Vaisala Oyj

Hello and welcome to the Vercela Q2 2021 interim report. Throughout the call, all participants will be in listen-only mode, and afterwards, there will be a question-and-answer session. Today, I'm pleased to present President and CEO Kai Ostomoff, CFO Karina Marinen, Head of IR Perla Dimata, and Chair of the Board of Directors Perla Vojko. Please go ahead with your meetings.

Thank you, and welcome also from my part to Vaitola's second quarter earnings call. I am Kai Ersmann, the CEO of the company, and I'll walk you through the prepared remarks before opening up for questions. We had a great second quarter, excellent growth in orders and net sales and operating result margin at 10%. The recovery that started already during the first quarter of the year has continued stronger and faster than we early anticipated, and the recovery had a positive effect on our second quarter demand, particularly in Asia Pacific and in Europe. The recovery was visible in all segments except aviation and in emerging markets. If we look at the geographies in China and in U.S., economic recovery started earliest, and that was clearly also visible in the orders received, especially on the industrial measurement side. And thanks to the strong growth in order intake, our order book now is all-time high at 165 million euros. The shortage of components, which is very prevalent on the marketplace today, did not affect Isola's delivery capability during the second quarter. And I'll come back to this a little bit later in the presentation. The EBIT margin was at 10% in compared to the previous year. Second quarter was 8.7% of net sales. And the operating result, it increased to 10.9 million euros. Now, before diving into the financial figures, let's look at some of the key events during the second quarter. And I'll start with talking about the operational excellence. We were very successful at the pace of the increased demand, scaling up our delivery capability in a very challenging supply environment. And we were very successful in matching demand without any hiccups on our delivery side. And I am extremely proud of our, especially on our sourcing and operations personnel and teams on making that happen in reality. The environment in terms of the component shortage is something where the established suppliers of electronics components, not only IECs, but broader also in other electronics components, have had to inform us, like other customers, that they are unable to deliver their earlier committees. forcing us to deal with that then evident shortage of components through acting on secondary markets, through other suppliers, through redesigning our designs to match other corresponding components and being successful in terms of delivering against the demand from our customers. especially in the increasing market like we have experienced, is really, I think, a great proof of the excellent operational capabilities that we have in our high-mix, low-volume environment. The second key point I would like to take up is the fact that financial times listed the 300 European planet leaders of 2021. And it includes European companies that achieved the greatest reduction of their greenhouse gas emissions reduction between 2014 and 2019. And we are very, very proud to be on the top 20 list in Europe. Our total greenhouse gas reduction during that timeframe was 94%. And we have even improved, obviously, after 2000, sorry, during the, actually during that timeframe, it was 86.9%. And we have seen in 2019, increased that number to 94%. So I'm very proud of all of our responsible investments and behavior and happy to be among the leaders in terms of companies on fighting the climate change. Speaking of climate change, the weather and systems in the face of ever increasing extreme weather conditions, especially facing the most vulnerable nations, namely the markets, I'm very happy to see that we were able to close the Ethiopia project and now have a goal ahead to implement this in the coming three years together with the local authorities. I think this is an extremely important piece of infrastructure and even more important in the future in all nations around the world, but like I said, especially in emerging markets. We focus on culture and leadership practices, our ways of working and our future work to retain and recruit the best possible talent in the world. And to lead these activities, I'm very happy to note that we will have Timo Leskinen to join us to lead these activities. quote-unquote, quote. Vital is creating new innovations for a sustainable planet. When we look at the recent events like 3455, like I said, the very unfortunate extreme weather incidents in, for example, in Germany, in Central Europe, but also around the world, It's ever more important that we carry our responsibility of fighting climate change and really building a more sustainable. In the second quarter, I'll give you a couple of examples where we are not just talking about this, but we are actually doing this, putting our money where the mouth is in terms of launching new solutions and products to our customers to help them to create their operations to be more sustainable. And in second quarter, we launched several new products, all of which linked into one or more UN Sustainable Development Goals. These highlight really the vital purpose and drive to create products and solutions with an impact to a better world. We are closely linked to many key megatrends today, and we can play a very important role in helping, as I said, helping our customers to drive their operations and decisions to be more sustainable. Examples of products and solutions. In renewable energy side, we introduced a new dual LIDAR scanning LIDAR to the market, which is very important for building, especially for renewable solutions in wind parks. In the continuous monitoring system side, we launched a new combination of carbon dioxide probe and a wireless data logger, which is an example of use of this product is in vaccine research. And in air quality, the new sensor advances our offering to improve air quality monitoring and decision-making capability for urban communities around the world. Now, let's look at more closely into the financials during the second quarter. We had a, in terms of an order receipt, very strong quarter, but the order receipt increased by 25% compared to the previous quarter a year earlier. The increase was in both business areas. And in industrial instruments, life sciences, the market segments that led the orders received increase were industrial instruments, life sciences, meteorology, and renewable energy. Order growth continued also positively in power industry and liquid measurements and in aviation market segments. It's worth noting, obviously, that in meteorology, this includes the early announced 13 million Ethiopia contract as well. When we look at the order book, thanks to the excellent growth in orders received, I'm very happy to note that that order book is now at the all-time high of 165.3 million euros. This represents also, when we look at the quarter-on-quarter, represent the 6% growth compared to the first quarter of this year. The increase was in both business areas, and in industrial measurements, the order book grew in all market segments, and in weather and environment, the order book increased in renewable energy and meteorology market segments, whereas aviation and ground transportation experienced a decrease. We had an excellent quarter also in terms of the net sales. Net sales increased by 20%. If we look at the constant currencies, the net sales increase was 23%. The net sales increased most in industrial instruments, life sciences, meteorology, and renewable energy market segments. the net sales decreased in ground transportation and in aviation market segments. And then when we dive into the business areas, excellent performance continued in the industrial measurement side. The orders received for life sciences as well as industrial instruments were very strong. And power industry and liquid measurements were growing as well. It's worthwhile noting, while we had an excellent quarter, it's still worth noting that the second quarter comparison to previous year's second quarter, obviously the previous year's second quarter was impacted by the COVID-19 pandemic. And LEMIC, which makes the percentage growth when compared year on year a bit higher. But nevertheless, I would conclude that we had an excellent performance continuity in industry measurements. When we look at the net sales, the net sales growth increased by 31%. with increased operating result and increased EBIT percentage to an excellent 23.7% of net sales, despite somewhat lower gross margin compared to the comparison quarter last year due to the slightly different mix. The gross margin was very good at 63.7%. Again, slightly down compared to the previous year due to the same reason of sales mix. Net sales growth was strong in instruments, life science market segments, and good in power industry. And we continue to invest in the future competitiveness in terms of R&D with 12.2% of the net sales. In weather and environment business area, the strong growth in terms of our order intake continued as well. The increase in orders received was very strong in meteorology market segment. And this included, as said earlier, announced 13 million weather infrastructure projects in Ethiopia. The orders received increased also in renewable energy and aviation market segments. And in ground transportation, the market segment decreased to this very strong comparison period in last year's second quarter. We do not see any changes in terms of outlook in ground transportation. The market expectation for ground transportation is expected to be stable. In the weather and environment side, the net sales growth was 14%, and net sales grew in meteorology and renewable energy market segments especially. The net sales in ground transportation and aviation market segments at the same time decreased. The growth margin improved by one percentage point thanks to improved sales mix and increased volumes and the operating result uh improved to one million euro or one percent one and a half percentage points of net sales then uh let's look at how this adds up when looking at the looking at the first half of 2021 uh The first half net sales in Vaisala grew by 13%, and if we were to look at in constant currencies, the growth were 16%. The operating result increased following the growth in net sales. The gross margin was at previous year's level, and the operating result was 9.5 percentage points of net sales. The EPS grew significantly to 43 euro cents. And it's worth noting that the effective tax rate was low at 13%. And we estimate the effective tax rate to decline due to the ability to utilize the carry loss forwards from previously announced acquired In terms of a cash flow, we had also a strong first half driven by excellent result positive changes in networking capital as well as lower capital expenditures. Our financial position remains strong in all aspects. The capital expenses were down as investments to the very large building code they have finished, the building project, the R&D building here in Vantaa, as well as the office building in Boulder, Colorado. The 2021 capex is still slightly higher than a normal year prior to these investments, due to the fact that we are still investing and furnishing the laboratories here in the R&D building here in Vantaa. Then looking at how does the rest of the year look like? We do expect that the market for high-end industrial instruments to continue the growth at the strong start of the year in 2021. Life sciences and power industry markets are also expected to continue to grow as well as renewable energy in 2021. weather environment side. Liquid measurements market is expected to continue to recover. And in meteorology markets, developing market demand is expected to continue to suffer and recover is expected to take longer than in developed markets where we expect the market to be to be stable and in aviation market, you may recall the market declined significantly during 2020, the year 2020. And the market outlook remains weak, although some market is expected, market recovery is expected to gradually to happen. This is really a tale of two cities where where the domestic flying, if you look at underlying factors, the domestic flying has picked up in the US and in China, whereas in Europe, as well as in the continental or international travel, remains on a very depressed or decreased levels at the moment. The ground transportation market, as I said earlier, is expected to be stable. When we look at the business outlook for this year, we raised the outlook in about 10 days ago, exactly 10 days ago, based on the strong first half. And despite the risks that I spoke about in terms of the component shortage, we saw a increase in it to sort of the net sales range. We estimate now to be 400 to 420 million. and the operating results to be in the range of 40 to 50 million. The limited availability of components we see as expanding, and we do not see the end of this during this year, at least. We are actively mitigating this. And as I said, we were very successful doing this during the first half. We are facing the same issue now during the second half. We are working with our suppliers, the secondary and tertiary sources, as well as then redesigning some of our products when needed. But especially when we have to utilize spot markets to compensate for the the lack of delivery capabilities from our regular suppliers. Now, we see that the component prices on the sport market can be manifold when compared to established supplier prices that we have. So, different components, therefore, has increased the material costs and the transportation costs have increased as well. And we do estimate that these will have a negative impact on the operating results during the second half of this year. Now, just to summarize what I just said, we had an excellent growth continued in the second quarter with very strong profitability, and we ended up with an all-time high order book of 165 million euros. This is the end of the prepared remarks, and now I'll open the floor for any questions that you may have. So, operator, please.

Thank you. If you do wish to ask a question, please press 01 on the telephone keypad. If you do wish to withdraw your question, you can do so by pressing 02 to cancel. There will be a brief pause while questions are being registered. It seems like we have no questions from the line. Okay, we have one question from Marty Recknam from Carnegie. Please go ahead, Eli, it's open.

Hi, it's Matt Perico in Carnegie. A couple of questions. First about the component and transport costs that you mentioned already in the speech. You already touched upon the topic how long you expect that to continue, but do you have any idea how long we should extend those um higher costs naturally second half this year but how long into 2022 do you have any any kind of idea how it could be or is it just as as black box to you as it is to us um it's very difficult to see say exactly when this will end i'll give you two kind of a last half full half

empty statements from the market the past two days. So, DSMC, which is the largest supplier of integrated services in the world, said that they see some easing up of the supply from the side already now in the third quarter, early fourth quarter. At the same time, the CEO of Intel said, I think this morning, that he sees the shortage continue into next year. So, There you go, I think we have a visibility into this, yes. Okay, okay.

And is it so that has the component cost already affected Q2 gross margin or were you still relatively safe in Q2 and you expect that this price increase would take place only in the second half?

Yeah, so first of all, we did not see any impact of that in the second quarter numbers yet. Second comment is that there are kind of two separate issues in terms of when we talk about the price increases in terms of component prices. As I tried to allude in my prepared remarks, there's obviously kind of an inflation on the marketplace and the prices like with many other things from established sources and vendors and so on. Then there's a kind of a separate item, which is more dealing with the shortage at the moment. And as I said, when one has to go to the spot market to buy compensated for the lack of capability of delivery from established sources, then often you end up paying multifold the kind of the regular prices for those components.

Right. Okay. Thank you. So basically when you had some kind of small negative impact in gross margin in the industrial business, that was just driven by the sales mix impact and nothing else. Okay. And technically, I just want to confirm that how it actually goes in your accounting. So when the component costs are higher, then your gross margin is affected. But how is it with transport costs? Is that in the fixed costs so that we don't see all the change in the gross margin but in the overall cost level? No, no, it will be above the cost margin. It's a variable cost. Okay, okay, good. Then related to the tax, which was extremely low, as you said, in Q2, and including those past losses becoming receivables, was this a one-time thing, or can the tax loss carry forward still increase if you kind of see that, okay, it's even better than what you saw?

So obviously, we estimate, so this was an estimate of, when I said the tax, we estimated to have a 13% tax rate, was an estimate for this entire year. And you do see that we have a possibility to benefit from the tax credit forms. So sometimes, sometimes.

Okay, okay, good. And then just another technicality, were there any other unusual cost increases in Q2 except the 2.2 million cost, which was related to a previous M&A transaction?

No, no, no.

Okay. And then finally, If I look at your weather business numbers and particularly the order intake, which now included the Ethiopian 13 million order, is the weather outlook basically unchanged compared to Q1 if we just exclude the Ethiopian order? Because orders excluding that, they came down a bit. And if I interpret it your way, comments about the outlook for weather business. I didn't see so many kind of new positives there. So is it basically unchanged or has it improved?

I think it's in a big picture. I think you're right. It has not really materially changed since first quarter. As I said, we do expect the aviation eventually to recover. So, a quarter of time has passed on that side since first quarter, and likewise on the emerging markets. But I think you're right. Your summary is fair that it has not materially changed since first quarter.

Okay. And then perhaps one theme still. You discussed in the Q1 report that that it's possible that some of your customers have been buying products a bit ahead of normal schedule to prepare for any kind of component shortages affecting your delivery capability. Do you still think that that would be one theme behind the kind of very strong growth in industrial measurement side? Or Is it something that the ramp-up is just being so high and strong that basically it just that was the only reason why Q2 was so strong?

No, I think now when we look at the entire first half, I think the big driver on the growth behind the industrial measurements is first of all the increased significantly increased economic activity around the world. And partly also the pent-up demand. I mean, many of these components actually go into the different processes, different facilities of our customers who are building up capacity to match today's and tomorrow's demand.

Right. Okay. That's very helpful. That's all from my side. Thank you. Thank you.

Thank you. Once again, if you do wish to ask a question, please press the one now. Our next question comes from from injuries. Please go ahead, Elias.

Hi, and happy summer there for you, and congratulations for a nice result again. I'm not quite sure. My line was a bit bad in the beginning of Matti's question, so I'm not sure if he talked and you talked about it already. But just to follow up again on when you were hammering again market expectations and you're quite cautious being traditionally in your guidance. Again, like last quarter when we discussed, looking now at the two growth trends, why do you see growth slowing down in the second half that much? at least how I interpret the market comments there in the report you see some areas in weather picking up now after the pandemic and order book is good so first question on this which elements do you see slowing down in the second half not really seeing any slowing down I think part of it is if you look at that

Comparisons to the previous year, obviously, they changed. And percentage-wise, if you look at the second quarter growth, especially on the industrial measurement side, industrial measurements were very much hit during the second quarter of last year. So the percentage growth numbers are obviously kind of elevated due to that fact. it really was a bad quarter last year on the industrial environment side. Not so much in weather and environment. I think then the other comment, as we've said, when we came up with the new guidance, the uncertainty in the marketplace, especially in terms of the component supply, is absolutely there. As I said in my prepared comments, many, many established vendors, big established electronics vendors have had to come back and tell their customers, like ourselves, that they are not able to fulfill their existing contracts in terms of volumes. And this is the environment that we have been living now during the second quarter, and we'll most likely live during the second half. While we were successful in meeting the demand during the second half, this is obviously something which is something that we have to succeed day in and day out to fulfill all the all the demand in the marketplace.

So the component risk is only price risk. There's no risk in that you won't get any components so you wouldn't be able to deliver. So it's purely you'll get the components. It's only price.

No, no. I don't think that's a fair summary at all. I don't think that's a fair summary at all. My worry first and foremost would be on availability of the components. And in order to get the components that may, in some cases, if you, as I said, act on the spot market, that may lead into a cost. But the spot market is day by day dry here. Let's put it that way.

Okay. Okay. Then maybe thirdly, only on the Capital Markets Day, I know traditionally you've been looking at both business segments and R&D, but can you give any teaser? Is there any specific area that you are focusing now on in this Capital Markets Day?

Sure. Another question. Great question. But no, I would not like to pre-market yet or pre-release anything on the Capital Markets Day agenda yet. We will come back when the reports are done.

Okay. Thank you, and congratulations for a good report, Ian. Thank you.

Thank you. We have no more questions from the mic. I will hand it back to our speakers.

Yeah, so we have a few questions also.

They were already handled. Joni was on the phone line as well. They are handled.

Okay, all right. So we have a few questions online, but I believe we answered all those questions as well. So with that, I would like to thank you for spending the time with us, and I wish you a very good continuation of the summer and a very good week. Thank you very much.