Vaisala Oyj

Hello and welcome to the Vaisala third quarter earnings call. Please note this conference is being recorded and for the duration of the call, your lines will be on listen only. However, you'll have the opportunity to ask questions. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star 0 and you'll be connected to an operator. I will now hand you over to your host, Kai Hoistamä, to begin today's conference. Thank you.

Thank you, and welcome also from my part to Vaisala's third quarter earnings call. I'm accompanied here with Pille Voipio, our chairman of the board, Heli Lindfors, our CFO, and Paula Liimatta, our head of IR. My name is Kai Hoistamä, I'm the president and CEO. So our third quarter really was characterized by increasing profitability following improvement in gross margin. If we look at our net sales, Slight decrease of 2% compared to the year before. If we take constant currency, that would have been actually 2% increase. Order book ended at 166 million. And as said, operating result improved year on year. EB ending up at a little bit over 25 million euros. and the cash flow from operating activities returned to what I would characterize as a normal level as we were predicting. So, if we take a little bit closer look into the numbers, the orders received wise, there was a decrease by 8% that came from both business areas. especially on industrial measurements, but I'll get to them in more detail when I go through the business areas. And if we look at the market segments, there are multiple different market segments which contributed to this. And again, I'll give you more color when we go into the different business areas. As said earlier, the order book ended up at 166 million. on roughly on the same level as last year, which I would characterize as a good level for given the market environment at the moment. I already mentioned in terms of a net sales, we experienced a decrease by 2%, which would have been a growth of 2% in constant currencies. when we look at what business areas contributed, how, so industrial measurement decreased and weather environment was in previous years level in terms of market areas, growth from renewable energy, roads and automotive, as well as then power and energy market segments. Moving on to operating result, as said, the operating result increased, and when we look at the contributors to this, the gross margin improved to 58%, and here we got a The benefit of significantly reduced component spot purchases now, which had now on this year only 0.7 percentage point negative impact compared to 4.2 percentage point negative impact same time last year. so improved gross margin and then on the other hand on operating expenses we were on at the previous year's level and there obviously when we look at that between the quarters within the year we typically have a seasonality in the operating expenses whereby the third quarter is the lowest within a year in operating expenses driven by holidays, lower activity and so on in the third quarter and same thing happened this year as in the previous years. That all being said, we continued our IT investments into the new ERP system, which we are planning to go live early next year, as well as we continued the key investments on sales and marketing, as well as in R&D to ensure the long-term competitiveness of the company. Then if I move on to a little bit deeper look into the two business areas, starting with industrial measurements, In industrial measurements, the orders received decreased by 14% when compared to the same time previous year. The decrease was in industrial instruments, life sciences, as well as in the power and energy market segments. The foreign exchange rates were also impacting here. The decrease would have been only 8% in constant currencies. And if we look at that, where specifically did it come from? The Chinese Yuan, Japanese Yen and Dollar contributed mostly to this FX impact. In terms of a market share, we believe that we did not lose any market share. We did not gain market share either, but the market share was stable, just like it has been during this year in the previous quarters. Then in terms of an operating result, we did improve the operating result despite the decrease in net sales. The net sales decreased in life sciences and industry instruments. market segments at the same time the gross margin improved to 64 percent and here the again the same thing as on buy seller level the positive impact on significantly reduced component spot purchases compared to the same time last year did contribute quite a bit positively to this and then the continued market environment where unfavorable market makes meaning that focus on older products as well as then some price pressure continued then burdened on the other hand on the gross margin. In operating expenses we were on the same level as the previous year and this all then resulted that the operating result was at previous year's level at almost exactly 14.7 million euros, 100,000 euros more than the year before, being then 27.3% of net sales. Moving to weather environment. When we look at orders received, we were roughly on the same level as the previous year. Then variations in the different market segments, meteorology somewhat decreased, very strong on aviation. I would characterize this as normal kind of variance. between the different quarters in these markets. This is what we typically experience as well. The order book increased by 7% to 131.5 million euros. And maybe it's worthwhile here as well that if we look at the orders received, actually slight increase if we again look at in the constant currencies. In terms of an operating result, the margin again improved. First of all, the net sales grew strongly in renewable energy roads. an automotive but then straight decreased in aviation in this quarter again driven by various different projects in aviation you know that you notice the discrepancy on strong in orders receive weakness in net sales and this is again the normal variation between the quarters in this more traditional market segments that we have. In terms of gross margin, similar increases in industry measurement. There's clearly a tailwind from clearly lower spot purchases or costs related to spot purchases now only being 0.6 percentage point negative now compared to the 2.5 percentage points negative. year before and then the other positive contributor to the gross margin was higher share of more profitable products and as well as then higher share and growth in the subscription sales which have a high gross margin and thus created the overall gross margin. Overall, the result of this was that the operating result increased to 13.7 percentage points of net sales. So good quarter in weather environment. Then if I move on to where are we faring within the year, so what was the situation after the first nine months of 2023? I would characterize it as the headline here says, resilience in net sales and operating result, slight increase to the same time previous year, a growth of 5%, constant currency-wise actually would have been 8%, gross margin on a similar level as previous year. And then operating margin, slight decrease, and again driven by the incremental investments that we have been doing on what I would characterize in a normal course of business in terms of R&D and sales and marketing, as well as then the significant investments that we have been doing into the IT system renewals. This all resulting into roughly flat on earnings per share if we take that metric. Cash flow-wise, as I said in the opening slide, we are back on a normal level in terms of cash flow. no nothing dramatic on this and as we've indicated before it's we've been able to deliver on the promises on getting kind of more normal levels in terms of a cash flow and this leading into if we look at the financial position again the same headline I've been showing for the past three years strong financial position so no news on this We essentially, if we look at our net cash position, we are essentially debt-free, and all the financial metrics show a very, very healthy company. Then maybe two interesting parts of the call for you. On the market development for the remaining part of the year, The only change in this would be that we see now a slowdown not only in life science, but also in high-end industrial instruments, driven by the uncertainty and uncertainty lack of new investments by our customers. So we are not seeing kind of big new factory investments, big new renewals of production systems or investments into warehouses and laboratories and things of that nature, which would be driving really the high-end instrumentation growth. Partly also at least in part of our customer base in their own business and this is not a reference to our sales channel but our customers change the sales channel that the sales channel has been relatively full and given the uncertainty in the marketplace it has been they have been digesting the higher than usual sales channel leading into again slower investment decisions than usual. Then if we look at the business output for 2023, no changes on this. So we continue to see net sales being between 530 to 560 million euros and operating result being between 65 and 75 million euros. So if I just summarize the third quarter, the profitability increased following the improvement on gross margin, net sales essentially flat compared to previous year, order book on a healthy level, operating result actually increasing to the same time previous year, and cash flow on a normalized healthy level. With that, I would like to conclude and open up for any questions that you may have.

Thank you. 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. If you change your mind and want to withdraw your question, it's star 2. Please ensure your lines are unmuted locally, as you'll be prompted when to ask your question. Our first question comes from a line of Pauli Aioi from Inderes. Please go ahead.

Thank you. I'm Pauli Aioi from Inderes. Thank you for the presentation. I would like to ask about the subscription sales growth. It slowed down some from the previous quarter. So this is seasonal variation or new normal.

It's a seasonal variation, and there's a little bit on the year before there was a one-time booking of... net sales also which made the comparable a little bit more difficult than in the second quarter. So that's part of the explanation and part of the explanation is seasonality. You have to remember also that we have a somewhat strange data sales business where one customer segment is this winter maintenance related for road authorities And those subscriptions typically last only during the winter month periods on the Northern Hemisphere, i.e., fourth quarter and first quarter. And therefore, we feel like maybe unusual to typical data sales business. We have a little bit of a seasonality in terms of just as an underlying part of the business.

Thank you. Then I have a question regarding the demand direction in the industrial measurements. Did you experience a downward trend in new orders during the quarter, given that the new orders are weaker than sales growth?

You are asking within the quarter, I guess?

Yes.

No, the answer would be no. It was weakness throughout the quarter. Okay.

Okay, then finally regarding the sales, marketing and admin expenses, they slightly declined year on year, so why is that? Have you done certain measures to cut costs?

Yeah, so as we indicated in the last quarterly call, we put in spend restrictions across the company on essentially a hiring freeze and kind of reductions and kind of significant cautiousness on discretionary spending, spending on external consultants, travel, that kind of nature.

Okay, that was all from me.

Thank you.

Thank you.

Our next question comes from a line of A.T. Jotika from Evli. Please go ahead.

Hello, this is from Edli. Thank you for taking my questions. I have just two quick ones. First, going back to the price competition, and we obviously saw it in China this quarter. Was the effect on cross-margin higher this quarter when comparing to Q2? And how do you see this going forward to Q4?

No, it was not, and I think here when thinking about the price pressure, as usual, more commodity type, more low-end type of products, more you typically also experience price competition, so that my comments on the mix and the price pressure were kind of related in that sense.

Okay, thank you. Then the second question on the project sales, those have been on lower level throughout the year. How do you see it on Q4 and then going forward to 2024?

We are not giving guidance on that level on Q4 and so on, I would say, but it's a fair question on the quarters that have passed. I would put that in a within the normal variation between, like typical to our business, we have not received or booked any major orders like Ethiopia was last year. Obviously, some of the Ethiopia project was implemented during this year, but nothing new on the same kind of a scale has been coming in. Obviously, quite a bit of smaller project, but nothing to the scale of Ethiopia or Vietnam in the past years or that type of a thing. Okay, that was all from me.

Thank you. Before we proceed to the next question, as a final reminder, if you would like to ask a question, please press star 1. Our next question comes from the line of Matti Rikkonen from Carnegie. Please go ahead.

Hi, it's Matti Rikkonen at Carnegie. A couple of questions. First, regarding the gross margin in industrial measurements, you already said that the spot component burden was kind of relieved in Q3. But even if we exclude the kind of spot component additional cost from this quarter and the one year ago quarter, there is a quite big difference, actually 2.7 percentage points. So I was just wondering that When you said that the unfavorable product mix had an impact on gross margin, was that the only kind of component that was weaker in addition to negative operating leverage, of course? Or did you make any cost savings or some changes in the cost base in the delivery organization in IM that would explain that?

Yeah. Hey, Matti. So, good question. And so, short answer is no. And so, they were kind of the biggest contributors, as I was saying, was the unfavorable mix and related to that kind of a price competition in more volume type of products, which continued, as well as then the then obviously as you yourself said the operating leverage that our business leverage is kind of the cross margin scales well with increasing volumes and then and some not so well when decreasing volumes so there's a little bit of that as well all right and then your APAC sales were down is it

mainly related to China or is broad based in the whole of APAC?

It's mostly impacted by China and you have to remember that as I said in terms of a currency is the biggest head which actually came from yen or yuan, yen and then dollar and all of the APAC sales obviously are foreign denominated.

All right. And then do you have some kind of idea how the Chinese demand would continue after Q3? Is there any talks with the customers or your delivery partners? Do you have any insight what is happening inside China?

Yeah, so obviously we are on a daily basis talking to our customers and so on, and And I would characterize it this way. After being in China just relatively recently, there are some new government policies trying to revitalize the overall economy. I mean, our demand is to some extent related to overall kind of like how well that investment activities and industries overall there. So, there's some kind of government policies, more kind of more favorable government policies on that side. On the other hand, the uncertainty, they are not immune either for the uncertainty in the world, so demand side especially. Think about, for example, electric vehicles, while we are not selling any kind of, we are not exposed to electric vehicles per se, but even if they are increasing, they are probably not increasing the sales as much as they were forecasted, which then goes back to say lithium ion battery manufacturing, where we are supplying and You know, the investments to do that, is really on a lower level this year, despite the fact that the electric vehicles, for example, have been selling well, but not as well that somebody might have forecast. And I'm using it just as an example. So China is not an isolated, but it's also related to it, and very much the exports that they are selling outside of China.

All right, thank you. I think the rest of my questions were already asked in the presentation. I think there was quite a good set of kind of clarity or transparency regarding the end customer sector, so thank you for that.

Thank you, Matti.

That's all from my side.

Thank you, Matti.

There are no further questions, so I will hand you back to your host to conclude today's conference.

Thank you. Thanks for listening. And in case you have any further questions, you know how to contact us. Paula is the right person, and we would be happy to jump on another call, another occasion to give you any more or answer any more questions that you may have. So thank you, and have a great weekend. Bye now.