Vaisala Oyj (VAIAS) Earnings Call Transcript & Summary

Hello, and welcome to the Vaisala Q2 2021 Interim Results. [Operator Instructions] Today, I'm pleased to present President and CEO, Kai Öistämö; CFO, Kaarina Muurinen; Head of IR, Pola Liimatta; and Chair of the Board of Directors, Ville Voipio. Please go ahead with your meeting.

Thank you, and welcome also from my side to Vaisala second quarter earnings Call. I am Kai Öistämö, the CEO of the company, and I'll walk you through the prepared remarks before opening up for questions. We had a great second quarter, excellent growth in orders and net sales and operating results margin overall at 10%. Recovery that started already during the first quarter of the year has continued stronger and faster than we already anticipated and the recovery had a positive impact -- effect on our second quarter demand, particularly in Asia Pacific and in Europe. The recovery was visible in over all segments, except Aviation and in emerging markets. If we look at the geographies in China and in U.S., the economic recovery started earliest, and that was clearly also visible in the orders received especially on the Industrial Measurements side. And thanks to the strong growth in order intake, our order book now is all-time high at EUR 165 million. The shortage for component, which is very prevalent on the marketplace today, did not affect Vaisala's delivery capability during the second quarter -- earlier during second quarter, and I'll come back to this a little bit later in the presentation. The EBIT margin was up 10% when compared to the previous year. Second quarter was 8.7% of net sales, and the operating result increased to EUR 10.9 million. Now let's -- before diving into the financial figures, let's look at the some of the key events during the second quarter. And I'll start with the -- talking about the operational excellence. We were very successful in -- at the face of the increased demand, scaling up our delivery capability in a very challenging supply environment, and we were very successful in matching demand without any hiccups on our deliveries, delivery side. And I am extremely proud of our -- especially on our sourcing and operations personnel and teams on making that happen in reality. The environment in terms of the component shortage is something where the established suppliers of electronics components, not only ICs, but broader also in other electronics components have had to inform us like other customers that they are unable to deliver their earlier commitments, forcing us to deal with that -- deal with the then evident shortage of components through acting on secondary markets, through other suppliers through redesigning our designs to match other corresponding components. And being successful in terms of delivering -- delivering against the demand from our customers especially in the increasing market like we have experienced, is really, I think, a great proof of the excellent operational capabilities we have in our hi-mix low-volume environment. The second key point I would like to take up is the fact that Financial Times listed the 300 European planet leaders of 2021. And it includes European companies that achieved the greatest reduction of their greenhouse gas emissions reduction between 2014 and 2019. And we are very, very proud to be on the top 20 list in Europe. Our total greenhouse gas reduction during that time frame was 94%. And we have even improved obviously after 2000 -- sorry, during the -- actually, during that time frame, it was 86.9% and we have seen in 2019, we increased that number to 94%. So I'm very proud on our responsible investments and behavior and happy to be a leader -- among the leaders in terms of companies on fighting the climate change. Speaking of climate change, the weather observation systems in the face of every increase in extreme weather conditions, especially facing the most vulnerable nations namely in -- it's very -- I'm very happy to see that we were able to close the Ethiopia project. And now have a go ahead to implement this in the coming 3 years together with the local authorities. I think this is an extremely important piece of infrastructure and even more important in the future, in all nations around the world. But like I said, especially in the American markets. We focus on culture and leadership practices, our ways of working and our future work to retain and recruit the best possible talent in the world. And to lead these activities, I'm very happy to know that we will -- we will have Timo Leskinen to join us to lead these activities in end of third quarter, beginning of fourth quarter. Vaisala is creating increasing new innovations for sustainable planet. When we look at the recent events like Fit For 55 like I said, the very unfortunate extreme weather incidents in, for example, in Germany, in Central Europe, but also around the world, it's ever more important that we carry our responsibility of fighting climate change and really building a more sustainable planet. In the second quarter, we are not only -- I'll give you a couple of examples where we are not just talking about this, but we are actually doing this putting our money where the mouth is in terms of launching new solutions and products to our customers to help them to create their operations to be more sustainable. And in the second quarter, we launched several new products, all of which link into 1 or more UN sustainability goals. These highlight really the Vaisala's purpose and drive to create products and solutions with an impact to a better world. We are closely linked to many key megatrends today, and we can play a very important role in helping, as I said, helping our customers to drive their operations and decisions to be more sustainable. Examples of the products and solutions. In renewable energy side, we introduced a new dual lidar -- scanning LiDAR to the market, which is very important for building, especially for renewable solutions in wind parks. In continuous monitoring systems side, we launched a new combination of carbon dioxide probe and a wireless data logger, which is an example of -- use of this product is in vaccine research. And in air quality, the new sensor advances our offering to improve air quality, monitoring and decision-making capability for urban communities around the world. Now let's look at more closely into the financials during the second quarter. We had a, in terms of an orders received, very strong quarter, orders received increased by 25% compared to the previous quarter year earlier. The increase was in both business areas. And in industrial instruments, Life Sciences, the same market segments that led the orders received increased for industrial instruments, Life Sciences, metrology and renewable energy. Order growth continued also positively in our industry and liquid measurements and in aviation market segments. It's worth noting, obviously, that in metrology, this includes the early announced EUR 13 million Ethiopia contract as well. When we look at the order book, thanks to the excellent growth in orders received, I'm very happy to note that order book is now at the all-time high of EUR 165.3 million. This represents also a, if when we look at the quarter-on-quarter, it represents the 6% growth in -- when compared to the first quarter of this year. The increase was in both business areas. And in Industrial Measurements, the order book grew in all market segments. And in Weather and Environment, the order book increased in renewable energy and metrology market segments, whereas aviation and ground transportation experienced a decrease. We had an excellent quarter also in terms of the net sales. Net sales increased by 20%. If you look at the -- where we look at constant currencies, the sales increase was 23%. The net sales increased most in industrial instruments, Life Sciences, metrology and renewable energy market segments. The net sales decreased in ground transportation and in aviation market segments. And then when we dive into the business areas, excellent performance continued in Industrial Measurement side. The orders received for Life Sciences as well as industrial instruments were very strong. And power industry and liquid measurements were growing as well. It's worthwhile noting, while we had an excellent quarter, it's still worth noting that the second quarter comparison to previous year second quarter. Obviously, the previous year second quarter was impacted by this COVID-19 pandemic, which makes the percentage growth when compared year-on-year, a bit higher. But nevertheless, I would conclude that we had an excellent performance continued in Industrial Measurements. When we look at the net sales, the net sales growth increased by 31% with increased operating result and increased EBIT percentage to an excellent 23.7% of net sales despite somewhat lower gross margin compared to the comparison quarter last year due to the slightly different mix. The gross margin was very good at 63.7%, again, slightly down compared to the previous year due to the same reason of sales mix. Net sales growth was strong in instruments, life science market segments and good in power industry. And we continue to invest in the future competitiveness in terms of R&D with a 12.2% of the net sales. In Weather and Environment area, the strong growth in terms of our order intake continued as well. The increase in orders received was very strong in metrology market segment. And this included, as said, earlier announced EUR 13 million weather infrastructure projects in Ethiopia. The orders received increased also in renewable energy and aviation market segments, and in ground transportation, the market segment decreased to this very strong comparison period in last year's second quarter. We do not see any other changes in terms of our outlook in ground transportation. Market expectation for ground transportation is expected to be stable. In Weather and Environment side, the net sales growth was 14%. And net sales grew in metrology and renewable energy market segments, especially. The net sales in ground transportation and aviation market segments at the same time, decreased. The gross margin improved by 1 percentage point, thanks to improved sales mix and increased volumes. And the operating result improved to EUR 1 million or 1.5 percentage points of net sales. Then let's look at how this adds up when looking at the first half of 2021. The first half net sales in Vaisala grew by 13%. And when we were to look at in constant currencies, the growth wase 16%. The operating result increased following the growth in net sales. The gross margin was at previous year's level. And the operating result was 9.5 percentage points of net sales. The EPS grew significantly to EUR 0.43. And it's worth noting that the effective tax rate was low at 13%, and we estimate the effective tax rate to decline due to the ability to utilize the carry loss forwards from previously announced acquired companies. In terms of our cash flow. We had also a strong quarter, a strong first half, driven by excellent results, positive changes in net working capital as well as lower capital expenditures. Our financial position remains strong in all aspects. The capital expenses were down as investments to the very large building project have finished. We are building project the R&D building project here in Vantaa as well as the office building in Boulder, Colorado. The 2021 CapEx is still slightly higher than our normal year prior to these investments. But due to the fact that we are still investing and furnishing the laboratories here in the R&D building here in Vantaa. Then looking at how does the rest of the year look like. We do expect that the market for high-end industrial instruments to continue the growth at a strong start of the year in 2021. Life Sciences and power industry markets are also expected to continue to grow as well as renewable energy in the Weather and environment side. Liquid measurement market is expected to continue to recover. And in metrology markets, developing market demand is expected to continue to suffer and make recoveries expected to take a longer than in developed markets where we expect the market to be stable. And in aviation market, as you may recall, the market declined significantly during 2020 -- year 2020, and the market outlook remains weak, although some market is expected -- market recovery is expected to gradually to happen. This is really a tale of 2 cities where the domestic flying, if you look at underlying factors. The domestic flying has picked up in the U.S. and in China, whereas in Europe as well as in intercontinental or international travel remains on a very depressed and decreased levels at the moment. The ground transportation market, as I said earlier, is expected to be stable. When we look at the business outlook for this year. We raised the outlook in about 10 days ago, exactly 10 days ago. Based on the strong first half and despite the risks that I spoke about in terms of a component shortage, we saw an increase in it to sort of the net sales range, we estimate now to be EUR 400 million to EUR 420 million and the operating results to be in the range of EUR 40 million to EUR 50 million. The limited availability of components, we see is expanding, and we do not see the end of this during this year at least. And we are actively mitigating this. And as I said, we were very successful in doing this during the first half. But we are facing the same issue now during the second half. We are working with our suppliers, the secondary and tertiary sources as well as then redesigning some of our products when needed. But especially when we have to utilize spot markets to compensate for the lack of delivery capabilities from our regular suppliers, we see that the component prices on the spot market can be meaningful when compared to established supplier prices that we have. The shortage of components, therefore, has increased the material costs and the transportation costs have increased as well. And we do estimate that these will have a negative impact on the operating result during the second half of -- half of this year. Now just to summarize what I just said, we had an excellent growth continued in the second -- second quarter with very strong profitability, and we ended up with an all-time high order book of EUR 165 million. This is the end of the prepared remarks, and now I'll open the floor for any questions that you may have. So operator, please.

[Operator Instructions] It seems like we have no questions from the line. Okay, we have 1 question from Matti Riikonen from Carnegie.

Matti Riikonen, Carnegie. A couple of questions. First, about the component and transport costs that you mentioned already in the speech. You already touched upon the topic how long you expect that to continue. But do you have any idea how long we should extend those higher costs? Naturally, second half this year, but how long into 2022? Do you have any kind of idea how it could be? Or is it just as black box to you as it is to us?

It's very difficult to say exactly when this will end. I'll give you 2 kind of a glass half full half empty statements from the market the past days. So TSMC, which is the largest supplier of integrated circuits in the world, said that they see some easing up of the supply from their side already now in the third quarter, early fourth quarter. At the same time, the CEO of Intel said, I think this morning that he feels that the shortage continue into next year. So there you go, I think we have visibility into this, yes.

And is it so that has the component cost already affected Q2 gross margin? Or were you still relatively safe in Q2 and you expect that this price increase would take place only in the second half?

Yes. So first of all, we did not see any impact of that in the second quarter numbers yet. So I can comment is that there are kind of 2 separate issues in terms of when we talk about the price increases in terms of component prices, as I tried to allude in my prepared remarks. There's obviously kind of inflation on the marketplace and the prices like with many other things from established sources and vendors and so on. Then there's a separate item, which is more dealing with the shortage at the moment. And as I said, when one has to go to the spot market to compensate for the lack of capability of delivery from the established sources, then often you end up paying multifold of regular prices for those components.

So basically, when you had some kind of small negative impact in gross margin in the industrial business that was just driven by the sales mix impact and nothing else?

Right.

Okay. And technically, I just want to confirm that how it actually goes in your accounting. So when the component costs are higher, then your gross margin is affected. But how is it with transport costs? Is that in the fixed costs so that we don't see all the change in the gross margin, but in the overall cost level?

No, no, it will be above the gross margin. It's a variable cost.

Good. Then related to the tax, which was extremely low, as you said, in Q2 and including those past losses becoming receivables. Was this a onetime thing? Or can the tax loss carryforwards still increase if you see that, okay, it's even better than what you saw?

So obviously, we estimate -- so this was an estimate of -- when I said the tax -- we estimated to have a -- 13% tax rate was an estimate for this entire year. And we do see that we have a possibility to benefit from the tax carryforwards sometime.

Okay. And then just another technicality. Whether any other unusual cost increases in Q2, except the EUR 2.2 billion -- EUR 2.2 million cost, which was related to a previous M&A transaction?

No, no. That's it.

And then finally, if I look at your weather business numbers and particularly the order intake, which now included the Ethiopian EUR 13 million order. Is the weather outlook basically unchanged compared to Q1 if we just exclude the Ethiopian order because orders, excluding that they came down a bit? And if I interpret your comments about the outlook for weather business, I didn't see so many kind of new positives there. So is it basically unchanged? Or has it improved?

It's -- I think it's in a big picture, I think you're right. It has not really materially changed since first quarter. As I said, we do expect the aviation eventually to recover. So like quarter of time has passed on that side since first quarter. And likewise, on the emerging markets. But I don't -- I think you're right on your summary, it's fair that it has not materially changed since first quarter.

Okay. And then perhaps 1 theme still. You discussed in the Q1 report that it's possible that some of your customers have been buying products a bit ahead of normal schedule to prepare for any kind of component shortages affecting your delivery capability. Do you still think that, that would be one theme behind the kind of very strong growth in Industrial Measurements side? Or is it something that the ramp-up is just being so high and strong that basically it just -- that was the only reason why Q2 was so strong?

No. I think now when we look at the entire first half, I think the big driver on the growth behind the Industrial Measurements is that, first of all, the increased, significantly increased activity, economic activity around growth and partly also the pent-up demand. I mean much of these -- many of these components actually go into the different processes, different facilities of our customers who are building up capacity to match the today and then tomorrow's demand.

[Operator Instructions] Our next question comes from line of Joni Grönqvist from Inderes.

Congratulation for nice result again. I'm not quite sure I -- my line was a bit bad in the beginning of Matti's questions. So I'm not sure if he talked and you talked about it already. But just to follow up, again, on when you were hammering again, market expectations and you're quite cautious being traditional in your guidance. So again, like last quarter, when we discussed so. looking now at the Q2 growth trend, so which things or why do you see growth slowing down in the second half that much? At least how I interpret the market comments there in the report, you see some areas in weather picking up now after the pandemic and the order book is good. So first question on this. So which elements do you see slowing down in the second half?

We're not really seeing any slowing down. I think part of it is if you will get that comparisons to the previous year, obviously, they changed. And percentage-wise, if you look at the second quarter growth is -- especially on the Industrial Measurements side, Industrial Measurements, we are very much hit during the second quarter of last year. So the percentage growth numbers are honestly kind of alleviated due to that fact. And it really was a bad quarter last year on the Industrial Management side, not so much in Weather and Environment. I think then the other comment, as we've said in the -- when we came out with a new guidance, the uncertainty in the marketplace, especially in terms of the component supply is absolutely there. And as I said in my prepared comments, many, many established vendors, big established electronic vendors have had to come back and tell their customers like ourselves that they are not able to fulfill their existing contracts in terms of the volumes. And this is the environment that we have been -- we've been living now in during the second quarter and will mostly likely live during the second half. While we were successful in meeting the demand during the second half, this is obviously something which is kind of a something that we have to succeed day in and day out to fulfill all the demand in the marketplace.

So the component risk is only price risk? There is no risk in that you won't get any components, so you wouldn't be able to deliver. So it's purely -- you get the components, it's only price question?

No, no. I don't think that's a fair summary at all. I don't think that's a fair summary at all. My worry first and foremost, would be on availability of the components. And in order to get here and there the components may in some cases you, as I said, act on the spot market that may lead into elevated costs. But the spot market is day-by-day drier, let's put it that way.

Then maybe thirdly, on the Capital Markets Day. I know traditionally, you've been looking at all the older -- or both business segments and R&D, but can you give any teaser is there any specific area that you are focusing now on -- in this Capital Markets Day?

I love the question, great question. But no, I would not like to premarket yet or prerelease anything on our Capital Markets Day agenda yet. We will come back with due course of time.

Congratulations for a good report.

Thank you. We have no more questions from the line. I will hand it back to our speakers.

Yes. So we have a few questions also...

They were already handled, yes. Joni was on the phone line as well. They are handled.

Okay. All right. So we had a few questions online. But I believe we answered all those questions as well. So with that, I would like to thank you for spending the time with us, and I wish you a very good continuation of the summer and a very good week. Thank you very much. Bye now.