Vaisala Oyj (VAIAS) Earnings Call Transcript & Summary

Hello, and welcome to the Vaisala Q4 results call. [Operator Instructions] Afterwards there will be a question-and-answer session. I'll now hand the floor to President and CEO, Kai Oistamo. Please begin your meeting.

So this is Kai Oistamo, I'm the President and CEO of Vaisala, and I'm joined here with our Chairperson, Ville Voipio; our CFO, Kaarina Muurinen; and our Head of IR, Paula Liimatta. I also want to welcome you all for our fourth quarter earnings call. So fourth quarter 2021 completed a year of growth and excellent performance. We had a strong net sales growth in both business areas. The orders increased by 6%, but they are varying performance in the 2 business areas. In Industrial Measurements, the orders were very strong again in all market segments. And whereas in Weather and Environment, the orders decreased compared to fourth quarter 2020, partly due to the strong comparison period, partly due to missing the large project orders in 2020 -- fourth quarter 2021, whereas in fourth quarter 2020, we did have quite a bit of them there. The operating result was at comparison period level despite the additional material costs related to component spot purchases. We did make a very conscious choice to respond to the very strong demand that we experienced during the second half -- especially the second half of the year and took, therefore, actions to ensure the materials availability, component availability to match that demand. And with this approach, we did -- first of all, we were able to meet the strong demand. We won market share. And with that, taking the market share, we created even stronger foundation for the years to come. The cost of this was a 3 percentage point negative impact on the fourth quarter gross margin. The good results also were followed by higher incentive costs when compared to the previous year, which is also visible in the higher operating expenses in 2022. If I look at the highlights for the Q4 2021, first notion is the strong growth in both business areas. Net sales grew mostly in industrial instruments, life science, renewable energy on the Industrial Measurements side, and it's good to know that it actually grew very much in all the other segments as well. But once I mentioned where economy is especially strong and industrial in Weather and Environment side, renewable energy and meteorology market segments grew as well. We continue to invest as our strategy is into our offering portfolio, and we proceeded very well during the fourth quarter on renewing our -- continuing to renewal of our portfolio with multiple launches; both hardware products, software products and system products. And then it's also worth noting even if it's close, it actually happened in January 2022, we acquired AerisWeather, which is a subscription-based software company providing weather and environmental information. This acquisition supports very much our weather environment, business areas, strategy to drive growth in data as a service and software as a service. And when we combine areas, where there's industry-leading data services and developer tools, we believe that we can offer the best insights and forecasts for a very, very important weather environmental data parameters with easy-to-use industry-leading developer-centric approach. And this acquisition was closed -- had published and closed in end of January 2022. Now taking a deeper look into the -- what happened in fourth quarter. As said, the orders received increased by 6% when compared to year-on-year on Vaisala level. And then when we look into the 2 business areas, in Industrial Measurement, we grew actually 42% compared to year-on-year, whereas in the Weather and Environment, the decline was 14%. And as I said, there's a kind of seasonality and no large orders during this quarter. So we did not see any market change. It really was more of a seasonality and the lack of the big project orders happening to close in the fourth quarter. When we look at the order book in fourth quarter, the order book increased by 16% when compared year-on-year. The increase was in all market segments in Industrial Measurements and in Weather and Environment, it's strong -- specifically strong transportation and meteorology market segments. When we look at the ending order book or the other way of saying is the starting order book for this year, it actually increased 25% compared to the previous year with a very healthy level. Then looking at the net sales, strong growth, 17% year-on-year. The strong growth happened in both business areas. It was growth in all market segments again, in Industrial Measurements side and in Weather and Environment, the net sales grew in renewable energy and meteorology segments. And when we look at the aviation and ground transportation, they were on the same level as the previous year. Now looking at deeper into the Industrial Measurement, I have a same headline as I had in the last quarterly results when talking about the Industrial Measurements, excellent performance continued. And I think that very well described how Industrial Measurements fared in fourth quarter. The orders received increased strongly in all market segments, as I said. And the order book, when we compare to the year before, increased by 83%. The order book actually stood at the end of the year at EUR 33 million. And it's very important to note also that when we look at these orders received, it was not only that the underlying markets were growing, but we did clearly take market share and customers from our competitors' accounts that we have been trying to get for sometimes even years and here very much our excellent products, our capability to deliver and strong marketing actions clearly contributed to the success. When we look at the net sales growth, 26%, the operating result was EUR 9.8 million compared to EUR 8.3 million previous year, that means 19.6% of the net sales. When we look at the costs from the spot purchases inside of Industrial Measurements, they actually had a 4 percentage point negative impact on the gross margin. Also, when we continued to invest according to our strategy of strong investments into R&D, for example, 11.9% of net sales. Then when we go into Weather and Environment, as I said, the orders received decreased by 14% when compared to previous year -- same time previous year. When we look into the different market segments, in ground transportation, the orders actually increased. And in aviation and renewable energy where at the same level as the comparison period year before. The actual order intake was more kind of -- a decline in the order intake was more, as I said, more or less due to seasonality, and we do not see any significant changes in the market situation per se. And it's also worth noting that when we look at the -- despite the decline in orders received compared to the year before, actually the order book -- starting order book for this year or the ending order book for last year was on a very healthy level, also in Weather and Environment. The operating results in Weather and Environment were burdened by both the additional material costs caused by the spot purchases as well as then exceptional costs caused by the -- related to acquisitions in previous year. The operating result actually included EUR 0.9 million exceptional costs related to that. The gross margin decreased by a little bit over 2 percentage points and the component of spot purchases had about 2 percentage point negative impact on the gross margin. And as in Industrial Measurement side, we continue to invest according to our strategy and renew on our offering. And moving on to the full year financials, the first notion to make is that if I look at the full year 2021, the order intake was excellent, a 19% increase compared to the previous year. There was a strong demand in the industrial business area across all market segments, led to the exceptional increase of orders received by 33% compared to previous year. When we look at the Weather and Environment, also strong growth in order intake by 10%, exceptional increase in renewable energy and positive development also in the aviation market segment. In net sales, we grew by 15% and this came from both business areas. The operating result increased by 12% from previous year despite the challenging environment, especially due to the component availability and still COVID-19 environment. The operating result, when we look at the full year, EUR 6.9 million exceptional costs related to the, as said, earlier acquisitions. And this is the last time we are going to see this related to these acquisitions, the exceptional costs, just as a reminder. The gross margin decreased slightly due to the additional material costs related to component purchases, which has had a 1 percentage point negative impact on gross margin. And with the confidence on the company's financial position and future cash flow generation, the Board of Directors proposes now to the AGM a dividend of EUR 0.68 per share for 2021. And when we look at our dividend policy, this EUR 0.68 is very much aligned to our dividend policy, which is that we aim to pay a stable dividend, which will increase in line with net profit development. And our target, obviously, is to maintain high solvency and take all the future investments into account when deciding on the dividend. On cash flow, a very good year. Operating cash flow doubled compared to 2020 -- year 2020 from EUR 41 million to EUR 80 million. It really shows that our asset-light business model, which generates a stable and good cash flow through its operations. It's also worth -- I would take 2 points maybe when talking about the cash flow. It's -- when we started or when the COVID-19 situation hit and all the difficulties related to this, there was a little bit of a concern on credit loss allowance, and it's very happy to report that the credit loss allowance has not materially changed at all by this. And the other point maybe worth noting is the aging of receivables has actually improved in 2021 despite the market situation. Overall, financial position, I would summarize as strong in all aspects. The CapEx was down, as indicated earlier, due to the fact that we finished the 2 R&D buildings, say both here in Vantaa as well as in Boulder, Colorado. Earlier -- in end of previous year, it was still slightly elevated from the normal year, as we've indicated, due to the fact that we continued during this -- during 2021 to [indiscernible] and invest into the laboratories in the R&D building itself here in Vantaa. Now moving on to the market development and then outlook for this year. When we look at the market development overall, it's worth noting that we believe that the component availability will remain weak. Visibility is challenging and the component supply constraints are expected to continue throughout this year. And that means also that the additional material costs related to spot purchases are expected to remain on a high level during the year of 2022. That being said, we believe that the underlying market, to a large extent, especially on the Industrial Measurement side is going to be growing and offering us quite a bit of opportunities. The market for high-end industrial instruments, life science, power industry and liquid measurements is expected to grow. Market for meteorology and ground transportation is expected to be stable and aviation market, we believe that is continued to recover towards the pre-pandemic levels. And I forgot to mention actually renewable energy, which we also believe that as a market is going to continue to grow during the season. And that leads into our business outlook for year 2022, where we expect that our net sales will be in the range of between EUR 465 million to EUR 495 million, and our operating result, EBIT that is, will be in the range between EUR 55 million to EUR 70 million. So if I just summarize what I said, 2021 was an excellent year for Vaisala, year of growth and excellent performance, ended with a strong net sales growth in fourth quarter, good net sales growth in both business areas. And the order intake or, let's say this way, a strong order book in both business areas as a starting order book for this year is maybe the last point I would like to make. So that concludes my prepared remarks. And now let's open up for any questions you may have.

[Operator Instructions] Our first question comes from the line of Pauli Lohi of Inderes.

I have a couple of questions mostly on the component shortage. You said you have winning market shares currently, and at the same time, the gross margins are suffering a bit. So what's your ability and willingness to raise prices to meet the increased costs? Or are you happy to [ pro ] and let the margins suffer in the short term?

So I'll make 2 comments on that. So we have -- first of all, we have a strong history of increasing prices every year in the Industrial Measurements side, and we did increase again the list prices at the starting of this year more than what we have done in the previous years. That being all said, when we look at the spot prices, we are not selling our components on a spot market. So pricing component -- our products, according to whatever the spot price is for the components in a specific product, we don't believe that, that will be the right strategy. We believe that being a reliable and long-term oriented supplier will be something which -- first of all, our suppliers will appreciate and will as -- evidence would say it will help us to increase market share.

Okay. And then I would like to ask about the AerisWeather acquisition. Is there -- could you explain further the operational synergies between target companies' products and maybe our [indiscernible] channels? Or how should we see that synergies?

Yes. So I think it's highly synergetic to all the assets that we have at Vaisala so, as you may know, we have over EUR 20 million turnover on different kinds of a SaaS, DaaS, businesses inside of weather environment, various different verticals. And what AerisWeather brings to the table is an industry-leading data sales platform and extremely strong developer tools. I think that -- and those are the 2 things that we have not had as strong in our own operations, and I believe that they, thus, what we have as our old assets and now new assets with AerisWeather are highly synergetic and very excited to look at the future with the combined assets now.

Maybe finally, I would like to ask about the magnitude of the component shortage and how that -- how do you expect that to evolve in 2022, you'll get very useful indications about the impact in Q4 in the gross margins. But is it going to intensify? Or are you even better prepared to tackle this challenge going forward?

So the first thing maybe I would like to note is that we are -- when we are doing, look and how we have been approaching this component situation is that we have been very much anticipating a bit longer term also that what our supply is so that we can -- whenever there are situations on components that we cannot secure from the open market, then we can look at the alternatives and do required R&D changes and -- or offer other products instead in our portfolio. So kind of taking right kind of an approach, combining R&D investments, kind of right -- use the right mix products and then securing the components. So here, we are not working something -- we are already working kind of clearly ahead of today when we are doing this. The situation keeps changing. So it's very -- as I tried to say in my prepared remarks, the visibility remains relatively poor. So there are vendors who are indicating that the situation is going to improve maybe a little bit earlier, and there are vendors where the situation may have improved and then suddenly it's kind of decreased again. And that's the situation, I think that everybody is in. I think we have been extremely successful in this kind of -- with our efforts to secure the components, and I am extremely proud of our team, both in terms of securing the components and then being able to manage their very fast moves in the mix.

[Operator Instructions] The next question comes from the line of Matti Riikonen of Carnegie.

A couple of questions. First of all, during Q4, were you able to deliver all orders in both divisions, just with a higher cost but did you basically meet the volumes?

Matti, great to hear your voice. Yes, we did. We were able to deliver against the demand.

Right. So you basically just made the decision that delivering the volumes is kind of essential for the long-term good for the brand and then you just took the cost and that will, at some point, hopefully and of course, go away. So is that basically what you're thinking?

That's right. And maybe just 1 more elaboration. When you think about -- especially the -- so it's easier, maybe kind of explain in the industrial context. If you think about any industrial instrument or industrial buyer, they do not want to change their vendors. They only change their vendors if a new product is significantly better or there is a kind of a bad performance on the existing vendor or that kind of thing. So these are -- it's not a very fickle decision. It's kind of a -- and that makes me confident when I say that these investments leading into higher market share are much more sustainable than if you take, say, a consumer market.

Sure. Yes. Good. And then regarding the pricing, both short term and long term, did you try to put the increased component costs to end prices? Or is it just very difficult to do that at a short notice? And then thinking about the longer end, I think you have earlier said that you find it fairly easy to put -- pass on your higher costs to product prices. And you mentioned that you have been raising your prices in the Industrial Measurements side. So how should we think about this kind of lag to eventually put all your increased costs into the prices? It feels like that you are pretty reluctant to do it short term. But of course, did you even kind of try to improve your margin short term just by passing on the price? Or is it just -- it has to happen through the longer route and list prices on an annual basis?

Like with any vendor, you always make a decision or any company to make a decision on how do you price. And it's easy to raise prices, but you have to -- I believe that you have to be mindful on when doing that in a fickle environment. I would actually separate the 2 things here. There's an increasing -- inflation is going on with us, kind of our vendors and everything, all the market and passing on that type of price increase to our customers is straightforward. We have been doing that in the past. And even if in a situation where there has not been an inflation, we have been able to pass -- kind of increase our prices. And we typically do that through 1 increase in a year, but we are not kind of married to only that approach. But what we consciously decided is what I said -- I tried to say earlier also is whenever there's 1 incident or 1 given component, passing all the costs and thus going ourselves into kind of like a spot pricing, we consciously chose not to do that.

Fair enough. Yes. And of course, that sounds wise and that sounds good for the long term. I think the customers also would appreciate that they are just getting their volumes at the decent price and any price increases would be gradual.

And I would -- my experience would say, Matti, that all customers have a long memory. And if they believe that the price increases adjust, that's okay. If they believe that you are exporting things, memory will be very, very long. And people will get even eventually.

Yes. Good. Then about the kind of basic demand that you are facing. Do you still -- do you think that the customers still have pent-up demand after COVID or after component shortages so that, that would still continue to support your 2022 top line, like it probably did in '21 when 2020 was a weak year. There were a lot of spot purchases, et cetera, and then some of the pent-up demand probably affected positively in 2021. But do you think that you would get the similar benefit or boost in 2022?

So 2 things. If I look at GDP growth, which is like a generic industrial activities, kind of a highly correlated at least to it, all the forecasts for this year are still that the GDP growth in the world is going to still be clearly higher than an average year, even if it's going kind of likely to slow down towards the end of the year. So that speaks good in terms of especially the industrial instrument -- customers for our industrial instruments would expect -- experience the higher demand and therefore would be investing into new processes, facilities, renewing processes and that kind of things. The second thing is that we have been seeing investments. There's a whole host of bottlenecks still if you look at any industrial goods on -- or many segments that there seems to be bottlenecks still to deliver -- delivering against the demand, which one could believe that, that would lead into investments in multiple different industries.

Right. Okay. And then when you mentioned the annual price increases to list prices, how should we think about the gross margin impact going forward? You mentioned in Q4 that you had, on a group level, 3 percentage point negative impact on gross margin because you had to buy components from the spot market. Now with the current price increases in place, what do you think? Will it be a similar negative impact to your gross margin short term, of course, or do you think that the price increases offset already some of the cost increases that you have?

Of course, I think it offsets some of the cost increases now that being all said, as said, the visibility for this year is in terms of the component supply, it's relatively weak. And as we believe that the shortages are going to continue throughout the year, that will have a negative impact on our gross margin and that's leading into the outlook that we gave in terms of the net sales and profitability.

So if I formulate it differently, do you think that the gross margin headwind will be as strong in 2022 as it was in Q4?

I think time will tell. And why I'm saying this is that -- like I said, the visibility into the component market and supply keeps changing. I mean it's surprisingly unpredictable still after now being living in this for, what, 3 quarters or so.

All right. Okay. Fair enough. Final question, the AerisWeather acquisition, do you think that there would be significant top line synergies kind of immediately or very quickly after the acquisition? Or do you think that you would need to develop the offering slightly longer to basically get the synergy benefits out of it? And now, of course, talking about top line synergies mainly.

Yes. So there are some short-term opportunities. But obviously, what we believe was our kind of a case in investing into areas whether it's really about the longer term. And the way we can look at it is it's a missing piece that we did not have in [indiscernible] and kind of a complete, clearly the capabilities that what we have in-house. And getting those kind of real synergies in terms of the top line, some take longer, some shorter time. It may develop -- requires some new sales capabilities or some new adjustments in the offering and in some cases, just a plug and play.

We have 1 further question coming from the line of Paul de Thierry of Arke Advisers.

Congratulations on an encouraging set of results. Can I just continue, firstly, from the last question on the AerisWeather acquisition. Has the acquisition opened up a new set of customers either in new segments or geographical markets? And if so, what is the -- is there any potential to sell through any products in your division as a result of [Technical Difficulty]?

There's a bit of all of what you mentioned. So let me give you like a geographic example, AerisWeather is very much of a U.S.-centric company so far. We have a very strong offering in Europe. Obviously, this is kind of an opportunity to expand, build on kind of a mutual strength into, for example, into Europe. It's also additional sales channel to some of our offering. I think what I said in my prepared remarks, it's really important that AerisWeather brings really world-class developer tools. And I think that offers us kind of real differentiation also in the marketplace where kind of our excellent data offering combined with -- kind of combined sales channel and the developer tools that come from them. I think that's -- there you have the equation kind of.

Okay. You -- just you mentioned you increased -- managed to increase market share in [ Q4 ], are you able to give any more granularity in what areas and any figures on market share gains that you made?

Unfortunately, not in terms of I can give you that there's all kinds of anecdotal evidence on customers that we have been chasing for a long period of time, customers that we know that have been our competitors, customers in various different segments. So the market share gains have been coming from various different segments. So it's not on 1 or 2. It's kind of across the board. And -- but giving you kind of a number that will be -- unfortunately, there is no independent research on the relatively small markets that we are in, and hence, independent market share research and market share moves in terms of quantified numbers that we would not be able to give you that.

Okay. But when you look at market share, are the market share gains you're getting from existing customers who, say, moving away from [indiscernible] and switching more of their orders to Vaisala or [Technical Difficulty]?

It's both. It's absolutely both.

Okay. Your R&D -- your expenditure amounts of your sales in R&D, I think it's 11.9% 2021, is that -- can we sort of assume that, that is a stable figure going forward and actually looking to the vision, so I noticed in Weather and Environment, is it 12.9% versus [Technical Difficulty]?

So first of all, we continued to look at our investment portfolio. So it's not like it's a fixed number before any of the market segments or business areas. So we do actively manage the portfolio of investments we have and proactively look at this forward-looking where we believe that there's a best return on investment within the business areas and across the business areas.

Okay. Just 2 more questions. Apologies if I missed it if someone of you asked this, but looking at the component availability issues. What -- are there any particular areas that stand out where you think greater difficulties than others? Or is it being generally equal?

I would say, any electronic components and integrated circuits of various different clients, analog and digital ICs, you name it and you name a vendor, and they would be -- I doubt that there would be many, if any, vendors who would actually meet the demand. And it varies in terms of the specific component. You may have individual vendors where a single component or family of components or broader family of components that could easily meet the demand and then the same vendor with the next family of components might not and to make it kind of more difficult situation, this picture keeps changing. So how it may have looked like 3 months ago, the picture even with the same vendor and even if I would pick a fixed set of components, might look very different today and will look very different in 3 months from now.

[Operator Instructions] Okay. There seems to be no further questions coming through at this time. So I'll hand back to our speakers for the closing comments.

Thank you for following our calls, and thank you for the excellent questions from all of you. And we look forward interacting and speaking with you soon. So have a great weekend, and thanks for joining.