Vaisala Oyj

So, this is Kai Östömö. I'm the president and the CEO of Vaisala. And as the operator said, I'm joined here with our chairman of the board, Ville Voipio, our CFO, Karina Murinen, and head of IR, Paula Liimaa. So, as usual, I'll make some prepared comments, and then we'll open up the line for Q&A. Before I go into the numbers, maybe worth to note that one market environment during the first quarter, which proved to be very, I would say, surprising and somewhat disappointing in terms of the war breaking out in the middle of Europe. So the Ukraine war and other events around the world, like the COVID in China, where obviously not foreseen and surprising events, especially the war in Ukraine, very disappointing and shocking event. And we here at Paitala, we very much immediately, once the news broke out, we assessed the situation and decided that we were not comfortable to continue the business in Russia nor in Belarus, and we suspended that part of the business immediately and it's uh worth to to reiterate that that that side of the business uh traditionally has not been uh that sizable for for vice a la the it might take past five years the net sales from that region uh all in all has been between one to two percentage points on an annual level So not very meaningful in terms of the size to overall at Vaisala. So despite all that, we did have an excellent start of the year. Excellent in terms of a net sales growth, very strong in both business areas. Excellent in terms of operating results, which doubled, more than doubled compared to the year before. order book ended up at 169 million euros which is all-time high for us and the orders received also grew very nicely on both business areas. Now before diving into the numbers I would like to highlight few points that happened here on strategy execution and advice. Two points on renewing our offer according to our plans. First I'd like to highlight the automotive weather service deal that we made with Volkswagen. Volkswagen as you know is the second largest automotive company in the world and what we provide for Volkswagen just as much as many of the other car partnerships that we have is a hyperlocal weather service and forecasts, precipitation information and weather warnings shown on the infotainment screen on the car. and this deal just strengthens our very strong leading position in the automotive weather service and we do see this great opportunity in the years to come. On the other side of the business we renewed and expanded our product offering intended for the data center customers. Data centers as you know is a big increasing business and we have been having a very solid business and offering in that segment. We have enjoyed a good market growth in that side. Now we completed our offering so that we can serve as a a one-stop shop, so to say, with our offering to these very, very important customers. Sustainability is at the heart of our strategy and two important events during the quarter I would like to highlight. First thing is that we announced that we commit to the science-based target initiative to reduce our emissions. So we will do the assessment on science based on our all our emissions direct and indirect during this year and make a concrete plan and then work to reduce those according to the science-based target initiative by 2030. We also got a very nice recognition from Financial Times. Financial Times creates this climate leaders list annually. And in this year's list, we ranked as number five on that list, on all the companies in terms of how much they have been able to reduce greenhouse gas emissions between 2016 and the present day. So very, very proud of what we have been able to do. And I think it's a great highlight also on our strategy execution on this part. Then moving on into the actual numbers during the first quarter. So if I look at the quarter's receipt, increased by 18%. Very happy with that. The orders received came from both, strongly from both business areas. And if I look at the market segments, which I would like to highlight, would be renewable energy, aviation, industrial instruments, and life science market segments. Those were the strongest contributors, but there was a growth in many other market segments as well. Then going into the order book, it increased by 8% when compared to the first quarter of 2021. The increase came from largely the same market segments in industrial instruments and life sciences market segment in industrial measurement side and aviation and renewable energy in the weather and environment side. And worth to reiterate that we ended with the order book, we ended up with the all-time high size of order book at the end of the first quarter. When we move on to net sales, net sales grew 29% year on year, very strong growth on both business areas. Again, if I look at the market segment side, renewable energy, meteorology, industrial instruments and life sciences market segments were the strongest contributors to the growth. It's worth noting also that this time around the strengthening dollar helped a bit or the comparables. So if I look at in constant currencies, the growth would have been 25%, very strong number. that as well. Diving into the two business areas, starting with industrial measurements, excellent performance in all aspects. Orders received increased very strongly and and when we look at the order book compared to last year we ended up in the ended for 45 41 percent higher in terms of the orders received during the quarter 90 percent increase here looking at net sales net sales growth of 34 percent which then then increased the the operating result to excellent 27.5% of net sales. Also, gross margin improved to 64.3%. During the quarter, there was additional material costs, from purchases from the spot market, So the component challenges continued during the first quarter as we anticipated. Although in this quarter the impact on gross margin was less than the quarter before. And this is really caused by the fluctuation between the specific components the market changes and the component in shortage changes as well as the suppliers who have a shortage changes kind of a dynamically from quarter to quarter. It's also worth noting when we look at the gross margin that year before there were no spot purchases in the comparable number in first quarter of 2021. in weather environment side orders received were at the excellent level it was driven by especially by we know renewable energy and aviation market segments and we ended with the order book of 133.5 million euros which is good growth from last year and in terms of an orders received increase of 17% when we compare to the first quarter of 2021. And in terms of operating result in weather and environment, it increased to 4.4% of net sales. You may recall that due to seasonality and other things, typically the first quarter is difficult for weather environment. In many past years, we have been at breakeven or even below breakeven in terms of operating results. So having an operating result of 4.4% of net sales, it makes me very happy. And I think it's a very good performance buy. by the business area. The net sales growth was driven by renewable energy, meteorology market segments, as well as ground transportation. Gross margin was on a very healthy level, and here also there were additional material costs related to components purchases, but on a lower level. fourth quarter as they materialized. And when I look at the entire company, on how we fared as a company during the first quarter, the operating result, again, an excellent level, 14.8% of net sales, net sales growth of 29%, and if I make the comparison on constant currencies, it would have been 25%. Gross margin was at, on the previous year's level, slight increase there. And here I want to maybe emphasize Again, the spot purchases, we actually did make a significant commitment into spot purchases also during this quarter, even if then the actual impact on the numbers during the quarter was clearly less than what the commitments in this quarter were. And this is really due to the fact, as I said earlier, that the the components in question, the vendors in question, they fluctuate from quarter to quarter and even the shortages which come and go at a relatively rapid motion kind of change from quarter to quarter, even month to month. And then If we turn the result into EPS during the quarter, it translates into 38 euro cents compared to 17 euro cents the year before. In terms of cash flow from operating activities, it decreased somewhat due to the negative impact on net working capital. This really was The biggest impact on this was the change in the accounts receivable. This was due to the fact that the business grew significantly compared to last year. When we compare to the comparable period last year, actually, we just emerged out of the COVID-19 slump, I would call it, during 2020. So... The way I would read the changes in the cash flow is related really to the strong growth in terms of a business. If we look at our financial position, I would characterize it as continues to be very strong. And maybe I'll go into maybe more interesting, which is then the market development and the business outlook for the year. Here, I'll go back to maybe how I opened the session in terms of what happened. The war broke out in Ukraine, the COVID-19 lockdowns in China, many things happening in the world, which makes the unpredictability and in the world to be on a very high level and transparency on the markets overall to be quite challenging. So uncertainty for the rest of the year in terms of I would say second order and third order impacts in terms of What does the impact on inflation to real economy mean? What does the increase in energy prices, especially in Europe mean? What is the impact on the lockdowns in China? For both the real economy in China as well as the consequential potential impacts into logistics, which are already strained and so on. or the uncertainties significantly grew during the quarter. That all being said, we did not change our outlook and our view on market development. We continue to see that high-end instruments, life sciences, power industry, liquid measurements and renewable energy clearly are growth segments. The aviation very much supported by the numbers also during the first quarter, is in a recovery mode towards pre-COVID-19 levels. It's still kind of a way to go there, but clearly a recovery is seen in the marketplace. And on the other hand, meteorology and ground transpilation we see to be stable market segments. And in terms of a number, this translates into no changes in our business outlook. We see that our net sales for the full year are in the range between 465 to 495 million euros and the operating result between 55 to 70 million euros. So just to summarize and conclude my prepared remarks, excellent start of the year in a dynamic market situation. Strong net sales throughout the company, very good operating result and very strong order book. So good start of the year despite the fact that the world around us is experiencing all kinds of uncertainties and That concludes my prepared remarks, and operator, if you would open up the line for any questions.

Yeah, thank you. If you have questions for the speakers, please press 01 on your telephone keypad. Please hold until we have the first question. So we have the first question from Pauli Loche from Interim. Please go ahead.

Thank you, Hanna. Thank you Kai for your presentation. I have two questions. First, I would like to ask about the strong sales development in the weather and environmental business area. Do you see any particular reason why it was so strong in Q1? Do you believe it could continue also in the following part?

So, very good question, Pauli. And I would note two things. First thing is that weather environment business has is less prone to pre or some same kind of a seasonality than some other businesses have during the year. So the quarters to some extent go up and down depending on what orders came in at the what time both in terms of orders received and in terms of a net sales. So so there's a kind of a part of this is within the natural fluctuation between the quarters. That being said, we are very happy with the renewable energy, both net sales and the orders received. So that obviously is a market segment, which we do believe that also when we look at longer term and probably is going to grow, and probably now with the war in Ukraine, the consequential investments, especially in Europe, to alternative energy sources, is probably going to strengthen that trend longer term. That probably is going to turn into actual investments, not this year, but in the years to come. But nevertheless, I think it's a good foundation for a longer term growth also.

OK, thank you. Then my second question is related to the component shortage and the additional costs related to spot market purchases. So do you actually see that there will be some extra costs in the following quarters or is that just a risk that we need to take into account, but it's uncertain if that materializes?

I do think that there are going to be costs when we do need to act on the spot market as we have been acting on the spot market. like said the actual what materializes in a given quarter kind of fluctuates as we have seen if you look at this quarter compared to the for example the previous couple quarters but the market situation has not changed and if I would say anything some of the uncertainties that I raised at least raise a question on what kind of an impact they may have longer term in the component development decide and then maybe a second notion I would say that the spot market itself obviously the longer this lasts more difficult it is to act on it and that the market is getting smaller from where to pull from as the situation continues

Okay, thank you very much.

So we have another question from Matti Rikkonen from Carnegie. Please go ahead.

Hi, it's Matti Rikkonen, Carnegie. A couple of questions. I will take them one by one. First of all, the gross margin resilience that you now enjoyed in Q1, less than one percent impact compared to the three percent impact if I recall correctly in Q4. Is there any way to kind of have the range of potential outcomes when it comes to this gross margin impact because it's pretty big and of course three percent sounds big but my question is that Could it be perhaps even bigger in a particular quarter? And then again, if we look at the positive side, is it possible that in some quarters it actually might be zero? So I understand that it depends on the component mix and selection and naturally depends on the market prices. But do you yourself have any kind of idea where the gross margin volatility, where it could be kind of what are the positives and negatives at the extreme sides and where we kind of are in that respect.

Thanks, Matti, for a very difficult question to be kind of specific on. As I said, the changes on the component supply side change relatively rapidly. And if anything, it's probably more rapid now than from a component perspective and an individual vendor perspective. They tend to kind of go from good to bad in relatively rapid motions. How long will that continue also? It's hard to say. Probably depends a little bit on the individual vendor itself. And part of it is also from our sales mix. What happens to be kind of what customers want to pull and buy. And then on the other hand, what happens to be the the supply situation for those specific products on that specific quarter so as you can see now from that kind of a present quarter and the previous quarters you know this tends to kind of fluctuate and giving you kind of an exact range on what kind of between what kind of numbers this is I don't feel confident enough to give you an exact guidance other than and maybe give you the elements on what impact the actual result. Obviously then the one thing to add upon what I just said in terms of what impacts the actual results. Obviously how much can we move also the cost to our prices and therefore

kind of mitigate the impact on the cooking machine. Okay, thank you. I guess we just need to kind of look and see what happens. But thanks for the explanation. I remember that you mentioned something about redesign of some components perhaps earlier, if I don't totally misremember. How is that going forward? and at what stage of the year do you think that you would have addressed the issues with most critical components that you have already kind of anticipated?

Good question and here again I have to emphasize the dynamic nature of the market so of the supply situation so we are constantly like on a daily and weekly basis, looking at what's the supply situation, what's the outlook for the coming months, where can we actually mitigate the potential shortages by changing the components, where can we change it by negotiating with the customers or suppliers, where can we change it by changing potentially our offering in terms of a complementary or other product, so changing the demand from one product that may have a shortage of component to something which is similar or close to within our offering. So it's both directing the demand, it's changing the components and then acting on the shortages by negotiating with the vendors and then, fourthly, the spot market purchases. And it's really, we are actively pulling. It's not a one time thing. This is an active, ongoing process and ongoing activities that we do every day and we do these kind of changing the components kind of just multiple of those have been ongoing some completed and other ones ongoing as need okay have you been able to deliver all orders that you were supposed to deliver in Q1 so has that

has the component shortage affected your ability in that respect?

I would say that there is no impact on the net sales of that who kind of lost sales from not being able to deliver during the first quarter.

Okay, good. Then to another matter, the Volkswagen partnership, does that include kind of all new models that go out of production or does that also include some kind of older models that are already in traffic and is it possible to just change the software in the way that it would be possible to utilize your weather systems or weather information there? How does it work in practice? Are you kind of in all new Volkswagen models from the this moment on?

It's new cars, and then it's up to... I would say this way, that it's then Volkswagen's decision on where they have slight kind of facelift, where they might have still an old software, for example, and it might be too cumbersome or costly or whatever, to update their infotainment system. I would explain it this way, that it will eventually, I think ambition at least, is that it will come in all new cars at a certain point. But the rollout starts now.

Okay, thank you. And then final question of course related to the guidance. If we think about the headwinds that you embed in the guidance when you basically keep it intact, are they mostly known risks or known headwinds that you already see that will happen, or is it more estimated headwinds that you see that might have an impact on the rest of the year? So what kind of composition in the guidance, what does it consist of?

Yeah so obviously kind of there's both so obviously the known headwinds are kind of taken into account when we kind of guide the range so keeps the upper boundary and the lower boundary that being said what I tried to communicate as well that now there's a whole host of unknown headwinds, which we need to estimate when we look at the guidance, due to the fact that from multiple different levels, I would say the market is really difficult to predict and difficult to forecast, especially towards the end of the year, due to all the things that I mentioned during my prepared remarks. China, the other day, you could be Ukraine war, energy prices, inflation, what happens with Fed in their interest rate increases and tightening the monetary policy in the US and so on and so on. So there's multiple different things that just need to be also estimated.

Okay. The reason for asking is that I think we had a similar situation last year where there was a lot of uncertainties in the beginning of the year and you started with the fairly conservative guidance in the beginning of the year and then you ended up raising that quite many times.

So I'm just thinking about... I understand, Matti, but I think it's fair to say that the uncertainty in the marketplace is on an exceptionally high level at the moment.

sure totally agree thanks for the answers that was all from my side so we have another question from paul de terry from arcadvice please go ahead hi uh good afternoon kind uh congratulations on this consider results can i just pick up on something you mentioned recently um concerning component supply where you said that you'd actually managed to, although you took a hit to the gross margin in Q4, you'd actually managed to pick up some new customers. Has that continued into Q1? And I'll assume just by an answer to the previous question that you haven't lost any customers as a result of your inability to supply or component issues. But have you continued to take any market share?

Yeah, thanks Paul for the question. So to answer the second part of the question, have we lost any customers? It's kind of implied that we have been able to, we did not lose any net sales due to the capability or not having a capability to deliver. So the answer would be easy no. Have we been able to continue to increase market share? especially on the industrial measurement side I would say yes and here a big part of this is really our capability to deliver which is superior to our competitors has been at least okay thank you and then just going back to the automotive agreement with Volkswagen could you just

uh expand a little bit more on how the agreement works uh and uh are the agreements similar to i gather you're working with you're already working with bmw high-end dying mercedes um could you just just expand a little bit on that please yeah so it's always a

without going into the deal structure itself, it's a similar kind of agreement than what we have announced earlier, for example, with BMW. So it's the same kind of functionality and same kind of capabilities that Volkswagen acquires.

That's great. Many thanks. That's all for now.

Thank you. So we have no further questions. Ladies and gentlemen, I remind you that if you wish to ask a question, please dial 0 and 1 on your telephone

If no further questions, thank you for the audience, for the interest. And I want to remind also that if any further questions, Paula is the right contact, and we would be very happy to have further discussions with any of you. So thank you.