Vaisala Oyj

This is Kai Östömö, and welcome to Vaisala's fourth quarter 2022 operating result call. I'm joined here with our chairman of the board, Ville Voipio, our CFO, Eli Lindfors, and our head of IR, Paula Liimatta. And I am Kai Östömö, the president and CEO of the company. So welcome, everybody. If we look at the fourth quarter 2023, it really was characterized by strong order intake. If we look at year-on-year-wise, the orders were up 14% and really driven by a very strong performance on weather and environment side. Also, the operating result margin was up from the comparison period from the previous year, and cash flow activities continued strong. Let me dive deeper into the numbers. But before I do that, let's look at the highlights for the entire year. There are many other things than just delivering the numbers for a company to really ensure the competitiveness in the long term. We successfully continued renewing our product portfolio. There are multiple product launches across the company, both in the weather and environment side, in different areas of it, as well as then in different parts of industrial measurements. Very notably, if we look at the orders, I think the highlight of the year really was the airport surface observation deal to Kuwait, which was 20 million euros worth and was actually the biggest deal that Vaisala has done in its history. Very happy to see that coming in. We continued our journey on the sustainability side, couple things on that. The science-based targets we committed to that initiative last year submitted our plans to the science-based targets organization, and we are expecting their approval of our plans now, in fact, in any week now. In practice, the good example of the kind of things that we can do even in our offering for the sustainability was the new EcoSonde that we launched to the marketplace where we actually reduced the amount of plastics used in the sonde by two-thirds. And I just want to highlight Sounds trivial, but making sure that there's no compromise whatsoever on the performance, the accuracy, reliability in a very harsh environment that the sun goes through, being basis also for any accurate meteorological forecast in the world. I think it's a great example of the capability and the commitment for the company when we were able to do this for the satisfaction of our customers. Our employee engagement remained on a very good level, in a strong level. We did a measurement of that in the fall as well. That's a very good indication also on really that the, as employees, are really the biggest asset for almost any company, but especially for a company like Vaisala, where our performance really is based on the knowledge and engagement of our employees. This is very happy and satisfactory to see really the results also in numbers. And then lastly, the new ERP system, we went live early this year, as we have been indicating throughout last year. And we got there successfully. The system is up and running. We are delivering delivering our customers, we are billing, we are getting orders in and we are producing and things are working. Obviously, kind of getting kind of a new, completely new system in a big organization has always a learning curve and we are well progressing on that learning curve. And I'll talk about that a little bit later as well. Moving on to orders received in fourth quarter. As I said, the quarter was characterized by strong order intake. The orders received increased by 14% compared to the corresponding time previous year. The increase would have been 16% if we would have measured in constant currencies. As I said, really strongly contributed by weather and environment business area. In terms of the order book where we ended, again, a record high order book at the year end. And again, in business weather environment on the back of very strong year and the fourth quarter in terms of order intake, that really drove the order book increase. And here in the middle, you can see actually the division for our order book between this year, i.e. the things, the products and the orders that are expected to be delivered during this year versus what are then in the longer term order book that we have. So the dark blue is for this year and the pale blue is for the coming years. And you have the comparison also on the side to the same time at the end of last year. When we look at the net sales for the company, the net sales increased in fourth quarter by 4%, and I'll just remind you that the comparison period in industrial measurements was quite high. We had a record high fourth quarter in in industrial measurements a year before. And despite the headwinds on the industrial measurements, we were able to actually increase the net sales, as said, by 4%. If we looked at in constant currencies, it would have been 8% increase in net sales year on year. Very much driven by, again, a very strong performance on weather and environment business area side. If we look at the market segments, the net sales was really driven strongly by aviation as well as power and energy market segments. And then on the other hand, there was a decrease when we look at the year-on-year side on life sciences market segments. Then when we go into operating result in fourth quarter, the gross margin improved by a little bit short of percentage point. And here it was very much contributed by almost complete lack of spot purchases, as we have been indicating before, giving us a three percentage point increase tailwind compared to the same time previous year. The operating expenses increased somewhat in practice. They were almost on the same level despite obviously the salary inflation and inflation overall that all companies experienced throughout the year. I'll get into a little bit more on the gross margin as I go through the business areas. Starting with industrial measurements, here orders received decreased by 8% year-on-year. If we would have measured again on constant currencies, it would have been half of that, i.e. 4% decline compared to year-on-year. As I said earlier, the comparison period was was very strong, record high fourth quarter in 2022, but nevertheless declined, and this was really driven by the change of the market environment that happened during the second quarter in 2023, and then remained on more muted level during the rest of 2023, and that's the environment that we experienced also in the fourth quarter. We did not lose market share. It really was driven, this decline in orders received really was driven by the size of the market being lower than the year before. Order book likewise ended up about six million lower than the year before. Again, having been at the record high year before. Then we move on to the operating result in industrial measurements. First, starting from net sales, the net sales decreased, especially on life sciences market segment. The overall net sales declining by two and a half million euros. If we would have actually measured this net sales in constant currencies, it would be an actually one percentage point increase compared to a year before. The gross margin improved by a percentage point. Again, as I said earlier, driven by the tailwind that we had from the absence of spot purchases. The difference between the tailwind that we got and the realized gross margin really comes from two aspects. The things that worked against us was that our capacity was planned for a higher than materialized volumes, and that drove the the factory overheads to a higher level than anticipated. And then secondly, also as natural in this kind of market situation, increased price competition as well. The operating result decreased compared to the previous year, ending up with 15.1 percentage points of net sales. Moving on to weather environment, a different kind of a story and continuation of what we have been experiencing throughout 2023. The kind of starting from orders received, they grew strongly or very strongly during the fourth quarter. If we look at the measured currencies, 22% up from the previous year. if we would have taken constant currencies almost 40%, i.e. 37% year-on-year growth. I think it's fair to say that the orders received grew very strongly during the fourth quarter. Obviously, we had the fortune of actually getting the Kuwait deal in during the fourth quarter, so that contributed significantly to this. But even if you do the math, we would have had an increasing cross margin, increasing orders received even without that contribution. Then moving on to operating performance in terms of net sales, we had again a good quarter on that. nice growth on net sales and very satisfactory also to see that the net sales grew on all market segments, very strongly on aviation and strongly in renewable energy market segments. A little bit similar story in the gross margin again, gross margin improvement during fourth quarter compared to the previous year. Here, Again, the tailwind from absence of component spot purchases. And then what worked against us was kind of similar things as I mentioned in the seal measurement side. Operating result improved significantly. I'm very happy seeing where we ended on operating result being 8.3% each point of net sales. And this really, it's worth mentioning that the biggest improvement, biggest contributor to this was the traditional side of the business, what we internally call the flagship business. And it's very, very satisfactory to see the strategy being executed and then seeing the results also of strategy being executed and driving the flagship business really for profitability rather than growth. Then if I look at the overall financials for the entire year, I would characterize the entire year that Paisala showed resilience in a relatively difficult and hard to predict marketplace. As said, when we look at the entire year, net sales grew by 5% in constant currencies, would have been 8%. Cross-margin improvement by a percentage point, again, helped by the component spot purchases. And operating result improving also slightly from the previous year. And it's worthwhile here to mention that we continued our investments for the long-term competitiveness in R&D, in sales and marketing, and we were in the middle of very large IT system renewal throughout the entire year. The earnings per share were a euro and 35 euro cents. And if you look at the cash conversion, clear improvement from the previous year being 130%. If we look at the operating cash flow, The net working capital decreased mainly due to the decrease of trade receivables, as you can see on this slide. Dividend side, the proposal for the annual shareholders meeting from the board is 75 euro cents. for the year, which is clear improvement. And when you look at the trend that I am showing for the past 10 years in the slide, it's a nice growing trend and really shows our execution against our dividend policy, which is increasing dividends, kind of following the increase on the performance of the company. Here, when we look at the financial position, It's been the same headline for the slide as long as I can remember being a strong financial position. Very happy to see, especially in a high interest rate environment, and essentially being a debt-free company and the cash conversion improving. So it gives us a very good resilience on the turbulent market and gives us also an opportunity for us to... invest in the right things. Then moving on, how does the ongoing year look like? When we look at the market outlook for 2024, we see growth from the market growing in power and energy, liquid measurements, and renewable energy, while then stable in industrial instruments, life sciences, meteorology, aviation, and roads. Here I would like to add a little bit color on industrial measurements and life science. We do expect that they are stable to the level that we experienced throughout the second half of last year, after kind of a level correction during the second quarter of last year, for the first half of this year, and then we do expect an improvement on those two markets through the second half of this year. We expect that the industrial investment cycle will start in different industries, different speeds, but we we do anticipate that that will start to occur during the second half of this year. Then a few words on kind of a short term. As in the press release was mentioned, we are, during the first quarter of this year, we are now, as I indicated earlier, now live with our new ERP system, and we are in a process of scaling that and getting to the full efficiency of it, which is quite natural. We are not experiencing any kind of fatal things or anything like that, but it's natural when you are running a cross-company system, which is completely new, and lots of people need to be using it Lots of learning curve. We need to kind of get through that learning curve as fast as we can and work through the kinks that there may be along the way. That's what we are doing. However, now combined with the industrial action here in Finland during exactly at the same time, that obviously takes away days for climbing that learning curve. and kind of happening at the same time that we anticipated that will have impact on our performance during the first quarter. We expect that we are going to be through the learning curve in kind of an assuming kind of a normal level of operations throughout the company by second quarter of this year. And what does this all mean in terms of the numbers? If you look at the business outlook, the net sales estimate for the full year is in the range between 530 to 570 million euros, and the operating result between 63 to 78 million euros. So as a summary, looking back into last year and especially fourth quarter, a good fourth quarter, especially in weather environment, a good last year. Actually, I would say very good last year in weather environment for last year. Big changes in the market environment in the industrial measurement side, but I think we showed resilience in a difficult market environment. I think it gives us also a good basis going forward. I'll stop here with my prepared remarks and open the floor for any questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Matti Rikkonen from Carnegie Investment Bank, Finland branch. Please go ahead.

Good afternoon. It's Matti Rikkonen, Carnegie. I have four questions. I'll take them one by one. The first three ones are related to gross margin and the spot component impact. In the weather business, the underlying gross margin is which exclude the spot component costs, they recovered fairly well in 2023. So was that due to sales mix or just higher top-line volume?