technologies for our customers. As Andre alluded to, we actually have a new technology that we're rolling out as we speak, and engaging with customers on a regular basis. So I just want to mention that because I don't want to leave the impression that somehow our G&E business has been put on hold or put on the backburner, that's not the case. Next slide, please. So I just want to switch gears, talk a little about our SimSports business. If you could move on to the next slide. So a lot of excitement and positivity to report on here. As you're probably aware, we launched the Invicta pedals in late March. We followed that up in June with the launch of the Forte pedal set. We have been absolutely delighted with the response of the market. And that's not just reviewers and influencers. It's been particularly gratifying as to watch end users and how they've reacted once they've received the pedal sets. So it's been a very, very encouraging debut in a new market segment. We were able to generate sales of around $1 million this quarter, but it could have been a lot more. Again, going back to some of Andre's earlier comments, we had a very, very difficult time supporting sales of Invicta pedal set. We had one component in particular that came from a factory that was locked out, and that was a function of China's zero-tolerance policy on COVID. So for a prolonged period of time, we had no product. So I just wanted to share that with here. Moving on to the next slide. Just wanted to for what's coming next. What are we doing to flesh out the portfolio? And most likely, the next product will be another pedal set, best time at the entry level, a brand that we call La Prima. And I just wanted to spend a little time providing some context. When you hear us talking about Invicta, we mentioned it in the previous slide, is very much focused on the high-end of the market, so higher ASP, high margin, lower volume. Forte coming down this stack as a mainstream play, so more affordable, perhaps less features, but a larger market. La Prima is the segment, often time is describe as entry level or value. I have to stress, this is not cheap. So please don't hear cheap here. This is very much -- stick with me people, this is at the high end of the entry level. But it's a product we're extremely excited about. It's a product that gives us the opportunity to bring people into our platform, because -- as our intention to offer upgrade options that allow La Prima buyers to come in at the lowest price point and upgrade to Forte and allow Forte customers and La Prime customers who have taken advantage of that to subsequently upgrade to Invicta. So we're really excited about this product and what it brings to the table. Looking beyond La Prima, it is our intention to further broaden the portfolio with steering wheels and wheel-bases. The ideal scenario would be that we flesh out the portfolio and every one of the brands we've discussed. I'm not going to commit to outrageous note, but we would love to achieve that in this calendar year. We would love to achieve that. So think about this as a basic ecosystem, steering wheel, wheel-base and pedals in each of our brands. That would be a goal for the end of the year, as I say. But too early to commit to that, but that's certainly what we're trying to achieve. As we look beyond '22 we start to consider a full ecosystem, a complete simulator. So we start talking about chassis or racing rigs as described here, seats and then the plethora of accessories that comes with that shifters and hand brakes being examples of those types of accessories. So there'll be no letup in our focus here, lots of products to come and hopefully lots of excitement to be had. Looking beyond the products and the product portfolio, clearly, we want to do more to increase our presence in the market to encourage sales of our products, and we are endeavoring to add more channel partners or resellers as we often call them. And particular in geographies where we have a limited presence. Think of Japan, for example, as an example of our territory, where we yet have any direct present, so looking to increase our presence through resale. Also looking to move beyond our one hub that we have to-date, which here in Denmark. We hope to stock hubs in North America and Asia Pacific. And that will assess both our resale partners as well as the end users who choose to order from a web store. And assess them all and have a ready access to our products at much more reasonable at freight rates. Last thing I want to mention on this slide is that with the debut of the La Prima brand, we do see opportunities in other market segments, and I'm referring specifically to gaming consoles. The low-cost nature of La Prima does open up the possibility to sell to that cost-sensitive market. And so we'll be looking towards Sony with the PlayStation, Microsoft with an Xbox in an effort to broaden the market for those products. Next slide, please. In terms of promotion, we've been working again to increase our presence in the market. A couple of areas here we want to highlight. We have signed an agreement with Kevin Magnussen to be our brand ambassador. In the unlikely event, you don't know who Kevin is, he is one of the 20 lucky individuals to get to list Formula 1 race driver as their career. So very, very well known in the racing industry, particularly well known in Denmark. So we're very, very excited about this. Of course, as a brand in ambassador, Kevin will help on awareness for our brand and adoption for our products. But actually, this engagement goes way beyond that. Kevin is heavily involved in its visits here to our Aalborg facility and working with R&D. And his focus here is to ensure our products deliver on their brand promise, which is best feel of a real race car. And we're really, really excited about that development as well. Looking beyond the agreement with Kevin, we've also signed an agreement with the GetSpeed Race Team. They are based out of the Nurburgring in Germany. They are very much focused on endurance racing, which believe it or not, as I've seen in some racing, end users will try and compete over long periods of time, i.e., way beyond the 2 hours of a typical race. And this is very much, I think that we want to exploit. Down the line, GetSpeed Racing will allow you to try before you buy at their shop and the racetrack. And you'll also be able to go around the Nurburgring and their RaceTaxi, which will be suitably covered the Asetek's sponsorship or Asetek branding, I should say. Next slide, please. Again, not much to add to this slide. The strategy and the underlying tactics haven't changed too much. I think if I was to draw your attention to anything it's the second last bullet on the right-hand side, which is the really highlights, the focus we've put on bringing out more products, so fleshing out the product portfolio in the next 6, 12, 18 months. So...

Perhaps if I could just [ hit ] in, John. Now that we've done all these cost savings and cost cutting would perhaps also make sense to believe that we have stopped a little bit on the marketing efforts. On the SimSports side, which we have not, we will attend 2 or 3 trade shows, Gamescom being the closest one next -- actually, this month.

This month, yes.

So we believe that when your revenue is under pressure, we believe that it's too good to stop doing marketing. So we keep our original marketing plan. So just to...

Yes. The theory here guys is rightsizing isn't always downsizing.

No. So perhaps I should just continue John.

Yes.

Anyway since we're moving into the Data center space. So please change the slide. One more, please. Thank you. So when we are at the topic of downsizing, it would, of course, be obvious to just shut down the Data center effort entirely. We have chosen not to do so. We have basically stopped any further development. We are servicing our customers. But we are still 2 people, plus myself, working on influencing what's going on in Brussels and there is still positive signs, so I think it's a little bit too early. But I would also say that with what's going on in Ukraine, what's going on with the gas situation, et cetera, if that's not enough to accelerate this, then I don't think it will happen anytime soon. So in my head, we are looking a year ahead. And if we don't see any, let's say, significant or material progress on the legislation, then we will stop pushing and then we will just wait the situation and see what happens. And for us to come back if the demand starts to come back, it's no big deal. We have the right team. We have the right people, we have the right technology. So we spent more than $80 million on this venture. And with the focus on being green as it is right now and with the supply situation of gas and oil in Europe being it as it is, if that's not enough to accelerate it, then I don't believe Asetek can do a difference. So that's how we see that. Yes. On the strategic development, I think there's not much to add. So let's jump into the financials and go to Slide 22.

Yes, a couple of slides forward. Thanks, Andre. What we're looking at here is the -- just to give you a picture. It's an unchanged picture of the volatility in our earnings and the volatility in our revenue base. And you'll see how -- when revenue goes up, so goes the EBITDA margin. That's a very natural functionality there, but it's also one that we see pretty much every quarter. You can see that with our revenues of $17 million here in Q2 of '22. The EBITDA margin went up by 7% or 6.5%, whatever it was percent. And just to add an note here that around 4.5% of that comes from the gross margin and then the rest, of course, is improvements in the overhead cost base et cetera. Next slide, please. Looking at the income statement. And if we have taken a look at the left-hand side of the screen a traditional picture. Here where we have quarters this year compared to last year to the left hand side, and then you have the half year revenues in the middle of the thing here. First half 2022 revenues was up $31 million versus the $48 million the year before. That's a reduction of 36%. If we take a quarter, it's $17 million versus $23 million, so it's a reduction of a little bit less, meaning 27%. And of course, this revenue reduction comes from the fact that we are selling less units and we're selling less units for the reasons that Andre and John just talked about, component shortage, supply challenges, inventories destocking, and of course, the big thing, which is the softer end use demand. We are being helped a little bit by the fact that we have now started selling these SimSports products at $1 million in Q2. It does not, of course, offset the entire reduction coming from our bread and butter business, the G&E business, but it certainly does help. We're also being helped by the fact that our ASPs, our average sales prices, in Gaming and Enthusiasts have increased. They are currently running around $55 per unit, which is 10% up compared to last year. We should be careful a little bit not to confuse increased ASPs with increased margins or increased profitability. It is merely a sign of more complex products and maybe bigger products and more features. But of course, rather have the ASP increase than decrease. I will come back to our gross profit and our gross margin shortly. So let's just take a look at the total operating expenses. They came in at $7 million, $6,992,000 in the second quarter versus $8 million or [ $7,930,000 ] last year. So it's $1 million down. And for the quarter and the same reduction for the half year, meaning all of the reduction came here in the second part of the half year, meaning the second quarter. And of course, that comes from staff reductions and other reductions in overhead expenses. We are being helped by the fact that the Danish currency krone versus the U.S. dollars have improved in our favor by 10%, roughly. And that is about half of the reduction that comes from that currency improvement. Looking further down, operating income for the half year of $1.8 million and for the quarter, second quarter of a whopping $146,000. All the way to the bottom line, income is -- before taxes of $800,000 for the quarter and -- but still a loss of about $1 million for the half year. All in all, a contraction of the business, which we hope, of course, is temporary. With that change the slide, please, just a quick look at the gross margins. Gross margins for the half -- for quarter at 42.3%, which is pretty similar to the same quarter last year where it was 42.3% million. For the half year and full, it is lower, it's 40.5% for the half year of 2022 versus 42.7% last year. This year has, even though Q2 has been better and the full half year has been worse, and that is because of exchange rates and higher [indiscernible] and changes in product rates. We can certainly feel here in Q2 that shipping rates are improving. Just maybe 5 minutes before we went into this call, I got an analysis telling us how the shipping environment is improving. And you know what did not read anything, but the headline, and it's a picture that we can recognize. And then I should also add it, yes, in Q2, we have seen an improvement. But I actually don't think we have seen the full improvement coming from the decrease of the price of the Chinese renminbi that came in April or May. There is a delay in inertia in our inventories, of course, and the way we -- from we buy a product to we sell and harvest the money from the customer. So that could be something coming from there. That's not the same as saying as our gross margins necessarily will increase, please don't note that because there are so many other factors. And there are many variabilities in this picture. But at least the foreign exchange rates are playing in our favor as it is in the current year. Change the slide, please. Balance sheet, we saw -- the ones who have been following us earlier, you saw a big decline in our cash holdings in Q1 from $25 million at the end of the year and the last year, approximately to $11 million - $12 million now. That level is being maintained here in the second quarter. And the reason for the decline in the first quarter was very much driven by the fact that our accounts payables reduced by a significant amount in Q1, and that was driven by the contraction of the business, and we have had some very long accounts payable base that got normalized during Q1, and that's why that the cash balance was driven down to what's actually a more normal level at that point. We have now started in Q2 to draw on our financing of the new headquarter structure. I'll come back to that. But apart from that, then it's the same business. We still have a very solid partner for our OEM customers, and we still have a lot of flexibility to develop products and IP and also defend IP to choose to do so. So we still have a quite solid platform for expanding our product portfolio. Next slide, please. A few words on the headquarter domicile construction. It is going according to plan. It's scheduled for delivery in mid-2024, a good 2 years from now. And things are progressing as planned. We were at some point, nervous about the cost of the thing. The total investment here is about $50 million, and that has not changed. We were nervous about the cost because everybody was talking about construction materials, skyrocketing in price. And we did hear some non-formal talk about how our suppliers would probably face us with increases in prices. And they did, but nothing material, and we can see prices are coming back down again. So we actually think we are on pretty solid ground when it comes to the price of the construction. The construction financing is planned is in place. The plan continues to finalize the financing of the entire construction when we are done with the building. It is easier to finance a finished building than a construction site with a lot of drawings with experts. Since we are faced with the reduction in our company with the reduction of our forces, we, of course, start talking about if we and how we can take in additional tenants to fill up the space and reduce our cost of operating the premises. The good thing is that you can always see it on the drawing here or the rendering that the construction consists of 4 individual construction 4 individual buildings. And it's fairly easy -- it won't be fun, but it's fairly easy to seal off or whatever we should call it, a portion of the construction and rent that out. There's a common building for canteen or whatever it's called, et cetera, et cetera, meeting rooms, et cetera, which could be shared. We do realize that the timing of this is not optimal with the market scenarios we're seeing and with the reduction in forces. However, it's not easy. It's not a thing you can turn off and on. We've tried to maybe perceive if it would be worth considering postpone a portion of the construction. But it came back as being a quite a compose exercise that was not fruitful. And with that change the slide, please. The strategics of all this, it continues to be the same, almost at least. On the G&E Gaming and Enthusiasts side, I think it's about evolving, optimizing, diversification, turning little knobs and bolt to improve the business. And then we are in the midst of building a new business segment, it would eventually turn into being the SimSports business line. So there's a lot of tasks there that are all the same as similar. On the cost base optimization, we have now added a task and operational task of rightsizing the organization. We have gone through the nasty task of sending our termination letters, but of course, now there's a long period of actually making the organization work on a smaller level. Sizing up is one task, sizing down is a different test. And then at the end of the thing here, cash flow improvement, cash conversion and all that maintenance on the balance, of course, with the construction of the new domicile gets just more and more important. With that change the slide to you, Andre, which is a summary and outlook slide.