Vaisala Oyj

Hello, and welcome to the Vaisala Q4 results call. Throughout the call, all participants will be in listen-only mode, so there's no need to mute your own individual lines. And afterwards, there'll be a question-and-answer session. I'll now hand the floor to President and CEO, Kai Ustamo. Please begin your meeting.

So, this is Kai Ustamo. I'm the President and CEO of Vaisala, and I'm joined here with our chairperson, Ville Boipio, CFO Karina Muurinen and our head of IR Paula Liimatta. I also want to welcome you all for our fourth quarter earnings call. So fourth quarter 2021 completed a year of growth and excellent performance. We had a strong net sales growth in both business areas The orders increased by 6%, but varying performance in the two business areas. In industrial measurements, the orders were very strong, again, in all market segments. And whereas in weather environment, the orders decreased compared to fourth quarter 2020. partly due to the strong comparison period, partly due to missing the large project orders in fourth quarter 2021, whereas in fourth quarter 2020, we did have quite a bit of them there. The operating result was at comparison period level, despite the additional material costs related to component spot purchases. We did make a very conscious choice to respond to the very strong demand that we experienced during the second half, especially the second half of the year, and took, therefore, actions to ensure the materials availability, component availability to match that demand. And with this approach, we did first of all we were able to meet the strong demand we won market share and with that taking the market share we created even stronger foundation for the years years to come the cost of this was a three percentage point negative impact on the fourth quarter cross margin the good results also were followed by higher incentive costs when compared to the previous year, which is also visible in the higher operating expenses in 2022. If I look at the highlights for the Q4 2021, first notion is the strong growth in both business areas. Net sales grew mostly in industrial instruments like science, renewable energy on the industrial measurement side. And it's good to know that it actually grew very much in all the other segments as well. But the ones I mentioned were especially strong. And in weather environment side, renewable energy and meteorology market segments grew as well. We continue to invest, as our strategy is, into our offering portfolio, and we proceeded very well during the fourth quarter on continuing renewal of our portfolio with multiple launches, both hardware products, software products, and system products. And then it's also worth noting, even if it actually happened in January 2022, we acquired Aeris Weather, which is a subscription-based software company providing weather and environmental information. This acquisition supports very much our weather environment, business areas strategy to drive growth in data as a service and software as a service. And when we combine areas, weather, industry leading, data services and developer tools, we believe that we can offer the best insights and forecasts for very very important weather environmental data parameters with in the easy to use industry leading developer-centric approach and the this acquisition was was closed uh and published and closed uh in uh end of january 2022. Now, taking a deeper look into what happened in fourth quarter, as said, the orders received increased by 6% when compared to year-on-year on Paisala level. And then when we look into the two business areas, in industrial measurement, we grew actually 42% compared to year-on-year, whereas in weather environment, the decline was 14%. And as said, There's kind of a seasonality and no large orders during this quarter. So we did not see any market change. It really was more of a seasonality and lack of the big project orders happening to close in the fourth quarter. When we look at the order book in fourth quarter, the order book increased by 16% when compared to year on year. The increase was in all market segments in industrial measurements. And in weather environment, it's specifically ground size transportation and meteorology market segments. When we look at the ending order book or The other way of saying is the starting order book for this year, it actually increased 25% compared to the previous year with a very healthy level. Then looking at the net sales, strong growth, 17% year-on-year. The strong growth happened in both business areas. It was growth in all market segments again, in industrial measurement side, and in weather environment, the net sales grew in renewable energy and meteorology segments. And when we look at the aviation and ground transportation, they were on the same level as the previous year. Now, looking at deeper into the industrial measurement, I have the same headline as I had in the last quarterly results when talking about industrial measurement. Excellent performance continued. And I think that very well described how industrial measurements fared in fourth quarter. The orders received increased strongly in all market segments, as I said. And the order book, when we compare it to the year before, increased by 83%. The order book actually stood at the end of the year at 33 million euros. And it's very important to note also that when we look at this orders received It was not only that the underlying markets were growing, but we did clearly take market share and customers from our competitors' accounts that we have been trying to get for sometimes even years. years and and here very much our capable excellent products our capability to deliver and strong marketing actions clearly contributed to that success when we look at the net sales growth uh 20 26 percent uh the operating result uh was uh 9.8 million compared to 8.3 million previous year that means 19.6 percent of the net sales the when we look at the the costs from the spot purchases inside of industrial measurements they actually had a four percentage point negative impact on on the gross margin the also when we continue to invest according to our strategy of strong investments into R&D for example 11.9 percent of net sales then when we go into weather and environment As I said, the orders received decreased by 14% when compared to previous years, same time previous year. When we look into different market segments, in ground transportations, the orders actually increased, and in aviation and renewable energy were at the same level as the comparison period year before. Actual order intake was more – kind of decline in the order intake was, as I said, more or less due to the seasonality, and we do not see any significant changes in the market situation per se. And it's also worth noting that when we look at the – despite the – The decline in orders received compared to the year before, actually the order book, starting order book for this year or the ending order book for last year was on a very healthy level, also in weather environment. the operating result in weather environment where burned by both the additional material cost caused by the spot purchases as well as then exceptional costs caused by the the the that was a related to acquisitions in in previous year the operating result actually included 0.9 million exceptional costs related to that. The gross margin decreased by a little bit over two percentage points, and the component spot purchases had about two percentage points negative impact on the gross margin. And as in industrial measurement side, we continue to invest according to our strategy and renew our offering. And moving on to the full-year financials. The first notion to make is that if I look at the full year, 2021, the order intake was excellent, 19% increase compared to the previous year. There was a strong demand in the industrial business area across all market segments, led to the exceptional increase of orders received by 33% compared to previous year. When we look at the weather environment, also strong growth in order intake by 10%, exceptional increase in renewable energy and positive development also in aviation market segment. In net sales, we grew by 15% and this came from both business areas. The operating result increased by 12% from previous year despite The challenging environment, especially due to the component availability and still COVID-19 environment. The operating result when we look at the full year, 6.9 million exceptional costs related to the, as said, earlier acquisitions. And this is the last time we are going to see this related to these acquisitions, the exceptional costs, just as a reminder. The gross margin decreased slightly due to the additional material costs related to component purchases, which has had a one percentage point negative impact on gross margin. And with the confidence on company's financial position and future cash flow generation, the Board of Directors proposes now to the AGM a dividend 68 euro cents per share for 2021. And when we look at our dividend policy, this 68 euro cents is very much aligned to our dividend policy, which is that we aim to pay stable dividend, which will increase in line with net profit development. And our target, obviously, is to maintain high solvency and take all the future investments into account when deciding on the dividend. On cash flow, a very good year. Operating cash flow doubled compared to 2020, year 2020, from 41 million euros to 80 million euros. It really shows that our asset-like business model, which generates a stable and good cash flow through its operations. It's also worth – I would take two points maybe when talking about the cash flow. It's when we started or when the COVID-19 situation hit and all the difficulties – Related to this, there was a little bit of a concern on credit loss allowance, and it's very happy to report that the credit loss allowance has not materially changed at all by this. And the other point may be worth noting is the aging of receivables has actually improved in 2021 despite the market situation. Overall financial position I would summarize as strong in all aspects. The capex was down as indicated earlier. due to the fact that we finished the two R&D buildings both here in Vantaa as well as in Boulder, Colorado, earlier in the end of previous year. It was still slightly elevated from the normal year, as we've indicated, due to the fact that we continued during 2021 to furnish and invest into the laboratories in the R&D building itself here in Vantaa. Now, moving on to the market development and then outlook for this year. When we look at the market development overall, it's worth noting that we believe that the component availability will remain weak. Visibility is challenging, and the component supply constraints are expected to continue throughout this year. And that means also that the additional material costs related to spot purchases are expected to remain on a high level during the year of 2022. That being said, we believe that the underlying market to a large extent, especially on the industrial measurement side, is going to be growing and offering us quite a bit of opportunities. The market for high-end industrial instruments, life science, power industry, and liquid measurements is expected to grow. Market for meteorology and ground transportation is expected to be stable, and aviation market, we believe that is continue to recover towards the pre-pandemic levels. And I forgot to mention actually renewable energy, which we also believe that as a market is going to continue to grow during the season. And that leads into our business outlook for year 2022, where we expect that our net sales will be in the range of between 465 to 495 million euros. And our operating result EBIT, that is, will be in the range of between 55 to 70 million euros. So, if I just summarize what I said. 2021 was an excellent year for Vaisala. Year of growth, an excellent performance. Ended with a strong net sales growth in fourth quarter. Good net sales growth in both business areas. And the order intake, or let's say this way, a strong order book in both business areas as a starting order book for this year is maybe the

last point i would like to make so that conclude my concluding concludes my uh prepared remarks and uh now let's open up for any questions you may have thank you if you wish to ask a question please dial zero one on your telephone keypads now to enter the queue once your name has been announced you can ask a question if you find it's answered before it's returned to speak you can dial zero two to cancel Our first question comes from the line of Pauli Lohi of Inderes. Please go ahead, your line is open.

Hi, this is Pauli Lohi from Inderes. Thank you for the good presentation. I have a couple of questions mostly on the component shortage. You said you are winning market shares currently and at the same time the cross margins are suffering a bit so um what's your ability and and willingness to raise prices to meet the increased costs or are you happy to grow and let the margin suffer in the short term so

I'll make two comments on that. So, first of all, we have a strong history of increasing prices every year in the industrial measurement side, and we did increase, again, the list prices at the starting of this year more than what we have done in the previous years. That being all said, when we look at the spot prices, we are not selling our components on a spot market. So pricing component, our products, according to whatever the spot price is for the components in a specific product, we don't believe that that will be the right strategy. We believe that being a reliable and long-term oriented supplier will be something which, first of all, our suppliers will appreciate and will, as now evidence would say, will help us to increase market share.

Okay, thank you. And then I would like to ask about the ARIS weather acquisition. Is there, could you explain further the operational synergies between

um target companies products and maybe maybe all these distribution channels or how should we see the synergies yeah so i think it's uh highly synergetic to to uh the all the assets that we have a advisor so as you may know we have over 20 million turnover on different kinds of disasters businesses inside a weather environment, various different verticals. And what Ares Weather brings to the table is an industry-leading data sales platform and extremely strong developer tools. And those are the two things that we have not had as strong in our own operations, and I believe that they are thus uh what we have as our old assets and now new assets with uh aries weather are highly synergetic and and uh very excited to to look at the future with with the combined assets now okay uh maybe finally i would like to ask about the magnitude of the component shortage and uh um how that

How do you expect that to evolve in 2022? You get very useful indications about the impact in Q4 into course margins, but is it going to intensify or are you even better prepared to tackle this challenge going forward?

So the first thing maybe I would like to note is that when we are doing a look at how we have been approaching this component situation is that we have been very much anticipating a bit longer term also that what our supply is so that we can whenever there are situation where we're on on components that we cannot uh secure from the open market then we can look at the alternatives and and do required r d changes and and or offer other products instead in our portfolio. So kind of taking the right kind of an approach, combining R&D investments, kind of use the right mix in our product, and then securing the components. So here we are not working something. We are already working kind of clearly ahead of today when we are doing this. The situation keeps changing. It's very, as I tried to say in my prepared remarks, the visibility remains So, there are vendors who are indicating that, you know, the situation is going to improve maybe a little bit earlier, and there are vendors where, you know, the situation may have improved and then suddenly it's kind of decreased again. And that's the situation I think that everybody is in. I think we have been extremely successful with our efforts to secure the components, and I am extremely proud of our team, both in terms of securing the components and then being able to manage the very fast moves in the mix.

Okay, thank you. That was all from me.

Thank you. As we have one further question in the queue, just as a reminder to participants, if you do wish to ask a question, please dial 01 on your telephone keypads now. The next question comes from the line of Matti Rikkonen of Carnegie. Please go ahead. Your line is open.

Good afternoon. It's Matti Rikkonen, Carnegie. A couple of questions. First of all, during Q4, were you able to deliver all orders in both divisions? just with a higher cost, but did you basically meet the volumes?

Hey, Matti, great to hear your voice. Yes, we did. We were able to deliver against the demand.

Right. So you basically just made the decision that delivering the volumes is kind of essential for the long term, good for the brand, and then you just took the cost. And that will at some point hopefully and of course go away. So is that basically what you're thinking?

That's right. And maybe just one more elaboration. When you think about especially the – so it's easier maybe to kind of explain in the industrial context. If you think about any industrial instrument or industrial buyer, they do not want to change their vendors. They only change their vendors if a new product is significantly better or there's kind of a bad performance on the existing vendor or that kind of thing. So it's not a very fickle decision. And that makes me confident when I say that these investments leading into higher market share are –

most much more sustainable than if you take say a consumer market sure yeah good and then regarding the pricing both short term and long term did you try to put the increased component costs to end prices or is it just very difficult to do that in at the short notice and then Thinking about the longer end, I think you have earlier said that you find it fairly easy to pass on your higher costs to product prices. And you mentioned that you have been raising your prices in the industrial measurement side. So how should we think about this kind of lag to eventually put all your increased costs into the prices? It feels like that you are pretty reluctant to do it short term. But of course, did you even kind of try to improve your margin short term just by passing on the price or is it just it has to happen through the longer route and list prices on an annual basis?

Like with any vendor, you always make a decision or any company, you make a decision on how do you price and, you know, it's... easy to raise prices but you have to I believe that you have to be mindful on when doing that in a fickle environment. I would actually separate the two things here that you know there's a increasing you know inflation is going on with us kind of our vendors and then everything all the market and passing on that type of a price increase to our customers is straightforward we have been doing that in the past Even if we're in a situation where there has not been an inflation, we have been able to increase our prices. We typically do that through one increase in a year, but we are not married to only that approach. But what we consciously decided is what I tried to say earlier also is that whenever there's one incident or one given component passing all the costs and thus going ourselves into kind of like a spot pricing, we consciously chose not to do that.

Fair enough. Yeah, and, of course, that sounds wise and that sounds good for the long term. I think the customers also would appreciate that. that they are just getting their volumes at a decent price, and any price increases would be gradual.

My experience would say, Matti, that all customers have a long memory, and if they believe that the price increases are just, that's okay. If they believe that you are extorting things, the memory will be very, very long.

people will get get even eventually yes good um then about the kind of basic demand that you're facing do you still do you think that the customers still have pent up demand after covet or after component shortages so that that would still continue to support your 2022 top line like it probably did in 21 when 2020 was a weak year there were a lot of stoppages etc and then some of the pent-up demand probably affected positively in 2021 but do you think that you would get the similar benefit or boost in 2022 so two things uh if i look at gdb growth which is like a generic you know industrial activities kind of a highly correlated at least to it

you know, all the forecasts for this year are still that the GDP growth in the world is going to still be clearly higher than an average year, even if it's going to kind of likely to slow down towards the end of the year. So that speaks good in terms of especially industrial instrument for customers, for our industrial instruments. would experience the higher demand and therefore would be investing into new processes, facilities, renewing processes and that kind of things. The second thing is that we have been seeing investments, there's a whole host of bottlenecks still if you look at any industrial good on or many industrial use many segments that there seems to be bottlenecks still to deliver delivering against the demand which you know one could believe that you know that that would lead into investments in in multiple different industries right okay and then when you mentioned the annual price increases to your list prices

um how should we think about the gross margin impact going forward you mentioned in q4 that you had on a group level three percentage point negative impact on gross margin because you had to buy components from the spot market now with the current price increases in place what do you think will it be a similar negative impact to your gross margin short term of course Or do you think that the price increases offset already some of the cost increases that you have?

Of course, price increases offset some of the cost increases. Now that being all said, I said the visibility for this year is in terms of the component supply, it's relatively weak. And as we believe, that the shortages are going to continue throughout the year, that will have a negative impact on our gross margin, and thus leading into the outlook that we gave in 2008 sales and profitability.

So, if I formulate it differently, do you think that the gross margin headwind will be as strong in 2022 as it was in Q4?

I think time will tell, and why I'm saying this is that, like I said, the visibility into the component market and supply keeps changing. I mean, it's surprisingly unpredictable still after now living in this for, what, three quarters, so.

all right okay fair enough um final question um the aries weather acquisition um do you think that there would be significant top line synergies kind of immediately or very quickly after the acquisition or do you think that you would need to develop the offering slightly longer to basically get the get the synergy benefits out of it and now of course talking about top line top line synergies mainly.

Yeah, so there are some short-term opportunities, but obviously what we believe, what's our kind of a case in investing into areas where it's really about the longer term and the way we can look at it, it's a missing piece that we did not have in our jigsaw puzzle and kind of complete the capabilities that we have in-house. And getting those kind of real synergies in terms of a top line, some take longer, some shorter time, it may require some new sales capabilities or some new adjustments in the offering and some cases,

Just a plug and play. Right. All right. Thanks a lot. That was all from me. Thank you.

Thank you. And we have one further question coming through. That's from the line of Paul Desary of Arco Advisors. Please go ahead. Your line is open.

Good afternoon and congratulations on an encouraging set of results. Can I just continue firstly from the last um question on the areas whether acquisition has the acquisition opened up a new set of customers either in new segments or geographical markets and if so what is the is there any uh potential to sell through any products in your division as a result

There's a bit of all of what you mentioned. So, let me give you like a geographic example, where there is very much of a U.S.-centric company so far. We have a very strong offering in Europe. Obviously, this is kind of an opportunity to expand, build on kind of a mutual strength into, for example, into Europe. It's also additional sales channel to some of our offering. I think what I said in my prepared remarks is really important, that AresWeather brings really world-class developer tools. And I think that offers us a kind of real differentiation also in the marketplace where kind of our excellent data offering combined with their combined sales channel and the developer tools that come from them. I think there you have the equation, kind of.

Okay. Thank you. You mentioned you managed to increase market share in Q4. Are you able to give any more granularity in what areas and put any figures on market share gains that you made?

Unfortunately not. So I can give you – there's all kinds of anecdotal evidence on customers that we have been chasing for a long period of time, customers that we know that have been our competitors, customers in various different segments. So the market share gains have been coming from various different segments. So it's not on cloud one or two. It's kind of across the board. And – But kind of giving you kind of a number, that would be – unfortunately, there is no independent research on the relatively small markets that we are in. And hence, you know, independent market share research and, you know, market share moves in terms of quantified numbers, that would – we would not be able to give you that.

Okay, but when you look at market share, are the market share gains you're getting from existing customers who are, say, moving away from buyers and switching more of their orders to the buyer, or is it from brand new customers? It's both. It's absolutely both. Okay. Thank you. Your R&D, the benefit amount of your sales and R&D, I think it's 11.9% in 2021. Can we sort of assume that that is a stable figure going forward? And actually looking into the divisions, I noticed in weather and environmental, it's 12.9%. That's a good 10.9% if that's a fair impression going forward.

Yeah, so first of all, we continue to look at our investment portfolio. So it's not like it's a fixed number for any of the market segments or business areas. So we do actively manage the portfolio of investments we have and actively look at this forward-looking whether we believe that there's a best return on investment within the business areas and across the business areas.

Okay, thank you. Just two more questions. Apologies if I missed this in one of your answers, but looking at the component availability issues, are there any particular areas that stand out where you've seen greater difficulties than others, or has it been generally possible?

I would say any electronic components and, you know, integrated circuits of various different kinds, analog and digital, ICs, you know, you name it and you name a vendor, and there would be, I doubt that there would be many, if any, vendors who would actually meet the demand. And it varies in terms of the specific component. You know, you may have individual vendors where a single component or family of components or broader family of components that could easily meet the demand and then the same vendor with the next family of components might not. And to make it kind of more difficult, the situation, you know, this picture keeps changing. So, how it may have looked like three months ago, the picture, even with the same vendor, and even if I would pick a fixed set of components, might look very different today and will look very different in three months from now.

Actually, that's all. Thank you very much for answering my question.

All right. Thank you. Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. Okay, there seem to be no further questions coming through at this time, so I'll hand back to our speakers for the closing comments.

Thank you for following our calls, and thank you for the excellent questions from all of you, and we look forward to interacting and speaking with you soon. So have a great weekend, and thanks for joining.