Vaisala Oyj

Hello, everyone, and welcome to listen in to Vaisala first quarter result presentation. There are four persons from Vaisala online here today. We have our chairman of the board, Mr. Raimo Voipio. Good afternoon. We have our CFO, Mrs. Karina Mourinen.

Good afternoon.

Our investor relations manager, Ms. Paula Liimatta. Good afternoon.

Good afternoon.

And then yours truly speaking right now, Kjell Forsén, President and CEO of the Vaisala Group. Welcome once more. We live in times when uncertainty and volatility is the current normal. Economic indicators go the wrong way all over the world. The coronavirus is not sparing anyone. No man is an island and no company either. But having said that, Vaisala was only marginally affected by the consequences of the coronavirus outbreak in the first quarter. Net sales grew, gross margin and EBIT improved. Order intake, to be discussed more in detail in a minute, declined in our weather and environment business area, but grew in Vaisala industrial measurement business area. To me, Vaisala's performance in this quarter really shows what we are capable of. We are successfully and constantly increasing our operational excellence, as well as improving and deepening our R&D capability. When the world gets back to normal, Vaisala is certainly prepared and in great shape for growth in new areas as well as ready to cater for pent-up demand. And then over to the actual presentation. Here we do have the first quarter in a nutshell, and I will not yet go into any details here. You can see that orders received is down. Order book less so down with 6%. Net sales is up with 4%. Quite a remarkable improvement in gross margin, more than 3%, up to 56.4. Also, I would say a very nice improvement in our operating profit, from zero last year to more than five million euros this year. Consequently, naturally a good improvement in earnings per share as well. Cash flow we get back to in more detail a bit later. So orders received, yes, we have the right slide here. Orders received is down with 21%. Well, then what about the currency effects this year? Slightly more or 22% down in comparable rates. But most importantly, we need here to realize that the comparison quarter is really a tough one. Last year's first quarter was more or less abnormal, with two very large orders amounting to 22 million euros. In addition to those two large orders, we had several others also that were on the large side. And as those of you who follow Weissel very well know, the order intake, and especially when it comes to large projects, varies a lot from quarter to quarter. and if you look back over time the order intake first quarter this year does not really stick out as an especially weak one let's go on what about order book then it's down but less so with six percent and uh i think it's important to note here that if we compare to the fourth quarter Last year, we actually have a 2% increase in our order book, meaning that book to bill is slightly above one, which is a positive signal, actually. And also, some of you may remember the Ethiopia order that we actually signed last year, but which is still pending ratification of the Ethiopian parliament. Well, that is still the case. So the Ethiopian order is not in the order book. What about net sales then? Here we have a nice growth of 4%, and it's the EMEA region that really sticks out as being particularly strong here because the growth in EMEA was 26%. That's quite something, really. Vaisala's delivery capability was perfectly normal during the entire quarter. We do have to work harder when it comes to sourcing. We do keep track of all our key suppliers, make sure that they are in shape and that they have the capability to deliver what we need. And we have also increased our stock to make sure that if there are disturbances, when it comes to our suppliers, we can take that for quite some time without corresponding delivery disturbances. And speaking of deliveries, most of everything we deliver goes on air cargo, and we know that regular flights are basically halted, but the career services is up and running basically as normal. and so are our deliveries as well. Still, when it comes to net sales in the fourth quarter, Asia Pacific was the weakest region here, going down with 13%, and there we might see the corona effect. Another thing which really sticks out is the growth we have in project business. The relative share of our project business grew with 27%. And that really, in combination with an improved profitability, is quite remarkable. But I'll let our CFO Karina dig into that a bit more.

So the operating result of the first quarter was strong. The main reason for the good operating result is the improvement in gross margin. The improvement was about 3 percent points, and we achieved 56.4 percent gross margin during the first quarter, which for the first quarter is a good result. Behind the cross-margin improvement, we had improved cross-margin in project business as well as in our digital business within weather and environment business area. In industrial measurement, the cross-margin improvement was coming from both product business and services businesses. The net sales growth and delivery growth was around 4%, so this is a very good result, improving the efficiency with the 4% net sales growth and delivery growth. Operating expenses were on previous year's level, as due to the limitations caused by the coronavirus situation, we were not able to travel, and there are limitations to all events, for example, marketing events. So the operating result was 5.2 million euros, which is 6% compared to net sales. And then amortization of intangible assets is now lower than what it was a year ago. It was 1.7 million euros. as the amortization is not including order book anymore. Then, our cash flow for the first quarter. Change in cash was 3.2 million euros negative, so the cash decreased, and it was mainly due to the increase in investments and especially the investments to the two building projects that are currently ongoing, the other one in the US and the other one in Finland, the R&D building. And the building projects were totally 5.5 million euros. The result for the period was generating altogether more than 12 million euros positive cash flow. Our financial position continues strong. Return on equity was 8.1% points compared with the 0.4% a year ago. And the gearing is almost zero, so minus 0.5% compared to the minus 15 year ago.

All right, thank you, Karina. Then let's have a look at how the business areas did. And we'll start with weather and environment. So this is where the orders received is down with 31%. So a larger figure than we have for the group as the industrial measurement had been improving or growing order intake. And the main reasons for this then really is the very tough comparison quarter last year, the large orders I already talked about. Order book is down here with 8%. However, net sales is up with 4%. We do have a very nice improvement in operating result here as compared to last year. It's still a negative, but that's the way it usually is when it comes to weather and environment. R&D expenditure basically on last year's level. This is where we do have the strong growth in project net sales, so up with 27%. As I already mentioned, EMEA was the strong region here, both in project and product deliveries. Gross margin really improved remarkably here with 4%, and that then as a consequence of what Karina just mentioned, the improvement we have in our digital business, as well as our capability these days to make project business in perfectly profitable fashion. All right, let's go on and have a look at industrial measurement then. Well, what really sticks out here is of course what we have in the heading here, the EBIT, but before we get to that one, we do have a growth here in orders received, up at 2% or flat in constant currencies. Order book is up at 5%. And basically, we do not see any corona influence here. Net sales up 2% and gross margin really, really strong, almost 66%. That is quite something, really. And as a consequence, of course, then operating result is improved as well. with up to 21.4%. We did see orders received increasing in Americas and EMEA. China actually was flat in the first quarter. Net sales increased in all regions and shows really the strength we have here and the resilience, I would say, of the business as well. Then if you go over to the market outlook and business outlook, we did issue a new guidance. So we lowered our guidance for both net sales and operating profit. In relative terms, the net sales guidance was lowered more than the EBIT guidance. What are the underlying facts for that? Well, going forward, we feel that there might be a delay or postponement of really large orders on weather and environment business. Emerging markets are of growing importance in our weather and environment business, and emerging markets are not really resilient to the consequences of the coronavirus outbreak. So they will be, as we feel, especially hit and thereby hitting our business as well. Then as I mentioned in another context, the regular flights are basically stopped now, meaning that aviation is not really there. So meaning also that there's a loss of income from aviation better services, which is important to several of our customers. However, we do foresee that the market for Weissel industrial measurement will keep growing. It is where we really have the resilience. However, we feel that growth will be impacted and slightly smaller than last year. So the new guidance we have then is for net sales to be in the range of 370 to 405 million euros. and operating result or EBIT in the range of 34 to 46 million euros. And with that, over to your questions. Operator, please.

Thank you. Ladies and gentlemen, if you would like to ask a question, it's 01 on your telephone keypad to register. You can withdraw your question at any point by pressing 02. Once again, that's 01 on your telephone keypad to register. And our first question comes from the line of Matti Rikkonen from Carnegie. Please go ahead. Your line is now open.

Good afternoon. It's Matti from Carnegie. Two questions, if I may. First of all, when you talk about the weather business slowdown, which is part of your guidance cut fairly recently, Should we expect that that is mainly due to overall softness among the weather customers plus, of course, then the kind of emerging market customers where you tend to get these large lumpy orders occasionally? So is it so that when you also mentioned the budgets that are likely to be cut, should we understand that that would work in the normal economic mode so that first you get cuts in your order intake and then that will be reflected in your net sales probably in 2021 as lower net sales? Or do you see that already this year you would see a more meaningful cut in orders which are delivered during the same year. If you understand what I mean with the first question.

I think I do, Matti. Thank you for the question. Yes, I think both of your statements are true. Of course, the delivery time for very large projects is usually several years. So if those are postponed, that then has an effect also over time. And it may also be that smaller orders are affected, but to a lesser extent, then also impacting this year. And all of this then leads to the new guidance we have issued. But it's also important to remember that we have also been able previously to compensate with a larger number of mid-sized and smaller orders for the lack of large orders. And this is of course what we are going for this time around as well.

All right, fair enough. And then the second question was related to industrial business. it seems that the growth in Q1 was fairly low compared to what you usually generate. And particularly when you say that there was no coronavirus impact yet in Q1. So could you explain that which parts of the industrial business were actually kind of perhaps weaker than you expected? Or would you say that the Q1 was totally normal with 1% growth?

Well, in industrial measurements, we of course do go for higher growth than that. But I mentioned that China was flat as opposed to growing in the first quarter. So that then actually most likely is a consequence of the coronavirus, although the impact of that is not huge. And as I mentioned, in industrial measurement, we did see orders received increasing in both Americas and EMEA. Actually, very, very good outcome in EMEA. So we are very positive when it comes to industrial measurement here going forward as well. Did I answer your question?

Yeah, so if I understand correctly, you're basically advising us to not look at the one percent growth in in so so detail so basically you think that the industrial measurement demand is still pretty much at last year's level of course deducted by the corona virus impact so that there is no structural change in the demand pattern geographically or otherwise in the industrial so that This one quarter just happened to be fairly low, but you don't see any kind of relation to coronavirus with that growth.

Well, as you said, we do not see any structural change here. The wording in our guidance is that we see a slowed down growth. So we do still see a growth for this year in Weissmann industrial measurement.

Okay, thank you.

Thank you once again. It's 01 to register for any questions. And our next question comes from the line of Joni Greenquist from Inderes. Please go ahead. Your line is open.

Hello, Anna. I have a couple of questions. First, I'd like to continue a little bit on the comments you make on the outlook and keeping in mind the good Q1 that you delivered. If I understand correctly, you're still quite confident on Q2 as well. Are you seeing then taking into account the lowered guidance. So are you expecting more in the third and fourth quarter to see the corona effects coming in?

Well, I can't really comment on one quarter level here. Guidance is for the rest of the year, but of course you are on the right path here because we do have our seasonality there. where in our weather and environment business, the bulk of the business tends to be toward the end of the year. But more detail than that can't really be at this point in time.

Okay. Then you mentioned in the report also that you found some alternative ways to deliver projects and services. So could you maybe Give some examples of what kind of ways these are, and are these something that you could also continue doing after the crisis? And thirdly, on this same topic, so has this also helped in improving the gross margin?

Could you please repeat the third question?

Yeah, so it's... So could you first give some examples of which alternative way you found to deliver projects and services now in these Corona times? All right.

If you want me to start with that one. In general, like I said here earlier on, not only related to projects, most of what we deliver goes as air cargo. and actually also on regular flights, not only on sort of transportation career flights. But as things are what they are right now, basically everything goes on career flights, and that works really well. And so that's not a problem. Then when it comes to projects, then we do have, of course, project managers, who tend to travel to where the projects are being implemented, and that is of course not possible at the moment. But we have actually very nicely been able to support our representatives, and you may remember that we have more than 100 representatives in both our business areas out in the world, and mainly in the sort of developing countries. So our project managers have been able to remotely support of representatives and customers to carry on with the installations and projects. And also, I would say, using very innovative new methods. One thing we are trying out right now, and which looks very promising, is to use augmented reality. Without going into details in that one, that is a very promising way to actually carry on the project management remotely. And you also asked whether we think that this is something that we might continue to do in the future. So will we continue to work in this way? I think that is perfectly possible that we will to some extent that some of the good new practices we come up with due to the coronavirus actually will stay with us as positive practices. And one, I'm not sure if you referred to that one, but when I talked about the new guidance, I said that in relative terms, the profitability guidance is more lowered, sorry, the net sales is more lowered than profitability guidance. And this is partly due to what we just talked about. So as we are very extensive travelers, basically everything we do is export business. And as we can't travel, of course, we have less travel cost, which then is actually improving our profitability. So, Jouni, that was perhaps a slightly larger answer than what you asked for.

No, actually, I think the AIG, it was the things I was looking to. So post-crisis, we could expect that you continue with this, and it's actually improving your profitability. So something good also from the crisis.

Yeah, yes. But I'd really like to point out here that we do not see this profitability improvement really in the first quarter. So the travel restrictions, et cetera, they caught on towards the end of the quarter. So the effect of that is not really extensive in the first quarter.

Okay, thank you. Thank you, Joni.

Thank you. Our next question comes from the line of Jonas Horsland from Evli Bank. Please go ahead. Your line is now open.

Good afternoon, everybody. A question related regarding the industrial measurement outlook or just a clarification when you say that this year industrial measurement is expected to grow less than last year. And last year was a very exceptional year where the top line grew quite significantly due to the acquisitions as well. So do you mean that industrial measurements will grow less than the organic growth was last year for industrial measurements.

Thank you, Jonas. That is a very good clarifying question. So, when we say that we will have less growth, then we are comparing with the organic growth rate.

Okay, good, good. Then perhaps the topic that you touched upon relating to your operating expenses, for instance, you mentioned traveling less now, maybe there's less activity. But how do you see your, do you see any measure, are you taking any measures right now or plan to take any additional measures to control your operating expenses so that we due to the crisis and due to the fact that it's quite difficult to see how things will go, but cost is something that you can sort of control a little bit. Are you taking any measures now or planning to take measures to sort of control your operating expense levels so that it could end up not growing that much this year, for instance?

Yeah, I think we'll let Karin answer this one.

So far, the cost reduction that we foresee in our operating expenses and also partially being part of our cost of goods sold is, of course, the travel that has almost stopped completely. Also, expenses that are coming, for example, from marketing events or other activities that require people being present, multiple people being present, those will be canceled for the time being and also some external spending like professional services will not be on the normal level because you cannot continue these projects due to the limitations. Those are the cost savings that we foresee for the time being.

Would this then perhaps summarize, would they result in a, what kind of cost operating expense development would you expect to see based on these measures this year? Would you expect to have higher objects or approximately the same Because in history, of course, operating expenses usually go quite nicely up all the time with sales, but how do you foresee operating expenses developing?

I can comment on our R&D activity where we have a long-term objective to continue investing in our R&D and continue the research and development activities, and there our objective is to continue all the projects that were planned for this year, and we are aware that there will be difficulties, especially in testing the products in laboratories, but anyhow, we will do what is possible in order to progress as planned. Otherwise, I would say that We didn't give any guidance on the operating expense levels, how they will be developing compared to previous year.

Okay. Thank you very much. Thank you, Jonas.

Thank you. Once again, if anyone has any questions, it's 01 on your telephone keypad to register. And as we have no more questions registered, I hand back to our speakers for any closing comments.

Thank you very much for listening to us and also for the very good and clarifying questions. Thank you very much.

Thank you. Thank you.