Vaisala Oyj (VAIAS) Earnings Call Transcript & Summary

Hello and welcome to Vaisala's third quarter earnings call. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Kai Oistamo, to begin today's conference. Thank you.

Thank you and welcome also from my part to Vaisala's third quarter earnings call. I'm accompanied here with Ville Voipio, our Chairman of the Board; Heli Lindfors, our CFO; and Paula Liimatta, our Head of IR. My name is Kai Oistamo. I'm the President and CEO. So our third quarter really was characterized by increasing profitability following improvement in gross margin. If we look at our net sales, a slight decrease of 2% compared to the year before. If we take constant currency, that would have been actually 2% increase. Order book ended at EUR 166 million. And as said, operating result improved year-on-year, ending up at a little bit over EUR 25 million. And the cash flow from operating activities returned to what I would characterize as a normal level, as we were predicting. So if we take a little bit closer look into the numbers, the orders received-wise, there was a decrease by 8%. That came from both business areas, especially on Industrial Measurements, but I'll get to the more detail when I go through the business areas. And if we look at the market segments, there are multiple different market segments, which contributed to this. And again, I'll give you more color when we go into the different business areas. As said earlier, the order book ended up at EUR 166 million, on -- roughly on the same level as last year, which I would characterize as a good level for -- given the market environment at the moment. I already mentioned, in terms of the net sales, we experienced a decrease by 2%, which would have been a growth of 2% in constant currencies. When we look at where did it -- what business areas contributed how, so Industrial Measurement decreased and Weather and Environment was in previous year's level in terms of our market areas, growth from renewable energy, roads and automotive as well as in power and energy market segments. Moving on to operating result. As said, the operating result increased. And when we look at the contribution -- the contributors to this, the gross margin improved to 58%. And here, we got the benefit of significantly reduced component spot purchases now, which had now on this year only 0.7 percentage point negative impact compared to 4.2 percentage point negative impact same time last year. So improved gross margin and then, on the other hand, on operating expenses, we were on -- at the previous year's level. And there -- obviously, when we look at that between the quarters, within the year, we typically have seasonality in the operating expenses, whereby the third quarter is the lowest in -- within a year in operating expenses driven by holidays, lower activity and so on in the third quarter. And same thing happened this year as in the previous years. That all being said, we continued our IT investments into the new ERP system, which we are planning to go live early next year as well as we continued the key investments on sales and marketing as well as in R&D to ensure the long-term competitiveness of the company. Then if I move on to -- a little bit deeper look into the 2 business areas, starting with Industrial Measurements. In Industrial Measurements, the orders received decreased by 14% when compared to the same time previous year. The decrease was in industrial instruments, life sciences as well as in the power and energy market segments. The foreign exchange rates were also impacting here. The decrease would have been only 8% in constant currencies. And if we look at that, where specifically did it come from, the Chinese yuan, Japanese yen and dollar contributed mostly to this FX impact. In terms of our market share, we believe that we did not lose any market share. We did not gain market share either, but -- so the market share was stable, just like it has been during this year in the previous quarters. Then in terms of an operating result, we did improve the operating result despite the decrease in net sales. The net sales decreased in life sciences and industrial instruments market segments. At the same time, the gross margin improved to 64%. And here, the -- again, same thing as on Vaisala level, the positive impact on significantly reduced component spot purchases compared to the same time last year, and it contributed quite a bit positively to this. And then the continued market environment where unfavorable market mix, meaning that focus on older products as well as then some price pressure, continued then burdened, on the other hand, on the gross margin. In operating expenses, we were on the same level as third quarter year previous year. And this all then resulted that the operating result was at previous year's level at almost exactly the EUR 14.7 million, EUR 100,000 more than the year before being 27.3% of net sales. Moving to Weather and Environment. The -- when we look at orders received, we were roughly on the same level as previous year. Then variations in the different market segments, meteorology somewhat decreased, very strong on aviation. I would characterize this as normal kind of variance between the different quarters in these markets. This is what we typically experience as well. The order book increased by 7% to EUR 131.5 million. And maybe it's worthwhile here as well that if we look at the orders received, actually a slight increase if we again look at in the constant currencies. In terms of an operating result, the margin again improved. First of all, net sales grew strongly in renewable energy, roads and automotive, but then decreased in aviation in this quarter, again, driven by various different projects in aviation. You notice the discrepancy on strong in orders received, weakness in net sales. And it is again a normal variation between the quarters in these more traditional market segments that we have. In terms of gross margin, similar increases in Industrial Measurement. There's clearly a tailwind from clearly lower spot purchases -- or costs related to spot purchases now only being 0.6 percentage point negative now compared to the 2.5 percentage points negative a year before. And then the other positive contributor to the gross margin was higher share of more profitable products and as well as then higher share and growth in the subscription sales, which have a high gross margin, and thus, created to the overall margin. Overall, this -- the result of this was that the operating result increased to 13.7 percentage points of net sales. So a good quarter in Weather and Environment. Then if I move on to where are we faring within the year, so what's the situation after the first 9 months of 2023? I would characterize it as the headline here says: resilience in net sales and operating results; a slight increase to the same time previous year; and a growth of 5% constant currency-wise, actually would have been 8%; gross margin on a similar level as previous year; and then operating margin, a slight decrease and again, driven by the incremental or the investments that we have been doing what I would characterize in a normal course of business in terms of R&D and sales and marketing as well as then the significant investments that we have been doing into the IT system renewal. This all resulting into roughly flat on earnings per share, if we take that metric. Cash flow-wise, as I said in the opening slide, we are back on a normal level in terms of cash flow. So nothing dramatic on this. And as we've indicated before, it's -- we've been able to deliver on the promises on getting kind of more normal levels in terms of our cash flow. And this leading into -- if we look at the financial position, again, the same headline I've been showing for the past 3 years: strong financial position. So no news on this. We -- essentially, if we look at our net cash position, we are essentially net debt-free and all the financial metrics, I'm sure, are very, very healthy, healthy company. Then maybe to add interesting parts of the call for you. On the market development for the remaining part of the year, the only change in this would be that we see now a slowdown in -- not only in life science, but also in high-end industrial instruments driven by the uncertainty and lack of new investments by our customers. So we are not seeing kind of big new factory investments, big new renewals of production systems or investments into warehouses and laboratories and things of that nature, which would be driving really the high-end instrumentation growth, partly probably -- partly also at least in part of our customer base in their own business. And this is not a reference to our sales channel but our customers sales channel that the sales channel has been relatively full. And given the uncertainty in the marketplace, it has been -- they have been digesting the higher-than-usual sales channel, leading into, again, slower investment decisions than usual. Then if we look at the business outlook for '23, no changes on this. So we continue to see net sales being between EUR 530 million to EUR 550 million, EUR 560 million and operating result being between EUR 65 million and EUR 75 million. So if I just summarize the third quarter: the profitability increased following the improvement on gross margin, net sales essentially flat compared to previous year, order book on a healthy level, operating result actually increasing to the same time previous year, and cash flow on a normalized healthy level. With that, I would like to conclude and open up for any questions that you may have.

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

I'm Pauli Lohi from Inderes. I would like to ask about the subscription sales growth. It slowed down some from the previous quarter. So this is seasonal variation or new normal?

It's seasonal variation, and there's a little bit on the year before. There was a onetime booking of net sales also, which made the comparable a little bit more difficult than in the second quarter. So that's part of the explanation, and part of the explanation is seasonality. You have to remember also that we have a somewhat strange data sales business, where one, say, customer segment is this winter maintenance-related for road authorities. And those subscriptions typically last only during the wind month periods of -- on the Northern Hemisphere, i.e. fourth quarter and first quarter. And therefore, we're kind of like that. Maybe unusual, the typical data sales business, we have a little bit of a seasonality in terms of just as an underlying part of the business.

Then I have a question regarding the demand direction in the Industrial Measurements. Did we experience a downward trend in new orders during the quarter given that the new orders were weaker than sales growth?

You are asking within the quarter, I guess?

Yes.

No. The answer would be no. It's -- it was weakness throughout the quarter.

Okay. Then finally, regarding the sales, marketing and admin expenses, they slightly declined year-on-year. So why is that? And have you done certain measures to cut costs?

Yes. Yes, yes. So as we indicated last -- in the last quarterly call, we put in spend restrictions across the company on essentially a higher increase and kind of reductions and caution -- kind of significant cautiousness on discretionary spending on external consultant travel, that kind of nature.

Our next question comes from the line of Atte Jortikka from Evli.

This is Atte Jortikka from Evli. I have just 2 quick ones. First, going back to the price competition, and we obviously saw it in China this quarter. What's the effect on gross margin higher this quarter when comparing to Q2? And how do you see this going forward to Q4?

No, it was not. And I think here, when thinking about the price pressure, it -- as usual, more commodity type, more low-end type of products, more -- you typically also experience price competition. So that my comments on the mix and the price pressure were kind of related in that sense.