Vaisala Oyj (VAIAS) Earnings Call Transcript & Summary

Good day, and welcome to today's Vaisala Second Quarter 2023 Conference Call. This meeting is being recorded. At this time, I'd like to hand the call over to Vaisala President and CEO, Mr. Kai Oistamo. Please go ahead, sir.

Thank you, and welcome for the second quarter -- Vaisala second quarter call from my side as well. My name is Kai Oistamo, I'm the President and CEO of the company. And I'm joined here with our CFO, Heli Lindfors; Paula Liimatta, our Head of IR; and our Chairman of the Board, Ville Voipio. Yes. If I characterize the second quarter, it really was about uncertain market and actually pretty good performance in an uncertain market. So if we look at the numbers, actually, our net sales grew by 9%, and we had a higher EBIT than year before same time. That being said, the growth came from a different place than it has been for a while now. So growth in orders received, net sales was really driven by Weather and Environment, a great performance on that side. And at the same time, more mutated performance on Industrial Measurement side. That also led into us giving a revised outlook on July 17, and I'll repeat that at the end of my prepared notes. So if we start with the orders received, really on a company level, grew by 5%. If we take in constant currencies, that would translate into 7% growth year-on-year. Orders received really grew from, as said, Weather and Environment business area, having a great quarter. At the same time, decrease in Industrial Measurement business area side. If we look at the market segments, the orders received grew strongly in roads and automotive, having a great quarter as well as in renewable energy as well as then in power and energy market. That translated into order book being EUR 167 million at the end of the quarter. Order book being flat year-on-year on Industrial Measurement side, and the increase to the order book came from the above-mentioned market segments, Automotive, Meteorology, Renewable Energy and Weather and Environment business area overall. Turning into net sales, nice 9% growth year-on-year in terms of net sales growth. In constant currency, that would translate into 11% growth year-on-year on a company level, really good driver behind was Weather and Environment business area, while Industrial Measurement decreased in terms of net sales compared to the same time previous year. In terms of, again, market segments, same market segments, Renewable Energy, Roads and Automotive market segments as well as the Subscription Sales grew as well nicely over the same time previous year. Then if we look at the operating result, comparison year-on-year on a company level. I'll start with the gross margin. Gross margin was on the same level as the year before. The component purchases continued to have a negative impact this time, a bit less than a percentage point, so 0.8 percentage points. The operating expenses continue to increase. This is on the back of both the investments that we did already last year in terms of sales and marketing, in R&D and the renewal of our IT systems, we are in the middle of renewing our ERP and the related systems and that continued into this year and that was then visible, of course, on the operating result line as well. Then taking a little bit of a deep dive into the business areas and starting with Industrial Measurements. The second quarter orders received in Industrial Measurements decreased by 6% year-on-year. If I again take the constant currency, this would translate into 3% decline in orders received. And if I look at where in terms of market areas, and then industrial instruments, life sciences are the ones which really contributed to the negativity this time around. The order book stayed flat when we compare to last year's -- same time last year in terms of the ending order book that we had after second quarter. Net sales-wise, Industrial Measurement had a 3% decrease year-on-year. At constant currency, that would have been flat 0. And where did it come from? Life Sciences market segment was the one which this time around was the weak one. And the gross margin side, a significant decline to 59.7 percentage points. The issues that contributed to this were, obviously, the -- as I mentioned earlier, component spot purchases continued to have an impact on when we look at it at this time, like I said, less than before, but still 1.2 percentage points negative impact on gross margin. But then specifically maybe this quarter, the price pressure and unfavorable mix due to gross margin, if I open that up a bit with what we saw in the marketplace, was that due to the uncertain market environment, economic environment, the higher interest rates, our customers postponed, reevaluated, mainly postponed their industrial investments, and that then translated into softer demand into our products. We did not see really cancellations of the projects. They really moved forward in time, and that will be one. And then geographically as well, if I look at kind of specifics, China was clearly softer than we anticipated during the second quarter. There was some softness anticipated already typically after the [indiscernible] little bit of a regrouping time in the investments in China this time, that and the uncertainty and maybe the slowness on picking up post COVID in the economy contributed to China being clearly a slower and softer market that we anticipated. The softness in the marketplace also then led into more of a price competition, especially in China, which then is visible in the gross margin as well. I did not see any new competition per se, we did not lose market share or anything of that nature. So in a summary, it really price pressure and unfavorable product mix was the cause of this due to the uncertain -- really an uncertain economic environment around. So all this resulted in a decrease in operating results as well to EUR 6.8 million during the quarter. Very different story on Weather and Environment side. A great quarter, I would characterize. Strong growth in orders received. Biggest contributors being Roads and Automotive, Renewable Energy, Subscription Sales. Order book grew by 8 percentage points compared to the same time previous year and growth in terms of our operating -- constant currencies would have been actually even 16%, so, as I said, a great quarter in orders received. Similarly in net sales, a very strong quarter for Weather and Environment, 18% year-on-year growth, constant currency, that would have been even 20%. Then where did it come from? I already mentioned Renewable Energy, Roads and Automotive, Meteorology as well as then the Subscription Sales. The gross margin improved also from previous year over 3 percentage points. And here, the low -- clearly lower component spot purchases compared to previous year contributed to that. But also, I'm very happy to report the good execution of our strategy where we see the growth of our newer market segments, newer businesses where inherently, there is a higher gross margin now taking bigger share of the business in Weather and Environment also being visible in the gross margin during the second quarter, i.e. stronger sales, stronger share of the sales from Renewable Energy, stronger share of the sales through Subscription Sales as well. And that all led in the increase in operating results compared to the same time previous year as well. Then if I take a look at the first half. Overall, first on the cash flow side, we had a cash flow from operating activities increased as we have been indicating before. That being said, a somewhat softer quarter than anticipated [ related ] that the -- our component inventories did somewhat increase and tie up a little bit of capital. But despite this, as I said, operating cash flow actually did increase during the first half. Our financial position continues to be strong. No material changes in that during the first half compared to the previous years. Then into market development and business outlook. Longer term, we believe that the market trends and the market position that we have has not really changed. The underlying themes in terms of investments in the world into life sciences, pharma, biopharma, investments in the world to renewable energy, as an example, have not gone anywhere. And we continue to be longer term, we are situated very well in terms -- in a growing market. Now in terms of outlook for the second half of this year, we continue to believe that majority of the market segments as well as we serve continue to be growth markets. And the exceptions being Meteorology and Aviation. As before, the outlook is that they are stable as both of them are mature markets, as we have indicated before. And all of this then led into us revising our business outlook for '23, July 17, in such a way that we now estimate -- we narrowed the net sales range, and now we estimate net sales for this year to be in the range between EUR 530 million to EUR 560 million and our operating result being in the range between EUR 65 million to EUR 75 million. So a mixed quarter, uncertain underlying market led into a softer market in Industrial Measurements and weaker numbers on that side. On the other hand, very good performance on Weather and Environment side and a good execution on the strategy as well. Quite overall, really just recapping the net sales. We did grow net sales close to 10% year-on-year and expansion on EBIT side as well. And I just went through the outlook as well. So I'll stop my prepared remarks here, and I'll open up the line for any questions you may have.

[Operator Instructions] The first question comes from Pauli Lohi from Inderes.

This is Pauli Lohi from Inderes. First of all, I would like to ask about how have you responded to the increased price competition in China?

So it has been -- it's a market price and it has meant that we had to be -- we always have to be competitive in the marketplace. So we have been needing to be, yes, like I said, competitive in the marketplace, which means that we have had to not be as aggressive in price increases as we anticipated before that.

Okay. You changed the verbal communication about component availability or their impact on your margins. So has anything changed in that area since Q1 or should I read that the component availability has normalized completely, but impact comes with a lag due to the inventory cycle?

Yes. So thanks for the question. Maybe I should have even, in the prepared remarks, be even clear on that. So we see the component availability to continue to improve. It's -- our previous outlook was that by end of the year, we see that the impact of the component shortage related spot costs is going to disappear to not be material. And then we continue to believe that. So it's exactly like you said characterize that new commitments are largely going -- there's some lag on through the inventory that we already have in place.

Then I would like to ask about Weather and Environmental business area, there was strong gross margin and very strong product sales. Do you see any temporary factors here or do you find this gross margin level is sustainable?

So I'll divide up the Weather and Environment into 3 pieces. So the traditional side of the business, our flagship business, that tends to be a little bit of a changing from quarter to quarter, then there are changes in terms of the projects. There's changes in terms of the mix. So that has not gone anywhere from a historical side. That being said, then the growth, as I said in my prepared remarks, we have been strategically investing into B2B-led growth underlying inherently growth markets, Renewable Energy being example, Subscription Sales being another one, where the gross margin in the marketplace is clearly higher than the traditional side of the business. And as we execute this strategy over time, there should be -- if we are successful with the execution of the strategy, we should be able to increase the gross margins in this side of the business.

Makes sense. So finally, I would like to ask about fixed costs. Do you still -- do you expect to hire more people and remain thereof this year and otherwise invest into fixed costs despite market cycle cooling down in the industrial segments?

Yes. We have obviously taken measures on this already in terms of slowing down the hiring and being extremely prudent in even replacing people. There are obviously rules which [indiscernible] and higher [indiscernible] our business critical roles, but we are very mindful in spending additional operating expenses.

Arttu Heikura from Evli.

This is Arttu Heikura from Evli. You downgraded Life Sciences and high-end Industrial Measurements guidance from growth to moderate growth. So could you elaborate what is in actual means? And would it be possible that there has been some kind of boom over investments within these industries?

Yes. So first of all, it just reflects what the market now has been during the second quarter. So that's basically -- and for Life Sciences somewhat also in -- during the first quarter. So that's basically what that downgrade was. In terms of Industrial Instruments, it's harder to say whether there was like an impact on investment boom during the post-COVID years or not, as the end markets for Industrial Instruments is so broad and very, very hard to make a statement on that. In Life Sciences, there probably was a little bit of an investment boom during the past 2 years [ or 3 years ] for obvious reasons. That being said, we do see orders coming in Life Sciences side as well. So it's just slower for the time being.

Okay. Then about the Industrial Measurements gross margin and price competition, especially in China. Do you see it continue to win? And was there any price competition in other markets?

I'll take the last one first. So there was some, but it was kind of specifically hard in China. And I think this is related also, if you look at the economic activity, the GDP growth rates around the different regions as well, if you clean it up from services related GDP kind of contribution. So I think it's kind of a good part of the explanation there, why specifically in China. And then in terms of continuing our visibility, as you well know, into our sales channel is relatively short or quite short. So it's very hard to make kind of a longer-term comments on it and where we are today. We certainly believe that this is kind of -- again, I repeat what I said in the end of my remarks -- prepared remarks that if you look at the underlying trends that we are serving, I don't think they are gone anywhere on the electrification of the vehicles, the renewable energy, investments into more efficiency, lower carbon dioxide emissions, alternative energy sources has not gone anywhere.

Then about the Weather and Environment strong quarter, have you seen there in any market segments, some kind of uncertainty or even demand slowing down? And how do you expect the demand continuing in Weather and Environment?