Vaisala Oyj (VAIAS) Earnings Call Transcript & Summary

All right. This is Kai Oistamo, and Welcome to Vaisala's Fourth Quarter 2022 (sic) [ 2023 ] Operating Result Call. I'm joined here with our Chairman of the Board, Ville Voipio; CFO, Heli Lindfors; and our Head of IR, Paula Liimatta. And I am Kai Oistamo, the President and CEO of the company. So welcome, everybody. If we look at the fourth quarter 2023, it really was characterized by strong order intake. If we look at year-on-year wise, the orders were up 14%, really driven by a very strong performance on Weather and Environment side. Also, the operating result margin was up from the comparison period from the previous year. And cash flow activities continued strong. Let me dive deeper into the numbers. But before I do that, let's look at the highlights for the entire year. There are many other things than just delivering the numbers for a company to really ensure the competitiveness in the long term. We successfully continued renewing our product portfolio. There are multiple product launches across the company, both in the Weather and Environment side, in different areas of it as well as then in different parts of Industrial Measurements. Very notably, if we look at the orders, I think the highlight of the year really was the airport service observation deal to Kuwait, which was EUR 20 million worth and was actually the biggest deal that Vaisala has done in its history. Very happy to see that coming in. We continued our journey on the sustainability side. A couple of things on that. the science-based targets we committed to that initiative last year, submitted our plans to the science-based target organization and we are expecting the approval of our plans now impact in any week now. In practice, the good example of the kind of things that we can do even in our offering for the sustainability was the new [ Eco-sonde ] that we launched to the marketplace, where we actually reduced the amount of plastics used in the sonde by 2/3 and I just want to highlight, it sounds trivial, but making sure that there's no compromise whatsoever on the performance, the accuracy, reliability in a very harsh environment that the sonde goes through, being basis also for any accurate meteorological forecast in the world. I think it's a great example of the capability and the commitment for the company when we were able to do this for the satisfaction of our customers. Our employee engagement remained on a very good level and a strong level. We did a measurement of that in the fall as well. And that's a very good indication also on really that the -- as employees are really the biggest asset for almost any company, but especially for a company like Vaisala where our performance really is basis (sic) [ based ] on the knowledge, and the engagement of our employees is very happy and satisfactory to see really the results also in numbers. And then lastly, the new ERP system, we went live early this year as we have been indicating throughout last year and we got there successfully. The system is up and running. We are delivering our customers. We are billing. We are getting orders in, and we are producing and things are working. Obviously, kind of getting kind of a new -- completely new system in a big organization has always learning curve, and we are well progressing on that learning curve, and I'll talk about that a little bit later as well. Moving on to orders received in fourth quarter. As I said, the quarter was characterized by strong order intake. The orders received increased by 14% compared to the corresponding time previous year. The increase would have been 16% if we would have measured in constant currencies. As I said, really strongly contributed by Weather and Environment business area. In terms of our order book, where we ended, again, a record high order book at the year-end and again, whether in Environment on the back of very strong year and the fourth quarter in terms of order intake, that really drove the order book increase. And here in the middle, you can see actually the division between -- for our order book between this year, i.e., the things -- the products and the orders that are expected to be delivered during this year versus what are they in the longer-term order book that we have. So the dark blue is this year and the veil blue is in for the coming years. And you have the comparison also on the side to the same time at the end of last year. When we look at the net sales for the company, the net sales increased in the fourth quarter by 4%. And I'll just remind you that the comparison period in Industrial Measurements was quite high. We had a record high fourth quarter in Industrial Measurements a year before. And despite the headwinds on the Industrial Measurements, we were able to actually increase the net sales, as said, by 4%. If we looked in constant currencies, it would have been 8% increase in net sales year-on-year, very much driven by, again, the strong performance on Weather and Environment business area side. If we look at the market segments, the net sales was really driven strongly by aviation as well as power and energy market segments. And then on the other hand, there was a decrease when we look at, again, the year-on-year side on Life Sciences market segment. Then when we go into operating result in fourth quarter, the gross margin improved by a little bit short of percentage point. And here, this is very much contributed by almost lack of -- complete lack of spot purchases as we have been indicating before, giving us a 3 percentage point tailwind compared to the same time previous year. The operating expenses increased somewhat in practice. They were almost on the same level despite obviously the salary inflations and inflation overall that all companies experienced throughout the year. I'll get into a little bit more on the gross margin as I go through the business areas. Starting with Industrial Measurements. Here, orders received decreased by 8% year-on-year. If we would have measured again on constant currencies, it would have been half of that, i.e., 4% decline compared to year-on-year. As I said earlier, the comparison period was very strong, record high fourth quarter in 2022. But nevertheless, decline in this was really driven by the change of the market environment that happened in -- during the second quarter in 2023 and then remained on more muted level during the rest of 2023, and that's the environment that we experienced also in the fourth quarter. We did not lose market share. It really was driven this decline in orders received, really was driven by the size of the market being lower than the year before. Order book likewise ended up about EUR 6 million lower than year before, again, having been at the record high year before. Then we move on the operating result in Industrial Measurements. First, starting from net sales. Then net sales decreased, especially on Life Sciences market segments, the segment's overall net sales declining by EUR 2.5 million. And if we would have actually measured this net sales in constant currencies, it would have been actually 1 percentage point increase compared to year before. The gross margin improved by 1 percentage point, again, as I said earlier, driven by the tailwind that got -- that we had from the absence of spot purchases. The difference between the tailwind that we got and the realized gross margin really comes from 2 aspects. The things that worked against us was that our capacity was planned for higher than materialized volumes and that drove the factory overheads to a higher level than anticipated. And then secondly, also, as natural in this kind of a market situation, increased price competition as well. The operating result decreased compared to the previous year, being ending up with 15.1 percentage points of net sales. Moving on to Weather and Environment, a different kind of a story and continuation of what we have been experiencing throughout 2023, the kind of starting from orders received. They grew strongly -- very strongly during the fourth quarter. If we look at the measured, currency is 22% up from the previous year. If we would have taken constant currencies almost 40%, i.e., 37% year-on-year growth. So I think it's fair to say that the orders received grew very strongly during the fourth quarter. Obviously, we had the fortune of actually getting the Kuwait deal in -- during the fourth quarter. So that contributed significantly to this. But even if you do the math, we would have had an increasing gross margin -- increasing orders received even without that contribution. Then moving on to operating performance. In terms of our net sales, we had again a good quarter on that. Nice growth on net sales and very satisfactory also to see that the net sales grew on all market segments, very strongly on aviation and strongly in renewable energy market segments. A little bit similar story in terms of our gross margin, again, gross margin -- clear gross margin improvement during fourth quarter compared to the previous year. Here, again, the tailwind from absence of components spot purchases and then what worked against us was kind of similar things as in -- I mentioned in Industrial Measurements side. Operating result improved significantly. I'm very happy seeing where we ended on operating result being 8.3 percentage point of net sales. And this really -- it's worth mentioning that the biggest improvement -- biggest contributor to this was the traditional side of the business, what we internally call the flagship business and it's very, very satisfactory to see the strategy being in -- kind of being executed and then seeing the results also of strategy being executed and driving the flagship business really for profitability rather than growth. Then if I look at the overall financials for the entire year, I would characterize the entire year that Vaisala showed resilience in a relatively difficult and hard to predict marketplace. As said, when we look at the entire year, net sales grew by 5%, in constant currencies would have been 8%. Gross margin improvement by a percentage point, again, helped by the component spot purchases and operating result improving also slightly from the previous year. And it's worthwhile here to mention we continued our investments for the long-term competitiveness in R&D, in sales and marketing, and we were in the middle of very large IT system renewal throughout the entire year. The earnings per share were EUR 1.35. And if you look at the cash conversion, clear improvement from the previous year being 130%. If we look at the operating cash flow, the net working capital decreased mainly due to the decrease of the trade receivables, as you can see on this slide. Dividend side, the proposal for the Annual Shareholders Meeting from the Board is EUR 0.75 for the year, which is a clear improvement. And then when you look at the trend that I am showing for the past 10 years in the slide, it's a nice growing trend and really shows our execution against our dividend policy, which is increasing dividends, kind of following the increase on the performance of the company. Here, the -- when we look at the financial position, it's been the same headline for the slide as long as I can remember being a strong financial position, very happy to see, especially in a high interest rate environment and essentially being a debt-free company and the cash conversion improving. So it gives us a very good resilience on the turbulent market and gives us also an opportunity for us to invest in the right things. Then moving on, how does the ongoing year look like, the market outlook -- when we look at the market outlook for 2024, we see growth from the market growing in power and energy, liquid measurements and renewable energy. While then stable in Industrial Instruments, Life Sciences, Meteorology, Aviation and Roads. Here, I would like to add a little bit color on Industrial Measurements and Life Science. We do expect that they are stable to the level that we experienced throughout the second half of last year after kind of a level correction during the second quarter of last year for the first half of this year. And then we do expect an improvement on those 2 markets through the second half of this year. As Industrial, we expect that the industrial investment cycle will start in different industries, different speeds, but we do anticipate that, that will start to occur during the second half of this year. Then a few words on kind of a short term as in the press release was mentioned, we are -- during the first quarter of this year, we are now, as I indicated earlier, we are now live with our new ERP system, and we are in a process of scaling that and getting to the full efficiency of it, which is quite natural. We are not experiencing any kind of fatal things or anything like that. But it's natural when you are running a cross-company system, which is completely new and lots of people need to be using it, lots of learning curve we need to kind of get through that learning curve as fast as we can and work through the kinks that there maybe along the way. That's what we are doing. However, now combined with the industrial action here in Finland during exactly at the same time, that obviously takes away days for climbing that learning curve and kind of happening at the same time that we anticipate that, that will have impact on our performance during the first quarter. We expect that we are going to be through the learning curve in -- assuming kind of a normal level of operations throughout the company by second quarter of this year. And what does this all mean in terms of the numbers. If you look at the business outlook, the net sales estimate for the full year is between the range -- is in the range between EUR 530 million to EUR 570 million, and the operating result between EUR 63 million to EUR 78 million. So as a summary, looking back into last year and especially fourth quarter, a good fourth quarter, especially in Weather and Environment. A good last year, actually, I would say, very good last year in Weather and Environment for last year. Big changes in the market environment in the Industrial Measurements side, but I think we showed resilience in a difficult market environment. And I think it gives us also a good basis going forward. I'll stop here with my prepared remarks and open the floor for any questions.

[Operator Instructions] The next question comes from Matti Riikonen from Carnegie Investment Bank, Finland branch.

It's Matti Riikonen from Carnegie. I have 4 questions. I'll take them one by one. The first 3 ones are related to gross margin and the spot component impact. In the Weather business, the underlying gross margins, which exclude the spot component costs, they recovered fairly well in '23. So was that due to sales mix or just higher top line volume?

It was both. First of all, Matti, how are you? Good to hear you, voice. So answer is it's both. So as per our strategy, you may recall that inside of Weather and Environment business, we have 2 types of businesses. We have the traditional side of the business, and then we have the 2 newer growth businesses, the renewable energy as well as then the data side of the data business. Both of these 2 kind of latter ones are growth businesses and they are inherently having a higher gross margin than the traditional business. So as by executing our strategy, we should have an increasing gross margin over time from these 2, as these 2 newer and higher gross margin businesses grow in the relative share of Weather and Environment. That being said, we did have a great year also on the traditional side of the business. And we -- as I indicated in my prepared remarks as well, we have had a strategy on focusing that business for profitability rather than growth as we had in the past. And as I was indicating, we did see good indications and good measured result as well on getting to -- on that path also on the traditional side of the business.

All right. Good. Then secondly, in the industrial business, the same gross margins, they did not improve. So you had pretty much the same sales. You had pretty much the same gross profit. So that kind of indicates that when in 2023, you absorbed the cost of spot components, you have not been able to basically make the price increases at all in '23. So would that be a correct assumption that getting those prices back to the level where they were originally excluding the spot component costs that...

Yes. So as I said in the kind of prepared remarks, too, on the gross margin, especially on the Industrial Measurements side, 2 parts. One part is as the year -- remember, the year started very strongly. We actually had a record high first quarter last year. So strong volumes, strong order intake. We actually scaled our capacity, made capacity investments in the factory kind of accordingly and that we did not see the full depth of the fall on the market and the speed on the fall in the market during the second quarter early enough. And we -- and part of the price to pay for that was that our factory overheads as the volumes were lower than planned in the factory had an impact on the gross margin. So I would even say that, that's a higher piece and then the price competition as such.

Okay. But you have been mentioning particularly the price competition in China. So if you kind of -- if you would like to give us an idea how much did the factory overhead component and then the price discounting theme have an impact? What kind of shares did they have in the kind of gross margin remaining flat and not improving?

Yes. I'm not, Matti, going to go any further than what I said at the overcapacity in the factory, so to say. I mean that's technically true what I'm saying as a whole overhead, but it's a higher -- capacity plan higher than what the actual capacity [indiscernible] ended up being. It's a higher piece in -- like if you look at, call it, a miss on the gross margin, if you take out the spot -- tailwind from the spot purchases than the price competition per se.

All right. And what would you say about the Industrial Measurements' sales mix in Q4? Was it normal? Was there anything kind of unusual in it?

There was nothing kind of that should be mentioned. I mean I would characterize it as normal. Obviously, the Life Sciences business was best throughout the year, it was lower in the market. But if you look at it from a product perspective, I don't -- there's nothing specific to mention.

Okay. And then finally, regarding your guidance for 2024, is the high end of your guidance kind of coming from the second half improvement in IM, which you mentioned is kind of that already embedded in your guidance fully that there will be an improvement in the second half?

Obviously, I mean, there's a range in the guidance. And obviously, the high end means that we are performing relatively well, and there's a market pickup in the second half. But as -- kind of as the market has been, it is tough to make a kind of really call out what exactly is the time. And I don't expect that it's going to be kind of a uniform all the markets and all the kind of subsegments that we are serving would be kind of starting at the same time either. So it's -- I would expect it to be kind of a gradual improvement during second half.

The next question comes from Atte Jortikka from Evli.

This is Atte from Evli. I have a couple on Weather and Environment. So the substrate subscription sales grew 7% also in Q4, same as in Q3. Were you more or less happy with the development on H2?

More or less, if you look at the entire year, there was a 15% increase in subscription sales. And you have to remember that this is more than any other business that we have dollar denominated. So the headwinds on that business from the weakening of dollar was much stronger than any other part of the portfolio.

Okay. That's very helpful. Then on the Roads and Automotive, so the orders declined in Q4 and you also set the market outlook to stable. What are the main kind of drivers behind this softness in this market?

It's really here. This is a tough market to call out. If you think about the market itself that this is kind of -- really what drives this market is the Road, Weather investments by local, regional and national road authorities. And again, the business is kind of not a steady flow of orders. So even the market, if you integrate it over time, it's a stable market with a little bit of ups and downs between the different quarters and as it's not an increasing market. It's an inherently a flat market. The Automotive data BP, it's actually in the subscription sales.

The next question comes from Waltteri Rossi from Danske Bank.

First question comes on the possibility of a declining sales actually included in your guidance at the low end. What's the main risk here that you see?

It's -- in a way, it's 2 things. First of all, it's -- as I indicated, it's very hard to call out the improvement in the market conditions in today's environment. When do industrial investments start to pick up. And the second piece is that you have to -- maybe have to remember also that we had a record high first quarter last year in Industrial Measurements. So it's kind of -- the first quarter comparable is very high. Then obviously, it changes, but thereafter be changes, but the first quarter comparable is tough.

Okay. Next question is on the market shares in the Industrial Measurements, how did they develop? You mentioned that you didn't lose any market shares, but did you gain any in any of the subsegments?

I would say -- well, apart from the Power and Energy, which is -- it's small and where we kind of did well and everything else, and we continue to gain market share. And that's very happy with that. Apart from that, given the relatively flat market and the absence of any kind of really major new projects or refreshments of existing industrial processes or things of that nature, the market shares are very hard really to move freely because really, the market shares are moving typically when new investments are done or an overhaul of existing business -- existing process, sorry, or existing facility or that nature happens. And if you look at last year, it was like notably absent all that during the second half of the year.

Okay. Just to make sure you said apart from the Power and Energy, you'd continued to get market share.

Yes, that's correct. So apart from -- so in overall, like if you -- let's talk about Power and Energy separately, but rest of the Industrial Measurements, we -- I didn't see any major market share changes by anybody in the marketplace during the year. And then on Power and Energy, it's a different type of a kind -- as you saw and like it grew nicely last year. We anticipate it's going to grow this year as well. It's a new market where we have a unique product where, obviously, it's kind of a slightly different story.

Okay. Can you comment on what segment do you see like the most promising there in the Industrial side?

So it depends how you look at it. But if I look at it purely from a financial perspective, obviously, the high end industrial instrument is a mark of it, I mean that kind of it. And there, we have a very strong offering. We have -- we are continuing renewing the offering as well. I feel very confident about that. And when the market picks up, I think that will kind of drive a big part of the growth and a big part of the profitability as well. Likewise, as an end market segment, Life Sciences is the single largest end market segment. And again, here, I would expect that the different parts of that market will start to pick up a little bit at the different speeds, different parts being the kind of manufacturing of the pharma, then the distribution of the pharma-related things as well as in pharma-related equipment being the third and probably the pickup will start from the pharma side. I like the manufacturing of pharma kind of drives everything and then that drives investments into the machinery and drives in the pickup on the distribution as such.

All right. Last one regarding the ERP implementation. You noted that you have now in Q1. How big is this impact both on -- in growth and margins? And what is the total cost of this implementation?

We have always -- like any time you bring out the new ERP, it's there, as I said, a learning curve. And the -- what I pointed out in my remarks was that it's actually the combination, an unfortunate simultaneous happening for the new ERP and then the industrial action in Finland, which kind of in combination slows us down to climb on the learning curve, and that is unfortunate. Then the total cost of it, we have not talked about rather than saying that it's obviously a significant investment. It's not only the core ERP with actually 5 or 6 other systems around it, which we renewed also over the past 2 years. So overall, it has been a sizable investment for the company. But I feel actually that we are by far on the better side of it having -- we're being alive and seeing it functioning across the company.

Okay. So one last follow-up on that. You feel confident that you'll get it done the implementation during Q1, and you don't see any risks, it's taking longer.

In any business, always -- there always are risks. But as we said in the prepared remarks and in the press release, we expect to resume normal operations by second quarter.

The next question comes from Pauli Lohi from Inderes.

Hello, Kai. This is Pauli Lohi from Inderes. Thank you for the presentation. I would like to continue with the assumed improvement in market conditions towards the second half of the year in Industrial Measurements. Is this based on easier comparable figures or assumption about lowering interest rates? Or do you also have some like actual material customer insights that would support improving demand in H2?

Yes. So it's a good question. So obviously, the comparables will get easier. I think that -- but really what I was talking about is the market will start to -- we anticipate that the market will start to improve during the second half. And then -- no I lost my thought. Can you repeat actually your question? I lost train of my thought.

Yes, I asked if there is like assuming on high level that low interest rates will help you or do you have some customer insight?

Right. Yes. So yes, the customer insight was what I was kind of going to. So we actually have a relatively good visibility on the bigger investment cases around the world. Obviously, not everything, and many of the things kind of follow, but I think it's a good indication on the bigger investments in various different kind of industries into the bigger projects being planned, and there's interactions with various different parties kind of building those and so on. What has happened over the past 6 months, 9 months is that despite actually quite a bit of activity on that side, the decision by the parties involved has been that they have been postponing them forward. So we -- I think we do see -- before they materialize to sales, we will see kind of an incoming kind of interest turning into orders as well.

Okay. Then you had cooperation negotiations in Weather and Environmental business area during Q4. So what was the outcome? And when is that visible as savings in that income statement?

If you look at last year, no, there actually was only the cost of it was visible in the income statement. So all the benefits out of it will come this year. And it was both reducing some headcount and then kind of a permanent headcount as well as then reducing some activities with our subcontractors. So we kind of looked at it from a cost side rather than purely from a headcount side.

Okay. Okay. And then finally, you mentioned that during Q1, the strikes in Finland could affect you. So how those affect in practice?

In practice, if you look at month of February, the strike is ongoing right now. And it's anticipated now 5 days -- working days in the factory by [indiscernible]. And who knows how this will continue.

Okay. So it's affecting many, many customers and also your production?

Yes. Yes. We have some mitigation capabilities, without going into details on those.

[Operator Instructions] The next question comes from Matti Riikonen from Carnegie Investment Bank, Finland branch.

It's Matti again. A couple of more questions. How large is China's share of net sales in the Industrial business for you?

It's about 20% of Industrial Measurements. The whole of APAC is about 1/3.

Okay. And when you talk about Industrial Measurement price pressure, is that only visible in China? Or is it present in other markets as well?

We've commented mostly in China, and it's mostly visible in China. But in, call it, a flat market, if you wish, it's natural that there's more of it than in a growth market across the board as well, but most visible in China.

Right. And then thirdly, when you talk about Industrial Measurement and Life Science being the most declining segment there, are we talking about roughly 10% decline in Life Science or even more than that?

We have not gone into that level of detail in it, but the -- I would say this way that depending on a subsegment in Life Sciences, it has been kind of even more significant if you take the pharma distribution than the other subsegments. But it has been a clear decline.

All right. Good. Then about price hikes this year in the Industrial business, what kind of opportunities do you see that or have you already made some price increases for this year? And what is the kind of opportunity for that, either now or later during the year?

We have -- as we usually do, we have done exactly the same in both sides of the business that the list price increases have already happened and being executed. And then obviously, then how will they exactly materialize, we will then report later.

There are no more questions at this time, so I hand the conference back to the speakers.

So thank you for your interest and your questions. You know that where we are. And any further questions, let us know, drop a mail to Paula or give a call, and we are happy to jump on another call to give you further clarification on the numbers. Have a great rest of the day. Thanks. Bye-bye.