Vaisala Oyj (VAIAS) Earnings Call Transcript & Summary

Hello, and welcome to Vaisala Q3 2022 Interim Report Conference. My name is Pricilla, and I will be according to for today's event. I will now hand over to your host to begin today's conference. Please go ahead.

Thank you. And here, I'm joined with our Chairman of the Board, Ville Voipio; our CFO, Kaarina Muurinen; our Head of IR, Paula Liimatta and myself, Kai Oistamo, I'm the CEO -- President and CEO of Vaisala. We had an excellent performance during the third quarter. Whether we look at orders received or net sales both grew strongly, and I'm very happy to report also in both business areas. Our order book ended at a record level of EUR 188 million at the end of the quarter. And the operating result increased when we look at year-on-year, i.e., third quarter to third quarter. The orders received grew by 25% and net sales by 20% when we go -- when we compare to the same time previous year. When we look at in more detail into the orders received, as said, 25% compared to third quarter 2021. If we look at on constant currencies, that corresponds to the 17% growth in constant currencies. As said, from both business areas and when we look deeper into the segments that we serve -- market segments that we serve in industrial instruments, life sciences, power industry, meteorology, renewable energy would be the market segments that I would mention where the demand was the strongest. The order book, as said, reached new record level again, and we increased compared to same time last year 14%. Same market segments where the growth came from. And then if I take Weather and Environment also mentioned that renewable energy, ground transportation, aviation would be the market segment that I would highlight. Then when we look at net sales, as said, 20% growth in constant currencies that corresponds to 12% growth compared to the same time last year. Very strong growth in both business areas, which is worth mentioning. And when we look into the different market segments, industrial instruments, life sciences, meteorology, aviation and renewable energy be the ones which are again, merit highlighting. In terms of an operating result, as said, increased when we compare it to the same time last year. This is despite the fact that the gross margin decreased to 54.7% compared to 3 percentage points higher at the same time last year. This came due to the negative impact on component -- on spot purchases. If you look at the entire spot purchases that had a 4.2 percentage point negative impact on the gross margin, and this 4.2 percentage points then was partly offset by higher share of more profitable product business, pricing and economies of scale generated then by the higher volumes that we experienced. As we have indicated before, we continue to invest, and that led into increase in operating expenses compared to the same time last year. So we continue to invest according to our growth strategy. And the other contributor, as we have mentioned in the previous quarterly calls, was the IT system renewal that we are investing in during this year. Going into the 2 business areas that we have, first, starting from Industrial Measurements. Excellent performance continued, as it has been throughout this year. The orders received increased strongly in again Industrial Instruments, life sciences and power industry and market segments. The order book itself reached all-time high, 60% up from last year. And that corresponds to -- in terms of that -- if we look at it in the constant currency side, that will be 21% in -- basically in constant currencies. When we look at Industrial Measurements, net sales side, again, strong net sales growth, 22% corresponds to 40% in constant currencies. Industrial Instruments, life sciences market segment were especially strong, albeit that the growth came from all market segments. Gross margin decreased here as well in Industrial Measurements. 3.5 percentage points decrease in gross margin, and this is really related back to the earlier comment into just component spot purchases, which in Industrial Measurements context had a 6.3 percentage point negative impact, which then we were able to partially offset by economies of scale higher -- through the higher volumes and other actions that we took -- like pricing actions we took during the year. And the operating result ended up being 14.2%, which is up from 14.2% -- EUR 14.6 million, which is up from EUR 14.2 million corresponding to the same time last year corresponding to 25.3 percentage points of net sales during the third quarter of '22. Moving on to the Weather and Environment business area, as said, excellent quarter there as well. The order book ended up at an all-time high. Orders received increased strongly in meteorology and renewable energy market segment and order book reached at the end of the quarter, nearly EUR 150 million. And when we look at the percentage wise, the orders received, they grew by 21% compared to the same time last year. In terms of a net sales in Weather and Environment, strong growth in meteorology, aviation, renewable energy market segment. Same kind of a decrease in gross margin as in Industrial Measurements. In Weather and Environment decrease was 3 percentage points due to the spot market -- spot component spot purchases, which had a 2.5 percentage point negative impact on the gross margin when compared to the same time last year. And the operating result, EUR 7.5 million or 9.9% of net sales. Moving on to the year-to-date financials. The operating -- when we look at the year-to-date numbers, the operating profit margin improved year-on-year to 13.4 percentage points of net sales. Net sales grew by 19%. And kind of when we turn that into constant currencies that would be correspondingly then 13% growth year-on-year. Gross margin close to the previous year, which shows our capability to mitigate the increase in both, in the inflationary costs on our component as well as the spot purchases, which now when we turn it into a year-to-date number, had a 2.5 percentage point negative impact on gross margin. And then if we turn this into earnings per share, this would correspond to EUR 1 as earning per share. Cash flow from operating activities decreased and then this is really kind of came through -- mainly through the increased activities in terms of increased sales. It's a change in net working capital was the biggest contributor to this. And our financial position continues to be strong. And it may be worth noting on the capital expenditure side that when we look at the year-to-date number, as we have indicated before, we have now returned to the normal level -- that's what we call a normal level, so i.e., the level before the building project that we experienced during the few past years. When looking at the market development and business outlook. We updated this, and we see growth in the same segments as before, i.e., high end Industrial Instruments, life sciences, power industry, liquid measurements and renewable energy. Aviation continues to recover and then meteorology and ground transportation continue to be stable. And then on the back of very strong third quarter, we raised our business outlook now October 14. And now we see our new guidance is that we estimate our full year net sales to be in a range between EUR 500 million to EUR 520 million and our operating result for 2020 be in the range between EUR 62 million to EUR 72 million. So if I just summarize before I open up for questions. We had an excellent, very, very strong third quarter. Very happy to report that it came from both business areas. Orders received, net sales both grew strongly during the quarter and the order book ended up at a record high level at EUR 188 million. So very, very happy on our performance during the third quarter and gives us a good -- given the strong order book, gives us a good basis for continuing the performance in the fourth quarter. I'll end up with my prepared remarks here and I'll now open up the line for any questions you may have. Operator, please.

[Operator Instructions] We will first take our first question from Paul de Thierry from Arke Advisers.

A couple of questions. I'll take them in turn. You mentioned your gross margin impact at the group level of 4% in the quarter. And I'm just looking at how that's run throughout the year. I think it was 1% in the first quarter, 3% in the second quarter and now 4%. Can you give us any further color on whether you expect this sort of pricing pressure to continue at this level? Is it likely then to ease itself away to become as we go through 2023? So that was my first question.

Okay. Thank you, Paul for the question. And as I said in my prepared remarks, the pressure actually came from the acquiring the components from the spot markets. And as we have indicated throughout the year, during this year, there has been a significant shortage of components -- electronic components in the marketplace. And it was very much of a conscious decision that we chose to be active on the spot market and acquire the components that we need, which has enabled us to meet the very, very strong demand, as you can see in terms of our net sales growth and -- net sales growth, both in the fourth quarter as well as the year-to-date. And it very much was a business decision, and we are very happy with the business decision has yielded exactly as we intended. Maybe kind of as continuing kind of the second part of your question in terms of going forward, I would answer it this way, that I would -- we expect the component shortage situation continue now in the fourth quarter and into next year. However, it gradually will improve and when we go into -- especially when we go into next year the component -- we expect that the component situation -- availability situation will be better as we go into next.

Okay. So on a sort of related issue, you mentioned before that actually you redesigned some of the components given the shortage and lack of availability. Are you still in an elements of redesign? Or are you actually reversing some of the redesign of products as the component shortage in certain areas becomes less? What are the pressures on the business at the moment? And are you seeing -- are you easily able to produce the same quality and specification of products given the component shortage?

Yes, thanks for the question. So first of all, on the quality side, we make no compromises on the quality. So we always -- we hold the quality criteria, and we will not do anything which would be of lower quality. So that's kind of a -- that's kind of a hard line that we have. Then back to your question in terms of how do we manage the -- have managed and continue to manage the component shortage situation. There are kind of, I would say, 3 kind of things that we continue to do. One thing is to negotiate with -- first of all, we do have a good visibility into the availability situation, we have had and which has helped, and we continue to have that, which allows us also to negotiate with the vendors on the availability of the components in -- especially in the areas where it's hard to design around or find other solutions. And together with our vendor partners, we have been able to manage part of -- the shortage in the marketplace. Then when there is situations where our -- despite the best efforts our vendors have not been able to deliver. We have been active on the spot market using our strong balance sheet securing the components that we need to meet the strong demand, as I said. And then thirdly, in some cases, we have been redesigning some of the products around another kind of replacing the missing component or the component that is offshore supply with something else that is in a better supply. But it's always a mix between these 3 things, and we continue to play with the 3 things.

We will now take our next question from Arttu Heikura from Evli.

It's Arttu Heikura from Evli. Do you hear me?

Yes. Good to hear your voice.