Vaisala Oyj

Hello and welcome to Vaisala Q3 2022 Interim Report Conference. My name is Priscilla and I'll be your coordinator for today's event. I'll now hand over to your host to begin today's conference. Please go ahead.

Thank you. And here I'm joined with our chairman of the board, Ville Voipio, our CFO, Karina Murinen, our head of IR, Paolo Liimatta, and myself, Kai Östömö. I'm the CEO, President and CEO of Vaisala. We had an excellent performance during the third quarter. Whether we look at orders received or net sales, both grew strongly, and I'm very happy to report also in both business areas. Our order book ended at the record level of 188 million at the end of the quarter, and the operating result increased when we look at year on year, i.e. third quarter to third quarter. The orders received grew by 25% and net sales by 20% when we compare to the same time previous year. When we look at more detail into the orders received, I said 25% compared to third quarter 2021. If we look at on constant currencies, that corresponds to 17% growth in constant currencies. As said, from both business areas and when we look deeper into the market segments that we serve in industrial instruments, life sciences, power industry, meteorology, renewable energy would be the market segments that I would mention where the demand was the strongest. The order book, as said, reached new record level again. And the increase compared to the same time last year, 14%. Same market segments where the growth came from. And then if I take weather environment also mentioned that, Renewable energy, ground transportation, aviation would be the market segments that I would highlight. Then when we look at net sales, as said, 20% growth in constant currencies that corresponds to 12% growth compared to same time last year. Very strong growth in both business areas, which is worth mentioning. And when we look into the different market segments, industrial instruments, life sciences, meteorology, aviation and renewable energy be the ones which again are merit highlighting. In terms of an operating result, as said, increased when we compared to the same time last year. This is despite the fact that the gross margin decreased to 54.7 percent compared to three percentage points higher same time last year this came due to the negative impact on component on spot purchases if you look at the entire spot purchases that had a 4.2 percentage point negative impact on the gross margin And this 4.2 percentage points then was partially offset by a higher share of more profitable product business pricing and economies of scale generated then by the higher volumes that we experienced. As we have indicated before, we continued to invest and that led into increase in operating expenses compared to the same time last year. So we continue to invest according to our growth strategy. And the other contributor, as we have mentioned in the previous quarterly calls, was the IT system renewal that we are investing in during this year. Going into the two business areas that we have, first starting from industrial measurements, excellent performance continued as it has been throughout this year. The orders received increased strongly in industrial instruments, life sciences and power industry market segments. The order book itself reached all-time high, 60% up from last year, and that corresponds to But in terms of that, if we look at it in the constant currency side, that would be 21% . When we look at industry measurements, net sales side, again, strong net sales growth, 22% corresponds to 40% in constant currencies. Industrial instruments like science in this market segment were especially strong, albeit that the growth came from all market segments. Gross margin decreased here as well in industrial measurements. Three and a half percentage points decrease in gross margin And this is really related back to the earlier comment into the component spot purchases, which in industrial measurement context had a 6.3 percentage point negative impact, which then we were able to partially offset by economies of scale through the higher volumes and other actions that we took, like pricing actions we took during the year. And the operating result ended up being 14.2%, which is up from 14.6 million, which is up from 14.2 million, same as last year, corresponding to 25.3 percentage points of net sales during the third quarter of 2022. Moving on to the weather and environment business area, As said, excellent quarters there as well. The order book ended up at the all-time high. Orders received increased strongly in meteorology and renewable energy market segments. And order book reached at the end of the quarter nearly 150 million euros. And when we look at the percentage-wise, the orders received, they grew by 21% compared to the same time last year. In terms of a net sales in weather environment, strong growth in meteorology, aviation, renewable energy market segments, same kind of a decrease in gross margin as in industrial measurements. In weather environment, the decrease was three percentage points due to the component spot purchases. which had a 2.5 percentage point negative impact on the gross margin when compared to the same time last year. And the operating result, 7.5 million euros or 9.9% of net sales. Moving on to the year-to-date financials. The operating, when we look at the year-to-date numbers, the operating profit margin improved year-on-year to 13.4 percentage points of net sales. Net sales grew by 19%, and when you turn that into constant currencies, that will be the corresponding 13% growth year-on-year. gross margin close to the previous year, which shows our capability to mitigate the increase in both in the inflationary costs on our component costs as well as the spot purchases, which now when we turn it into a year-to-date number had a this would correspond to one euro as a earning per share. Cash flow from operating activities decreased, and then this is really kind of came through mainly through the increased activities in terms of increased net sales. It's a change in the net working capital the biggest contributor to this. And our financial position continues to be strong, and it may be worth noting on the capital expenditure side that when we look at the year-to-date number, as we have indicated before, we have now returned to the normal, that's what we call a normal level, i.e. the level before that the building project that we experienced during the few past years. Then, looking at the market development and business outlook, we updated this and we see growth in the same segments as before, i.e. high-end market instruments, life sciences, power industry, liquid measurements and renewable energy. Aviation continues to recover and then meteorology and ground transportation continue to be stable. And then on the back of very strong third quarter, we raised our business outlook now October 14th. And now we see our new guidances that We estimate our full year net sales to be in the range between 500 to 520 million euros and our operating result for 2020 be in the range between 62 to 72 million euros. So if I just summarize before I open up for questions, we had an excellent very very strong third quarter very happy to report that it came from both business areas orders received net sales both grew strongly during the and the order book ended up at the record high level at 188 million and so very very happy on our performance during the third quarter and gives us a good given the strong order book gives us a good basis for continuing the performance in the fourth quarter. I'll end up with my prepared remarks here and I'll now open up the line for any questions you may have. Operator, please.

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. We'll pause for a moment to allow everyone an opportunity to signal for questions. All right, we will first take our first question from Paul D. Terry from ARC Advisors. Please go ahead. Your line is open.

Yes, good afternoon. Thank you for taking my question. A couple of questions, and I'll take them in turn. You mentioned your gross margin impact at the group level of 4% in the quarter. And I'm just looking at how that's run throughout the year. I think it was 1% in the first quarter, 3% in the second quarter, now 4%. Can you give us any further colour on whether you expect the pricing pressure to continue at this level? Is it likely then to eat itself away as we go through 2023? That was my first question.

Okay, so if I... Thank you, Paul, for the question. And as I said in my prepared remarks, the pressure actually came from the acquiring the components from the spot markets. And as we have indicated throughout the year, during this year, there has been a significant shortage of electronic components in the marketplace. And it was very much of a conscious decision that we chose to be active on the spot market and acquire the components that we need, which has enabled us to meet the very, very strong demand, as you can see in terms of our net sales growth and, well, net sales growth both in the fourth quarter as well as the year to date. it very much was a business decision and we are very happy with the business decision as yielded exactly as we intended and maybe kind of continuing kind of the second part of your question in terms of going forward I would answer this this way that I would we expect the component shortage situation continue now in the fourth quarter and into next year. However, it gradually will improve and when we go into, especially when we go into next year the component, we expect that the component availability situation will be better as we go into next year.

Okay, thank you for that. On a related issue, you mentioned before that actually you redesigned some of the components given the shortage and lack of availability. Are you still in an element of redesign or are you actually reversing some of the redesign of products as the component shortage in certain areas becomes less?

um how what are the pressures on the business at the moment and and are you seeing are you easily able to produce the same quality and specification of products given the component shortage yeah so so thanks for the question so first of all on the quality side we we make no compromises on the quality so so we always we hold the quality criteria and we will not not do anything which would be of lower quality. So that's kind of a hard line that we have. Then back to your question in terms of how do we manage or have managed and continue to manage the component shortage situation. There are kind of I would say, three things that we continue to do. One thing is to negotiate. First of all, we do have a good visibility into the availability situation we have had, which has helped, and we continue to have that, which allows us also to negotiate with the vendors on the availability of the components, especially in the areas where it's hard to design around or find other solutions. And together with our vendor partners, we have been able to manage part of the shortage in the marketplace. Then when there is situations where despite the best efforts, our vendors have not been able to deliver, we have been active on the spot market using our strong balance sheet. securing the components that we need to meet the strong demand, as I said. And then thirdly, in some cases, we have been redesigning some of the products around another kind of replacing the missing component or the component that is offshore supply with something else that is in a better supply. But it's always a mix between these three things, and we continue to play with the three things.

Okay, that's fantastic. Thank you so much.

Thank you, Paul. We'll now take our next question from Artur Heikkura from IBLI. Please go ahead. Your line is open.

Good afternoon. It's Arttu Heikuro from EBLI. Do you hear me? Yes. Hey, Arttu. Good to hear your voice. A few questions from my side. In the report, you commented that Vaisala has won new customers. Could you elaborate what were the factors behind new winner customers? What I mean is that, is it due to your product availability or something else? And how big customers are we talking about?

Thank you for the question. I think it's a good question. And as our business mix is very broad, there's not a single answer to this. In the industrial measurement side, We have a huge amount of customers and we have acquired multiple of the customers. It's difficult to quantify exactly how much market share because of the segments that we serve are relatively small and there are no independent market research. that one could rely on. But there's strong evidence from when we look at the customer base, people who we are selling to, we have gotten new customers, we have gotten customers that we have been trying to sell to for some times in some cases, and we know who they had been buying before. So there's clearly kind of a market share and winning these customers from from other places. My colleague here is actually saying that maybe I'm answering the wrong question. If you were asking about the X weather, there was...

only a mention about new customers.

I'll just continue. In some other cases, especially in the weather environment side, some of the biggest, there are maybe a little bit of the bigger customers. Also there, we have gained customers that we know exactly who they've been buying from before. Sometimes it is actually winning market shares or winning customers that have been served by other customers. In some cases, it's customers where we have not been able to offer a proper offering before. When you ask whether it comes from availability or our offering, I would answer actually both. It's definitely the fact that we have been able to deliver has helped us but it's on the back of a very strong forefront that we have and that's kind of especially evident obviously in the newer areas where where we have not been kind of serving the market so far okay then the economy is

going into the bad shape and I'm just wondering if you could comment in your own words that how do you see the market development in the near future say 2023 and has there been any signs of customers becoming more cautious?

Yeah, when I look at the kind of in third quarter we did not see any slowdown in the marketplace. despite all the increased inflation and some signs of slowdown in the economy around the world. I would say this way that we are well situated strategically as a company. If we look at our offering, the market segments and our portfolio that what we serve, I'll take you three examples of this. When we talk about renewable energy, I have a hard time seeing world stopping investments into renewable energy, given what the situation around the world is. So I would expect that that will continue to grow. How exactly, whether it has some impact on the economy or not, hard to say. But in general, I would expect that that continues to grow. Other example, if I take the pharma or life sciences side is the largest market segment that we serve in data. So measurement side again, given, you know, that increased attention to especially the biopharma side and the new kind of advances in the pharma environment and the importance given the pandemic continues to go around the world, and the new threats that we can read in the papers. Hard to imagine that the investment in the pharma industry would start to shrink. And thirdly, in general, many of our products, especially in the industry instrument side, will yield into better control, of industrial processes resulting in lower energy consumption and lower carbon footprint. And again, given the higher energy prices, actually those are good investments.

I see. That's all from me. Thank you very much.

Thanks.

Thank you. Once again, ladies and gentlemen, if you would like to ask a question, please press star one. It appears there is no further question at this time. I'd like to turn the conference back to you for any additional closing remarks.

Thank you, everybody, for joining. And if you have any further questions, please do not hesitate to contact us. is the right contact, and we are happy to set a call or meet you in person in the future. I wish you all a very good weekend. Thank you.

Thank you. Thank you for joining today's call.