Vaisala Oyj

Welcome to Vaisala's bi-annual January, June and second quarter report. I am Kai Österman, president and CEO. I'm joined here with Heli Lindfors, our CFO, and Paula Liimatta, our head of IR. The second quarter was characterized by strong growth in terms of orders received and net sales and good profitability. If we look more into the numbers, first notion is that both business areas performed well after the slow start that we had in the year, especially on the industrial measurement side. We grew net sales by 13% year on year. The order book grew by 14% when we compared to the order book that we had in the beginning of the year. And then orders received grew likewise by 14%. This all resulted in operating margin being 15.9%. on a very good level, especially given it is second quarter for our somewhat cyclical business. More qualitatively, I would say that the industrial measurement, it was great to be seeing that back on growth. I'll go more into the details in a little while on both business areas. On weather environment, I would say it was a strong quarter in all aspects. The two things that I would like to kind of raise at this point in terms of specific things in the quarter, in terms of a business, the high growth in subscription sales, 16%, was very pleasing to see. And likewise, the services sale growing, especially in the industrial measurement side. It really was great to see the good work that we have been doing building that business, building the capabilities and the channels and productizing the offering as well, getting it under control together with the increased embedded base that we have been building over the past few years really kind of came to fruition in the way that it did in the second quarter was extremely pleasing. In terms of the market view on the year, the year 2024, remains unchanged. I'll go more into details on that at the end of the presentation. And then the business outlook, as you may have noticed, we narrowed the outlook as we are in the middle of the year. And we have a little bit more grounds, better grounds on making the estimates for what the annual performance is. I'll get more into the numbers later on. But I'll start with the strategy implementation. And this may now start to look familiar. This is a strategy one pager on what we are, who we are, and what are the key strategies, strategic priorities, what's our purpose as a company. and what the megatrends we are living. Reminding that we are, it really is the canvas that we are looking at is climate change. We think that that's by far the biggest challenge. And therefore, for us, as we are on the right side of the climate change, we are part of the solution provider for our customers to be more sustainable, be more be able to improve their performance vis-a-vis climate change, we think that that's a huge opportunity leading into the purpose of the company taking every measure for the planet. A couple of things on the quarter, highlighting on the strategy execution. The bubbles on the right, the one you see on the bottom row, drive profitability as a leader of weather systems. This is something that I have been talking about over the couple of quarters already. I am extremely pleased to see how, when we changed the strategy some two and a half, three years ago, on really driving this for profitability. Now that really has been coming to fruition in a systematic way. We have been able to improve. I think this is now a seventh or eighth quarter in a row, which is a big contributor, especially on the weather environment side. in the improved profitability. And I think it's a great example of how clarity on the strategy and then clear execution can lead into good results. The other thing on a key competence side and capability in terms of, for example, taking full use of digitalization and AI, we continue to invest into our own capabilities. And I would like to also take the opportunity to welcome Girish Agarwal to join the company and the leadership team being the chief digital and information officer. I think he brings along kind of capabilities and experience to help us to be even more nimble, effective and really be able to take the capabilities to the next level. Then a couple of examples of how this strategy is kind of realized in practice in different parts of the company, different parts of the offering that we do. First on the left, we have the the continuous monitoring deal with the warehousing and distribution facilities of PostNUD in Sweden, whereby PostNUD is capable now, through our equipment, make sure that their warehouses and distribution facilities stay in the desired parameters, verify that the medical products, the pharma products distributed stay good and they are safe to use for the consumers and the society. Extremely important part and I think all of us can relate to that. In the middle, the example on the weather environment, more of a traditional side, is the new weather radar and wind shear products in the airport in the Dominican Republic that we built. And here is, again, a a place in the Caribbean where the harsh weather can be really harsh and it's extremely important to have the right information to really ensure the safe takeoffs and landings and the capacity of the airport and it's a great example of how we contribute to this. This may be also a good moment to comment on the on the sizeable weather radar deal that we received from Spain, Spanish authorities. As you have heard, it takes time from the award to actually signing of the contract, but we are at the final stages of this, and I would expect that coming weeks, if not coming days, actually, we get this finalized, but it is not yet in the order book order numbers that I am presenting today. The last one is the real-time air quality data now visible on BMW group cars, so minis and BMWs. And this is a great example, kind of building on the weather data that we have been providing to the same cars, not only BMW, but other brands, many other brands as well. But here it's building on the capabilities we are building, kind of bringing more to the customers and not only showing the weather data, but also the air quality data that then helps the drivers to adjust the indoor airflow in polluted areas and then decide which way, where do they want to park, where do they want to maybe then kind of exit the car and so on to avoid health risks. But now moving on into the financials and taking a little bit more deep dive into them. First, on Vaisala level, as said, the orders received and net sales grew strongly. The order book ended up at the record high, almost 200 million, up 14% when compared to the beginning of the year or end of last year. and net sales increased by 13%. Here, as I will go through and when I look at the business areas, two things maybe to note on the net sales side, especially on the industrial measurement side, we have to take into account when we look at the year-on-year comparisons, it's good to note that the second quarter last year was difficult for us, so the comparison period when I may have said it in the first quarter call that it was difficult this time around, it's fair to say that it's this little bit easier comparison period, taking nothing away from our performance. And on the other hand, on the weather environment side, the net sales on weather environment side, as usual, it's between the quarters, there's movement in terms of where the project sales are realized. And in this quarter, we are a little bit benefiting from a relatively lower first quarter where We had less project sales realized in the first quarter. Now we got more in the second quarter. So this kind of shifts between the quarters are normal in the weather and environment side. As said, the services sales increase was a big contributor, especially on the industrial measurement side for the growth. And it's also good for the health of the business. The gross margin improved to 57%, almost two percentage points up compared to the previous year. The business mix contributes to this, and then also the higher net sales increases the scale. And then, as we have noticed earlier as well, that the business is highly scalable. Higher net sales easily then converts to a higher gross margin often in our business. In terms of industrial measurements, it really is satisfying to see back on green numbers. Orders received increased 8% when we compare year on year. The order book up 3% when we compared to the end of last year. And remembering that the end of last year, we did take some orders in anticipation for the ERP change that we had during the first quarter and anticipating some difficulties on short-term delivering at that point or taking orders actually at that point. Then net sales-wise increase 7% year-on-year. As I said earlier, yes, the comparison period was a little bit soft last year. And a big contributor to the net sales growth was the services sales, which actually, when we look at industry measurements alone, it's 43% year-on-year growth, which is really satisfying to see. Gross margin improved likewise. Again, same explanations, economies of scale through to the volume increase as well as the favorable sales mix. And it's great also to see the EBIT being back on the 20s, so 21.7% EBIT margin for the quarter. Then on weather and environment side, As the headline says, strong quarter in all aspects. Orders received grew 18% year on year. Order book, 17% compared to the end of last year. Net sales, the same, 18% year on year. As I said, what you have to note in the quarter, though, is that growth was mainly driven by large orders received during the past quarters, and there's a higher percentage of realized project sales in second quarter, for example, when you compare to the first quarter. So these kind of quarterly shifts, as you can see from the graph as well, are typical in this type of a business. Nevertheless, very satisfying quarter. Subscription sales, as I said, 16% growth year on year, good progress on that strategy. And then due to the economic scale, high net sales, high volumes, the gross margin improved as well, leading into EBIT margin of 12.2%, almost doubling from the comparison period year before. From a cash flow perspective, we continued on a good level. Cash flow from operating activities decreased a little bit despite the increase in net result, and this is due to the increase on the net working capital, mainly driven by actually the growth and the the example would be that both the increased net sales will will require more net working networking capital as well as then the order book that we have does require uh especially in the project business uh does it kind of when it grows it dies more and more networking capital so that's actually explanation for this we did have a dividend payment of of the 27.2 million in the quarter as well. Likewise, it's worth to note that we prepaid our bank loan by 15 million during the quarter as well. Free cash flow in the quarter was around 18 million euros. Then when we look at the The half a year, as we are an engineering company, the headline is equation. So weak first quarter plus strong second quarter equates to solid first half. And I think actually that equation is spot on. And we kind of came back from the weak quarter, both in terms of our weather environment, like I said, timings of some of the project revenue, as well as then especially on the BIM side, on the difficulties that we had due to the ERP change and simultaneous industrial actions during the first quarter. And now in the second quarter, we did not experience any of those disturbances in the quarter as such. And then when we look at the half a year EBIT margin 11% up from previous year, two percentage points, a little bit over two percentage points, and likewise EPS nicely up compared to the previous year. Maybe on the operating expenses side, Worth to note the two things. We obviously launched the ERP already in the first quarter and now we are gradually seeing decline on the investments into the IT, basically the ERP side. We are still... increased level still in the second quarter and continues to be in the third quarter, but gradually it is declining. And then the R&D costs, as the bullet point says, minus five percentage points year on year. Here it's more on being prudent on where do we spend the money partly also insourcing kind of some of our external R&D that happened already last year now we are getting the benefit of it and then the part of it is also the the reduction in force and the rescoping of the R&D that we did at the end of last year in the weather environment in the traditional side of the business, which kind of all contributed to the small decline on R&D costs. Financial position remains strong, low leverage on the balance sheet as usual. And just as a reminder, we have a very asset light business model on it. I don't think there's really anything to highlight maybe on this slide other than really the points that I made, strong financial position and through the asset-light business model and low leverage in the balance sheet. Then into the market and business outlook. The outlook remains unchanged. So this is unchanged from the start of the year. Exactly as we said from the beginning of the year, the markets remain unchanged. uncertain and predictable. There's lots of uncertainty in terms of the timings of investments and so on. The overall economic outlook in the world remains uncertain. Timings of, for example, interest rates cuts and so on, as we all know, are very difficult to predict, leading into a host of uncertainty in customer behavior and end-user behavior. That all being said, we see the market as we said earlier, we are seeing this year the market size being roughly on the same level as what it was in the second quarter last year in the industrial measurement side. That all being said, we are seeing early signs of of recovery happening in North America, not really anywhere else at the moment. It's still very early, and we do expect that this early recovery will kind of continue towards the second half of this year and the end of the year, so being kind of more visible at the end of the year. But then sort of uncertainties, how I would characterize still at the marketplace today. And with all that, we then specified the business outlook for 2024. We narrowed the range on net sales from 550,000 530 million to 570 million to 540 to 570 million. And then likewise in the operating result, we narrowed correspondingly. Earlier we had from 63 to 78 million euros operating result anticipated. Now we are saying we would be in the range of 68 to 78 million euros. With that, I would like to conclude my prepared remarks, and I would like to open 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 Indias. Please go ahead.

Hello guys and thank you for the presentation. I would like to first ask about the order intake in the weather and environment business area. It was very strong with Spain order not included in the book. So what were the main drivers there?

It actually came from multiple different sides, mainly on the traditional side of the business. Like when you look at the order book in a weather environment, you have to remember that the subscription sales is not in the order book as it's subscription sales. And then the bulk of that then is really from the traditional side of the business. And it really came from no particular big order. There were... few mid-size orders like in kind of between five to ten million euros but there's nothing special in the quarter that drove it. It really was a steady stream of orders that just coming in.

And do you see any particular trend behind those smaller pieces?

Not really. I mean, part of this is also a bit of a... timing thing that when sometimes the orders coming in as you see the Spain is a good example that that it's very difficult to predict when can we actually book book an order and sometimes there's more red tape and sometimes less so so there's bit of a timing thing part of the good performance overall in the business I have to say though is is that we did invest we had a technological debt on the traditional business and the product side some time ago and I'm talking about like five six years ago and we have been over investing into that business to pay back that debt over the past years and now like since some time I think we have a very solid offering and the kind of or going to be paid back the debts. And that's probably part of this, that we are performing well in the marketplace.

Okay, that's clear. Then about the high service sales growth in the industrial measurement. Have you changed something in your business model or is this linked to a certain fast-growing product segments or where is this coming from?

There's no specific change in this. I think, as I said on my remarks and And what we said in the release as well, that this is partly really a result of systematic work that has been done for quite some time now. And we have been able to systematically increase the share of the services sale and also the professionalism and the operational efficiency, how we run the business. But also, I have to say that when you go back, post-COVID times when we grew very rapidly, also our embedded base grew quite a bit, you know, a 20% year-on-year growth. Now that is all in the embedded base, and we are now taking the benefits of the embedded base. They start to be of the time that the renewals of the services contracts and otherwise being available for the service contracts. So the embedded base is significantly higher than some years ago.

Okay. And do you think this is...

Yeah, no, I don't think you are not going to see the kind of a sustaining 40% growth. And so I think this is more of an exceptionally high at this quarter. Again, taking nothing away from the quarter, but it's an exceptionally high at this quarter.

Okay. Then regarding your fixed costs, what are your main investment or spending priorities in the coming 12 months, assuming that the demand starts to pick up as expected?

So investment side, we continue to invest into R&D, like two biggest investments that we do are R&D and then on the other hand, on the go-to-market side. And renewing the product portfolio, it's a systematic work, which we continue to do. And that goes into various sides of the business. So there's no kind of a particular thing that I want to take up. It's more, this is a long-term and kind of a long-term strategy and kind of a continuous long-term investments. That's part of our business model and the formula, and we continue to do that. On the sales and marketing side, we need to be continuously then be agile in terms of investing into when, you know, the certain markets, for example, require more direct investments, direct people, then we do that. And the mix between indirect, direct, for example, in the industrial measurement side, we need to be agile on this and be kind of managing that carefully. So the sales and marketing will be the other one which we will see us continuing to invest.

Okay, that was all from me. Thank you very much.

Thank you.

The next question comes from Matti Rikkonen from Carnegie. Please go ahead.

Hi, it's Matti at Carnegie. A couple of questions. First of all, if we look at the industrial measurements business, was there any change in the order momentum during the quarter. That means that was it kind of fully even throughout the quarter?

Thank you, Matti, for the question. So I would say if you take kind of a meaningful accuracy on this, it's relatively even. I think this business really is driven by how many working days. Remember that a big part of the business is quite transactional. A big part of the business is kind of selling kind of small unit volumes. And there, if just the number of working days affects it, then that then effects the net sales in the quarter more than anything else. During the half, I would say, as I said in the market outlook, that early signs in the US of market starting to recover, but like I said, early signs, nothing major yet.

Right. So basically you are saying that just more working days.

If I look at the months, that's like, if I look at the months, that's still the biggest driver on kind of what the nest set sales, for example, will be in the months are.

All right. Then I continue with industrial measurements and the services part that was already discussed to some extent. I have earlier, thought that services is mainly calibration. And I was wondering how can that grow so much in this quarter and also in Q1. So I would like to kind of repeat the question that is there a sudden volume increase or have you kind of made any changes to your pricing or what explains that that in one quarter this can be such a high number. Was there some exceptional payment that is one of, or could you kind of discuss this a bit?

Yeah, so no, there was nothing exceptional, no one deal, no one payment, no one customer. This comes from a very large number of transactions and customers as well, so like the rest of the business in the industrial measurement side. And a big part of it really is the fruits of the systematic work that we have been doing this for years. And then the second thing is, really the embedded base grew quite a bit. Remember that, that the embedded base grew quite a bit in the years where we grew industrial measurements by 20% year on year. And there's a certain lag when we get then the, especially the calibration for, as you just mentioned, you know, the calibration contracts sometimes lag the sales as the products are calibrated as they are shipped and sold.

Okay, but I still fail to understand that why in so far in two specific quarters the calibration activity would have been so much higher that explains the big number. And if it's really so that it's caused by the bigger base that you have built over several years, why isn't it kind of repeatable during at least this year and then maybe later?

stabilizing after that but how can it be isolated in two quarters that's my question well it's probably not going to fluctuate like a drastically between the quarters so i just want to manage the expectation that that this is a kind of specifically high quarter kind of and i'm not expecting over 40 percent growth year on year and obviously kind of things catch up and so on so it's It's always the question on the relative numbers when you look at that. It depends what you compare it to.

All right. Of course, the absolute euros are fairly small. There you go. But of course, the deviation in percentage is large.

Yeah, but it is, you know, it's 10%, over 10% of the net sales in industry measurement side. It's size of part of it.

So, it's an important part. And then, All right. And then when you talked about industrial measurement gross margin having benefited from favorable sales mix as well, does this relate to these services? that we're increasing?

Not so much. No, no. What I was referring, actually, thank you for the question. Actually, that's a good question. And maybe I should have said it in the prepared remarks as well, that if you look at the geography mixes here, I think more than more meaningful than anything that, as I said, the North America has picked up a bit. While we continue to see China as a very challenging market, the uncertainty in China continues. If I look at the now last week's third plenary session, outcomes seems disappointing. It's early days though. We have not seen the concrete actions yet, but nevertheless, what the communique has been, it seems vague in the minimum. So the uncertainty and the real pickup has been waited for in China. It has not happened and I'm not expecting necessarily to happen anytime soon either. So the mix between the geographies, there's a kind of a gross margin. We are benefiting from that. And then also what type of products we are selling. We sold more profitable products in the quarter than some other quarter.

Okay, fair enough. Then regarding the guidance, if you think the drivers of top line revision Is the kind of higher guidance in terms of more condensed to the upper end, is it due to better momentum in weather? and less downside risk in industrial? Or how should we look at that?

Yeah, I think I would say this way, that what we did, as you said, is we raised the bottom end of the guidance. And what it actually means is that when we started the year, there was quite a bit of uncertainty in the year. and there was quite a bit of uncertainty obviously in how will the year go when we gave the guidance and that was exactly the moment when we were in the middle of the ERP change and in the middle of the industrial actions which we did not have a visibility to that whether they would continue longer than what they did and led us into relatively broad range in terms of our guidance and now we brought it what I would say kind of back to a normal level in terms of a breadth of the guidance. having half a year kind of under our belt and seeing where the business is heading.

Okay, all right. And then regarding the margin guidance, again a bit kind of puzzling, or it's related to the cost savings that you have been making. So if you assume that part of the margin improvement was due to cost savings. When should we expect that the fixed cost would increase again and catch up the kind of short-term gap in planned investments? You said something about that, but should we kind of expect that fixed cost would start to increase already in the second half, or what's the kind of timing of those costs normalizing.

Yeah, as I said in the previous quarterly calls, we are trying to look at this very carefully in this very exceptional, unpredictable moment that in the business model, we see the fixed costs or R&D investments and sales investments grow in order to grow the top line. Given the uncertainty, we have been more prudent than usual in terms of controlling the costs and selecting how we do things and so on. As the market continues to grow, I would anticipate that we would start to invest more into R&D and sales. This we do by really like, given the situation, we need to be just kind of a little bit more short term kind of managing the uncertainty. When do we start and how do we start? When we get more confidence, then we will start.

All right. Thanks for that. And then finally, two technical things regarding the large Spanish weather radar tender wind, is the complaint period for competitors over now? So you said that it's about weeks or days?

It is over.

Okay, good. And then secondly, could you remind us where does the rental income come from? Do you have some spare income? room in your facilities or where does it actually come from?

No, no, that's a good idea, but no. So it actually comes from the wind lidar business. So the very large wind lidars we do when people do this kind of, especially offshore wind resource assessments, we do that partly through a rental business model as well.

Okay. Excellent. That was all from me. Thank you.

Thank you, Matti.

The next question comes from Atjotika from EVLI. Please go ahead.

Good afternoon. This is Atjotika from Edli. Thank you for the presentation and congrats on the strong Q2. I have a couple of questions left here. Firstly, still on EM cross-margin, could you roughly quantify how much of the margin increase was due to the volumes and how much of it was due to the improved sales mix?

I would say this way, both contributed to it. Probably the increased net sales was a kind of, if we compare to, especially to first quarter, the increased cross margin, increased volumes where the bigger contributor, when like sequentially, I would have to look at the numbers to answer properly to you when we compare to year on year.

Okay, thanks. Then another question on the IM services. So basically when looking at the historics on absolute level, those have kind of stayed at a similar level between the quarters per year. Now those are clearly at a kind of new absolute level of net sales. Do you think this is a kind of sustainable level going forward this year in absolute terms?

I really don't want to give any guidance on that at this stage. uh, it's, uh, like, like you said, it's, it's, uh, give me now for two quarters, a little bit higher than, than earlier. So, so let me be a bit prudent and, and let's get back to that on, on, on the third quarter call.

Okay. Yeah, understood. Uh, then, uh, lastly from me, I think I saw from on the weather and environment side on the orders received, uh, you commented on orders decrease strongly in renewable market, which is a growth market for you. Is this more kind of a timing issue or do you see something new in the underlying market?

It's actually mostly changing the behavior by the customers. So again, it's kind of related to the, you know, now the availability shortages are completely over. Our delivery capability is very good, as in any other business. And kind of the, from order to delivery, time has shortened, so the customers don't see a point in ordering months before when they know that they can get it kind of a shorter as well. So it's more of a change in the behavior than anything else. And it kind of goes back to that maybe kind of like when you look at the historical numbers for the past some years, the component shortage drove those, even those from order to delivery a bit higher than what they could have, should have at that time otherwise.

Okay. Very helpful. That was all from me. Thank you.

Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Walt Terry Rossi from Danske Bank. Please go ahead.

Hi Kai, thanks for the presentation. I only have a few questions left. So first on the sales, were there any deal slippage from Q1 included in these strong Q2 numbers?

Not really a good deal of slippage, no. But as I said in the prepared remarks, the project sales tends to be in industry measurement side, sorry, in weather environment side, something that it's, you know, customer acceptances and things of that nature, things that are beyond our control. So they kind of move from quarter to quarter and there was some movement between the first quarter and the second quarter. That's why you saw a weaker first quarter net sales and sort of like explains partly the higher net sales in the second quarter.

Okay, but in Q1, there was some discussion that you lost some some orders because of the industrial actions, but... Yes, and that was mainly... That was all in industrial measurement side.

In industrial measurement side, there was nothing particular, nothing in the first quarter and second quarter in terms of deal movement or revenue movement. My comment was purely on weather environment. All right.

Understood. Thanks. Then still on the profitability, could you once repeat again, what were the main drivers behind improved profitability in the weather and environment segment?

I'm not sure if you already touched this, but... Yeah, happy to. Part of it is in terms of higher volumes leading to better cross margin. So it's kind of the volume scaling. So that's a cross margin comment. And there always is a question on between the quarters on what actually the mix is and so on. So that you have to always take into account like a quarterly basis into account. But then also in the OPEX side, you know, the General comments that I said for the company apply very much also for weather environment that we had the operating expenses in control. We were mindful on where we spent the money. And in the R&D side, as I said in the comments, we did restructuring on the weather environment side late last year, where the kind of savings are now seen in the numbers as well.

All right, clear. Then on ex weather or the subscription business, is it still negative on EBIT level and do you still expect it to break even in the near future?

It still is in the negative numbers and we still have a line of sight on when it will become profitable.

All right, thanks. Then on the outlook, you said that you see early recovery signs in North America. Can you specify what are these signs that you see?

So when we look at the deal flow, when we look at the kind of inquiries, and to some extent also our sales, that there's small but encouraging signs. To date, I emphasize small, but still.

All right, thanks. And lastly, you raised the lower end of your guidance, but you still note that there are some uncertainties in the air. What would you say that these uncertainties are or where do they race from?

It's all in the market. It's all in the market. As I said, the market is very uncertain and people continue to be hesitant on making new investments. When we just talked about, for example, the early signs of recovery starting in North America that can easily go away. Will there be similar signs in the second half in the other geographies? Time will tell. A lot of different things can impact that. So I think the market is just very difficult to really predict accurately at the moment.

Do you have any internal expectations regarding the other geographies when they would recover?

No. Well, as we said, in general, we are saying that this year the market remains largely on the same level as the second half of last year. There's some seasonality in every year, obviously, that the second half tends to be slightly bigger than the first half. We expect that to be the case also in this year, but then other than that, it's just too early to make like definite statements on anything.

Okay. Fair enough. Thanks a lot for the questions and congrats on the good result.

Thanks a lot, Teemu.

There are no more questions at this time. So I hand the conference back to the speakers.

All right. Thank you for very good questions. And if you have any further questions, you know where to find us. Please direct those questions to Paula, and we will be happy to address them as they come. And in the meanwhile, I wish you very happy remaining of the summer.