Vaisala Oyj

Hello and welcome to Vaisala Financial Statement Release 2022 conference call. My name is Priscilla and I'll be your coordinator for today's event. Please note this call is being recorded and I will now hand you over to your host, Mr. Kayo Stamo, to begin today's conference. Please go ahead, sir.

Thank you. I'm the president and CEO of Vaisala. Welcome, everybody. I'm joined here with our chairman of the board, Ville Voitio, our CFO, Karina Mourinen, and our head of IR, Paula Liimatta. Vaisala's fourth quarter, I would characterize it that the strong net sales growth was the characteristic of our fourth quarter as it was for the entire year. We had a solid performance during the quarter which ended a good year. The growth of orders received continued strong in both business areas and especially so in weather and environment business And I'll go deeper into the details in the two business areas in a little while. The net sales grew by 13%, and order book ended over 180 million euros, which gives obviously a very good start for the year 2023. And reflecting the performance in the year, board of directors is proposing 72 euro cents of dividend. That's your four euro cents increase from last year to the annual general meeting later in the spring. Before I go into the numbers, I thought that I would give you a little bit of a highlight on 2022 on some of the key areas from Vaisala. In terms of a strategy, product and technology leadership from sensors to digital solutions is extremely important for us. We had several key product launches in both industrial measurements and in weather environment. On top of that, I would like to highlight the acquisition of Aeris Weather, which is a subscription-based software company providing weather and environmental information, which we acquired and closed the acquisition almost exactly a year ago and now it's fully integrated in our data business and we are very happy with the acquisition as well as the progress that we've made on the digital business side as well. Speaking of that, the other key event during the year obviously was the launch of Paisala XWeather, which is a product family brand for our digital offering. It's a forecast and observation suite of services using a combination of intelligent hardware and software, and business models are software as a service and data as a service. And very much with the developers in focus. And as said, very happy with the progress during the year. The second key topic, which I've talked about to you in the previous quarterly releases as well, is the sustainability leadership. And if I think back to the year 2022, I'd raise two events during the year. One thing is the accolades that we got again from Financial Times. We were selected in top five. which is top five public companies out of, if I recall right, 1,600 public companies in Europe, in terms of ability to reduce or their track record of reducing greenhouse gases during the past years. Very proud of that. And the second highlight on the same sustainability topic is our commitment to set science-based targets, which we will send now for validation to SPPI in 2023. And then lastly, You all are probably very aware that reliability and quality are very much the words that are associated to our products and solutions. They are key elements on our offering. And as the Mars rover in the picture shows, We have been part of the Mars missions now for quite some time. An interesting story now is that we have actually been in Mars providing a weather forecasting or observation network in Mars for 10 years. The whole design was supposed to be lasting minimum two years. Now it's been 10 years and still going strong. And I think it speaks highly of the capabilities, technologies, and the commitment that the company has on the reliability and quality of our offering. Moving on to the numbers on fourth quarter. Growth of orders received continued strong in both business areas, and especially in weather environment business area, as I said earlier. The orders received grew 17%, and if we look at in constant currencies, that translates to 13% in constant currencies. And if we look at the market segments where that growth came from, meteorology, aviation, and industrial instruments would be the ones that I would highlight. They had the strongest demand growth. There were other ones as well, but the strongest ones were these three. Then if we look at the ending order book for 2022, We ended the order book with 181.5 million. The order book itself grew from third quarter 21 by 13%. And obviously, as I said earlier, it gives us a very strong starting point for 2023. And on the right, you can see the analysis on how much of that that's 80% of the order book that we have, starting order book that we have, actually is for the current year, i.e. 2023, and the 20% is then for the out years.

It's a similar ratio as what we have had already some time in previous year as well.

Then when we look at net sales in fourth quarter, Company level net sales grew by 13%. In constant currencies, the net sales increase was 8%. We had a strong net sales growth in both business areas. And when looking at the market segments, the strongest growth came from industrial instruments, life sciences, power industry and aviation market segments. Looking at operating results, we increased the operating results year on year. Very happy to note that the gross margin was at previous year's level at 53.5 percentage points, despite the fact that the component spot purchases had a three percentage point negative impact on the gross margin. And we were able to compensate that with economies of scale and higher prices. Simultaneously, operating expenses increased. This was driven by the IT system renewal and investments then, as we have been doing consistently in sales and marketing, as well as in R&D. where in all operating expenses grew compared to the previous year. Then moving on into the two business areas, starting with industrial measurements, very good performance continued. The orders received grew by 11% and orders received, as said earlier, really driven by industrial measurements life science and liquid measurements market market segments and the the resulting order book up 27 compared to the same time last year when we look at the net sales in industrial measurements the net sales growth was uh or grew by 20% compared to fourth quarter previous year. That's a 10 million higher sales in a quarter compared to the same time previous year. And when we turn that into constant currencies, if you look at in constant currencies, that's a sales growth by 14%. In terms of our market segments, all market segments in industrial measurements had a very strong growth. Strongest ones were industry instruments, life sciences, power industry market segments. But as I said, we experienced strong growth across all market segments in industrial measurements. And if I move on to weather and environment, I think that quarter was really characterized by excellent growth in orders received. The orders received grew from same time last year by 24 percent that we kind of in constant currencies that will be 19 percent increase in orders received. The orders received growing in meteorology aviation and ground transportation market segments and then the

order book ended up at almost 140 million. That's up 10% compared to the same time previous year.

In terms of net sales, 9% growth in weather environment compared to the same time previous year. The net sales growth driven by aviation and meteorology market segments Similar story in terms of a gross margin as in weather environment. On previous year level, 49%, despite again, the component spot purchases having a two percentage point negative impact. And I want to remind you on the weather environment where we have a large part of the business is with long-term contracts came to public entities where the ability to increase prices due to that kind of an increase in its component costs is much more limited than in industrial measurement side. So I think the fact that we were on a previous year level on gross margin is actually an excellent result. In terms of an operating result, slight decrease compared to previous year, driven by the investments that we are making. Then if we move on to the whole year and look at the whole year financials, the full year operating profit margin improves year on year to 12.2 percentage points of net sales. Year was characterized by a strong net sales growth, 17% compared to previous year, 12% in constant currencies. And when we look at the entire year, the gross margin was close to previous year's level. only 0.4 percentage points lower than the year before, despite, again, the headwinds that we experienced from component spot purchases, which had a 2.7 percentage points negative impact on gross margin. The operating result, as I said, improved to 12.2%, and when we turned that into earnings per share, a nice healthy growth on that as well to 1 euro 24 cents. And here's a picture on the dividend development and how does the 72 euro cents that now is a proposal for AGM relate to a little bit of a history and as we have a dividend policy of increasing the dividend in line with the increasing results of the company. I think this reflects nicely also a little bit longer term how we have been able to turn the kind of growth of the company into the growing dividends and to the shareholders as well. In terms of a cash flow, the cash flow from operating activities decreased And this is due to the increase in net working capital in two sides. It's trade receivables, which, and then on one hand, and then on the other hand, capital tied in inventories, both really driven by what we experienced through the year. And when we look at the entire financial position, again, as I've said before in previous quarterly releases, very strong financial position continues. And here maybe just a highlight that we have actually done what we set out a year ago to do this during 2022 in terms of capital expenditures. going back to the level before the building investments into the two sites that we had both here in Vantaa as well as in Boulder, Colorado. And then a few words on market development and the outlook that we are seeing for this year. When we look at the market segments and the development of the market segment that we anticipate for 2023, Our forecast is that we will experience growth in terms of market in high-end industrial instruments, in life sciences, in power and energy, in liquid measurements, renewable energy, and roads, as well as automotive segments, and meteorology and aviation remain stable. And when we turn this into our business outlook for 2023, we estimate that our full year 2023 net sales will be in the range between 530 to 570 million euros. And the operating result will be in the range between 70 to 85 billion euros. So as a summary, strong net sales growth continued through fourth quarter 2022 orders received and net sales grew strongly and the order book ending order book give us a good start for the year 2023. With this I would like to conclude my prepared remarks and operate that we would be ready for any questions and answers that you may have.

Thank you sir. Ladies and gentlemen, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. To redraw your question, please press star 2. We'll pause just for a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Matti Rikkonen from Carnegie. Please go ahead. Your line is open.

Hi, it's Matti Rikkonen, Carnegie. A couple of questions. Firstly, Could you remind us how long the ERP project is scheduled to be? And what is the level of investment that you are putting into it? How many quarters that will impact?

So, if I answer that question, Makki. So, hi, first of all, and good to hear your voice. And we have not set out on the size of the investment. me put this in in perspective that we kind of our plan here is that we will take the time to make sure that there are no blunders in executing the erp we are a complex company we are in all represented all around the world we have many many many different entities around the world we have a huge portfolio of products as well as then then our business portfolio is exceptionally large, I would say. And making sure that the entire functionality or the capabilities across all the complexities that we have takes some time. And we want to be prudent on this and really make sure that there will be no hiccups whatsoever through the transition.

all right the second question goes to the gross margin improvement or let's say gross margin improvement after you get rid of the spot component purchases so i was wondering to what extent does your guidance imply that the situation regarding components would become normal in the second half of 23 that is are you kind of factoring in that the first half is still going to be burdened by higher component prices or what's your view behind the guidance regarding gross margin and spot common spot purchasing yeah a great question and maybe that should have been in a prepared remarks as well we'll have to come to think about that so our outlook in terms of a material availability is that

it will now improve during the first half of this year and will normalize by the end of the first quarter. Already now we are clearly seeing the improvement in the material availability. There are still some completely different levels, but some shortages in things like connectors and cables and things of that nature. but much, much less than what we experienced during last year. So there will be a little bit of some effect during the first half of this year, but we foresee that the market will normalize by mid-year.

Right. So basically, if we are looking at the normalization of your cost base, coming from gross margins, then let's say in 2024 is the first full year when you don't expect any kind of known impacts on gross margins. Okay. Correct. That's correct. That's correct. Good. Then question related to the power market and equipment that you are selling there. It was quite a long struggle to basically get the right kind of meters and get that to the clients first in testing phase. And now it seems that during several quarters, it has started to kind of gain momentum. How is the sales to the power segment going at the moment? Is it coming from a small set of customers who have decided that they will basically refund renew their whole fleet? Or is it more broad-based? Could you describe a bit where the demand is actually coming from at the moment?

Yes, very good question. The answer is both. In a way, we continue to have new customers coming in and, as you implied, testing the product and taking a little bit of this and that. But it is increasingly, increasing number has been during this year that has been the trend and the driver behind the increasing sales in the power segment. That increasing part of the customers are now taking and implementing our solution throughout their network. So we have been seeing orders, big orders, these kind of big orders of full conversions coming in. for multiple customers on all geographies.

Right. And is there any competitive product out there at the moment, or are you basically still competing against the traditional way of technician going to the device and taking those oil samples and then getting back to laboratory? Or is there any other way, more automated way to get it done? Just thinking about your competitive advantage period there.

Yeah. So there are other means, especially the one that you alluded to. And so we are not alone in the marketplace. The level of maybe the automation that we can bring through our solution, I think it is a competitive advantage, but we are not acting alone. Nobody else has similar technical solutions like we have.

Okay, then about the overall level of demand that you have seen in 21 and 22. I can't remember many years when your demand in both divisions has been this good despite all the all the kind of negative changes in the market related to COVID and component shortage whatever. So do you think that this level of growth is sustainable or do you expect that there would be some kind of slowing down at some point because yeah that's an open question.

So first of all I agree with you that we have it's been when we look at a bit of a history it has been a excellent year in terms of a demand now during past year and a bit longer as well since the recovery from COVID. I think both are underlying. There are two things. There are the macro trends. We have been talking about things that drive, really, in terms of the macro side, the solutions from us. Things like focus on sustainability, focus on climate change, fighting climate change, energy efficiency, recycling, or... I'm searching the word on... Kind of a closed circular economy. It was the word I was looking for. So there are macro trends with that. We'll continue to drive the demand. There are market segments like pharma, especially biopharma, where you look at any market studies and they would indicate that there's a long-term market growth expected from those despite the uncertainties in the world. But of course, part of the strong growth that we have been experiencing has been coming from kind of a recovery from from COVID and kind of like the stoppage of everything for a while in 2020. And that effect will slowly, I'm expecting that that will fade away. So it's a bit of a both and I think kind of continuing on the extremely strong kind of a demand levels that we have been expecting. They probably will a little bit normalize, but that being said, I think there are strong market trends that are driving the demand for our production solutions.

Okay. And then finally, question related to 2022 and your guidance upgrade in October. You guided at that time a higher top line growth range and you basically delivered in that range. You also guided a higher EBIT range and the outcome for the full year ended up in the fairly low end of that guidance range. So I'm just trying to figure out what made the margin come out to the low end of the guidance range. So what did you have in mind when you set the EBIT guidance or when you raised it in October and what were the things that then basically pushed the margin to the low end?

Part of it is really kind of a timing of the cost of some of our investments came out maybe a little bit differently than we were foreseeing. At the same time, the demand came out maybe a little bit even stronger than what we anticipated.

Okay, so basically there was no kind of estimate on spot purchasing that would have brought you more cost than you anticipated. That will always be involved.

there always is a little bit of that the spot purchases where especially during last year and to some extent will remain a hard to forecast kind of a thing where you know i'll give you an example and this is not really kind of a just even if as i said um the market is clearly kind of working towards normalization but if i take now end of last year there were kind of small things happening due to the COVID-19 in China, where even if the market was normalized, there were some factory lines stopped in China, and immediately you have line stops for a month in some supplier somewhere. You know, it has a little bit of a ripple effect through the supply, supply is so tight, even if a starting point would not be a shortage.

Okay. All right. That's all from me. Thank you.

Thank you. Once again, ladies and gentlemen, if you have any questions, kindly press star one. We'll move on to our next participant, Artu Hekura from IDO. Please go ahead. Your line is open.

Good afternoon, it's Arttu Heikura, Eveli.

Good afternoon, do you hear me?

Yes, we can hear you.

Okay, so could you, Kai, also confirm that you hear me? Yes, I can hear you, but not what I saw before.

Okay, just give me a moment. Just hold on a moment. I will reconnect you. Just give me a moment, about a few minutes. I will get back to you. Then you'll dial in to Star 1 again. The speaker seems to be disconnected. Hold on. Okay. Hi there, Arttu.

Hello.

Yes, you can go ahead with your question. Sorry about that. Our fancy conference phone decided to boot itself in the middle of a call.

Okay, that's okay. Matti covered quite a lot of questions, so I have only you. your orders received declined in renewable energy in Q4. Could you open up the drivers behind the decline? Is it just a seasonality or something?

It's a seasonality more than anything else. We had a very, very strong orders received in the year before, and it's nothing more than a seasonality. If you look at the annual basis, we had a very good view on renewable energy.

Okay. Then about the ex-veta segment of business, could you comment on the recent development of the segment in terms of sales and new customers?

Yeah, we have not given kind of the the exact numbers in terms of the segment itself. That being said, I can say, as I said in the prepared remarks, I'm very happy with the progress that we made through 2022. The area's weather gave us a good boost that we were kind of expecting from it, and it really fully delivered on the expectation, and I'm very happy on the progress against the plan on that segment.

Okay. Then about China. If I remember, so the business was a year ago that big, but how the business is now and what do you expect from China's opening from the COVID restrictions?

Yeah, good question. Actually, we had a good year in China. It's very much in line with the whole company. And China is a significant, very significant market for us. It continues to be. And obviously, now the little bit brighter outlook overall in China votes well for us as well as anybody else who does business in China.

Okay, thank you. That's all from me. Thank you.

Thank you. We'll move on to our next participant, Mati Rekonanen from Carnegie. Again, please go ahead, sir. Your line is open.

Hi, I forgot to ask a question about the liquid measurement new product line that you announced a couple of days ago. Is this the first kind of bigger launch since the acquisition of K-patents and does this in any way change the addressable market estimate that you have been using at your capital market stage? So I'm just figuring what kind of market potential does this new product line have?

Yeah, so first of all, thank you for asking. Thank you for noting. It is actually a major announcement since that now shows the full integration of what used to be a K-patent technology and then what used to be Weisslack technology. Now it's fully integrated into the Indigo family that we have in industrial measurement. It's as the picture was also in in in one of my slides it actually had now for example the displays are the same that we are using same displays and same same display the display modules as with any other uh industrial measurement products that we have allows us also and uses same kind of product architecture which means also that now we can start to build on the synergies potential technologies that we provide from Vaisala side and what we obtain from Cape Attenborough side. So as a market size overall, I don't think that much increases the market size. It's more of a competitiveness in the marketplace and the breadth of our offering into the market.

Okay, and since this niche has not been addressed so much, could you describe the competition in the segment? What kind of players do you have and how is the market structured? Is it a lot of smaller players or are there some dominant players in that segment, like in liquid measurements?

Yeah, liquid measurements is... First of all, when we talk about overall liquid measurement, there's multiple different technologies that are typically serving different kinds of problems or applications, solutions, where one is measuring liquids. Somebody may be measuring concentration, somebody may be measuring content of different substances. transparency, maybe something and so on and so on. So there's multiple different types of measurements that are done typically with different technical solutions in liquid measurements. And when we have indicated liquid measurements as a market size, we have been talking about what is the addressable market for the refractometers that the technology that we obtained from K-patents. And that's not covering the entire market, when one talks in general about liquid measurements. And there are different companies typically tied in with that one type of a technology serving one part of the market. Other companies with a different kind of a technology serving other parts of the market. And each one of these, there may be a bigger companies in some of these smaller companies in other ones, but it's typically one technical solution dominates the market segment. So then when we look at the part of the market that we address, it's divided up with the smaller players where we are strongest in that part of the market. Did I answer your question clearly enough? Yes, yes. It's a little bit of a complex answer, but it is a little bit of a complex market as well.

All right. Thank you.

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

Thanks. I just want to thank everybody for participating and bearing through us with our technical problems. We will improve on this for the coming quarters, and I wish you a happy end of the week, and we will be in touch. Thank you.

Thank you for joining today's call. You may now disconnect. Happy weekend.