Vaisala Oyj (VAIAS) Earnings Call Transcript & Summary

Hello, and welcome to the Vaisala Q2 2022 Interim Report. [Operator Instructions] Today, I am pleased to present President and CEO, Kai Oistamo. Please go ahead with your meeting.

Thank you. And thanks for everybody for joining the call from my side as well. I'm joined here by -- with our -- by our Chair of the Board, Ville Voipio; our CFO, Kaarina Muurinen; and our Head of IR, Paula Liimatta. Vaisala had a strong second quarter, despite the fact that the market environment remains challenging. Both the COIVID-19 situation, especially in Asia as well as and the Ukraine war, the economic uncertainties throughout the world, as well as the challenging component situation was the environment we operated in. And despite all of that, both the demand side remained strong as well as our delivery capability remained on a very high level. The order intake grew by 10% and net sales likewise by 10% on a back of very strong Industrial Measurement business area, whereas the Weather and Environment business area was on a previous level during second quarter, albeit as a comparison to a very strong second quarter last year. From the market area perspective, the net sales increased strongly in industrial instruments, life sciences and aviation market segment, which was very pleasing to see as well gradually growing towards the pre-COVID-19 levels. What was also very pleasing to see was the fact that we were able to keep our gross margin on a same level, above 55%, as last year despite the fact that there was about a 3% negative impact through the component spot purchases that we continued to do actively during the third quarter. And we were able to offset this 3 percentage negative impact by our pricing actions as well as then the more profitable sales mix increase -- relative share, obviously, on Industrial Measurements as well. The EBIT fell somewhat short of previous year and this was on the back of increased operating expenses. 2 things to mention here, as we've indicated before, we are renewing our IT systems, especially the ERP system this year, which is a significant investment, planned investment and we continue to do that and its progresses well so far. And the second thing is that we continue, as we indicated before, we continue to invest on our future growth into R&D and into sales and marketing. The order book also, on a back of very strong order intake, ended up on a record high level on Vaisala level. Then I'll move on the non-financial highlights for the second quarter. We continue to work to expand our product offering as well as then our operational excellence. On new product launches, it's worth mentioning the new C-band weather radar, which is completing our weather radar offering, which is strategically also very important. This radar family really excels in delivering high-resolution weather forecasting information. And just as an example, it's able to differentiate between snow, hail, sleet, and rain through its capabilities. We have been investing very heavily into ESG and in the sustainability. Sustainability, as you know, is at the heart of our strategy. And it was pleasing to, again, during the quarter, get a couple of notices in the marketplace. First, to mention is the Carnegie Sustainability Award for this year where we were selected in the category of small cap companies, the leading company. And the second thing I would like to mention on this is the Sustainalytics report came out on a huge number of companies, and again, we performed extremely well. If you look at our ESG rating, we were on the top 2 percentile on electronic equipment industry assessed by Sustainalytics. So extremely good results. The third highlight I would like to raise is the acknowledgment on the Finnish -- in design competition or Fennia Prize on the handheld on the Indigo family. I think this is actually part of the larger investment that we have done over the past few years, investing into the usability and capabilities on -- throughout our portfolio, and it was very pleasing also here to get the external acknowledgment on the hard work and very good work that the organization has been doing over the past years. Moving on to the financials. If I look at first, the second quarter orders received, they grew, as I said, by 10%. The increase came on the back of very strong Industrial Measurements business area. And as I said earlier, the Weather and Environment was on the same level as second quarter last year. And I'll just repeat myself the second quarter last year was very strong in weather environment. When looking at the business areas or market segments, industrial instruments, life sciences, ground transportation, and aviation were the among the strongest market segments were contributing to that growth on the orders received. With the strong orders received, we reached a new record level on the order book at the end of second quarter. And here, it's also worth noting it's both business areas contributing to this. And industrial instruments, life sciences and Industrial Measurements and in ground transportation, aviation, renewable energy on the Weather and Environment side were the strongest contributors. When we look at the net sales, during the second quarter, net sales grow by 10%. If we look at the constant currencies, it will be 5% compared to second quarter this year -- the second quarter last year. This is, again, on a very strong growth on the Industrial Measurement business area. I'll come back to that a little bit later in the presentation. And Weather and Environment, as I said, it was on the previous year's level and same market segments as on the order book contributed to the growth on -- strong growth on the net sales side. Gross margin, as I mentioned earlier, remained on -- over 55% and this, like I said, was very pleasing to see, especially in the environment where we need to operate, given the shortage of components. 3 percentage negative impact on the spot purchases during the quarter and the ability to offset this by pricing actions as well as a more favorable profitable business mix. I think that's -- there is a very good performance by the organization. From the OpEx side, as I said, operating expenses increased according to our plan. So the IT system renewal and the long-term investments into both sales and marketing as well as R&D contributed to this. And that led into operating result decreasing somewhat year-on-year. Now diving deeper into the business areas. I think this is the same headline for Industrial Measurements. Now the third time in a row, maybe it's lack of my imagination or running out of superlatives, but it really was, again, an excellent performance continuing. The orders received increased strongly on most market segments, especially in the industrial instruments, life science and power industry, the order book reached -- increased when we compare to previous year by 43% and orders received by 24%. So really an excellent performance on orders received and resulting order book. And similarly, when we look at the net sales on Industrial Measurement side, really a very good quarter, net sales growth of 24%, and even when you -- we would be able to look at it in constant currency, 17% increase year-on-year in constant currency. So very good quarter. The strongest contributors in terms of market segment, industrial instruments, life science and power industry again. The gross margin, slight decrease. We were almost able to compensate the additional costs related to components spot purchases which were the headwinds were about 3 percentage points on the gross margin, so we were almost able to compensate that by increasing the prices as well as then kind of ability to sell more profitable parts of the gross profit. The operating result was at EUR 11.5 million when comparable number previous year was EUR 10.5 million. That translates into 21 percentage points of net sales. When we look at the Weather and Environment, even if the -- when we look at the percentage growth in terms of orders received was a little bit over -- a percentage point over the same time last year, we have to just remind you again that the second quarter last year, we had a record high quarter in terms of orders received in Weather and Environment. So even if the growth was only 1 percentage point, I would consider actually the order intake as very good. And this actually can translate -- be translated also in terms of our order book -- ending order book that we had at the end of the quarter, which was on an all-time high level as well. On net sales, slight growth of 1 percentage point, in constant currency was decrease of 3 percentage point points. The market segment I would like to highlight is aviation market segment, which, as I said, is very pleasing to see the continued improvement on the market segment towards the pre-COVID-19 levels. The gross margin decreased somewhat again due to the component spot purchases, which had the same 3 percentage point negative impact on the gross margin. That being said, we were able to compensate most of it again through pricing actions and more profitable mix also on the Weather and Environment side. The operating expenses -- operating results due to increased operating expenses and declined investments ended up being minus EUR 1.1 million during the quarter. As we are in the middle of the year, it's good to look at the first half financials. And when we look at how we fared so far in the year, net sales have been growing by 19% and in constant currencies that then translates into 14%. We have increased -- being able to improve our gross margin from previous year to 55.7 percentage points. This is very much also on a back of, also a very good first quarter as you may remember. And this all in a situation where we had a component spot purchases had on a half yearly basis 2 percentage points negative impact on the gross margin. Whereas in the previous year, we had no component spot purchases during the same period. And the operating result margin increased to 11.7% compared to 9.5% at the same time previous year. In cash flow terms, a slight change in the negative cash flow side, 2 contributors to this. We have increased our component inventories to mitigate the difficult component availability situation in the marketplace as well as then delayed deferred liability -- changing the deferred liability or a decreasing liabilities during first half of this year. And the biggest contributor is on the back of very strong last year, we had also a strong incentive payment during first half of this year compared to the previous year. On a financial position, again, a same headline as I had on the same slide after first quarter. Strong financial position continues. Maybe the one number I would like to draw your attention to here. As we have been indicating for some time, our capital expenditure now has decreased to the level prior to the building investments, both here in -- with the R&D building here in Vantaa, in Finland, as well as our facility in Boulder, Colorado. So now we are on the level that we have been indicating before. Then when we look at the market developments and the business outlook for the rest of the year, when we look at the market segments, the higher we expect the market to continue to grow on high-end industrial instruments, life science, power industry, liquid measurements and renewable energy. The aviation continues to recover towards the pre-COVID-19 levels. And meteorology and ground transportation, we expect to remain stable. And this then translates into keeping our business outlook for 2022 unchanged. So we anticipate our net sales to be in the range between EUR 465 million to EUR 495 million and our operating result to be in the range between EUR 55 million and EUR 70 million. So if I would just finish up by summarizing the second quarter. So really characterized by strong demand, strong delivery performance continuing throughout the quarter and especially pleasing was to see our capability to keep our gross margin on the same level than year before despite the component -- negative impact through the component purchases. So I was very happy to note that. So with that, I would like to conclude and open up for any questions you may have.

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

I have a couple of questions. First, I would like to ask about how do you guys see the development of sales volumes in the Industrial Measurements business area? And do you think that the volume growth despite seeing acute level in Q2 is, however, slowing down a bit in the second half of '22?

Like, we said just on the second last slide, we adjust guidance, which is actually very much of a growth guidance compared to the year before. Obviously, if you look at the comparables we experienced, if you look at the Industrial Measurement sales volumes throughout last year percentage-wise, obviously, they grew through the year quite a bit. So the comparables continue kind of yet to be harder to achieve going forward, if you look at the percentages. But we see so far with the limited visibility that we have. And I have to remind you that the market situation remains difficult to predict with war going on in Ukraine, the energy crisis in Europe, inflation, all the kind of economic what goes throughout the world, the continued impact of COIVID-19 in China. So the visibility is kind of exceptionally poor, I would say, on the overall economy. But with all that we can see, we are confident to keep our guidance.

My second question is actually related to the European energy crisis. Have you already seen any kind of boost in the demand for renewable energy solutions due to this difficult energy situation in Europe? Or do you expect that happen in the near future?

Yes, so a very good question. Thank you. And our part on the renewable energy, we really need to see the -- most of the demand when the investments really starts to happen. And I think right now it's more in the planning phase and the investments I would expect to come in the coming months and years. So many of these investments are big CapEx investments, which don't happen overnight. So I would expect that these investments are going to come not only short term, but very much on the long term as well. This is a big, big change in Europe.

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

Its Matti Riikonen, Carnegie. Couple of questions. You flagged the increased fixed costs, and I was thinking that what kind of increases are we talking about? So are they kind of permanent personnel-related increases that will probably remain fixed? Or are you kind of using external acquired services that are lifting costs temporarily. So what is the kind of rough split? And how would you characterize is the cost base going to be permanently higher?

Yes. So thank you, Matti. Very good question. And I'm going to split my answer into 3 parts. As I said, there are 2 main components what are driving the increase of operating expenses. One is the planned continued investments into the fueling the future growth of the company, which are into R&D -- according to our strategy into R&D and into our sales and marketing. And obviously, those are areas where we are mainly looking at internal resources. We are in a very much of an environment where the competitiveness of the company is about the knowledge base and the competitiveness for the employee base. That's the core competitive advantage that we have. So for example, our R&D investments very much of that is we continue to see very important that it's our own personnel. That all being said, obviously, we are, for example, in R&D, we continue to look at what are the kind of the more -- I would say repetitive things that where we can use outsourcing, but main part clearly is investing into our own knowledge base. Then on the IT investments, which is the second part of the answer, obviously, that's a project. And in this kind of an IT renewal, ERP system renewal, that's a big part of the costs are external. It's both kind of external partners, external consultants, external purchases and so on. So that's -- and it's a project, it's a finite timeframe as well when it's completed.

So are the IT projects -- I mean when you talk -- when you mentioned ERP, it used to mean that there's going to be a lot of cost and very long project. But nowadays, of course, we are perhaps hopefully living a different life. So are these ERP costs, you will certainly have some fixed ERP costs in terms of licenses or maintenance costs in any case. So what is the kind of relationship here between the project cost and then the remaining cost?

Yes, with the remaining cost, obviously, you have you compare with the running cost of the existing ERP as well. And I don't see a major increase on the running cost per se. Every company needs to have an ERP and you always have a running cost on it. And so I'm not seeing our ERP upgrade, and it's -- and we have our IT kind of platform investments here as well. The running costs I'm not overly concerned. There's no big cost pressure on that so far anyway. It's more of the -- kind of the project that we need to -- every company, every now and then, you need to just upgrade and that's how the life cycle goes.

Of course. Then technical questions related to the rental income. Could you remind us where was that coming from? And what is the reason that you don't record it in the other operating income, but it's in EBIT?

Yes. So where that is coming from, it's our wind LiDAR business, and especially on the wind park assessment type of a business where very expensive wind lidars are assessed, especially offshore, optimal positioning on offshore wind parks. So that's what that meant our revenue is. And I'll let Kaarina answer the accounting part of your question.

Matti, we are following IFRS 16 for the lease accounting. And the leases we make to our customers, they are booked as lease income, and they are part of our net sales. And then the expenses are part of our operating expenses.

Yes, and I actually already answered the real kind of reason. So if it's wind lidars that you lease to your customers, then of course, it's part of your kind of operating business. I just thought that you might have some kind of facilities that you just rent out than its working for different…

No, no.

Now I understand. Okay. That was a good clarification. Sorry for not knowing that before.

No, no, very good question.

Then finally, I don't think we discussed the thing about the Aeris acquisition. So did you book any kind of additional costs related to that purchase? You probably used some lawyers, but they were booked in Q1, right? So they did not increase the costs in Q2.

They would be in the Q1. There were some extraordinary like deal-related costs in the Q1 numbers, not is kind of -- I mean, the size of those costs were related to the actual size of the business, so no excessive costs. But thank you for, Matti, asking the question. I should have actually prepared my remarks actually saying also something about the AerisWeather and how that acquisition is going. I'm quite happy on both the -- it's fully integrated, it's fully part of the operational structure and we are off to a very good start. It's -- so far given its early days now being part of Vaisala 5 months, but very happy and very much on the plan that we -- ambitious plan that we had when we bought the company and when we did closed the deal.

All right. That was all from me.

Yes. So Matti, actually, it was EUR 0.5 million was the extraordinary costs during the first quarter.

And as we have no more questions registered. I hand back to our speakers.

All right. Thank you for very good questions. And as before, we are very much here for you. So any further questions you may have, please don't hesitate to contact us and we'll set up other occasions also for you to speak with us. And with that, I would like to wish you a very happy continuation -- good continuation of the summer. Hope you'll have a chance of getting a little bit of a break from your busy days -- working days as well. Thank you.