Vaisala Oyj

Good day and welcome to today's Vaisala second quarter 2023 conference call. This meeting is being recorded. At this time, I'd like to hand the call over to Vaisala president and CEO, Mr. Kai Oistamo. Please go ahead, sir.

Thank you and welcome for the second quarter, Vaisala second quarter call from my side as well. My name is Kai Oistamo. I'm the president and CEO of the company and I'm joined here with the Our CFO, Eli Lindfors, Päivi Liimatta, our head of IR, and our chairman of the board, Ville Voipio. I think I have lost the presentation machine. Sorry. Sorry. Yep. So, if I... Characterized the second quarter really was about uncertain market and actually pretty good performance in an uncertain market. So if we look at the numbers... Here we go. If you look at the numbers, actually our net sales grew by 9% and We had a higher EBIT than year before same time. That being said, the growth came from a different place than it has been for a while now. So growth and orders received, net sales was really driven by weather and environment, a great performance on that side. And at the same time, more muted performance on industrial measurement side. That also led into us giving a revised outlook on July the 17th, and I'll repeat that at the end of my prepared notes. So if we start with orders received, really on a company level grew by 5%. If we take in a constant currency, that would translate into 7% growth year on year. orders received really grew from, as said, weather, environment, business area having a great quarter, at the same time, decrease in industrial measurement, business area side. If we look at the market segment, the orders received grew strongly in roads and automotive having a great quarter, as well as in renewable energy, as well as then in power and energy market. That translated into order book being 167 million at the end of the quarter, order book being flat year-on-year on industrial measurement side, and the increase to the order book came from the above-mentioned market segments, automotive, meteorology, renewable energy, and weather environment, business area overall. Turning into net sales, a nice 9% growth year-on-year in terms of net sales growth in constant currency that would translate into 11% growth year-on-year on a company level. The driver behind was weather, environment, business area, while industrial measurements decreased in terms of net sales compared to the same time previous year. In terms of, again, market segments, same market segments, renewable energy, roads and automotive market segments, as well as the subscription sales grew as well nicely over the same time previous year. Then if we look at the operating result, year-on-year comparison on a company level, I'll start with the gross margin. Gross margin was on the same level as the year before. The component purchases continued to have a negative impact this time, a little bit less than a percentage point, so 0.8 percentage points. The operating expenses continued to increase. This is on the back of both the investments that we did already last year in terms of sales and marketing in R&D and the renewal of our IT systems. We are in the middle of renewing our ERP and the related systems, and that continued into this year, and that was then visible, of course, on the operating result line as well. Then taking a little bit of a deep dive into the business areas and starting with industrial measurements, the second quarter orders received in industrial measurements decreased by 6% year on year. If I, again, take the constant currency, this would translate into 3% decline in orders received. And if I look at where in terms of market areas, And then industrial instruments, life sciences are the ones which really contributed to the negativity this time around. The order book stayed flat when we compared to last year's, same time last year in terms of the ending order book that we had after second quarter. Net sales-wise, industrial measurement had a 3% decrease year-on-year. The constant currency, that would have been a flat zero. And where did it come from? Life sciences market segment was the one which this time around was the weak one. And the gross margin side, a significant decline to 59.7 percentage points. The issues that contributed to this were obviously the, as I mentioned earlier, component spot purchases continued to have an impact on when we look at it at this time, like said, less than before, but still 1.2 percentage points negative impact on gross margin. But then specifically, maybe to this quarter, the price pressure and unfavorable mix burden to cross-margin. If I open that up a bit, what we saw in the marketplace was that due to the uncertain market environment, economic environment, the higher interest rates, our customers postponed re-evaluated, mainly really postponed their industrial investments. And that then translated into softer demand into our products. We did not see really cancellations of the projects. They really moved forward in time. That would be one. And then geographically as well, if I look at kind of specifics, China, was clearly softer than we anticipated during the second quarter. There was some softness anticipated already. Typically, after the party congress, there's a little bit of a regrouping time in the investments in China. This time, that and the uncertainty and maybe the the slowness on picking up post-COVID in the economy contributed to China being clearly a slower and softer market that we anticipated. The softness in the marketplace also then led into more of a price competition, especially in China, which then is visible in the gross margin as well. did not see any new competition per se, we did not lose market share or anything of that nature. So in a summary, price pressure, unfavorable product mix was the cause of this due to the uncertain, really an uncertain economic environment around the world. So all this resulted in decrease in operating result as well to 6.8 million euros during the quarter. Very different story on weather environment side. A great quarter, I would characterize. Strong growth in orders received. Biggest contributors being roads and automotive, renewable energy, subscription sales, Order book grew by 8 percentage points compared to that same time previous year. And growth in terms of operating and cost appliances would have been actually even 16%. So, as I said, a great quarter in orders received. Similarly, in net sales, a very strong quarter for weather environment. 18% year-on-year growth, constant currency, that would have been even 20%. Then where we come from, I've already mentioned renewable energy, excuse me, roads and automotive, meteorology, as well as then the subscription sales. The gross margin improved also from previous year. over three percentage points and here the low clearly lower components for purchases compared to previous year contributed that to that but also I'm very happy to report the good execution of our strategy where we see that growth of our newer market segments newer businesses where inherently there's a higher gross margin now taking bigger share of the business in in weather environment also being visible in the cross-margin during the second quarter, i.e. stronger share of the sales from renewable energy, stronger share of the sales through subscription sales as well. And that all led into an increase in operating result compared to the same time previous year as well. Then if I take a look at the first half overall, first on the cash flow side, we had a good cash flow from operating activities increased as we had been indicating before. That being said, the somewhat softer quarter than anticipated uh related that the uh the uh our component inventories uh did somewhat increase and uh and tie up a little bit of a capital uh but despite this said operating operating uh cash flow actually did increase during during the first half our financial position continues to be strong no material changes in that during the first half compared to the previous years. Then into market development and business outlook. Longer term, we believe that the market trends and the market position that we have has not really changed. The underlying themes in terms of Investments in the world into life sciences, pharma, biopharma, investments in the world to renewable energy, as an example, have not gone anywhere, and we continue to be longer term. We are situated very well in terms of a growing market. Now, in terms of a Outlook for the second half of this year, we continue to believe that the majority of the market segments that we serve continue to be growth markets, and the exceptions being meteorology and aviation. As before, the outlook is that they are stable as both of them are mature markets, as we have indicated before. And all of this then led into us revising our business outlook for 23, July 17th, in such a way that we now estimate, we narrowed the net sales range, and now we estimate net sales for this year to be in the range between 530 to 550. 60 million euros and our operating result being in the range between 65 to 75 million euros. So a mixed quarter. Uncertain underlying market led into softer market in industrial measurements and weaker numbers on that side. On the other hand, very good performance on weather environment side and a good execution on the strategy as well. Overall, really just a Recapping the net sales, we did grow net sales close to 10% year-on-year and expansion on EBIT side as well. And I just went through the outlook as well. So I'll stop my prepared remarks here and I'll open up the line for any questions you may have.

Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star 1 on your telephone keypad. If you wish to cancel your request, please press star 2. I will pause for just a moment to allow you to signal. The first question comes from Pauli Lohi from Inderes. Please go ahead.

Hi, this is Pauli Lohi from Inderes. First of all, I would like to ask about how have you responded to the increased price competition in China?

Pauli, good to hear you. So it has been, as it's a market price, and it has meant that we had to be, we always have to be competitive in a marketplace. So we have been needing to be, yeah, like I said, competitive in the marketplace, which means that we have had to not be as aggressive in price increases as we anticipated before.

Okay. You changed the verbal communication about component availability or their impact on your margins. So has anything changed in that area since Q1 or should I read that the component availability has normalized completely but impact comes with the lag due to the inventory cycle?

Yes, so thanks for the question. Maybe I should have even in the prepared remarks been even clearer on that. So we see the component availability to continue to improve. Our previous outlook was that by end of the year, we see that the impact of the component shortage related spot costs is going to kind of disappear or not be material and then we continue to believe that so it's exactly like you said characterize that new commitments are largely gone there's some lag on on through the inventory that we already have in place thank you then i would like to ask about whether an environmental business area there was a

strong cross-margin and very strong product sales. Do you see any temporary factors here or do you find this cross-margin level is sustainable?

So I'll divide up the weather environment into three pieces. So the traditional side of the business, our flagship business, that tends to be a little bit of a So changing from quarter to quarter, there are changes in terms of the projects, there's changes in terms of a mix, so that has not gone anywhere from a historical side. That being said, then the growth, as I said in my prepared remarks, we have been strategically investing into B2B-led projects. growth underlying inherently growth markets, renewable energy being an example, subscription sales being another one, where the gross margin in the marketplace is clearly higher than the traditional side of the business. And as we execute this strategy over time, there should be, if we are successful with the execution of the strategy, we should be able to increase the gross margins in this side of the business.

Thank you. Makes sense. So finally, I would like to ask about fixed costs. Do you expect to hire more people in the remainder of this year and other ways to invest into fixed costs despite market cycle cooling down in the industrial segments?

Yeah, we have obviously taken measures on this already in terms of slowing down the hiring and being extremely prudent in even replacing people. There are obviously roles which you should use common sense and hire, but for business critical roles, but we really are very mindful in spending additional operating expenses.

Okay, thank you very much. That was all from me.

Artu Heikola from EVLI, please go ahead.

Hello, this is Artu Heikola from EVLI. You've downgraded life sciences and high-end industrial measurements guidance from growth to moderate growth. So could you elaborate what this in actual means and Will it be possible that there has been some kind of boom or overinvestments within these industries?

Yeah, so first of all, it just reflects what the market now has been during the second quarter. So that's basically... And for life sciences, somewhat also during the first quarter. So... That's basically what that downgrade was. In terms of industrial instruments, it's harder to say whether there was like the impact on investment boom during the post-COVID years or not, as the end markets for industrial instruments is so broad. And very, very hard to make a statement on that. In life sciences, there probably was a little bit of an investment boom during the past two years for obvious reasons. That being said, we do see borders coming in life sciences side as well.

So it's just slower for the time being. Okay. Then about the industrial measurements cross-margin and price competition, especially in China. Do you see it continuing? And was there any price competition in other markets?

I'll take the last one first. So there was some, but it was kind of specifically hard in China. And I think this is related also if you look at the economic activity, the GDP growth, growth rates around the different regions as well, if you clean it up from services related to GDP kind of contributions. So I think it's kind of a good part of the explanation there, why specifically in China. And then in terms of a continuing, our visibility, as you well know, into our sales channel is relatively short or quite short. So it's very hard to make longer-term comments on it and where we are today. We certainly... I believe that this is kind of, again, I repeat what I said in my prepared remarks, that if you look at the underlying trends that we are serving, I don't think they are going anywhere. The electrification of the vehicles, the renewable energy investments into more efficiency, lower carbon dioxide prices, emissions, alternative energy sources, has not gone anywhere.

Then about the weather environment, strong water. Have you seen there in any market segments some kind of uncertainty or even demand slowing down? And how do you expect the demand continuing in weather environment?

So not the same way at all in weather environment. And that's, if you look at even the history, I would say that's quite normal as well. If you think about the cyclicality of the weather environment business, especially the traditional side of the business, which is largely public business, money and that's not sensitive to the cycles the same way as private or private enterprises are. So the planning cycles and investment cycles are very different. So I'm not expecting the underlying dynamic really to change on the flagship side of the market in renewable energy. Hard to believe that there would be a slowdown in investments into into renewable energy, new wind parks and so on around the world. So I think the dynamics are somewhat different when you look at the weather environment. Then in terms of predictability between the quarters, as I responded to Pauli, the flagship market, if you look at the history, There's been a little bit of a volatility between the quarters, depending on what projects come in and what projects don't. But if you look at a little bit of an aggregate number, that side of the business tends to be quite stable. And then we do have the growth and the increasing portion of the sales gets from these growth markets, as I said.

Okay. Well, that's all from my side. Thank you.

Thank you. As a reminder, to ask a question, please signal by pressing star 1. Next question from Matti Rikkonen from Carnegie. Please go ahead.

Hi, it's Matti Rikkonen, Carnegie. I have a couple of questions. I'll take them one by one. First of all, regarding the competition that you mentioned, have you lost business volume to competitors?

No, we have not lost market share, if that's the question. We believe that we have not lost market share, nor have we seen new competition arise.

Right. Then secondly, how are the customers that you won during 2021 and 2022 treating you at the moment? So have they stayed with you Or is there kind of, do you see that there would be a return to earlier supply based on the pricing questions? So are they still with you or have you seen kind of departures?

We have not seen any departures. As we spoke during when we won those customers, once the customer changes, they tend to be quite loyal and making the changes happen in this way. It's quite hard. So answer, simple answer, no.

All right. Then thirdly, there's quite a lot of movement in inventories at the moment in the channel and with the end customers. Do you have a good visibility into that, first of all, and then Do you think that there would be some inventory correction taking place, if not at the end customers, then maybe in the channel? Is that something that would cause the sudden drop? Have you seen any indication of that?

Yeah, so first on the visibility on the channel, excuse me, so obviously, so just a reminder for everybody, 50% of our, roughly, 50% of our sales measurements is direct, and 50% is indirect through evaluated partners. And obviously, the channel visibility, when we talk about the direct channel, is much better than through partner channel. That being said, our products, just a reminder, our products need to be calibrated typically depending on the application. Sometimes it's even regulated at the time interval that it needs to be recalibrated. So it kind of ages in an inventory. So carrying a lot of inventory and also the huge amount of mix that we have it would be hard to kind of like bet kind of big volumes into the kind of a longer term inventory by the channel. So that's just a kind of a reminder on what the environment is. All being said, there may have been some inventory issues and it goes back to the China comment, that in China we do have the vast majority of our sales close to 100% goes through Pagma channel. So the channel is longer for us in China, so there may have been some of the channel inventory correction there during the quarter.

All right. Then Regarding your lower guidance for this year, does it basically assume that the softness in industrial business will continue as soft as it was in Q2? And then whether it would basically at least offset some of that with better than expected performance?

The answer... I would say this way, that we don't see, so first of all, the weather environment, as you know well, there's some changes with the quarters from, as I said, now in the call multiple times. So overall, I think weather environment underlying trends, the strength in the growth businesses, I am pretty confident about. But then the kind of mix between the quarters, when do certain quarters come in between the quarters, hard to predict on that side. And on the industrial measurement side, I would put it this way. We don't expect a sudden complete recovery of the market back to kind of a last year, all kind of historical growth levels. That being said, there's an uncertainty as well, as I said earlier in the call as well, that our visibility into the channel from orders to sales, so order to cash conversion for us is extremely fast. So the visibility into the channel is relatively short or quite short. So we are looking at also the macro environment, and I don't think the macro environment is much going to change during this year. High interest rates are going to continue.

All right. Then now that the top-line growth trend has clearly turned to a softer one for you, Do you expect that you can continue with the current cost base in the industrial business, or do you think that it would be appropriate to consider that you would try to look at the costs more intensively, maybe introduce some cost savings or not increase some of the costs that you planned for this year?

Yeah, so first of all, in terms of that, slow down in cost increases and being mindful, very mindful in terms of increasing resources and so on, of course. I mean, that's any sensible management would do. That all being said, I just want to repeat what I said earlier. I think the underlying trends in that business have not gone anywhere. Hard to believe. that the investment into efficiency, into low carbon dioxide footprint, investments into renewable energy type of solutions, investments into new pharma, biopharma solutions, where all of a sudden the trends would change. Nothing indicates long-term that that would be the case. We also need to be mindful that we don't do anything destructive, which would be destructive to our competitors as well, given that the belief that we have that the underlying market trends continue to be there longer term.

Right, good. Then finally, just regarding the price, price competition that has been mentioned oftentimes now. Should we kind of think that the industrial business weakness in Q2 was kind of coming from two sources? So it's the lower volume altogether and then your ability not to put through the price increases that you plan to do for this year because of the competition. So being the second element. Is there an additional third element that the prices would be actually cut from your earlier price levels? So not just you not being able to raise the prices as you planned, but also that there would be a lower price compared to your plans. Would that be the third element in the top line decline pattern?

Regarding the third piece, we have a kind of a very... clear process in terms of giving discounts and everything else, and we have not changed any of those policies during the first half.

All right. Very good. Thank you. That's all from me.

Thank you, Vakti.

Thank you. And it seems there are currently no other questions in the queue, but this I'd like to hand the call back over to Kai Oistamo for any additional work. Closing remarks over to you, sir.

Thank you. Thanks, everybody, for listening in. And in case of any further questions and inquiries, you know where to reach us. Paola is the right source. And we would be happy to jump on another call and clarify any further questions you may have. So I wish you a good weekend and happy continuation of the summer. Thank you. Thank you. This concludes today's conference call.

Thank you for your participation. Ladies and gentlemen, you may now disconnect.