Vaisala Oyj

OMXH:VAIAS

Earnings Call Transcript 2019-Q1

[Kjell Forsén, CEO & President]

Hello, and good afternoon, everyone. Welcome this very beautiful spring afternoon to have a look at Vaisala's first quarter results.There are a couple of Vaisala people present here. We have our Chairman of the Board, Mr. Raimo Voipio.

[Raimo Voipio, Chairman of the Board]

Good afternoon.

[Kjell Forsén, CEO & President]

Our CFO, Mrs. Kaarina Muurinen.

[Kaarina Muurinen, Chief Financial Officer]

Good afternoon.

[Kjell Forsén, CEO & President]

And the Investor Relations Manager, Paula Liimatta.

[Paula Liimatta, Business Controller & Head of Investor Relations]

Good afternoon.

[Kjell Forsén, CEO & President]

And my name is Kjell Forsén, President and CEO of the Vaisala Group.I think we have a very strong result from the first quarter, the result. Those of you who follow Vaisala may remember that we had issues last year when it comes to order intake. Still, we managed to end last year on a high note due to very strong fourth quarter, also order intake-wise. And last year turned out to be quite, quite good. But how did it all then carry over into first quarter of this year? Due to the low order intake we had, the opening order book for this year was significantly lower than a year before. So order intake is something that we hence have put special emphasis on. And let's see how it all worked out then.Well, orders received is up with 30%. I would say that is pretty much, actually, record big improvement we have here. Order book is up with 13%. Net sales is up with 10%. Now we all, of course, have to remember that we do have 2 acquisitions in these figures. One of them was present last year for 1 quarter. The other one came from 1st of January. So that, of course, has to be factored into these figures.Gross margin, I would say, quite nicely up with 2% to 53%. Operating result due to amortizations, one-off costs and increased R&D is on a breakeven level. Earnings per share is EUR 0.01 this time of the year, per share. Cash flow is strong as usually in Vaisala, up from previous year.Orders received, I would say, this is quite a nice ladder we are looking at here. So in comparable rates, this time around, we did have a positive currency effect. In comparable rates, in improvement is 27% in orders received. And then if we exclude the acquisitions and look at the organic growth, where the currency effect is still in, the improvement is 15%. So quite a solid development, I would say.Order book, which I mentioned was low at the start of the year in the Weather side of our business, is up year-on-year with 13%. If you look at quarter-to-quarter, comparing to last quarter of last year, we are up with EUR 30 million. This translates into a very nice book-to-bill of 1.34. That's orders compared to net sales. We have both business areas improving here. And of course, we do have an effect from the acquired businesses, from Leosphere and K-Patents. That effect is EUR 9 million. Then we do have some projects that take several years to implement. And if you look at the order book schedule for 2019, that amounts to EUR 101 million at this point in time.Then over to net sales. And here we do, of course, then have the currency impact, which actually amounts to EUR 2 million, which is split roughly equal between both business areas. We have net sales growing in both business areas. If we look at it geographically, it's EMEA growing, Americas growing, Asia Pacific going slightly down here in relative terms. But it's -- if you look at the volume, the business is roughly on last year's level, also in Asia Pacific. And I think this is quite good considering the low order book we had to start the year with on the Weather side of our business. And also, it is imperative to keep in mind that on a typical year, first half of the year, and especially first quarter, is really slow on the Weather side of our business. In that sense, this is a very typical year for the Weather side of our business.All right, let's continue. And here we have the operating result, which then is on a breakeven level here, roughly. And there are some factors affecting it strongly, which we haven't seen before, 2 of them. But the one in the middle here, you see is the R&D increase. So we continue to do that. And as I have mentioned previously, this year, we will invest or put more emphasis on the Industrial side of our business, whereas the Weather R&D will be basically flat as compared to previous year. But maybe you, Kaarina, want to give some more details around amortizations here.

[Kaarina Muurinen, Chief Financial Officer]

Yes. As we acquired Leosphere and K-Patents during the last quarter of 2018, we are now starting to do the depreciation of intangible assets. And some of those intangible assets are depreciated now during the first half of this year, like order book and the other intangible assets are depreciated over from 5 to 8 years. And the impact of the purchase price allocation-related depreciation was EUR 3 million. And then we had a one-off expense provision amounting to EUR 2 million, that was also exceptional and was then impacting the first quarter result, which was on a breakeven level.

[Kjell Forsén, CEO & President]

All right. Thank you, Kaarina. I think you can carry on with this slide as well.

[Kaarina Muurinen, Chief Financial Officer]

Yes. The cash flow was EUR 13 million higher than what it was during the first quarter a year ago, and the main reason for the strong cash flow is collection of receivables. And we had very good net sales during the fourth quarter of 2018, and that resulted in strong cash flow. We have also earlier been paying the pension insurance for the whole year as a prepayment and that's not possible anymore. And that's also positively affecting the cash flow.

[Kjell Forsén, CEO & President]

Okay, thank you. And then let's go over and have a closer look at the business areas. So let me start with Weather and Environment. And this is the area where orders received really picked up. You see the figure here of 36%. If we eliminate the currency fluctuation, growth is 34%. And there are some really big orders we got during the first quarter, which we didn't really see last year. Biggest one is the one we have to Argentina for 31 airports, renewal of the Weather portfolio there. And that is a project which is starting in last quarter of this year, so it is generating invoicing from, you could say, end of this year and onwards for like 2 years.Then the second largest we had is from Swedish road authorities, Trafikverket. They are renewing the road weather stations and replacing the current ones with Vaisala weather stations, so very, very large order as well. There were others as well. You could say that it was not just these 2, but other large orders also to an extent we did not see during last year. So really positive first quarter in that sense.Then, of course, we all through the presentation, need to keep the acquisitions in mind, but if you eliminate those and look at the organic growth of orders, that is up 20%. Net sales, however, if we then eliminate the acquisitions, is down with 9%. And that is due to the opening order book we had for this year. And of course, also due to the seasonality, which I just mentioned. All right. And then the operating expense increase is really visible here. As you can see, operating result is negative EUR 4 million here.All right. What about the Industrial Measurements then? Well here, we do have quite a nice increase also in orders received. It's up with 19%. However, if we eliminate K-Patents, the organic growth is up with 6%. And here, we now have also eliminated the currency effect. Order book is up with EUR 2.5 million and net sales is up 23%. And that is 19% in comparable currency rates. Organic growth is 6% with the currency tranche eliminated. Hence, quite an increase in operating expense, which is then affecting the operating result, which would be quite outstanding otherwise, I would say. R&D, as I mentioned previously, is going up during the year for Industrial Measurements. And then we had amortizations and the one-off costs which is affecting this business area.Let's go on. And here we have a summary of the key financial figures. I'm not reading through that. I think we dealt with most of them. I just mentioned a couple which we hadn't talked about, such as the capital expenditure, which is basically double from last year. This is the 2 building projects we have ongoing coming into the picture here. The depreciation, amortization and impairment, that is stemmed from the acquisitions we made, of course. And cash and cash equivalents is strong, as I think we previously mentioned, despite the dividend payment. But that is, of course, then in Q2.Let's go on and have a look at the guidance here or market outlook. First, market outlook is that we are basically seeing a flat picture on the Weather and Environment side of our business. Some variation between the areas. Not really any huge movements there. We do expect a slight increase in demand for digital solutions. No changes in Industrial Measurements. Situation is pretty good in all regions and the business we had in the fourth -- first quarter very much supports that, that is really the situation. We expect the demand for continuous monitoring systems to develop positively. And also here, first quarter results indicate that, that is really the case. Liquid markets, this is where K-Patents, the acquisition we made, comes into the picture. Expect that one also to develop positively. Power transmission has been a struggle. We have introduced it a couple of years ago. Volumes have not been what we expected. Also this one, we expect to have a fairly positive development during this year finally.All in all, commenting on the 2 acquisitions we have made, I would say that the situation for both of them, also market and demand-wise, is positive. And we are doing well integration-wise. And we are going, actually, according to plan, so the situation is positive there. Business outlook, no changes here. Net sales will be in the range of EUR 380 million to EUR 400 million. And the operating result EBIT will be between EUR 25 million and EUR 35 million. And we have the amortizations and one-off expenses affecting the EBIT quite a lot, actually.That ends the presentation. And now over to your questions, please.

[Paula Liimatta, Business Controller & Head of Investor Relations]

Thank you, Kjell. Let's start with questions from the live audience here in Helsinki.

[Matti Riikonen, Financial Analyst]

It's Matti Riikonen, Carnegie. Maybe some housekeeping questions first. You mentioned the rental contract provision for EUR 2 million now booked in Q1. Will that be all of that kind? I think you earlier, in Q4, you mentioned about EUR 2 million to EUR 3 million provision, but should we expect that, that is now the whole thing, EUR 2 million?

[Kaarina Muurinen, Chief Financial Officer]

We are not aware of other one-off expenses at the moment.

[Matti Riikonen, Financial Analyst]

Okay, good. Secondly, related to the amortization. And you mentioned that part of the amortization will be done in the first half, so it's bigger in the first half, like the EUR 3 million in Q1. And then the rest will be more evenly spread for many years. Should we expect that the EUR 3 million is a rough, good proxy for the second quarter provision as well, or amortization? And then how much should we expect for the second half?

[Kaarina Muurinen, Chief Financial Officer]

I would say that the amortization will decline with 1/3 during the second half, and already some decline during the second quarter.

[Matti Riikonen, Financial Analyst]

And then finally, you are making -- building 2 buildings at the moment. And you mentioned that the building CapEx has increased CapEx level. Would you have an estimate on the building CapEx for this year, just to separate it from the normal CapEx line?

[Kaarina Muurinen, Chief Financial Officer]

I don't think that we have given an estimate for this year. We gave an estimate for the whole CapEx, but not for this year.

[Matti Riikonen, Financial Analyst]

Yes. But should we expect that the CapEx in Q1 is still going to increase towards the year-end as the buildings...?

[Kaarina Muurinen, Chief Financial Officer]

Yes, definitely. Definitely, because the building projects are just starting, so there will be increase in the CapEx spend for the whole year.

[Matti Riikonen, Financial Analyst]

Right. Then turning to the Industrial business. Excluding acquisitions and FX, your growth in Industrial Measurements was 6% in Q1. Based on earlier trends, it could have been better. Was there any particular reason for it to be only 6% in Q1? And what would you say about the potential of increasing the speed towards the year-end? You mentioned about the transformer business may be improving towards the year-end, but how should we look at the situation?

[Kjell Forsén, CEO & President]

Well, the 6% growth in Industrial Measurements is done in flat currency rates. So if we used the sort of real growth and exclude the acquisition, then the growth is 10%. And I guess we will always have some currency fluctuations. So we are actually quite happy with the situation for organic growth in the first quarter. There is potential for that to go up, but I wouldn't be dissatisfied with that level either. And as I mentioned, we are also really satisfied with the way the K-Patents business has taken off.

[Joni Grönqvist, Analyst]

Joni Grönqvist from Inderes. I could continue a bit on, first on the top line topic, but partly relating also to how you are driving your fixed costs this year. So you commented here that fixed costs were just in line, so I just wanted to understand a bit. So in the top line, was there anything unexpected or negative drivers? So were you planning this kind of profitability for Q1?

[Kjell Forsén, CEO & President]

Well, on the profitability for -- on Vaisala level is, of course, now then suffering quite a lot from low net sales on the Weather side. And perhaps we expected a slightly higher net sales, but this is the way the project business is. It's very hard to precisely estimate.

[Joni Grönqvist, Analyst]

Then maybe on the fixed cost side, could you maybe comment a bit to how you are driving it, like going forward? Of course, in your guidance, but is it sales? And you commented that the R&D you increased much on the Industrial side, but which is the component that is more variable?

[Kjell Forsén, CEO & President]

Well, don't know about fixed cost -- or that is just part of the picture. We also have our manufacturing costs, where we have our Vaisala production system, which is giving us a great advantage and improving our cost situation from an operations, meaning, manufacturing point of view. And we expect to see continued good development in that area. Also, we have a company-wide lean undertaking going on. Investing quite a lot into that. That is going to give us efficiencies and savings, quality improvements and what-have-you, in many areas. So apart from the R&D increased efforts, there is really not that much other sort of raising of cost going on. Would you like to complement this? No?

[Kaarina Muurinen, Chief Financial Officer]

It's okay.

[Joni Grönqvist, Analyst]

Then finally on -- a bit more on the acquisitions you made. You said that they are proceeding according to plan, but could you maybe give some more color on what kind of actions you are still -- you need to do in these 2?

[Kjell Forsén, CEO & President]

The integration is still ongoing for both of them. Now 2 quarters for Leosphere, and we are really satisfied. We, at the receiving end of Vaisala, and believe also our colleagues at Leosphere, are really satisfied. We have a good spirit and also as the good order intake for Leosphere shows, the business and the demand situation is good. So it's going according to plan. I would say that 2 quarters is a bit short time period to give any kind of really deep estimates of how things are, but we are really happy with the way the situation is. And same is true for K-Patents. Of course, we had them now only for 3 months onboard, but really off to a very good start. And what I said about Leosphere, about the sort of attitude and mentality and business development, applies precisely the same for K-Patents.

[Kaarina Muurinen, Chief Financial Officer]

And in Leosphere, we are already quite far in the system integration. So we are taking the same systems into use, same ERP system and same tools for the sales organization. So that is progressing well. And when we have been finalize the implementation in Leosphere, we will continue with K-Patents, implementing the same tools for that company as well. And then from sales, in the present perspective, I think that, that has been progressing quite well so far. We are only 6 months from the purchase of Leosphere and we already see that the synergies from the combined sales organization, we already see the first ones.

[Joni Grönqvist, Analyst]

The synergies was good answer.

[Jonas Forslund, Managing Director]

Jonas Forslund from Evli Bank. When we are looking at your costs -- your cost level, and it's rising now partly due to the acquisitions, how much would you say that is related to the some 170 persons you have now grown through these acquisitions? And how much is this in some other kind of investments in the future?

[Kaarina Muurinen, Chief Financial Officer]

Majority of the cost increase in operating expenses is coming from the acquired companies, with the exception that R&D expenditure, as we reported in Industrial Measurements, is increasing or continues increasing.

[Matti Riikonen, Financial Analyst]

Matti Riikonen, Carnegie. One question more, related to the Swedish order from the Trafikverket, road weather system order. Is that including the support -- decision support system and the information systems that you mentioned in the market outlook, that you see higher growth in that segment for digital solutions? Or is there other digital solution areas where you think that you can grow your net sales?

[Kjell Forsén, CEO & President]

The Swedish order includes the weather stations and then network management software, which does not include decision support system. So it's basically the infrastructure and related software network management we are selling to Trafikverket. But all in all, there is a good -- there is an improved demand for digital solutions, including lightning data, for instance, which we have been doing for long. It's a good situation there. On the energy side, we do see things also. We're seeing demand increasing there. So all in all, it's a fairly positive situation in digital solutions.

[Paula Liimatta, Business Controller & Head of Investor Relations]

Now operator, I think we are ready for questions from those on the phone lines.

[Operator]

[Operator Instructions] As there seems to be no questions at this stage, I will hand the word back to the speakers for any closing comments.

[Paula Liimatta, Business Controller & Head of Investor Relations]

Thank you. Do we have any further questions from the live audience? If no, I would like to thank everybody and wish you a good day. Thank you.

[Kjell Forsén, CEO & President]

Thank you.

[Kaarina Muurinen, Chief Financial Officer]

Thank you.