Vaisala Oyj (VAIAS) Earnings Call Transcript & Summary

Good afternoon, and welcome to Vaisala's Virtual Investor Event. I am Niina Ala-Luopa, and I am from Vaisala's Investor Relations. We have 4 speakers and presentations today. First, President and CEO, Kai Oistamo, will give an overview of Vaisala's strategy and how the company is driving growth in a changing market. After that, Jarkko Sairanen will talk about Industrial Measurements business and strategic priorities that we have in that business. Our third speaker is Samuli Hanninen, who will provide an overview of Vaisala's Xweather subscription business. And fourth speaker today, Anne Jalkala, will give an overview of the Weather, Energy & Environment business. You can ask questions through the webcast chat function during the presentations, and we try to take as many questions as possible after each presentation. We have also reserved some time for questions at the end of this webcast before the wrap-up. But now without further ado, let's start and first presentation is by President and CEO, Kai Oistamo.

Thank you, Niina, and welcome from my behalf as well. As you remember, we held our Capital Markets Day about a year ago. A lot has changed still -- changed since that day, the world, the global business environment, geopolitics fundamentally changed. We have almost worked -- almost a full year on our -- with our renewed leadership team. And I wanted to also give you an overview on our business and as we continue to execute our strategy. I will now first give you an overview on the business environment and our strategy and then give the space for Jarkko, Samuli and Anne to go in-depth into our various different sides of our business. Let's start with who we are. What is Vaisala? We are a leading technology company, an industrial technology company, where we provide measurement, instruments and data to optimize industrial processes, drive energy transition and decarbonization. And we care for the safety and well-being of people and societies worldwide. Our success is deeply rooted in product and technology leadership. We are a leading player in a very large EUR 3.7 billion market with the ability to accelerate even further growth. We have increasing attractive business mix with over half of our business now Industrial Measurements and Xweather subscription business operating in growing marketplaces. We also have a balanced portfolio of complementary businesses creating resilience with different business models and different industry cycles. When we go into deeper into our businesses, even the individual businesses serve multiple different industries, multiple different end customers with -- who also have different cycles, giving even further resilience to industry cycles. In addition to all of this, we have shown agility and effective work with turbulence and rapid shifts in the marketplace and a geo environment, such as COVID-19 and the component shortage, the geographic tensions and lately the U.S. tariffs. We also have had a very strong track record of growth. If you look at the past decade, we've grown about 7 percentage points during that time, while delivering growing profits and improving our profitability. I mentioned the business landscape fundamentally changing over the past 12 months since we had the last time the CMD. And maybe a few words are appropriate about that. The trade policy shifts, the economic nationalism, the regionalization are here to stay, offering both challenges and opportunities. At Vaisala, we have built really a resilient to perform and grow constantly in this changing environment. A few examples of this. In 2020, we, as everybody else, were first faced with COVID-19 and following a big component shortage that impacted really every manufacturing industry worldwide. We had a very much of a clear playbook during that time. With very -- immediately when the shortage -- component shortage period started decided that we are going to go for securing every single shipment to our customers and procuring all the necessary components from the open market. So we did -- and during that time, we never missed a single shipment to our customers. And we managed to actually grow our business, especially on the Industrial Measurement side, significantly taking also market share from our competitors. Another example is a 2020 when Russia attacked Ukraine, creating havoc for global logistics chains. We manufacture most of our products here in Finland, and all the shipments in practice to Asia are over airfreight. And all of that actually went over Russia, when the airspace was closed very, very rapidly, we were able to reroute all our shipments around Russia, again, never missing any customer commitments during that period of time. And now if I take the last 12 months, obviously, the big topic has been the U.S. tariffs. We played different scenarios prior to actual decision on the size of the tariffs, prepare our business in such a way -- multiple different ways, actually. In the weather side, we have long-term customer commitments in U.S. as in rest of the world as well. And we shipped prior to actual tariffs, big part of that demand for the rest of the year into our own warehouses in U.S., mitigating the tariff impact and in weather -- in Industrial Measurement side, where we can rapidly change our oil prices, we did so actually in next day after the realization of the tariffs, we -- price is mitigating the tariff impact fully. So having a clarity on what the playbook is, having the right people in kind of playing that playbook and making clear decisions, that's the secret sauce. Now if I take how does the world look forward from here, the regionalization will continue, and we'll continue to challenge operating models for any company. We continue to monitor, obviously, all the changes in geopolitics and around the world, and we are prepared for different scenarios, we -- to mitigate the possible impacts to our business and to our customers. With this changing world, we continue to have a very, very robust strategy that we build upon. And our strategy has delivered very strong results if we look at the past years. If I take the past 10 years, our combined growth in the company has been about 7%. And if I take Industrial Measurement over that same time period, we have grown 11% with a breakthrough technologies, market growth and access to new markets as well. Simultaneously, we've been able to transform whether an environment business fundamentally improving profitability in the traditional business side and simultaneously creating a new subscription business, which we now call Xweather, and Samuli will talk about that a little bit later. And all this with a business model which ties very little capital and returns strongly cash. If you look at our cash conversion, like just beginning of this year -- since beginning of this year, it actually has returned the cash -- the cash return on the first 9 months during this year is 1. When I look at the business portfolio that the company has, it's fair to say that it's a balanced portfolio of complementary businesses and thus creating this resilience in this turbulent marketplace with different business models, different industry cycles. Simultaneously, we have very, very clear mandates for our businesses to deliver upon our strategy. If I start from Industrial Measurements, it has returned to growth now after 2 more difficult years post COVID-19 and the rapid growth phase following it, and now continues to be a key player in our growth agenda. We grow industrial measurements by focusing on key industries, deepening customer relationships and accelerating service growth. I mentioned Xweather. Xweather is the anchor on recurring revenue business for Vaisala. We operate in a very large growing marketplace, where we have consistently achieved double-digit growth organically, and we have boosted that growth with the acquisitions. And we continue to grow that business going forward. In weather, energy and environment, our focus clearly has been on profitability and maintaining our leading place in metrology, aviation and renewable energy market as we build service business as well. Jarkko and Samuli will go a bit deeper in their respective presentations into the 3 businesses that we operate in. Time to look at our strategy. The slide really summarizes it, and many of you have seen this slide before. But I'll take a couple of points and recap them now. Our strategy focuses on driving sustainable growth with global leader in measurement instruments and intelligence for climate action. Through our products and technologies, we enable business critical decisions and operations at our customers. Our purpose taking every measure for the planet emphasizes our active role enabling data-driven climate action. At the heart of our strategy are 4 success drivers. It all starts with deep customer understanding and commercial excellence, really understand deeply what our customer -- what are the challenges that our customers are facing, anticipating them going forward as well as really understanding the application where we can help them in their potential challenges. This unbind with product and technology leadership from our sensors to digital solutions really is what describes the key competitive advantage that we have at Vaisala. Excellent supply -- excellence in supply chain, partly demonstrated when I talked about the rerouting the air freight to Asia, partly kind of described also when I talked about the time when component shortages, this is really kind of one of the secret sauces that the company has. And it's all built on purpose-driven culture and talent. To complement our success drivers, we have identified 4 key priorities -- strategic priorities. We continue to drive industrial measurement through breakthrough technologies and product leadership. We grow share of our services and software revenues. We drive profitability as the global leader in weather, energy and environment. And while doing all of this, we need to all constantly challenge ourselves how we operate, how do we simplify our ways of working. How do we scale our operations so that we achieve greater impact and greater efficiency. Let's take a look at a little -- a short look at our capital allocation. We continue our investments in growth, that really is at the core. We are a growth company. And while doing that, we are aiming to improve our shareholder returns. First part of the capital allocation is to invest into ourselves, invest into R&D and, to some extent, also our sales to secure technology and market leadership. If I take only the R&D investment that has been during the past years and on average, 12% of our net sales. And if you look at the slide on return on capital employed, it actually is on a very good level. Example is from 2024, but even the earlier years, on a similar level. In addition to the organic growth and investments into our own operations, we do programmatic M&A, which is a critical tool to drive growth even further. We are looking to find established synergetic businesses can scale faster as part of Vaisala as what they could do independently. We aim for acquisitions and assets that open up new markets for us, they bring new competencies or capabilities to us. We target growth through small and midsized acquisitions. We are not looking at transformative M&A or market consolidation. A great example of types of M&A that we have been doing, and we continue to look at going forward are, for example, the WeatherDesk and Speedwell climate that we executed last year. We are also a solid dividend player. We aim to distribute a stable dividend which will increase in line with the increasing net profit development. Again, if I look at the net dividend earnings ratio for '24, it was 48%, which is we're on a good level. Just confirming our long-term financial targets. We published our financial targets about a year ago at our CMD. And I'm happy to reconfirm these targets. First, starting with average net sales growth being 7% on average, and this really is driving -- driven by 3 things. We are operating on growth markets on in Industrial Measurements and in Xweather, that drives further growth. We are also simultaneously expanding in new markets and new customer segments. And thirdly, the growth through breakthrough technologies allows us to create even more value to our existing customers and new customers through our own products, services and capabilities. Then on profitability side, we -- while growing the company, we are aiming to improve EBITDA percentage in a systematic way. Again, 3 drivers for this. We are changing the business mix or the business mix for the more growing parts of the company are more profitable. So that's a change in profitable business mix. We are also benefiting as we are a growth company, the scaling impact from growing the company is another profitability driver. And thirdly, very importantly, we are very diligent in our capital allocation towards more growth and profitable opportunities. And then all that we are doing with strong cash conversion over time. We are operating a business which ties very little capital in its operations, and it also returns rapidly the cash back. So it is something that we aim to continue also in the future. So if I try to conclude what I wanted to say 3 things I would like you to remember. The world has changed quite a bit over the past 12 months. But we continue to have a very robust strategy to drive resilient, profitable growth even in this changing marketplace. Secondly, we have increasingly attractive biz mix and very balanced portfolio of businesses, creating resilience with different business models, different industry cycles underneath. And thirdly, we are seeking for growth through breakthrough technologies, while at the same time increasing recurring revenue from both services and software. And this growth is supported also by programmatic M&A. So I would say we have all the keys for profitable growth and strong cash flow. And very proud to reconfirm our long-term financial targets as such. So that concludes my my prepared remarks, and I am very, very happy to answer any questions online. So Niina, any questions yet?

Yes, we do have a couple of questions here. First, a question from Nikko Ruokangas. You talked about your ability to adapt to different market situations. What kind of actions have you been doing recently due to U.S. government shutdown? How much did it affect your market?

Yes. So it's first of all, a great question. And part of it I actually went through already. So -- we all know the tariffs were came in force in the middle of this year. And we did the scenario opening for various different tariff levels in advance knowing exactly kind of what to do in the final number and what the tariffs between Europe and U.S. would be. And then as said, for the contracts or the customers that we have a longer-term contracts where it takes a little bit of time to renegotiate the financial contracts that we have with them, we preshipped in U.S. and bought us time. So we have now used that time on renegotiating and passing the cost on -- with the aim of passing the cost to our customer on the tariffs. And then on the side of the business where we can -- we have more freedom on changing the prices, we did so immediately. So that was the way we compensated. We also look at -- looked at alternatives, but this is the path we sort most attractive from a financial and operational perspective.

Next question comes from Matti Riikonen. In the short term, for example, in 2026, next year, can you meet your long-term financial target of 7% top line growth?

Great question, Matti. Unfortunately, we are not giving guidance to next year here. We are talking about the longer-term targets and longer-term strategy. And I can only repeat what I said. We are completely committed to delivering average 7% growth target for the long term.

Then next question comes from Waltteri Rossi. What kind of plans do you have to potentially combine the subscription-based business to the hardware business? Is there a potential to combining these 2 offerings?

Yes. So again, very good question. And I'll let Samuli to talk about it a little bit more, but I'll answer that kind of briefly. So first, synergy has to be kind of recognized that the roots of Xweather and the knowledge and deep understanding of the weather actually come from the same place. The fact that we have been building weather solutions, product capabilities over almost 90 years have been creating the foundation for deep understanding what weather and the opportunities are. And then we've built the business that Samuli runs. Part of that business is allowing when applicable to bring hardware elements and our own kind of measurement capabilities to it as well. And a great example of this is the world's leading lightning detection network, which we run, it includes the hardware and then we monetize through a sale of data and services as well as then we can combine also with the hardware that we might sell to our customers.

We have actually 2 questions related to data centers and perhaps save at least one of them to -- for Jarkko, but perhaps -- so Pauli Lohi has a question. How big importance do you give the data center industry as a source of growth for industrial measurements in the next years? And Mikkel has a similar, how do you see the data center opportunity?

Yes. So I'll actually let Jarkko to answer the more detailed question on this, but I'll stay on a bigger picture and just say that the data center has been a sizable market in Industrial Measurements for some time already. While we don't break it out in terms of exactly what the size of it is, we've just said and we continue to say that it's one of the bigger industries that we serve. And obviously, we all know that there's a huge investment that has been happening into the data centers. We have been beneficiaries of it. And I continue to believe that investments into AI and consequently, also the data centers will continue going forward. And it is -- has been lucrative market for us, and I believe it continues to be also in the future. .

I will save those -- these questions also so that Jarkko can talk about the data center business in more detail in -- after his presentation. But there's another question from Nikko Ruokangas. You said that the market has fundamentally changed during the last 12 months following our Capital Markets Day a year ago. Could you describe the process for reviewing the strategy and whether something needs to be changed following these fundamental changes. And what were the key parts you were reviewing?

Yes. So a couple of things. Again, I think it's a very good question. And I'll say 2 things. First of all, while reviewing our strategy and the core basis of our strategy, we feel that our strategy, as we communicated a year ago, it remains very, very valid and it's a very solid ground for us to build further growth. That being said, obviously, the changes, for example, the geopolitics and the tariffs in the U.S. required us to kind of look at how do we tackle this environment? How do we continue to serve our customers, how do we continue to grow and how do we drive our profitability. And here, we looked at the various different scenarios, we looked at the different capabilities that we may or may not build and looked at the various different scenarios as they decided on, as I described, partly early shipments and then negotiating kind of a later price increases or immediate price increases. At the same time, we need to continue to review this the tariff changes were just one incidence. But I believe it's a good sign of future as well, it is about looking at the supply chains. It's about how do we, again, serve our customers in a best possible way, keep our promises to the customer, whilst then growing and creating even more profitable company.

Thank you very much, Kai. I do have some other questions here, but we have reserved some time at the end of the webcast for those questions. So I will take those into the Q&A session a bit later. But now, let's move on with our program. I'd like to welcome here on stage Executive Vice President of Industrial Measurements, Jarkko Sairanen, who will provide an overview of the Industrial Measurements business.

Thank you, Niina, and good afternoon for all of you on the webcast. My name is Jarkko Sairanen. Some of you may remember me wearing a different hat in these events earlier, being the weather business environment area. But now since January 1, I have had the pleasure of leading the Industrial Measurements business and it has been a great new business area advise a lot to learn to know and our fundamentals are extremely strong. There has been 0 needs to modify anything in them. We have really the globally leading products. We have a tremendously strong position in the marketplace and the performance of the business has been excellent. The thing that we have been really focusing on is that during the last 2 years, as you will see also soon and many of you know, our growth has been flat. And therefore, what we have been working with the leadership team is really to identify the key levers. How do we ensure that we continue to drive the growth in the same way as over the last decade we have seen in this business. And therefore, also the name of this 20-minute summary that I will share with you entering the next growth phase. So I will briefly update you what we are really doing, which markets we serve and how do we believe that the growth will realize for us going forward. Perhaps building still a bridge what Kai was showing here earlier that Vaisala as a company taking every measure for the planet. So how do we think about that in the industrial measurements? So for us, the core is really the edgy transition and decarbonization if we simplify those into 2 words. Energy transition implies that we have to care in a lot of our customers about resource use, which is then also often energy consumption, energy efficiency. And then I would say in the decarbonization, we are really building sort of the future measurement seeds for the next era in the industrialization, which will be around decarbonized industries around CO2 management, around capturing CO2 in different phases and measuring that. I think there is a couple of other key words that you see in this text. One is this real-time insights into critical processes. And real-time means for us that we are really measuring in line in the customer processes. So we are not making analyzers where somebody is taking a sample and bringing it into a laboratory. Our measurement devices work sort of directly in line and provide the reliable insights into our customers in very demanding and difficult moment environments. And then the second one is value proposal is really extremely valid, when our customers are working with critical approaches, which were really the optimization phase of. Sustainability is also core for us. Obviously, there's a lot how we develop the instruments, how we think about their footprint going forward, their energy consumption, et cetera, but also how our customers see them because of the accuracy that they bring, the reliability they have, i.e., they are not drifting as some of the other options would do. And also how long they last. So they are really long-lasting decisions our customers take, so they are also contributing to the sustainability of the solutions that we bring to our customers. This is what the business development looks like from the financial side. And I was sort of showing the similar thing at the Vaisala level, I think the achievement, what the team has done over the last 10 years has been really impressive. So you see 11% compounded annual growth rate for revenue as the business has been growing. During this whole period, there has been only one M&A move that has been done, and it's not material enough to impact this compounded annual growth rate number, which you see here. Also, the EBITDA has been here high. So consistently for the last 10 years or so, about 20%, as you see from the financial performance. So a great story. The challenge that we have had is that we got a strong boost '21, '22 after the pandemic. And obviously, part of that boost was coming from the Life Science, and I will tell you later a couple of examples there. After that the last 2 years have been flat. Many companies who have been serving life science industries in an as focused manner as we have, have actually seen the top line to decline. So therefore, having been able to maintain it flat has not been totally bad achievement. And the good news is that if we look at this year, so the 3 quarters that we have reported out compared to the 3 quarters last year, our growth has been here 13% for this 9-month periods. Then also there is worthwhile to remember that there has been certain headwinds that we have been facing through the currency exchange rates especially in the third quarter, impacting our revenue on comparable currencies about EUR 3 million. So 1%, 1.5% of revenue, so relatively significant from that perspective, but still delivering these numbers as you see here. Kai was already talking about the resilience navigating the tariff environment successfully. I don't mention more about it than really saying that we have been quite agile and successful in sort of compensating that impact into our performance as such. Big portion of the recent growth has been coming from these questions that Niina was already alluding to data centers, I will go also a bit deeper into those segments here in brief. These are the core markets and then the drivers behind what we have. And these numbers that you see on the top line are spot on the same one that we used a year ago in the Capital Markets Day. So let's start with these industrial markets. As you see, there is a number of different segments that we serve. However, a few of those that we have raised to the upper line are really, I would say, the most important ones for us also strategically. All in all, this segment is growing in a healthy space, the digitalization of industrial manufacturing, I think that is pretty understandable to all of us as such. But then also alluding to your question, what is happening with AI, what is happening with data, what is happening with the buildup with the computing capabilities broadly, which is obviously positively impacting our business in the data centers. And then this electrification also decarbonization long term, is a position that we are really building. If I mention here a couple of examples for you and perhaps starting with the data center. Now I'm talking of a global average. So there is obviously differences in the different geographies, also in the sizes of the data centers. But if we take the today understood average, so a quarter. So 75% of the energy consumption that we have in data centers is actually going into running the processor, the chips, the GPUs from NVIDIA and a quarter, so 25% is going into maintaining the environmental conditions as they should be. Obviously, the processors are leading into a lot of energy generation, the biggest ones that are being built today, several hundreds of megawatts. That is the power or capacity there. Think about your Sona, where you may have 8 kilowatts. What is a temperature that you get there. So I think it's pretty understandable that some cooling will be needed or otherwise, it gets very hot, very fast. Too hot environment would lead into SLA problems or service level problems with these data centers, the processors want not be running as needed. Cooling too much is a heavy energy cost as we understood when this 25% is going into the edge. So therefore, these data centers have hundreds of measurement points, we are thankful that many of those are delivered by us to actually optimize this energy consumption. There is right now happening also transition to liquid cooling. We are also positioned there. So our measurement devices are today also to measure the temperatures of the liquid coolants, so this is a specific area where I think we are well positioned. We have really the devices that are needed by the highly qualified data center players and also for the future when the technology is evolving. The second example here, the batteries. Just to give you an indication of what we do there, the battery manufacturing when you are producing the cells. So the battery cells, lithium-ion cells, it implies that your production environment has to be extremely clean. So if we think of the lithium, if we would be in contact with water, i.e., humidity, it's a contaminant that may lead into not only big quality problems, but even to explosions. And therefore, they have to really drive air very specifically in order to meet the production quality that they need to have. And this humidity, I think it's pretty descriptive what they have to do. So imagine yourself being in a meeting room, where you have a meeting room, which can contain, say, 15 to 20 people, so relatively large meeting room. So if you have a normal humidity of any environment in that room, there is about 1 liter water in the air. So 1 liter water in there, now when we go to the battery manufacturing for lithium ion batteries in that same space, there can be only 1 drop of water. So 1 tiny droplet when you think about it. So this is -- if your viewpoint is minus 70, what we are measuring there continuously from the air flow with a very, very fast reaction speed. And again, equally important for the quality but then also for the energy consumption, making the air unnecessarily dry will be tremendous energy constraint and about 1/3 of the energy consumption related to the battery manufacturing is related to this dehumidification that you do for the production. So impacts a lot. Then perhaps of these forward-looking things I want to mention, the latest -- or the last one there in the road is decarbonization, so I think we are very attractively positioned for the years to come. So we are developing the measurement portfolio, for hydrogen economy for decarbonization, already today, the early innovators who are capturing carbon dioxide directly from air it's called DAC direct air capture or using our instruments to measure their process and to optimize it. So a broad spectrum of equipment. Then the second one is life science. As I said, there was a tremendous boost, obviously, during the year of the pandemic. Now we feel that it's starting to pick up again. Here, we have also very strong mega drivers, obviously, the aging population that needs more sort of pharmaceuticals, life science-related innovations. There is also the regulatory compliance-related requirements. This industry is facing, but also new innovation, especially in the area of biotechnology. So we have cell and gene therapy and you name it, and there is a lot of things happening. It's the biggest single segment that we serve in Industrial Measurements, about 30% of our revenue. We are very proud to say that 50 of the globally largest pharmaceutical companies, life science companies, so 50 out of 50 logos use us. It doesn't imply that they are only buying from us, but they are also customers to us, obviously, to a lot of our peers and competition, but we have a strong business here. An example here was March 2020. Kai was referring to the pandemic time at that day, we got orders from Wuhan to supply our CO2 sensors for the incubators. So they were starting and trying to understand what is this virus all about, but obviously starting to develop the vaccines. And that also then triggered the tremendous growth that we saw '21, '22 in our business when the world was fighting to get these vaccines developed. Third segment power. And here, I want to start from Heathrow Airport. Many of you remember a few months ago, Heathrow Airport was closed for a full day, 24 hours. And the reason was that a transformer got fire, burned, exploded, whatever word you want to use in a substation that was the critical station of powering the airport. And the interesting thing here is that later is what discovered in the investigations that, that transformer there was measured humidity already 2018. So 6, 7 years earlier, but nobody did anything. There is 1 million of such transformers that we have globally. And only a fraction of those are even being measured not to mention that somebody would do something when a measurement device is showing you. So this is a tremendous new market opportunity for companies like us who can actually measure the conditions of the transformer. So basically, we are measuring if there is some gases in the transformer oil. And from these gases we can deduct that is there potentially a fault that is emerging. And we can measure 9 different gases in the transformer ore. Naturally, the key customers are transmission grid companies, utilities and with the electrification needs are only expanding. We need to invest a lot in new transmission lines as such. But interestingly, we have also new customer segment here, where we are scoring today first businesses, data centers. They have to ensure that their electricity is sort of in good hands, good shape. So they are also installing on transformers steel manufacturing sites, which are also making the transition with electrification are doing the same. So we see the expanding also to industrial sites. So as you see, really leading-edge products that we bring to these industries where we also see fundamentals of the growth to continue. If I mention a few words about what are these solid foundational elements that I started with, which I think are in excellent shape in the business. So we were talking about the performance, our market leadership position in these segments. We have a excellent global channel. So we have more than 250 partners globally, working with us every day and covering our sort of footprint in 150-plus countries as we do the business. And then what I was alluding here, what Kai was already mentioning, we are really working. So we have the luxury of working and serving this type of growth industries that we covered. So here, you see the 5 examples listed. And actually, 2/3 of our business is coming today from these segments. And obviously, that gives us a great confidence that the growth will continue. And we are investing for the future. And what you see here at the bottom, this technology leadership, the deep science work that we do to build these leading sort of instruments continues to be a foundation for our business. So there is the question, what else can we do? And here, you see the priorities that we have now identified some perhaps a bit more short-term operational where we can start to do immediately some more sort of strategic. But really the core is that we want to strengthen our relationship with the end customers. So I was talking about the channel that we have. Now we want to move further and closer to our end customers, understand the needs better, how can we serve them better, what are the difficulties that we face. And actually, the objective is to build these decades, long lasting business relationships with the leading end users in these industries that we are serving. This is also linked into this commercial excellence. So right now, we are very actively putting in sort of next level of account management practices, which obviously is very tightly related into the customer intimacy, we are investigating that could there be new ways how we could bring a bit more dynamic way, how we work with our pricing, so adding intelligence agility in there in order to sort of really get full value from the value which we deliver to our customers. And then the services, as was also mentioned as a Vaisala priority, it's a potential hidden gem in our portfolio because we have a very large installed base out there. So decades long that we have been working with our customers, the challenge that we have conventionally had is that the products are -- nobody needs to service them. But we have a lot of segments where the customers still due to the criticality of their processes, sometimes even by the regulation, want to and need to calibrate the sensors in order to make sure that the preciseness is really their spot on what it should be. So here, we are now building offering, making it really productized. We just launched here a few weeks ago, a new offering called Vaisala Circular which is sort of try first innovation. There is more to come, and we are really looking forward to start building this type of recurring revenue as part of the business. And then finally, we have here the aspiration that while over the last decade, we have not done any substantial M&A. Now we are really looking for opportunities that could be boost this organic growth most likely tied into this core growth segments that we are serving in order to accelerate the growth even beyond what we are able to do organically. So in summary, strong customer segments with underlying growth is the focus. There, we also want to work this customer intimacy be closer, try to make sure that these are really now decade-long partnerships that continue to grow with them, working with very exciting road map in our R&D. So there is every year sort of for the foreseeable future, what we can see, new breakthroughs coming, new exciting offering, which is extending our play that we have. And then really now going systematically after the opportunities -- untapped opportunity that we have in services to really also put their next year on and develop there also and support our systematic growth. So this concludes my overview and happy to take Niina here with me and see if you have any questions on the line.

We have lots of questions.

Okay.

Let's start a question related to life science. So a question from Mikkel with all the pharma investment activity in the U.S. right now, how do you see the life science market outlook? And when do you expect this to start showing up in your orders?

So as was in my graph, which was showing the financials, there was a statement that this year, we have been really enjoying the strong demand from the data centers, but also we have seen that the life science industry started to activate. So you can read that as orders have been visible already this year. We are expecting the -- and this is obviously not only our expecting but generic sort of industry expectation that the growth in the Life Sciences, pharma industry is probably somewhere between 5% to 10%. But then if we look at that biotech and biotech development. So there, we are talking of high double-digit sort of teens or teens growth numbers. And obviously, that's also something where we are focusing in. So we are pretty optimistic of the future and North America is actually the market where we have our biggest life science business today. So it fits well with those investments that are happening.

Next question is about power market. So Nikko Ruokangas has a question. You estimate your addressable power market to be worth EUR 250 million, which is up to 25% from our estimate from a year ago, which was EUR 200 million. Was the market -- the power market being this strong in in this year? Or have you changed the definition included in the addressable market?

Excellent question. And honestly, if I think about -- and I think the only fair way to say is that this is the market that we have been obviously developing -- offering for some time, but really starting to play quite recently in a significant manner. So this implies that we are learning all the time because right now, we are talking with customers. We are understanding their situations. As I mentioned, we see that there is new segments like these industrial customers emerging. So this is not only for grid companies, there is also anything else. So I would even say that most likely in the foreseeable future, our view how large this market opportunity actually may even get bigger. So I think we are learning and therefore, understanding that the opportunity is a little even larger, what we thought a year or 2 years ago.

Thank you. Then a question from Joonas Ilvonen related to M&A. What kinds of acquisitions might you do within industrial measurements as it hasn't been that active in this sense as whether an environment, might such acquisitions also help you build further customer intimacy in key industries? And another question, are you also working closely with AI data center, thermal management technology providers like Verti.

Yes. So obviously, what happens with M&A is very difficult to predict because it's not even in our control as we all know that so well. So naturally, we are looking at M&A opportunities that would be synergistic. So that would -- and then in this question that, okay, could it help our business in the core sort of segments which we serve. So certainly an objective. I think what we can say is that we are not looking for huge transformative M&A, but more like small, medium-sized companies. And then obviously, there has to be synergies. And usually, those synergies are either related somehow to technologies or really to this go-to market, which also refers to, I guess that is all I can speculate right now.

Thank you. Then a question from Simon Jonsson. How has sales to the battery and battery end market developed over the past few years, one would think that demand has been soft given the industry headwinds?

Yes. So we are not disclosing the specific euro numbers on the different segments. But I think the question is totally spot on the battery market has been a bit soft sort of globally due to the fact that there was, I would say, overcapacity in the investments, the utilized sales have been weak. However, what the industry is talking that there is no clear increase, again, driven also by EVs only, but really by the energy story systems. And right now, when you look at the industry insights, there is a lot of comments that most likely the demand will be picking up again in the years to come.

The one last question before we move on. Could you repeat which were those specific industries -- industries that account for 2/3 of the measurements?

Yes. Happy to do it. So as we have been saying, so Life Science is about 30% of our business. So that was even mentioned. The rest we don't disclose by size. But the second one, so there was 5 of those listed. So the second one is really the data centers, critical buildings. So we are calling age with critical buildings, obviously, driven by data centers. The third one is then this battery manufacturing, the fourth one is semiconductors and then the fifth one is this power. So these 5, which was also listed there separately. So those are the ones that I was alluding to about 2/3 of the business.

Yes. Thank you very much, Jarkko.

Thank you. My pleasure.

And moving on with our agenda today. Our next presentation is about Xweather subscription business. Please welcome Samuli Hanninen, Executive Vice President of Xweather.

Thank you, Niina, and also, a warm welcome virtually to our session today. So during the next 30 minutes, I will tell you a bit more about us, about Xweather, also in our numbers. And then the plan is also to show some additional demos as well. But let's get going that every company has survived. Kai was talking about that in the beginning of the session about Vaisala mission. Of course, with Xweather are a part of it. Vaisala is all about intelligence and instruments for climate action. Then what we do with Xweather is that we help other companies with weather. For our customers, weather is super critical. It's not small talk. It can be a huge risk or a giant opportunity. It is about protecting lives and properties or it's about losing them. So it's about making money or losing money. So for our customers, weather is critical. Then what really ultimately drives the outcome? So what do we do? We make our customers to know first. That is what we do. We help them to understand what is going to happen, not only providing the insights but also the foresights. And that is why 40% Fortune 100s are our customers. So what one would remember about Xweather that when you use Xweather, you are the first to know. So what do we do? We sell DaaS and SaaS, so data as a service and software/solution as a service, we operate on a growing EUR 2 billion global market. We basically have 2 horizontal offerings, one being our data products where we have the highest quality of global weather and environmental data available. That data is really of the highest quality, i.e., it can be used for insurances, for finances, for trading. On top of the data layer, we have something what we call Protect, i.e., our customers can protect their people and assets from different kind of weather risks. Then there are 3 areas where we go deeper into the value chain. Those are our 3 verticals. Our 3 verticals are transportation and logistics, where we, for example, serve car manufacturers, winter maintenance organizations and road asset managers. What are we able to do is that we bring together those ones who use the roads with the ones who maintain their roads. On an energy side, our most important sort of subsegment is renewable energy. As we all know, weather is the fuel of renewable energy. As the amount of renewable energy assets in -- basically in any country's portfolio are rather large as of today, renewable energy matters also to all energy producers, not only to those energy producers who are producing renewable but for all. The biggest external weather or the biggest external attribute influencing, for example, the pricing of nat gas is wind. That sounds quite funny rented. That the biggest thing impacting the pricing of natural gas is wind. That is because wind is the part in the value chain, which is, of course, volatile as studies generated by better. In addition to energy, we are also in the finance and insurance market. I was already touching one area of them, which is the commodity trading. In addition to that, we are also serving a lot of commodity traders. For those for first to know is of essential importance naturally. On the right-hand side of the slide, you see some of our customers natural. We feel, at the same time, very proud and humbled on having those kind of customers, which also provide us room to grow. Altogether, we have roughly 2,000 customers as subscription customers in Xweather. There are a couple of areas where Vaisala Xweather is clearly the leader, road weather for automotive is one of those. We have global automotive OEMs using our data ranging from European and U.S. car makers to all the main global ones. We started the road weather data as an infotainment play, i.e., seeing what is the destination weather or things like that, as ADAS and AD are getting more common. That is, of course, becoming also a safety feature, which is further elevating the -- our position in the value chain. When it comes to the globe real-time lightning data, we are clearly the leader. We are the only ones having a global lightning detection network, and we are also operating the U.S. national lightning detection network. We detect a lot of lightings. But what I think is even cooler than detecting the lightning is that how fast we can do it. So it's not only about the accuracy of the network, but it's also about the latency. If the thunderstorm or the lightning strike hits you, and you are more than 5 kilometers or, let's say, between 4 and 5 kilometers away from the location, you actually receive our warning before you hear the thunder. That's how much we have optimized the performance of our lightning detection network. I would love to demo that, but I would really need to have good luck to be able to do it. I already talked about weather and energy trading. And there's a fourth area, which is really also our stronghold is the better forecast quality in Europe and North America. Those also being the areas where we focus most, so roughly 50% of Xweather business is DaaS, so Data as a Service, the other 50% one software/solution as a Service. A bit more than 60% of our customers come from North America, plus 30% from Europe. The remaining roughly 5% are the Global and different parts of the world from Latin America to Australia. During the last 3 to 6 months, we have also started to extend our coverage outside of Europe and North America. As mentioned earlier, our growth has been double digit now for a 4 consecutive years. And as you see from the figures, the growth has been strong. As earlier also mentioned by Kai, we've been also utilizing acquisitions as part of our growth strategy. So the 3 biggest ones being there Aris, WeatherDesk and Speedwell Climate. Those all together present roughly 1/3 of the total revenue. So always, when we have been able to acquire a company, we've been able to to make the company grow and to further accelerate our own growth. Our net revenue retention is plus 100%, and our business is very clean when it comes to ARR. So over 95% of our revenue is recurring. Then I'm sure I will get questions so I will answer it in advance. So yes, we are profitable, EBITDA being our most important KPI and we are not currently reporting further details, except for the subscription net sales. But let's move on. This is also a slide that we referred a bit already earlier. So how do the software and hardware play to get there. So in addition, of our business being recurring, it also has a network effect, i.e., the more you use it, the better it gets. When we are selling our SaaS solution, being it, I mentioned a product called Protect, when we are selling that product, that product quite often comes with the piece of hardware. The reason why it comes with the bit of hardware is that, that improves the forecasting accuracy, like no matter whether you'd use deterministic modeling or AI, you cannot invent data from a place where there is no day, i.e., you need a measurement. Those Vaisala ex gas sensors are the devices that we ship together with our solutions. As now we install that device onto our customer premises, Vaisala also has access to that data. i.e., from that onwards, that device further improves our capabilities to forecast. So that device's data becomes part our data asset. Naturally, that improves the data quality and the forecast quality, so we are able to sell an improved data-as-a-service offering and improved solution as a service offering. The same logic can apply to different kind of measurement attributes. Lighting network behaves in that way, but so does a temperature sensor. So the more we have people using it the better it also gets. Then moving forward. So what is it that is differentiating us. When we established Xweather roughly 4 years ago, we were big believers on AI and ML. It was already by that time visible in the industry that those things will change the ways how we are doing with the forecasting. So we started applying AI and ML basically everywhere where we can, everywhere where it adds the benefit. So when somebody asked us to case, where do you exactly use AI or ML, the answer more or less is everywhere. But we combine like discussed earlier, that data science and ML knowledge together with the 89 years of Vaisala's history of understanding both meteorology and metrology. And that's the unique combo that we can do, understand both the deterministic and probabilistic side of the things. And that's also where the hardware comes to the picture. So how we differentiate AI and ML and hardware. Those are the 2 things. Then what is our team like? We are only software people. So we don't really that much build hardware. So we are builders, explainers and translators of weather intelligence. Roughly half of our team is basically in the Helsinki capital area, the other part in U.S., in Boulder, Maryland, where we just opened an office and in Minneapolis. And then the blue dots are where also our sales guys are. We had a really global team with more than 20 nationalities, and we are currently in 10 countries. We are roughly 250 people. And actually, our head count hasn't changed, as our business really scales with cloud and computers, not only with people. So that's us in a nutshell. And I was thinking that a good way to show our products and explain a bit more about those would be to have some demos. So I was thinking of running us through let's see, 3 or 4 demos. One thing which we are really excited about is MCPs. I'm sure everyone has heard those. So -- so as part of LLMs, what MCPs are, they are like APIs for large language models. So MCPs help the large language models to receive the real-time information. So MCP itself stands for a model context protocol. I will be here showing example. So now you can play the video of us playing around with Claude AI. So this was done a couple of weeks ago. So we are asking the Claude AI that is connected to our weather back end that what is the likely correlation of weather and weather and lap times on the Singapore Grand Prix. That question is pretty complex one. Like how much does weather impact lap times in Singapore Grand Prix. And we are feeding that question here to our cloud-based LLM that is connected to our back end. And as you can soon see, it's actually able to make a graph. Okay, now it's building the HTML page. So it's able to build the graph without asking any further questions. I have to check the numbers, but it's roughly so that 1 Celsius degree or 2 Celsius degree seem to equal something like half a second. Now if you think about what this means and why I think this example is super good one is that just think about the role of a meteorologist. In the past, you actually had to have people, explaining the foresights and insights of everything, and you need to have all the domain-specific skills of various industries. Now I can give that intelligence to machine. That machine can tell me what does it mean? That is pretty amazing, and you can do that more or less for any industry. So feeling super excited about that. Of course, when it comes to trading or insurance, we have also our own meteorologists that are checking and verifying the reports. But we are a better unit of an AI edge. We didn't start by having 100 or 200 meteorologists but we actually did start with the AI and ML. Then moving on, I was talking about this lightening and telling that how short the latency is. So hearing the thunder or getting a text message before hearing the thunder, so I did this demo this morning. So just showing an example that there we have that lightning with less than 10 seconds of latency. And now I'm also adding there the threat zones. So here, you can see that where we are forecasting the lighting to go. In addition, I took the other layer, which is hail. And this is also pretty unique as we were the first ones in the industry to release hail forecasts. Hail as a phenomena is also something which is almost impossible to measure using traditional means. In practice, you would need to have a radio sound in every cloud. And that's not possible even for -- and we are to have them in every cloud. So how did we come up with this? Like we were actually able to utilize machine learning algorithms where we use the intra cloud lighting. So the lightning that happens within the cloud as a proxy for hail detection. Now we can roughly say with the 80% likelihood 30 minutes in advance the rig of lightning. On this area where I was showing the demo, it is very important because there are a lot of solar farms. And if a lightning -- sorry, if a hail hits a solar farm, we are not talking about tens of millions in damage. We can talk about hundreds of millions of damage. And when you have the warnings in place, you can turn the panels upside down, so that then they are not hitting, the hail is not hitting the panel flat. Then moving on, this is another example if we play the video. So showing how our customers use these capabilities in practice, this is from -- I think, from Panama airspace. So you are actually seeing how people can build their own polygons. So this is now a grid line in Central South America. And now our users can customize and build their warnings. So if lightning is close, spiking me warning. Here is another example, not now with the lightning but actually with the road weather, so this is in upper, somewhere close to now it's tender so close to between border of Western Canada. So no, it was Detroit. So on the Credit Lake. So this is another example that where you can issue those warnings that you get slippery roads, risk of having black eyes, et cetera. So using the same portal, you can configure the alerts for whatever is critical for your business. Then our last example, if we play the video, this is then about -- a bit more about the energy and the trading part of it. So this is our portal call Xweather Power Up, where we aim to help the industry improve the liquidity. As PPA, so power purchase agreements help with volume risk, they not help with the volatility. So in this tool, you can see both the forecasted wind and the historical values, both the price curves and all the data. So now having an index and data you can trust helps you, for example, to make a trade or do a swap. I'm showing an example here because this is just like this very interesting that talking about big changes lately as you see from this slide, something really happened in the German energy market in 2022. That was basically natural gas not flowing in anymore. And all of a sudden, you got negative prices especially during the summer months because of solar. As the only part, which is now flexible is solar and wind, not something that cannot be managed without having highest quality of weather data. But that's all the demos. I think we had some time for Q&A, Niina.

Yes. We have several questions. So let's aim to take as many as possible. First question from Matti Riikonen. You mentioned net revenue retention being over 100%. Has that number changed during the past 2 years?

Yes. As with any of our core KPIs, so our core KPIs being ARR, then, of course, the EBITDA and also the NRR. So as with any business, naturally, we aim to improve. So yes, NRR is one of our key measurements. And yes, it has improved.

Okay. The next question is from Pauli Lohi. Do you see the development of AI-based weather modeling systems driving up the competition in the data service market?

That's a good question. I think there are many things which are changing in the market. Of course, the fact that private enterprises can build their own weather model using AI and ML itself is a change. If we look at the changes in the marketplace or with the actors, yes, there are a lot of start-ups because development is fast, but we haven't really seen like that kind of completely new bigger entrants or new forces. That it's more of this tradition now that you have incumbents and you have newcomers, but we haven't seen any change in balance. Maybe the only thing is that the amount of startups is still quite high. So the industry hasn't, in that sense, consolidated.

Then a question from Waltteri Rossi. To what extent ex whether currently utilized Vaisala's hardware in its offering, is the potential to bundle the offering more in the future?

Yes. So when it comes to those networks that we operate by ourselves, for example, the lightning networks. That is, of course, like Vaisala's own hardware 100%. We also bundle our hardware with our -- like I was showing the product called Protect. This far we have bundled more than 1,000 sensors. And that also mostly in our key markets like North America and Western Europe. So yes, we are doing it, and our intent is to continue doing it.

Thank you. Then a question from Mikkel. How long do you think Xweather can sustain double-digit growth before the comparison base becomes too high?

Yes, that's, of course, a fact always that when numbers get bigger, making the growth numbers same is might be trickier. We were showing the total market size of being EUR 2 billion. And like I said, that North America and Western Europe also have been our focus areas. So we firmly believe that there is -- in this market, there is a lot of room to grow.

Okay. The next one comes from Nikko Ruokangas. You seem to be well positioned in next Xweather market and the drivers are strong. What is the biggest barrier in accelerating the growth even further as the market opportunities peak?

Yes. One of the things that we did in very beginning with Xweather and that was also partially like driving our acquisition strategy was that we wanted to really build the back end would enable us to scale cost efficiently. As a subscription business is a bit different than some of the other businesses, we truly need to automate everything. So we've been -- during the last 3 years, we've been able to build those back ends. We also did the conscious decision of focusing on Europe and North America first, as you cannot be best everywhere at the same time. I feel confident of us having the needed enablers in place to continue to grow and also capture markets from new geographies.

Okay. Thank you. Then a question from Simon Jonsson. Could you elaborate on what makes up Xweather's competitive advantage?