Vaisala Oyj (VAIAS) Earnings Call Transcript & Summary

Hello, and welcome to Vaisala Financial Statement Release 2022 Conference Call. My name is Priscilla, and I will be your coordinator for today's event. Please note, this call is being recorded. And I will now hand you over to your host, Mr. Kai Oistamo, to begin today's conference. Please go ahead, sir.

Thank you. This is Kai Oistamo. I'm the President and CEO of Vaisala. Welcome, everybody. And I'm joined here with our Chairman of the Board, Ville Voipio; our CFO, Kaarina Muurinen; and our Head of IR, Paula Liimatta. So Vaisala's fourth quarter, I would characterize it that the strong net sales growth was the characteristic of our fourth quarter as it was for the entire year. We had a solid performance during the quarter, which ended a good year. The growth of orders received continued strong in both business areas, and especially so in Weather and Environment business area. And I'll go back -- I'll go deeper into the details in the 2 business areas in a little while. The net sales grew by 13%, and order book ended over EUR 180 million, which gives obviously a very good start for the year 2023. And reflecting the performance in the year, the Board of Directors is proposing EUR 0.72 of dividend, that's EUR 0.04 increase from last year to the Annual General Meeting later in the Spring. Before I go into the numbers, I thought that I would give you a little bit of a highlights on 2022 on some of the key areas from Vaisala. In terms of our strategy, product and technology leadership from sensors to digital solutions is extremely important for us. We had several key product launches in both Industrial Measurements and in Weather and Environment. On top of that, I would like to highlight the acquisition of AerisWeather, which is a subscription-based software company, providing weather and environmental information, which we acquired and closed the acquisition almost exactly a year ago. And now it's fully integrated in our data business. And we are very happy with the acquisition as well as the progress that we've made on the digital base side as well. Speaking of that, the other event -- key event during the year, obviously, was the launch of Vaisala X weather, which is a product brand -- family brand for our digital offering. It's a forecast and observation suite of services using a combination of intelligent hardware and software, and business models Software as a Service and Data as a Service, and very much with the developers in focus. And as I said, very happy with the progress on the -- during the year. The second key topic, which I talked about to you in the previous quarterly release as well is the sustainability leadership. And if I think about in back the year 2022, I'd raise 2 kind of events during the year. One thing is the accolades that we got again from Financial Times. We were selected in top 5, which is top 5 public companies out of, if I recall right, 1,600 public companies in Europe in terms of ability to reduce or the track record of reducing greenhouse gases during the past years. Very proud of that. And the second highlight on the same sustainability topic is our commitment to science-based targets, which we will send now for validation to SBTi in 2023. And then lastly, you all are probably very aware that reliability and quality are very much the words that are associated to our products and solutions, they are key elements on our offering. And as the Mars [ rover ] in the picture shows, we have been part of the Mars missions now for quite some time, an interesting story. Now it's that -- we have actually been in Mars providing a weather forecasting -- weather observation network in Mars for 10 years. The whole design was supposed to be lasting minimum 2 years, now it's been 10 years and still going strong. And I think it speaks highly of the capabilities, technologies and the commitment that the company has on the reliability and quality of our offering. Moving on to the numbers on fourth quarter. The growth of orders received continued strong in both business areas and especially in Weather and Environment business area, as I said earlier. The orders received grew 17%. And if we look at it in constant currencies, that translates to 13% in constant currencies. And if we look at the market segments where that growth came from meteorology, aviation and industrial instruments would be the ones that I would highlight. They had the strongest demand growth. There were other ones as well, but the strongest ones were these 3. Then if we look at the ending order book for 2022. We ended the order book with EUR 181.5 million. The order book itself grew from the third quarter '21 by 13%. And obviously, as I said earlier, gives us a very strong kind of starting point for 2023. And on the right, you can see the analysis on how much of that -- that's 80% of the order book that we have, starting order book that we have actually is [ 4 days ] the current year, i.e., 2023 and the 20% is then for the out years. It's a similar ratio as what we have had already some time and previous year as well. Then when we look at net sales in fourth quarter, company level net sales grew by 13%. In constant currencies, the net sales increase was 8%. We had a strong net sales growth in both business areas. And when looking at the market segments, the strongest growth came from Industrial Instruments, Life Sciences, Power Industry and Aviation market segments. Looking at operating results. We increased the operating result year-on-year. Very happy to note that the gross margin was at previous level -- previous year's level at 53.5 percentage points, despite the fact that the component spot purchases had a 3 percentage point negative impact on the gross margin. And we were able to compensate that with economies of scale and higher prices. Simultaneously, operating expenses increased. This was driven by the IT system renewal and investments then as we have been doing consistently in sales and marketing as well as in R&D, where all in all operating expenses grew compared to the previous year. Then moving on into the 2 business areas, starting with Industrial Measurements. Very good performance continued. The orders received grew by 11% and orders received, as I said earlier, really driven by Industrial Measurements, Life Science and Liquid Measurements market segments. And the resulting order book up 27% compared to the same time last year. When we look at the net sales in Industrial Measurements, the net sales growth was -- grew by 20% compared to fourth quarter the previous year, that's a EUR 10 million higher sales in a quarter compared to the same time previous year. And when we turn that into constant currencies, if you look at it in constant currencies, that's a sales growth by 14%. In terms of our market segments, all market segments in Industrial Measurements had a very strong growth. Strongest ones were Industrial Instruments, Life Sciences following Industry Market segments. But as said, we experienced strong growth across all market segments in Industrial Measurements. Then if I move on to Weather and Environment, I think the quarter was really characterized by excellent growth in orders received. The orders received grew from same time last year by 24%, that kind of in constant currencies, that will be a 19% increase in orders received. The orders received grew in meteorology, aviation and ground transportation market segments. And then the order book ended up almost EUR 140 million. That's up 10% compared to the same time previous year. In terms of net sales, 9% growth in Weather and Environment compared to same time previous year. The net sales growth driven by aviation and meteorology market segments. Similar story in terms of a gross margin as in Weather and Environment on previous year's -- year level, 49% despite, again, the component spot purchases having a 2 percentage point negative impact. And I want to remind you on the Weather and Environment where we have a large part of the business is with long-term contracts and public entities where the ability to increase prices due to the spur kind of increase in component cost. Component costs is much more limited than in Industrial Measurements side. So I think the fact that we were on the previous year level on gross margin is actually an excellent result. In terms of an operating result, slight decrease compared to previous year, driven by the investments that we are making. Then if we move on to the whole year and look at the whole year financials. The full year operating profit margin improved year-on-year to 12.2 percentage points of net sales, as year was characterized by a strong net sales growth of 17% compared to previous year, 12% in constant currencies. And when we look at the entire -- kind of entire year, the gross margin was close to previous year's level, only 0.4 percentage points lower than the year before. Despite, again, the headwinds that we experienced from component spot purchases, which had a 2.7 percentage points negative impact on gross margin. The operating result, as I said, improved to 12.2%. And that when we turn that into earnings per share, a nice healthy growth on that as well to EUR 1.24. And here's a picture on the dividend development and how does the EUR 0.72 that now is a proposal for AGM relate to a little bit of a history. And as we have a dividend policy of increasing the dividend in line with the result, the increasing results of the company. I think this reflects nicely also a little bit longer term, how we have been able to turn the kind of growth of the company into the growing dividends to the shareholders as well. In terms of our cash flow, the cash flow from operating activities decreased, and this is due to the increase in net working capital in 2 sides. It's the receivables, which on one hand. And then on the other hand, the capital tied in inventories, both really driven by [indiscernible] that we experienced through the year. And when we look at the entire financial position, again, as I've said before in previous quarterly releases, very strong financial position continues. And here, maybe the -- just to highlight that we have actually done what we said out a year ago to do this during '22 in terms of capital expenditures. Going back to the level before the building investments into the 2 sites that we had bought here in Vantaa as well as in Boulder, Colorado. And then a few words on market development and the outlook that we are seeing for this year. When we look at the market segments and the development of the market segment that we anticipate for 2023, we -- our forecast is that we will experience growth in terms of our market in high-end Industrial Instruments, in Life Sciences, in Power and Energy, in Liquid Measurements, Renewable Energy, and Roads as well as Automotive segments and meteorology and aviation remains stable. And when we turn this into our business outlook for 2023, we estimate that our full year 2023 net sales will be in the range between EUR 530 million to EUR 570 million. And the operating result will be in the range between EUR 70 million to EUR 85 million. So as a summary, strong net sales grow continued through fourth quarter 2022. Orders received and net sales grew strongly and the order book -- ending order book gives us a good start for the year 2023. With this, I would like to conclude my prepared remarks. And operator, we would be ready for any questions and answers that you may have.

[Operator Instructions] We will take our first question from Matti Riikonen from Carnegie.

This is Matti Riikonen, Carnegie. A couple of questions. Firstly, could you remind us how long the ERP project is scheduled to be? And what is the level of investment that you're putting into it [indiscernible] company quarters that will impact?

Yes. So if I answer that question, Matti. So hi, first of all, and good to hear your voice. And we have not set out on the size of the investment. But let me put this in perspective that we kind of our plan here is that we will take the time to make sure that there are no blunders in executing the ERP. We are a complex company. We are in -- we represent it all around the world. We have many different entities around the world. We have a huge portfolio of products as well as then -- when our business portfolio is exceptionally large, I would say. And managing -- making sure that the entire functionality or the capabilities across all the complexities that we have taken some time. And we want to be prudent on this and really make sure that there will be no hiccups whatsoever through the transition.

All right. The second question goes to the gross margin improvement or, let's say, gross margin improvement after you get rid of the spot component purchases. So I was wondering to what extent does your guidance imply that the situation regarding components would become normal in the second half of '23? That is -- are you kind of factoring in that the first half is still going to be burdened by higher component prices? Or what's your view behind the guidance regarding gross margin as spot purchasing?

Yes, great question, and maybe that should have been in our prepared remarks as well. We'll now come to think about that. So our outlook in terms of the material availability is that it will now improve during first half of this year and will normalize by end of the first quarter. Already now, we are clearly seeing the improvement in the material availability. There are still some completely different level, but some shortages in things like connectors and cables and things of that nature but much, much less than what we experienced during last year. So there will be a little bit of -- some effect during the first half of this year, but we foresee that the market will normalize by midyear.

Right. So basically, if we are looking at the normalization of your cost base coming from gross margins, then let's say, in 2024 is the first full year when you don't expect any kind of known impacts on gross margin, okay?

Correct. That's correct. That's correct.

Good. Then a question related to the power market and the equipment that you're selling there. It was a quite bit quite a long struggle to basically get the right kind of meters and get that to the clients first in testing phase. And now it seems that during several quarters, it has started to kind of gain momentum. What does -- how is the sales to the Power segment going at the moment? Is it coming from a small set of customers who have decided that they will basically renew their whole fleet? And -- or is it more broad-based? Could you describe a bit how -- where the demand is actually coming from at the moment?

Yes. Very good question. So it's -- the answer is both in a way. We continue to have customers, new customers coming in and as you implied, testing the product and taking a little bit of this and that. But it is increasingly -- increasing number has been during this year that has been the trend and the driver behind the increasing sales in the Power segment that increasing part of the -- part of the customers are now taking and implementing our solution throughout their network. So we have been seeing orders, big order -- this kind of big orders or full convergence coming in for multiple customers on all geographies...

Right. And is there any competitive product out there at the moment? Or are you basically still competing against the traditional way of technician going to the device and taking those oil samples and then getting back to laboratory? Or is there any other way, more automated way to get it done, just thinking about your competitive advantage period there?

Yes. So there are other means, especially the one that you alluded to. And so we are not alone in the marketplace. The level of maybe the automation that we can bring through our solution, I think it is a competitive advantage, but we are not acting alone. Nobody else has similar technical solution is what we have.

Okay. Then about the overall level of demand that you have seen in '21 and '22. I can't remember many years when your demand in both divisions has been this good despite all the kind of negative changes in the market related to COVID and component shortage, whatever. So do you think that this level of growth is sustainable? Or do you expect that there would be some kind of slowing down at some point? Because -- yes, that's an open question.

First of all, I agree with you that we have -- it's been -- when we look at a bit of history, it has been an excellent year in terms of demand now during past year and a bit longer as well since the recovery from COVID kind of started. I think that's both the underlying, there are 2 things. There are the macro trends that we have been talking about things that drive really in the sort of macro side, the solutions from us. Things like kind of focus on sustainability, focus on fighting climate change, energy efficiency, recycling or [indiscernible] or -- searching the word on -- kind of closed circular economy, was the word I was looking for. And -- so there are macro trends with that will continue to drive the demand. There are market segments like pharma -- especially biopharma, where you look at any market studies and they would indicate that there is a long-term market growth expected from those despite the uncertainties in the world. But of course, part of the strong growth that we have been experiencing has been coming from kind of a recovery from COVID and kind of like the stoppage of everything for a while in 2020. And that effect will slowly -- I'm expecting that will fade away. So it's a bit of both. And I think kind of continuing on the extremely strong kind of demand levels that we have been expecting. They probably will little bit normalize. But that being said, I think there are strong market trends that are driving the demand for our products and solutions.

Okay. And then finally, question related to 2022 and your guidance upgrade in October. You guided at that time a higher top line growth range and you basically you delivered in that range. You also guided a higher EBIT range. And the outcome for the full year ended up in the fairly low end of that guidance range. So I'm just trying to figure out what made the margin come out to the low end of the guidance range? So what did you have in mind when you set the EBIT guidance or when you raised it in October and what were the things that then basically pushed the margin to the low end?

Yes. Part of it is really kind of a timing of the cost of some of our investments came out maybe a little bit differently than we were foreseeing. At the same time, the demand came out maybe will be even stronger than what we anticipated.

Okay. So basically, there was no kind of estimate on spot purchasing that would have put you more cost than you...

Exactly. That will always be -- there always is a little bit of that, the spot purchases where especially during last year and when to some extent, still remain a hard to forecast kind of a thing where -- I'll give you an example, and this is not really kind of just even if, as I said, the market is clearly kind of working towards normalization. But if you take now end of last year, they were kind of small things happening due to the COVID-19 in China where when -- even if the market started -- was normalized, there were kind of some factory lines stopped in China. And immediately, our line stops for a month in some suppliers somewhere has a little bit of a -- this kind of a ripple effect through the supply as supply is so tight even if kind of starting point would not be a shortage.

[Operator Instructions] We'll move on to our next participant, Arttu Heikura from Evli.

Quite a lot of questions, so I have only -- Your orders received declined in renewable energy in Q4. Could you open up the drivers behind the decline? Is it just a [ original ] seasonality or something else?

It's a seasonality more than anything else. We had a very, very strong orders received in the year before, and it's nothing more than a seasonality. In a year -- if you look at the annual basis, we had a very good year on renewable energy.

Okay. Then about the X weather segment or business. Could you comment on the recent development of that segment in terms of sales and new customers?

Yes. We have not given kind of the exact numbers in terms of the segment itself. That being said, I can say -- as I said in the prepared remarks, I'm very happy with the progress that we made through 2022. The areas where they gave us good boost that we were kind of expecting from it and it really fully delivered on the expectation and I'm very happy on the progress against the plan on that segment.

Okay. Then about China, if I remember, so the business were a year ago, that big. But how the business is now? And what do you expect from the China opening from the COVID restrictions?

Yes. Good question. Actually, we had a good year in China as well, very much in line with the whole company. And China is a significant -- very significant market for us. Continues to be and obviously now a little bit brighter outlook overall in China bodes well for us as well as anybody else who does business in China.

We'll move on to our next participant, Matti Riikonen from Carnegie.

I forgot to ask a question about the Liquid Measurement, new product line that you announced a couple of days ago. Is this the first kind of bigger launch since the acquisition of K-Patents? And does this in any way change the addressable market estimate that you have been using at your Capital Markets Day? So I'm just figuring what kind of market potential does this new product line have?

Yes. So it's -- first of all, thank you for asking. Thank you for noting. It is actually a major announcement since that now shows the full integration of what used to be a K-Patents technology and then what used to be Vaisala's technology. Now it's fully integrated into the Indigo family that we have in Industrial Measurements. It's -- as the picture was also in one of my slides, it actually had now, for example, the displays are the same, we are using same displays and same display modules as with any other Industrial Measurement products that we have. Allows us also and use the same kind of product architecture, which means also that now we can start to build on the synergies -- potential synergies being the technologies that we provide from Vaisala side and what we obtained from K-Patents side, were -- and I don't -- So as a market size overall, I don't think it be that much increase the market size. It's more of a competitiveness in the marketplace and the breadth of our offering into the market that we are serving.

Okay. And since this niche has not been addressed so much, could you describe the competition in the segment? What kind of players do you have? And how is the market structured? Is it a lot of smaller players? Or are there dominant players in that segment, like in Liquid Measurement?

Yes. Liquid Measurement is -- first of all, when we talk about overall as a Liquid Measurement, there's multiple different technologies that are typically serving different kinds of apps -- problems or applications solutions where one is measuring liquids. It may be -- somebody may be measuring concentration, somebody may be measuring content of different substances, transparency, maybe something and so on and so on. So there's multiple different types of measurements that are done typically with different technical solutions in Liquid Measurement. And when we have indicated Liquid Measurement as a market size, we are indicating -- we have been talking about what is the addressable market for the refractor meters that we -- kind of the technology that we obtained from K-Patents. And that's not covering the entire market when one talks in general, about the Liquid Measurement. And there are different companies typically tied in with the one type of a technology serving one part of the market, other companies with a different kind of technology to the other parts of the market. And each one of these -- there may be a bigger companies in some of these smaller companies and other ones. But it's typically one technical solution dominates the market segment. So -- and then when we look at the part of the market that we address, it's divided up with kind of the smaller players where we are the strongest in that part of the market. Did I answer your question clearly now? It's a little bit of a complex answer, but it is a little bit of a complex market as well.

[Operator Instructions] It appears there is no further questions at this time, I'd like to turn the conference back to Mr. Kai Oistamo for any additional or closing remarks. Thank you.

Thanks. I just want to thank everybody for participating and bearing through us with our technical problems. We will improve on this for the coming quarters, and I wish you a happy end of the week, and we will be in touch. Thank you.

Thank you for joining today's call. You may now disconnect. Happy weekend, everyone.