Vaisala Oyj

Good day and welcome to today's Vaisala First Quarter 2023 conference call. At this time, I'd like to hand the call over to Kai Oystamo. CEO, please go ahead, sir. Thank you.

This is Kai Esmer. I'm the CEO and President and CEO of Vaisala. I'm joined here with our CFO, Karina Muurinen, our Chairman of the Board, Ville Voipio, and our Head of IR, Paula Liimatta. I would like to welcome everybody on this call on Vaisala's first quarter. By far, the first start of the year was characterized by strong demand, and this all despite the market activity remaining high despite all the uncertainties in the marketplace and in the business environment overall. I would like to remind you all on the reported numbers, now on orders received and in order book, that as we announced earlier, as of beginning of 2023, we changed our reporting so that weather environment business areas subscription sales are excluded from orders received as well as from order book. and now we are separately reporting in this aggregation of net sales as subscription sales. Now, looking at really the numbers, orders received, as said, grew nicely by 11%, and order book ended in 164 million. The operating result decreased due to the investments that we did during last year in sales and marketing and into R&D, focusing on the long-term competitiveness of the company. And I'll come back to this in a few slides. The cash flow returned to what I would characterize as normal first quarter for Vaisala. Last year was burdened by a few things. First of all, the shortage of components, which led in more capital tied into component inventory than typical, as well as then the acquisition of or the closing of the acquisition of areas where there Now we are back on a good track on cash flow as well. Looking a little bit deeper into the numbers, first quarter orders received, as said, grew by 11%. The orders received grew in both business areas. And if I look at the different markets, product segments or market segments that the orders received increased strongly in meteorology, roads and automotive, as well as industrial instruments. As said, order book reached almost 164 million at the end of the quarter. That represents 14% increase to first quarter 2020 to 2022. So, nice increase on that well. And again, the increase in industrial instruments as well as power and energy markets in industrial measurement market segments and in weather environment side in all market segments contributed to this. In terms of a net sales, similarly, growth by 11% compared to the same time previous year. This time, there was no significant impact on currencies. So we are only actually noting on, it would be saying constant currencies or real currencies, 11% on both. The net sales grew in both business areas, very strongly in industrial measurements business area, and very strongly in industrial instruments, life sciences, and power and energy market segments. As said, the operating result was burdened by the investments in sales and marketing and R&D that we did during the year of 2022. these investments for long-term competitiveness both in terms of our offering as well as our reach and building that. On top of that, it's worth noting that the gross margin was at previous year's level at 61% despite the fact that component spot purchases had a minus 1.3 percentage points negative impact on the gross margin and whereas the year before the first quarter it was only 0.4 percentage points negative impact. The other thing worth noting on the operating expenses is the continued renewal of our IT systems as we've previously indicated. this continued during the first quarter, as it will continue throughout this year. Then moving into the two business areas that we have, starting with industrial measurements, Good demand during first quarter. The orders received increased by 9% and order book by 10% compared to the same time previous year. And orders received grew in industrial instruments, liquid measurements, as well as in power and energy market segments. And if we look at the net sales, very strong market net sales growth, 19% year on year. Driven really by all market segments, very strong growth in industrial instruments, life science, as well as power and energy market segments. Looking at the gross margin, it decreased from previous year and now being 62.6%. And here the spot purchases, the additional market material costs related to the spot purchases had a 1.7 percentage point negative impact on the gross margin as compared to the 0.6 the year before. The operating result was slightly above last year being 15 million euros in terms of a relative operating result being 23.8% of net sales. Then moving on to weather and environment, again, strong growth in orders received, being 13% year-on-year. This is driven by meteorology as well as roads and automotive market segments. The order book ended at the end of first quarter at $125 million. million euros that represents 13% increase to year before. And here, just again reminding you that when you look at the years 2020 and 2019, this accounting change and reporting change that I was alluding to where the subscription sales are now separately reported, they are excluded from the orders received for year 2021 and 2022, but not the years before. Net sales-wise, the year-on-year growth was 5% for weather environment, driven by automotive and renewable energy market segments. Gross margin improved from previous year, now being at 50.2 percentage points, despite the fact that, again, the component support purchases had a negative 0.9% impact on gross margin compared to the 0.2 the year before. And the improvement really came from improved mix in weather environment. The operating result being on the negative side, 1.77 million euros, again, driven by the investments that we did really throughout last year into building the competitiveness, especially in weather environment case, especially the growth areas being, as we've described earlier, renewable energy market segments as well as the subscription sales-related activities. Then if we take a look at the first quarter financials and a bit of a look into cash flow, the cash flow from operating activities increased. as a result of decrease in trade receivables. So as I said in my opening, we returned to kind of a normal first quarter behavior in Vaisala, the clear improvement from first quarter last year. And overall, the strong financial position that Weisler enjoys continued throughout the first quarter. Then looking at the market development and business outlook, This remains unchanged. So we expect the growth from most of the market segments that we serve. And the only exceptions as a market segments being meteorology and aviation, which we expect to be stable throughout the year. So there are no changes in the market development we anticipate for this year. And similarly, no change in the business outlook for 2023. So net sales-wise, our expectation is that it will be in the range between 530 to 570 million euros. And in terms of operating result, in the range between 70 and 85 million euros. So, as a summary, before opening up for Q&A, strong demand continued in the first quarter. The orders received and net sales grew both by 11%. Order book ended up in a good result. Operating result somewhat burdened by the investment, long-term investments that we have been doing throughout last year. And then... The cash flow from operating activity is clearly improved from previous year. With that, operator, I would like to open up for Q&A.

Thank you, sir. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star 1 on your telephone keypad. And please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll now take our first question from Matti Riikkonen from Carnegie. Please go ahead.

Hi, good afternoon. It's Matti Riikkonen, Carnegie. I have a couple of questions. I would like to take them one by one. So, first of all, in industrial measurements, the gross margin declined year over year, and the decline was not totally noticeable. explained by the spot comment component composition so the underlying gross margin excluding these was a bit bit softer not much but a bit so can you explain why that was the case and has there been perhaps a growth in the delivery organization in a stepwise manner so that i remember that has happened sometimes in the past or is it just normal volatility between different quarters.

Hey Matti, good to hear you. It's the latter one. It really is all explained by the mix. It's a normal seasonality and as you may recall we often have a slightly lower gross margin in the measurements during the first quarter when at least that has been the history.

The fixed cost increased, like you said in the report, and as you have flagged already before. And I'm just wondering how much of that increase, which was roughly 11 million plus, how much of that is kind of permanent increase going to your sales and R&D organization? And how much is the kind of non-permanent, let's put it that way, going to ERP companies? projects, et cetera. Can you make that split? It would be easier to kind of estimate what will be left, let's say, next year.

Yes. So I would say this way, it's a good question, and I would say this way that the majority of that number is really kind of permanent. As you put it, permanent increases into sales and marketing and R&D and as kind of a clearly a smaller portion of that goes into ERP and other systems that we are creating. And obviously, you know, even if our plan is that the ERP is going to be going live at the turn of the year or early next year, these kind of big projects will have a tail in them as well.

you may want to take that into account in your in your model as well okay good then regarding the order backlog which increased and the part that is scheduled for delivery for this year actually was quite a bit bigger than last year i mean the delta is over three percent so assuming that that would come to top line this year it is of of significance so did you anticipate this type of kind of quicker deliveries or the delivery schedule being different than last year when you gave this year's guidance so how well is this embedded in your top line guidance for this year of course it's embedded in our top line guidance as we have not changed the top line guidance so yes so it

Part of, obviously, as the business grows, the underlying order book for any given year, as long as we continue to grow, should grow as well. So that's part of the answer. And part of it is also a bit of a seasonality, as you know, especially in the weather and environment side. Projects come and projects go. And part of it is also that seasonality. that kind of orders sometimes come in a little bit earlier than when you go especially when you compare a quarter on quarter or a year on year five quarters but yes we are in a obviously a better position than as we should be compared to last year.

All right then finally the subscription sales the new line that you announced that you will report that grew fairly nicely year over year, but what kind of seasonality should we expect between quarters? Is this a SaaS type of revenue that we should be expecting to grow basically from quarter to quarter, at least to some extent, or do you see that there is some seasonality?

Excellent answer. Yeah, excellent question and thanks for asking that. Normally, you would expect obviously that there is no seasonality in subscription sales. In our case, there is a slight seasonality as part of the subscription sales is related to winter maintenance related activities. And for obvious reasons, winter maintenance is less in the summer months, so that causes slight seasonality in the numbers as such.

So basically, winter months are supposed to be a bit better than the rest.

Yeah, so it's still like maybe kind of what I just said requires a little bit more explanation. So it's a volume-based pricing, so the volume is higher obviously in winter months than in summer months.

Right. All right. That was all from me. Thank you.

Thanks, Matti. Thank you. And our next question comes from Pauli Loi from Inderes. Please go ahead.

Hi, this is Pauli Loi from Inderes. First, I would like to ask about price increases. There has been a period of higher inflation last few years, but maybe the situation is getting better with component availability and so on. So, have you been still doing material price increases in Q1, and how long should we expect price increases from last year to boost your growth going forward?

Yeah. Hey, Pauli. Good question. So, we did price increases again, like we did last year during the first quarter. I would say this way that the price increases did not have yet a significant impact on the first quarter numbers as it tends to be, so that there's kind of older orders are in and kind of some deliveries for the price. things that got sold and billed during the first quarter. So the impact kind of gets through the first quarter and then with kind of a fuller impact now in the second quarter and so on. No change as such from previous years. And then kind of going forward, it's too early to say, kind of all depends on the inflationary environment and so on and how we need to think about how do we look at the marketplace and so on, the environment, again, at the end of the year. We tend to do these pricing changes only very selective times of the year instead of all the time hiking up the prices, part of it being a reliable, predictable supplier and a partner to our customers.

Thank you. Secondly, I would like to ask about, could you give some additional update regarding the growth plans in Expedia and this subscription-based revenue? How is the business progressing and should we expect the growth to accelerate when all the new employees actually will get started?

Yeah, so obviously...

We have high hopes on this, and I have to say that if you look at last year, the performance was very good. And we expect that we will have a good performance during this year as well. Obviously, you need to find that in the marketplace every day and so on. And, you know, the percentages are obviously getting tougher as business grows and as the base number grows. And that's part of when the business grows, we need to be investing into the business as well. And, you know, to ensure that both the offering as well as the reach through sales and marketing remains in such a way that it supports the growth plans that we have.

Yes. And finally, what are your plans for new recruitments or other growth-related expenses? Are you still increasing your fixed cost base during January?

So, I'll remind you that we are a growth company, and in order to be a growth company, you need to be investing into the future in a continuous basis. That all being said, I think if you look at last year's expansion in sales and marketing and in R&D in relative terms, I think it was faster and bigger than what we've done in the past years and probably a little bit bigger than what we will be doing going forward as well. So I think the pace will be somewhat slower. All depending on obviously how the market develops and the opportunities that we see.

Okay, thank you. That was all from me. Thank you. Just a reminder, to ask a question, please signal by pressing star one. Our next question comes from Artur Heikkura from Avery. Please go ahead.

Hello, how are you? Hey, good to hear you. I have a few questions. First, the growth in America was quite strong compared to other regions. Could you mention the growth drivers in that region?

I think it came from various different parts. Life sciences being a good contributor to it, but by far not the only one. I think in both business areas, actually, we had a good year in Americas. We had good projects in weather and environment side and projects In industrial measurement side, as I said, life sciences was a good driver, but there were other segments as well. Too early to say really the insourcing, the insourcing as kind of how much of an impact on the macro side it has, but certainly it's a trend that we are benefiting from that as a new manufacturing is being established in North America, new economic activity is established in North America, and obviously that drives the demand. Maybe one more other thing, kind of a worthwhile, you know, it's not a major part of it, but worth noting is obviously the acquisition of Aries Weather, which actually was, during last year, all about North America.

Yes, then about orders of renewable energy. They declined for the second time in a row. So I'm just wondering if the comparison figures were that high or was there some extraordinary peak in the sales last year and how do you see the underlying market growing compared to Vaisala's trajectory going forward?

Yeah, so we expect it to continue to be a growth market segment, and as we said in the guidance, we expect it to grow this year. There's some seasonality clearly in – seasonality may be a wrong word, but there's – because it's really – say, which quarters are bigger than the other ones, not seasonality in that sense, but it's seasonality in the sense that different quarters are slightly different from each other, coming also from various different geographies. Worth noting also in renewable energy that during last year, we really clearly expanded the market presence, now being... in all geographies. This related also the investments into wind energy in different parts of the world and the use of the wind lidars being broader and accepted throughout the globe rather than it all started if I go two years back in Asia-Pacific more than anything else.

Then about spot purchases. To what extent do you believe that spot purchases will continue going forward?

The volume of spot purchases is already clearly lower than it was a quarter ago and a quarter ago. It was lower than the quarter before, so we are clearly seeing the market normalizing. part of when you look at our numbers you have to remember that the way we report the numbers is the usage of the components that we have purchased from the marketplace not the purchase itself there are still some specific components especially on the older component side where the shortages are not completely over, but the volumes and the absolute values are clearly lower already than before. So this is all related. If you think about the semiconductor vendors, the capacity investments first came through newer processes, higher value silicon products, and gradually now going through like all the processes and many of the industrial components are in the older process based on all the processes and some of our products are having very old components and obviously that market is the last one where the capacity improvements are going to be visible.

Okay so there is still spot components in your balance sheet which is going to be used in the coming quarters? Yes, yes.

But you should expect that it's going to get, it's a declining number.

Okay. Then about your cash flow, which was supported by decreased trade receivables. Could you open the reasons behind decreased trade receivables?

Yeah, I tried to do it a little bit already in my prepared remarks. So when you compare to – so as I said, it really looks like, with an exception of first quarter last year, the first quarters tend to look at VISA. We tend to have a lot of deliveries during the fourth quarter, which then get paid, some of them, lots of orders in and lots of – deliveries get paid in the first quarter. So that helps, and that's normal seasonality in terms of the ported trade receivables. So that's kind of what you are seeing. Last year, when you look at the comparison period, there were a couple of extraordinary things happening, one being really the market being very tight in terms of a component and therefore meriting for more of a investment into the components and component inventories throughout the first quarter last year as well as the then the air is weather acquisition which we closed during first quarter and that had a cash impact as well.

Okay. So your market outlook was left the same but Have you seen any signs of customer uncertainty or have customers made decisions or postponed orders, etc.?

We have nothing to report on that. The market uncertainty remains on a high level, as it has been throughout the first quarter and then some time already, and we do recognize that. high inflationary environment and the uncertainty, the overall uncertainty in the world. But nothing extraordinary that I can report.

Okay. The ex-weather was talked and I would like to follow, come it back. So first, is the business profitable? And if it's not, how long do you think that could make money, exactly.

So we are not commenting on the profitability, but I'll answer your question this way, that the gross margins of that business are very healthy subscription sales gross margins, on the same level as you would expect on well-run data as a service software, as a service business. Then when we look at the profitability on that business, there's a question of how much do we invest into the business itself? How do we see it narrating the future investments? And that will then determine, in a way, when you ask about the profitability itself. So it's a balance on obviously. How long, how much do we invest into it versus how much cash does it generate by kind of underlying. But the health of the business, I want to just emphasize the health of the business is very good.

Yes, I'm just wondering how long does it take to, you know, impact on weather and environment profits. But you cannot disclose that. No. Yeah, that's all my side. Thank you very much.

Exactly. Thank you. Maybe there are no further questions in the queue. With this, I'd like to hand the call back over to Kai Oistamo for any additional or closing remarks over to you, sir.

Thank you, everybody, for participating. And if you have any further thoughts, further questions, you know how to reach us. just ping Paula and we will get back to you and we are happy to give you more color or ask any questions you may have so thank you and have a great weekend thank you this concludes today's conference call thank you for your participation ladies and gentlemen you may now