Vaisala Oyj (VAIAS) Earnings Call Transcript & Summary

Welcome to Vaisala's Bi-Annual January-June and Second Quarter Report. I am Kai Öistämö, President and CEO. I'm joined here with Heli Lindfors, our CFO; and Paula Liimatta, our Head of IR. The second quarter was characterized by strong growth in terms of orders received and net sales and good profitability. If we look at more into the numbers, first notion is that both business areas performed well after the slow start that we had in the year, especially on the Industrial Measurement side. We grew net sales by 13% year-on-year. The order book grew by 14% when we compare to the order book that we had in the beginning of the year, and then orders received grew likewise by 14%. This all resulted in operating margin being 15.9% on a very good level, especially given it is second quarter for our somewhat cyclical business. More qualitatively, I would say that the Industrial Measurement, it was great to be seeing that back on growth. I'll go more into the details in a little while on both business areas. On Weather Environment, I would say it was a strong quarter in all aspects. The 2 things that I would like to kind of raise at this point in terms of specific things in the quarter in terms of business, the high growth in subscription sales, 16%, was very pleasing to see and, likewise, the services sale growing, especially in the Industrial Measurement side. It really was great to see the good work that we have been doing, building that business, building the capabilities and the channels and productizing the offering as well, getting it under control, together with the increased embedded base that we have been building over the past few years really kind of came to fruition in the way that it did in the second quarter was extremely pleasing. In terms of the view on the -- market view on the year, year 2024, remains unchanged, and I'll go more in the details on that at the end of the presentation. And then the business outlook, as you may have noticed, we narrowed the outlook as we are in the middle of the year, and we have little bit more grounds -- better grounds on making the estimates for what the annual performance is. I'll get more into the numbers later on. But I'll start with the strategy implementation, and this may now start to look familiar. This is the strategy one-pager on what we are, who we are and what are the key strategies, strategic priorities, what's our purpose as a company and what the megatrends we are living, reminding that we are -- it really is the canvas that we are looking at is climate change. We think that that's to be, by far, the biggest challenge. And therefore, for us, as we are on the right side of the climate change, we are part of the solution provider for our customers to be more sustainable or be more -- be able to improve their performance vis-à-vis climate change. We think that, that's a huge opportunity leading into the purpose of the company, taking every measure for the planet. The couple of things that -- on the quarter, highlighting on the strategy execution, the -- on the bubbles on the right, the one you see on the bottom row, drive profitability as a leader of weather systems. This is something that I have been talking about over the couple of quarters already. I am extremely pleased to see how -- when we changed the strategy some 2.5 years, 3 years ago on really driving this for profitability. Now that really has been coming to a fruition in a systematic way. We have been able to improve. I think this is now a seventh or eighth quarter in a row which is big contributor, especially on the Industrial -- on the Weather Environment side in the improved profitability. And I think it's a great example of how clarity on the strategy and then clear execution can lead into good results. The other thing on a key competent side and capability in terms of, for example, taking full use of digitalization and AI, we continue to invest into our own capabilities. And I would like to also take the opportunity to welcome Ashish Agarwal -- Girish Agarwal to join the company and the leadership team being the Chief Digital and Information Officer. I think he brings along kind of capabilities and experience to help us to be even more nimble, effective and really be able to take the capabilities to the next level. Then a couple of examples of how this strategy is kind of realized in practice in different parts of the company, different parts of the offering that we do. First, on the left, we have the continuous monitoring deal warehousing -- deal with the warehousing and distribution facilities of PostNord in Sweden, whereby PostNord is capable now, through our equipment, make sure that their warehouses and distribution facilities stay in the desired parameters, verify that the medical products, the pharma products distributed are staying good, and they are safe to use for the consumers and the society, extremely important part. And I think all of us can relate to that. In the middle, the example on the Weather Environment, more of a traditional side, is the new weather radar that -- and windshear products in the airport in Dominican Republic that we built. And here is, again, a place in the Caribbean, where the harsh weather can be really harsh, and it's extremely important to have the right information to really ensure the safe takeoffs and landings and the capacity of the airport. And it's a great example of how we contribute to this. This may be also a good moment to comment on the sizable weather radar deal that we had -- we received from Spain, Spanish authorities. As you have heard, it takes time from the Board to actually signing of the contract, but we are at the final stages of this. And I would expect that in coming weeks, if not coming days, actually, we get this finalized,. but it is not yet in the order book, order numbers that I am presenting today. The last one is the real-time air quality data, now visible on BMW Group cars, so MINIs and BMWs. And this is a great example, kind of building on the weather data that we have been providing to the same cars, not only BMW, but other brands, many other brands as well. But here, it's building on the capabilities we are building -- kind of bringing more to the customers and not only showing the weather data, but also the air quality data that then helps the drivers to adjust the indoor airflow in polluted areas and then decide which way they -- where do they want to park, where do they want to maybe then kind of exit the car and so on to avoid health risks. But now moving on into the financials and digging a little bit more deep dive into them. First, on Vaisala level, the -- as said, the orders received and net sales grew strongly. The order book ended up at a record high, almost EUR 200 million, up 14% when compared to the beginning of the year or end of last year, and net sales increased by 13%. Here, as I will go through when I look at the business areas, 2 things maybe to note on the net sales side. On Industrial -- especially on the Industrial Measurement side, we have to take into account when we look at the year-on-year comparisons. It's kind of good to note that second quarter last year was difficult for us. So the comparison period, when I may have said it in the first quarter call that it was difficult this time around, it's fair to say that it's -- this is a little bit easier comparison period, taking nothing away from our performance. And on the other hand then, on the Weather Environment side, the net sales on Weather Environment side, as usual, it's -- between the quarters, there's movement in terms of where the project sales are realized. And in this quarter, we are little bit benefiting from a relatively lower first quarter, where we had less project sales realized in the first quarter. Now we got more in the second quarter. So this kind of shifts between the quarters are normal in the Weather and Environment side. As said, the services sale -- sales increase was a big contributor, especially on the Industrial Measurements side for the growth. And it's also good to know, for the health of the business, the gross margin improved to 57%, almost 2 percentage points up compared to the previous year. Here, the business mix contributes to this. The -- and then also the higher net sales increases the scale and then that -- and it kind of -- as we have noticed earlier as well, that the business is highly scalable. Higher net sales is then converted to a higher gross margin often in our business. In terms of Industrial Measurements, it really is satisfying to see back on green numbers. Orders received increased 8% when we compare year-on-year. The order book up 3% when we compare to the end of last year. And remembering at the end of last year, we did take some orders in anticipation for the ERP change that we had during the first quarter, anticipating the difficult -- some difficulties on short-term delivering at that point or taking orders actually at that point. Then net sales-wise increased 7% year-on-year. As I said earlier, yes, comparison point -- comparison period was a little bit soft last year, and big contributor to the net sales growth was the services sales, which actually when we look at the Industrial Measurements alone, it's 43% year-on-year growth, which is really satisfying to see. Gross margin improved. Likewise, again, same explanations, economies of scale through to the volume increase as well as the favorable sales mix. And it's great also to see the EBIT being back on the 20s or 21.7% EBIT margin for the quarter. Then on Weather and Environment side, as the headline says, strong quarter in all aspects. Orders received grew 18% year-on-year; order book, 17% compared to the end of last year; net sales, the same, 18% year-on-year. Here, as I said, what you have to note in the quarter, though, is that growth was mainly driven by large orders received during the past quarters, and there's a higher percentage of realized project sales in second quarter in -- for example, when you compare to the first quarter. So these kind of quarterly shifts, as you can see from the graph as well, are typical in this type of a business. Nevertheless, very satisfying quarter. Subscription sales, as I said, 16% growth year-on-year. Good progress on that strategy. And then due to the economies of scale, high net sales, high volumes, the gross margin improved as well leading into EBIT margin of 12.2%, almost doubling from the comparison period year before. From a cash flow perspective, we continued on a good level. The cash flow from operating activities decreased a little bit despite the increase in net result, and this is due to the increase on the net working capital, mainly driven by actually the growth. And the example would be that both the increased net sales will require more net working capital as well as then the order book that we have does require, especially in the project business. That's -- kind of when it grows, it ties more and more net working capital. So that's actually explanation for this. We did have a dividend payment of the EUR 27.2 million in the quarter as well. Likewise, it's worth to note that we prepaid our bank loan by EUR 15 million during the quarter as well. Free cash flow in the quarter was around EUR 18 million. Then when we look at the half year, as we are an engineering company, the headline is equation. So weak first quarter plus second -- strong second quarter equates the solid first half, and I think actually that equation is spot on. And we kind of came back from the weak quarter, both in terms of -- in Weather Environment, like I said, from the timings of some of the projects -- project revenue as well as then especially on the [ wind ] side on the difficulties that we had due to the ERP change and simultaneous industrial actions during the first quarter. And now in the second quarter, we did not experience any of those disturbances in the quarter as such. And then when we look at the half year EBIT margin, 11%, up from previous year, 2 percentage points, a little bit over 2 percentage points, and likewise, EPS nicely up compared to the previous year. Maybe on the operating expenses side, worth to note the kind of 2 things. We obviously launched the ERP already in the first quarter, and now we are gradually seeing a decline on the investments into the IT. Basically, the ERP side, we are still at increased levels still in the second quarter and continues to be in the third quarter, but gradually, it is declining. And then the R&D cost, as the bullet point says minus 5 percentage points year-on-year. Here, it's more on being prudent on where do we spend the money, partly also in-sourcing kind of some of our external R&D that happened already last year, and now we are getting the benefit of it. And then the part of it is also the reduction in force and the rescoping of the R&D that we did at the end of last year in the Weather and Environment in the traditional side of the business, which kind of all contributed to the small decline on R&D costs. Financial position remained strong, low leverage on the balance sheet as usual. And just as a reminder, we have a very asset-light business model on it. I don't think there's really anything to highlight maybe on this slide other than really the points that I made, strong financial position and through the asset-light business model and low leverage in the balance sheet. Then into the market and business outlook. The outlook remains unchanged. So this is unchanged from the start of the year. Exactly as we said from the beginning of the year, the markets remain uncertain and predictable. There's lots of uncertainty in terms of the timings of investments and so on. The overall economic outlook in the world remains uncertain. Timings of, for example, interest rates cuts and so on, as we all know, are very difficult to predict, leading into a host of uncertainty in a customer behavior and end user behavior. That all being said, we see the market -- as we said earlier, we are seeing, this year, the market size being roughly on the same level as what it was in the second quarter last year in the Industrial Measurement side. That all being said, we are seeing early signs of recovery happening in North America, not really anywhere else at the moment. It's still very early, and we do expect that the -- this early recovery will kind of continue towards the second half of this year and the end of the year, so end of the -- like being kind of more visible at the end of the year. But uncertainty is how I would characterize still the marketplace today. And with all that, we then specified the business outlook for 2024. We narrowed the range on net sales from EUR 530 million to EUR 570 million to EUR 540 million to EUR 570 million. And then likewise, in the operating result, we narrowed correspondingly. Earlier, we had -- from EUR 63 million to EUR 78 million. Operating result anticipating, now we are saying we would be in the range above EUR 68 million to EUR 78 million. With that, I would like to conclude my prepared remarks, and I would like to open for any questions you may have.

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

I would like to first ask about the order intake in the Weather and Environment business area. It was very strong, if the Spain order not included in the book. So what were the main drivers in there?

It actually came from multiple different sides, mainly on the traditional side of the business. Like when you look at the order book in Weather and Environment, you have to remember that the subscription sales is not in the order book as it's subscription sales. And then the bulk of that then is really from traditional side of the business. And it really came from no particular big order. There were a few midsized orders, like in kind of between EUR 5 million to EUR 10 million. But there's nothing special in the quarter that drove it. It really was a steady stream of orders that just coming in.

And do you see any particular trend behind those smaller pieces?

Not really. I mean part of this is also bit a timing thing, that when sometimes the orders coming in, as you see, Spain is a good example, that it's very difficult to predict when can we actually book an order. And sometimes there's more red tape and sometimes less. So there's bit of a timing thing. Part of the good performance overall in the business, I have to say, though, is that we did invest -- we had a technological debt on the traditional business and the product side some time ago, and I'm talking about like 5 years, 6 years ago. And we have been overinvesting into that business to pay back that debt over the kind of past years. And now like since some time, I think we have a very solid offering and the -- kind of going to be paid back the debt. And that's probably -- so a part of this that we are performing well in the marketplace.

Okay. That's clear. Then about the high service sales growth in the Industrial Measurements, have you changed something in your business model? Or is this linked to certain fast-growing product segments? Or where is this coming from?

No, there's no specific change in this. I think as I said in my remarks and what we said in the release as well, that this is partly really a result of systematic work that has been done for quite some time now. And we have been able to kind of systematically increase the share of the services sale and also the professionalism and the operational efficiency, how we run the business. But also, I have to say that when you go back post-COVID times when we grew very rapidly, also our embedded base grew quite a bit, 20% year-on-year growth. Now that is all in the embedded base, and we are now taking the benefits of the embedded base. They start to be of the time that the kind of renewals of the services contracts and otherwise kind of being -- kind of available for the service contracts. So the embedded base, significantly higher than some years ago.

Okay. And do you think this is sustainable? So that on a quarter level...

No. Yes -- no. I don't think it's -- you're not going to see the kind of a sustaining 40% growth. And so it's -- I think this is more of exceptionally higher this quarter, again, taking nothing away from the quarter, but it's an exceptionally higher this quarter.

Okay. Then regarding your fixed costs, what are your main investment or spending priorities in the coming 12 months, assuming that the demand starts to pick up as expected?

So investment side, we continue to invest into R&D. Like the 2 biggest investments that we do are R&D and then, on the other hand, on the go-to-market side. And on the renewing the product portfolio, it's a systematic work, which we continue to do, and that goes into various sides of the business. So that's -- there's no kind of a particular thing that I want to take up. It's more -- this is a long term and -- kind of a long-term strategy and kind of a continuous long-term investments. And it's -- that's part of our kind of business model and the formula, and we continue to do that. On the sales and marketing side, there -- it really is -- we need to be continuously then be agile in terms of investing into when the certain markets, for example, require more direct investments, direct people, then we do that and the mix between indirect, direct, for example, in the Industrial Measurement side, we need to be agile on this and be kind of managing that carefully. So the sales and marketing will be the other one which you will see us continuing to invest.

The next question comes from Matti Riikonen from Carnegie.

It's Matti at Carnegie. A couple of questions. First of all, if we look at the Industrial Measurements business, was there any change in the order momentum during the quarter? That means that was it kind of fully even throughout the quarter?

Thank you, Matti, for the question. So I would say, if you take kind of a meaningful accuracy on this, it's relatively even. I think this business really is driven by how many working days. Remember that a big part of the business is quite transactional, big part of the business is kind of selling kind of small unit volumes. And there, it's just kind of number of working days effects and that then effects the kind of net sales in the quarter more than anything else. During the half, I would say, as I said in the market outlook, that early signs in the U.S. of market getting -- starting to recover. But like I said, early, early signs, kind of nothing like major yet.

Right. So basically, you are saying that just more working days...

If I look at the 12 months that's -- like if I look at the months, that's still the biggest driver on kind of what the net sales, for example, will be in the months are.

All right. Then I continue with Industrial Measurements and the services part that was already discussed to some extent. I have earlier thought that services is mainly calibration, and I was wondering how can that grow so much in this quarter and also in Q1. So I would like to kind of repeat the question that, is there a sudden volume increase? Or have you kind of made any changes to your pricing? Or what explains that in, one quarter, this can be such a high number? Was there some exceptional payment that is one-off? Or could you kind of discuss this a bit?

Yes. So no, there was nothing exceptional, no one deal, no one payment, no one customer. This comes from a very kind of a large number of transactions and customers as well, so like the rest of the business in the Industrial Measurement side. And big part of it really is the kind of the fruits of the systematic work that we have been doing this for years. And then the second thing is really the embedded base grew quite a bit. Remember that the embedded base grew quite a bit in the years, where we grew Industrial Measurements by 20% year-on-year. And there's a certain lag when we get then the -- especially the calibration for the last -- as you mentioned, that the calibration contracts sometimes lag, lag the sales as the products are calibrated in the -- as they are shipped and sold.

Okay. But I still fail to understand that why in -- so far in 2 specific quarters, the calibration activity would have been so much higher that explains the big number. And if it's really so that it's caused by the bigger base that you have built over several years, why isn't it kind of repeatable during at least this year then -- and then maybe stabilizing after that? But how can it be isolated in 2 quarters? That's my question.

Well, it's probably not going to fluctuate like drastically between the quarter. So I just want to manage the expectation that this is kind of a specifically high quarter kind of -- and I'm not expecting over 40% growth year-on-year, and obviously, kind of things catch up and so on. So it's always the question on the relative numbers when you look at that. It depends what you compare it to.

All right. Of course, the absolute euros are fairly small.

There you go.

But of course, in percentage, this is large.

Yes. But it is -- it's 10%, over 10% of the net sales in the Industrial Measurement side. It's all part of it. So it's an important part.

Good. And then -- all right. And then when you talked about Industrial Measurement gross margin having benefited from favorable sales mix as well. Does this relate to these services that were increasing?

No, not so much. No, no. What I was referring at -- actually, thank you for the question. Actually, that's a good question, and maybe I should have said it in the prepared remarks as well that there's -- if you look at the geography mixes here, I think more than -- more meaningful than anything that, as I said, the North America has picked up a bit whilst -- while we continue to see China as a very challenging market. The uncertainty in China continues. If I look at now last week's third plenary session, outcomes seems disappointing. It's early days though. We have not seen the concrete actions yet. But nevertheless, what the communique has been, it seems vague in the minimum. So the uncertainty and the real pickup has been weighted for in China. It has not happened, and I'm not expecting necessarily to happen anytime soon either. So the mix between the geographies, just kind of a gross margin, we are benefiting from that. And then also what type of products we are selling, we sold more profitable products in the quarter than some other quarter.

Okay. Fair enough. Then regarding the guidance, if you think the drivers of top line revision is the kind of higher guidance in terms of more condensed to the upper end, is it due to better momentum in Weather and less downside risk in Industrial? Or how should we look at that?

Yes. Yes. I think I would say this way that what we did, as you said, is we raised the bottom end of the guidance. And what it actually means is that, when we started the year, there was quite a bit of uncertainty in the year, and there was quite a bit of uncertainty, obviously, in how will the year go. When we gave the guidance, that was exactly the moment when we are -- where we're in the middle of the ERP change and in the middle of the Industrial actions, which we did not have a visibility to that, whether they would continue longer than what they did, and led us into relatively broad range in terms of our guidance. And now we brought it, what I would say, kind of back to a normal level in terms of a breadth of the guidance, having half a year kind of under our belt and seeing where the business is heading.

Okay. All right. And then regarding the margin guidance, again, a bit kind of puzzling or it's related to the cost savings that you have been making. So if you assume that part of the margin improvement was due to cost savings, when should we expect that the fixed costs would increase again and catch up the kind of short-term gap in planned investments? You said something about that. But should we kind of expect that fixed costs would start to increase already in the second half? Or what's the kind of timing of those costs normalizing?

Yes, that we -- as I said in the previous quarterly calls, we are trying to look at this very carefully in this very exceptional unpredictable moment. That in the business model, we see the fixed costs or R&D investments and sales investments grow kind of in order to grow the top line. Given the uncertainty, we have been more prudent than kind of usual in terms of kind of controlling the costs and selecting how we do things and so on. As the market continues to grow, I would anticipate that the -- then we would kind of start to invest more into R&D and sales. We -- this is -- this we do by really like -- given the situation, we need to be just kind of a little bit more short-term kind of managing the uncertainty when do we start and how do we start. When we get more confidence, then we will start.