Vaisala Oyj

I am Kai Österman, the CEO of the company, and I am joined here with Heli Lindfors, who is our CFO, our chairman of the board, Ville Voipio, and as well as Paolo Liimatta, who is our head of IR. As usual, I'll give a short presentation on the quarter, and then I'll open up the meeting for the questions you may have. So when looking at the first quarter, it's characterized in terms of weak sales, but at the same time record high order book. And diving deeper into the sales side first, it's partly explained by very high comparable. It's good to remember that the quarter that we are comparing the sales to was a record high in the industrial measurement at the first quarter of 2023. So comparable is very high. And the market activity last year dropped in the second half and then remained on a lower level. And as indicated for the first quarter and for the actually entire year, we do not expect a major improvement on the market itself. Slight improvement towards the second half, but no major improvement during this year. So the market environment was clearly more difficult in industrial measurement than what it was still in the first quarter of 23. Then we had internally two things that impacted on the net sales. One very much planned, which was our cutover in the ERP side, where we moved into the new ERP during the first week of January. And there was kind of a planned cutover week when we moved all the data and got the new ERP up and running and have been working on that ever since. But that meant otherwise a loss of, if you look at, for example, the factory perspective, there's a loss of a little bit more than a week in terms of not being able to produce And like I said, that was very much anticipated before and planned for. And what was not anticipated was the industrial actions during the first quarter, which after we had kind of gotten the new ERP up and running post-first week, there obviously was quite a bit of a learning curve. When you take a complicated system or systems and system integration, There's a lot to learn for different people, different functions, different jobs to operate in the new environment. No matter how much training you do, it's really then in the end, the efficiency comes from actually working with the new system. and then simultaneously having an industrial action altogether, a full working week, and in conjunction a constraint on overtime, so there's actually the overtime was forbidden by the industrial action at the same time. That meant two lost weeks in terms of manufacturing. And that meant also that while the efficiency was slower, especially during the first six, seven, eight weeks of the quarter with the ERP, kind of a climbing up and getting, kind of catching up what we lost in the efficiency was very difficult or actually impossible to do the simultaneous action through the industrial actions. And furthermore, the learning curve was slowed down as, you know, as I said, comes from repeated use of new tools. And when you work on the new tools, then you are on strike for three days, work for two days, strike for three days, work for two days. It actually puts you back into in your learning curve. So kind of a getting up the efficiencies obviously was impacted as well by the simultaneous ERP ramp up and the industrial actions. Then other things in terms of what happened in the first quarter, we launched a new purpose, new brand, new strategic priorities. And this is very important for the company and clarity on what we are doing and how we prioritize our business. our work, our strategy, our investments going forward and so on. I'll talk about that in a second. And the second big event I want to take up at this stage was the approval of the science-based targets for the company. which is reducing the greenhouse commitment and plan to reduce our greenhouse gas emissions directly and indirectly by the year 2030 was approved by the SBTI organization. And a little bit more on that later in the presentation as well. But first, let's start with the renewed purpose and the strategic priorities. The purpose for the company is taking every measure for the planet. What that speaks of is really the importance of being part of the solution for fighting climate change, bringing solutions to our customers and being very responsible in our own operations. Taking every measure for the planet I think describes extremely well what this company is really for, what is our purpose now and in the future. It's also reflected in the category, how we define what category we are in. We are in instruments and intelligence for climate action. And again, the climate action is very much highlighted here. We are determined to be on the right side of the history in climate action. We are going to be part of the solution. not part of the problem. In terms of megatrends, a slight update there as well. Climate change, for us, is not a megatrend. It actually is part of the purpose. It's way, way bigger than a megatrend. It's the biggest challenge that humanity is facing. But within that, energy transition and industrial decarbonization is actually a big megatrend as we see it. It's actually part of these kind of solutions on how companies are becoming more and more sustainable, both in energy production as well as in their own operations and own products and services. AI and process optimization is a very important trend for us, especially when you think about AI a little bit longer term. What AI runs on actually is uniform, excellent quality data, and that's exactly what we produce. So I think this is a very important megatrend impacting our environment for next years to come. And then the health and well-being, you may recall this from a past as well, very important as well, partly related to climate change, especially kind of from a reducing biodiversity perspective, as well as then aging population around the world. So the challenges in health and well-being are just going to increase. And again, we play an important part in creating solutions. The success drivers are much what you have seen before. In terms of strategic priorities, we clarified them. First one being growing in industrial measurements through breakthrough technologies. That's very familiar from the past. And then drive profitability as global leader in weather systems. This is just clarifying that our traditional weather and environment business for institutional customers. We play an extremely important role. The importance of this for the societies in terms of adapting to climate change is very important, saving lives, saving infrastructure, especially vis-a-vis the increasing extreme weather events. And we play a very, very important role in it. And we have a very strong position and we see it as a possibility to continue to improve on the profitability on kind of monetizing that position while recognizing that we also carry a very important role in that whole industry. expand an energy transition and build recurring revenue in data, speaking out the growth opportunities, utilizing the great knowledge that we have created over the years across the company in how to measure weather-related parameters, weather-related events forecast weather-related weather and different weather parameters and monetizing that then in renewable energy, which you can think about, if you think about wind and solar, weather really is the fuel for renewable energy. And then the recurring revenue, i.e., data software and solution as a service sales, which we also see as an important growth opportunity for us. And then very importantly, more internally than externally, is the simplifying scale. As we are a growth company, when we are looking for new things, we have to at the same time always be looking at our old ways of working, and challenge ourselves how can we be more scalable, how can we be more efficient, how can we do the working practices that have brought us here, do they still apply for the future or should we actually take a new look at it and simplify them as such. very important from a small actions to bigger actions and across the entire organization and I think very important part of the being a growth company story as well. When we talk about climate change and sometimes it gets to be a little bit abstract on how do we really as Vaisala, how do we contribute? What does it really mean in concrete terms? And there's plenty of these examples if you go to Vaisala.com and I've taken here three very different types of examples on how do we contribute into climate actions through our own products and solutions. through our customers. The first example on the left is a Finland-based startup, Carbonate, who transforms concrete from being an emission source to be an emission sink. It's sometimes overlooked that concrete is actually one of the single biggest greenhouse gas sources, and there has not been an efficient solution on how to turn that actually in absolute terms also a very big CO2 source to be not the source and in this case actually a sink and with our instrumentation we've been helping carbonate to actually move from great idea to actually into real scale production and providing a real solution for an important element on human society's carbon emissions. In the middle, very different example. This is very much about the use of data. It's a city of independence in Missouri, U.S., who actually uses and improves its response to snowstorms using real-time weather data provided by us. And here, again, extreme weather events are more and more frequent, and that means also in the wintertime. And being the response to snowstorms is an extremely important part. And if nothing else, if you think about first responders' ability to actually do their job in case of kind of extreme snowstorms, it's very important saving human lives and so on. And here we provide actually the great data based on which the city of Independence actually has greatly improved its capability to respond to these kind of challenges. On the right, shipment industry, sea freight actually is quite a big source of carbon dioxide emissions as well. And lots of different kinds of solutions have been proposed. And one of the most more promising is to actually use sails of different kinds. In here, it's actually a mechanical sail, wind-assisted propulsion through Norse power. And here, in combination of their kind of a mechanical sail and our data on wind, accurate data on wind, we can actually jointly create a solution which reduces the fuel consumption of a sea freighter from 5 to 25, up to 25%. So a very significant improvement in terms of reduction in fuel consumption, which is directly correlated into reduction on greenhouse gases. Then moving on to the science-based targets, where really what we, during this quarter, the news was that we got the approval on our plans for the reduction from science-based targets initiative. And Our commitment is reducing our direct and purchased energy-related emissions to half from the absolute level of 2021 to by the year 2030. Here we already are very, very far. Actually, only 1% of our greenhouse gas emissions actually falls into this category. Ninety-nine percent of our emissions actually fall in the category of scope three, which is the lifetime usage of our product solutions, as well as then all the components, materials, and so on used for creating our production solutions. And here, I think, Partly this reflects also our responsibility on this subject that we have been doing over the many years already. We have been 100% renewable energy for many, many years. Our efforts on this actually are things that many companies are going to be facing a little bit later. And I think it's quite suitable for us to be a trailblazer on showing how your the scope three emissions can be halved in relation to gross profit by the same timeframe, i.e. by 2030. A lot of work to be done, but I think it's a very important part of both the values of the company, and I think it will give us competitive advantage as we progress on this target. Then moving on to the financials. So as I said, slow start in the year in terms of net sales. The orders received, it reflected partly the continued lower market activity, especially on the industrial measurement side. And here we are, remember we are comparing to the first quarter of last year when the market activity was record high. The order book, on the other hand, ended end of first quarter to 190 million, which is record, I said record high, up 10% quarter on quarter, so from fourth quarter of last year. And if you look at how much of that order book is slated to be delivered during this year, that's 75% is planned to be delivered during 2024. So that actually gives us a good confidence for second half. Net sales wise, first quarter down by 15% year on year. And I already talked about the things that impacted on net sales. On one hand, high comparable, that's what the slow market indicates for And then simultaneously industrial actions in Finland and the ramp up of the ERP system, especially the six, seven weeks beginning of the quarter actually were impacted towards the end of the quarter actually in terms of our own efficiency to take orders, to deliver, to turn orders to sales. I think we are pretty much back to normal already by now. Then the decrease on net sales, we partly were able to mitigate by lowering the operating expenses during the quarter as well. The gross margin, slight decline from 56% to 54 percentage points. That's reflecting the lower volumes in the manufacturing side. So if I look at how well did we manage to get the pricing, for example, through, we were kind of quite successful. When we look at isolated debt, we were very much able to mitigate increase in inflation in the components and services that we buy. But the lower than planned volumes during the quarter meant that the factory overheads since the only subscale usage of the manufacturing was used that meant that that was then reflected in the gross margin as you can see. Then looking at more into industrial measurement, the EBIT margin was 13.5 percentage points despite the clear drop on net sales. So the net sales was actually decreased when you look at year-on-year, almost a quarter. Orders received decreased by 14% when you look at year-on-year. The order book, on the other hand, by end of the quarter actually was up by 5%. When you look at the orders received decline on year-on-year, the one thing which, apart from all the things that I already explained, one specific thing in industry measurement side was also that we took some orders in in anticipation on the on the ERP change already in December of last year, which otherwise would have been kind of recorded in the quarter. And we are talking about in order of magnitude, four or five million in terms of orders as such. Again, it was the same things in terms of a gross margin side here, very much so that the lower delivery volumes, lower level of business led into lower utilization rate of the factory that impacted the gross margin side. One highlight I want to take on the industrial measurement side is the services sale, which I'm very happy to report that that grew by 30% despite the weak top line development otherwise. Moving on to weather environment, here the top line decline, which was 7% when we look at year on year, I would put that more in terms of that's kind of within the normal changes between the quarters that we typically have in the weather environment, taking into account the project type deliveries, the timing of recognizing revenue and so on. where do certain deliveries fall, whether they fall in the quarter or whether they don't and so on. So here, the net sales decline was not really that much impacted by lower market, nor that much by all the ERP changes and the strikes. The difference also between the industrial measurements and weather environment is that the time from purchase or the order to delivery is completely different. Typically, in industrial measurement, you can think about from order to delivery is three weeks, order magnitude, whereas in weather environments, it's three months. So there's more time to kind of catch up, despite the same impacts on ERP and the strikes. there's more time to kind of catch up and, and less prone to in quarter quarter incidents in, in, in, in weather environment, the gross margin continued to improve. So, so that that was now 51%. That's very happy to happy to report that as well. That's a continuation kind of, and that reflects the continue, the success of continuation of implementation of our strategy, where we drive the profitability in the, in the traditional side of the business as, as, as, At the same time, we look for growth both in the renewable energy and in the data sales. And the subscription sales actually did grow by 50% when we look at the year-on-year number on that. EBIT also reflects the successful continuation of the implementation of the strategy, reflects the improvement on the gross margin as well. Typically in weather environment, the EBIT is very heavily in the second half of the year. And now being kind of a clear, when you look at that, despite it's a very low number in absolute terms, it's clear improvement from, from the year before. And when you look at the kind of first quarters or time actually years before. Cashflow wise continued on, on good level. Some decline due to the fact of lower net sales, but overall in terms of cash conversion and so on, very good level cash conversion on 2.4. And then if you look at the free cash flow, about 15 million in the quarter. Leading also into this very strong financial position, the title, as I said, I think on past couple of quarterly calls, the title of this slide has been the same for a long time and I'm very satisfied that it stays that way. So we have very low leverage on the balance sheet and it reflects the asset-light business model that we have. The cash that we have had at hand, it's good to remember that we do have a post-quarter, we have the dividends payout and so on. And then maybe the other news here worth noting is the new capex investment, 10 million euros over a few years, where we are investing in new automated logistics center here in Vantaa, whereby we can automate and get much more efficient handling of our warehouse. And at the same time, we anticipate that that will give us further improvement in efficiency in the factory itself as well. And we now anticipate in the early summer when the estimated start on this project happens. Moving on to the market and business outlook, no change in the market outlook, exactly the same as what you saw in our fourth quarter anticipation for 424. and likewise for business outlook remains unchanged. Net sales we anticipate being between 530 to 570 million euros and operating margin between 63 and 78 million euros. And I would like to conclude the prepared remarks here and open up for any questions you may have.

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 Pauli Lohi from Indears. Please go ahead.

Hello, Kai, and thank you for the presentation. I would like to first ask about fixed costs, which declined by 7 million euros, or 12% from the comparison period. Was there any one-off savings, for example, related to strikes in terms of your own company, or should we see this as a valid run rate in the future?