Vaisala Oyj

OMXH:VAIAS

Earnings Call Transcript 2021-Q1

[Operator]

Welcome to the Vaisala Q1 2021 interim report. [Operator Instructions] Today, I'm pleased to present Kai Öistämö, President and CEO; CFO, Kaarina Muurinen; Head of IR, Paula Liimatta; and Chairman, Board of Directors, Ville Voipio. Please go ahead with your meeting.

[Kai Olavi Öistämö, President & CEO]

Thank you, and welcome from my side as well. This is Kai Öistämö. So good afternoon or good morning, depending on which part of the world you may be. So if we look at the -- first, how did the first quarter come together, I would summarize it that we had a strong start of the year. The market environment turned out to be more favorable. The economic recovery visible then through multiple of our segments was very visible, except for aviation and emerging markets. The economic recovery was especially strong in China and in U.S., but it was clearly visible in other parts of the world as well. And based on the increased visibility and the strong first quarter that we had, we have now narrowed our business outlook for the year. And I'll come back to that a little bit later in the presentation. The renewal of our product portfolio continued very well, and we proceeded well despite the COVID-19 situation, which our -- especially our personnel has to -- have had to fight through. We launched several new products such as Ceilometer which is in the picture here, which is a LiDAR-based measurement device which enables us -- or the user to measure the heights of clouds with the content of the cloud and overall gives a very, very accurate and good visibility into the atmosphere above us. They're very important for the meteorological customers of ours. Also, the -- our new R&D building is now fully open, and it's already partly populated and now waiting for the pandemic situation to ease up for -- to be fully having everybody on site. Our work and our products are closely linked to several of the megatrends and contribute to the several of the United Nations Sustainable Development Goals. And when we look at the first quarter, we saw an especially strong performance in life sciences and at wind LiDAR business, which are very closely connected to the health and well-being SDG as well as the renewable energy SDG, respectively. On renewable energy and talking about renewable energy and renewable electricity. Several companies aim to move fully to renewable electricity within the upcoming years, within kind of typically within the 5 to 15 years. We are very proud to be a forerunner in this space. We are very happy to report that we are now 100% renewable energy. We reached the target now during the first of -- or validated the results now during the first quarter and reached the actual target already in from last year. We were first technology company here in Finland to reach such a goal and, overall, the second company in Finland or out of all companies. We have now reduced our scope to emissions. That means our own emissions by 97% from 2014 baseline and continuing this work going forward. But even more importantly, I would bring up that our work in sustainability is really where we contribute to through our handprint, i.e., the products and services to our customers, which enable them to reduce their handprint -- or their footprint and thus, creating a very positive impact to the world. The other very, very exciting event during the first quarter was obviously the landing of Perseverance in Mars, carrying what was a relative humidity and pressure sensors. So not only did they land subtly on Mars, but now are being used on Mars. And now we are actually being -- what is being built is the first-ever meterology observation network on another planet. We think that this is a great, great showcase on how reliable, stable and accurate our products really can be in a very difficult environment. If this is not a very good proof point, how well -- when it works in Mars, it really will work in any environment also here in Planet Earth. Moving on to the numbers on first quarter. So orders received increased by 18% year-on-year. The increase was in both business areas. And when we look at the different market segments, it was increase in renewable energy, ground transportation, life sciences and industrial instruments, whereas in aviation markets due to the COVID-19 situation and a slowdown in travel, the weakness continued. And if we looked at -- in terms of the constant currencies, it would have been 23% growth in constant currencies. When we look at the order book in first quarter, that increased 10% year-on-year. Again, the increase came in both business areas. The increase was in all market segments, in industrial instruments and in Weather and Environment, it was in renewable energy from the transportation and meteorological market segments. There was a decline in large orders in Weather and Environment for the products -- the projects that there would be a delivery into next year and the year after. And that is visible also in our numbers. If you look at the order book beyond 2021, it really mainly consists now long-term service contracts in Industrial Measurements side. Moving on to net sales. They grew by 9% year-on-year. If we take the constant currency, it will be 9% growth year-on-year. The growth came from Industrial Measurements, whereas Weather and Environment was flat year-on-year. And from a market segment side, the growth came from life sciences, renewable energy, industrial instruments and ground transportation. The aviation and liquid measurements declined year-on-year. And noteworthy also is that net sales of large projects year-on-year declined, reflecting again on weaker order intake during last year on the large-budget projects. Then if we look at into the business areas. First, Industrial Measurements. I would say we had an excellent performance during the first quarter in Industrial Measurements. The orders received increased in all market segments. It's worthwhile also noting that I talked about the economic recovery around the world. It's the economic recovery, especially in China, most is the growth of the sales and the orders received in China for us. The -- when we look at the -- also in terms of the order book length, there was -- worth noting also is that the strength in China reflect -- was seen also that there were some larger and bigger orders, some annual orders in China, which now -- which were received during the first quarter. And then obviously, the larger orders come from a bigger success in power industry and continuous monitoring systems side. When we look at the net sales, net sales grew by 12% year-on-year, and that then led into an increased operating profit as well. The result was 9.4% compared to 7.6 -- I'm sorry, EUR 9.4 million compared to EUR 7.6 million, corresponding time last year, being now 23.8% of net sales. Net sales growth was strongest in life sciences and industrial instruments in absolute terms. And in relative terms, power industry offering grew very well as well, whereas liquid measurements declined, reflecting the disappointing order intake during the past few quarters. Then if we move on to Weather and Environment side, also a strong growth in orders received. The order growth was strongest in renewable energy and ground transportation, both in absolute terms and in relative terms. The order growth in the meteorological segment was flat. In developed countries, we saw some increase in orders received during the first quarter. However, the level of orders were still very low, and the market really hasn't started to recover. You should look at this as a quarterly change in volatility in terms of how the orders come in. And as I said earlier, the weakness in aviation continued due to the lack kind of travel in due to the COVID-19 situation. The operating results in Weather and Environment increased as a result of lower operating expenses. The operating result was minus EUR 800,000 in first quarter, which was compared to EUR 2.4 million loss in the corresponding time previous year. And when we look at the net sales, the net sales grow strongest in renewable energy and aviation -- sorry, renewable energy, whereas, again, the aviation declined year-on-year, again, due to the lack of travel due to the COVID-19 situation. The OpEx was lower compared to the previous year due to the more efficient ways of working and lack of travel, triggered by the COVID-19 situation. And worth noting also that the R&D activities continued according to the plan. And the new, as I said, the R&D facility was taken into use step by step during the first quarter. Now if we move on financials, the first quarter operating result was 8% -- 8.8% of net sales. And the drivers for increased operating results were net sales growth and lower operating expenses. As mentioned, the gross margin decreased due to the product mix on one hand and appreciated euro on the other hand. The OpEx decrease was due to more efficient ways of working triggered by the COVID-19 situation, as I explained. And maybe it's also worth noting that the comparison period last year included a onetime credit loss allowance booked for -- by EUR 1.1 million related to our one customer project, and which was then later reversed during the year last year. In terms of EPS, we grew to EUR 0.17 and financial position overall remained. If we look at the net working capital, we had a very good cash flow during the quarter, mainly contributed by increase in trade account payables and advanced payments from customers increased and thus leading into improved cash flow. And it's also worthwhile that, as we indicated earlier, the CapEx level now during the first quarter after the building project that we had during last year were completed. Now moving on into the market development and business outlook. How does the world look for the rest of the year? We see the COVID-19 pandemic will still cause us significant uncertainty for this year. While the situation has improved in developed world, it's still in alarming levels in many of the emerging markets if we just look at the terrible news we hear day-by-day from India, for example. We do despite all the COVID-19 situation that the global economy is going to continue to recover during 2021, and we will see a growth in high-end instruments, in life sciences, in power industry and in renewable energy, whereas meteorological segment in developed countries we expect to stay stable, whereas in developed countries stay on a weaker level due to the COVID-19 situation and the financial challenges caused by COVID-19 into the emerging markets. And the aviation markets, we expect to remain weak, although we expect some early recovery towards the end of the year. Now based on the strong performance during the first quarter and increased visibility into the year, we have narrowed our business guidance for this year. From a net sales perspective, we have raised our bottom end of our estimate by EUR 10 million. So our estimate now for the full year, net sales is from EUR 380 million to EUR 400 million. And correspondingly, we raised our operating -- the bottom end of our operating result guidance, so that it now reads EUR 35 million to EUR 40 million (sic) [ EUR 45 million ] expected for this year. So if I summarize the first quarter, we had a very strong start for the year. The market environment was more favorable than we expected, resulting from strong recovery, especially in China and U.S. and then we felt that strong order intake across multiple market segments. And now given the strong first quarter and increased visibility, we narrowed the business guidance for the year. That's the end of the prepared remarks. I would like to now hand over to any questions that you may have. Operator, please? Operator, can you hear us?[Technical Difficulty]

[Operator]

Sorry. Can you hear me clearly?

[Kai Olavi Öistämö, President & CEO]

Yes. So please open the line for questions now.

[Operator]

[Operator Instructions] And our first question comes from Joni Grönqvist from Inderes.

[Joni Grönqvist, Analyst]

I've got 3 questions, and starting with the guidance. Looking at the strong Q1, your guidance feel cautious. And even though you higher the lower end, and I understand your visibility is usually quite low in the beginning of the year. But taking into account the current trend and orders, don't you agree that if the trend continues, your upper end is also cautious? Or which risk, new risk do you see as the COVID and aviation headwinds were already in the comparables?

[Kai Olavi Öistämö, President & CEO]

Yes. If I kind of ask -- so, if I answer the first question. So as I said in my prepared remarks, the visibility to the COVID-19 situation were relatively poor as to the year. We hear about the new virus variance and so on. It's very unpredictable how the virus will behave and now giving us hesitation in terms of -- and visibility into how the market overall will develop towards the end of the year. The second point I would maybe just remind you is that, especially on the Industrial Measurements side, while our order book increased well during the first quarter, it still is a short-term type of a business. About half of the order book is due the next month and then very rapidly hit clients after that, meaning that there is some length in terms of -- I mentioned the China orders, there is the service contracts and some length in terms of power orders, but it's still mainly a very short-term type of an order book. And thus, while we are very happy on the level where it is today, it's still -- we need to win in the marketplace every day to perform well for them. The second point, maybe just to highlight, is that the slow order intake during last year and now also in the first quarter in terms of the big projects in Weather and Environment side is something that, again, gives a little bit less predictability in terms of net sales for the longer term. And then maybe one other thing which was not in my prepared -- my kind of a -- as we all know, the electronic component shortage is well documented and well discussed in the world. While on one hand, given our high mix, low volume type of a situation where a single component is not an epidemic problem to our business, where we are very different from many other companies. This obviously is something we, just like any other company, needs to kind of see that how well can we secure that, the component supply through the year.So far, we performed very well. But this is obviously something that every company in tech industry needs to kind of recognize.

[Joni Grönqvist, Analyst]

Yes. That was actually partly my second question. But if I continue on the component, do you see any inflation there? And how do you believe if there will be, do you -- how well are you able to push it forward to customers, the price increases?

[Kai Olavi Öistämö, President & CEO]

So, so far, we have not felt price increases in terms of the components. Now speculating the future. Any time there is a shortage on any commodity or any component, there always is a pressure to higher prices and fully to be expected. We are trying to manage that as well as we can. And then I'll just remind you, especially on the Industrial Measurements side, we have been able to, through the increased value added that we bring to the marketplace, we have been able to raise prices on at least on a selective basis. So I think we are in a, relatively speaking, in a good position to manage this. But obviously, it's something to watch. Obviously, it's something to watch.

[Joni Grönqvist, Analyst]

Yes. Then lastly, I'll take, again, the question that I took 6 months ago. Now you've been here a while on board. And do you have any -- or I know the company, whether have you seen or recognized any specific areas where you see improvement potential or more improvement potential?

[Kai Olavi Öistämö, President & CEO]

Yes. So as I think I answered the question more or less the same last time, let's see. So one thing is to secure the long-term growth. And that's my objective is, number one, that how do we make sure that we do the right things in such a way that we do not only grow this year and next year, but we also, [ at the right time ], that we have a very much of a long-term growth path for the company. I think there's a lot to do, and there's a good pipeline of innovation for years to come in the Industrial Measurements side. And if I look at one improvement area and then a potential for longer-term growth is the digital side of the business that we have been very well streamlining over the past year, 1.5 years. The profitability of that is in the right level, and it contributes nicely to our gross margin right now. But here is something that we have so far been unable to grow in a meaningful way. And I think that could be in terms of when I talk about long term in terms of a long-term area to focus on.

[Operator]

Our next question comes from Jonas Forslund from Evli Bank.

[Jonas Forslund, Managing Director]

Congrats to the whole Vaisala team for a really, really good results, especially a good Q1 result for you. I also had some questions regarding the outlook and given that you have such a strong performance, but I feel that we did cover that topic fairly well here in your previous answer. So I'll take another question instead. I noticed that in your report, Industrial Measurements came before Weather and Environment in the report order. Should we -- can we conclude something from this? Or is it just purely semantics?

[Kai Olavi Öistämö, President & CEO]

I would not read into it too much. It's more we try now to be consistent on that order. There's no kind of hidden messaging, all that.

[Jonas Forslund, Managing Director]

All right then. Very well. Then a more detailed question. Liquid measurements, which was acquired a company a few years back. And you said that they had disappointing new orders in the last year. Could you give us a little bit more color into what is the situation there within liquid measurements? Has there been any challenges, unforeseen events? And how do you see this part of the Industrial Measurements developing here in the near term?

[Kai Olavi Öistämö, President & CEO]

Yes. So we need to have challenges in terms of order intake during the past quarter, so in past months until now, fourth quarter -- no, no, in the first quarter, very happy to see that it turned into a positive number. So we saw an increase year-on-year in terms of order intake. Liquid measurements is out of any segment in Industrial Measurements portfolio, the one where the COVID-19 situation hit the hardest. It's -- the products are such that it really requires presence in the customer premises. And with the travel restrictions and restrictions to our customers' premises, it has been clearly more challenging, turn the pipeline into actual orders. And we have been working on that very hard. And now very, very happy to see that we have, at least in the first quarter now, we see positive numbers on the [ outlook of measurements ]. We continue to be very happy with the acquisition and see that it is a growth opportunity, not only for Industrial Measurements but for the -- in the company as well.

[Jonas Forslund, Managing Director]

Very well. Life science now with the vaccine programs everywhere. Do you see this -- the positive sort of tailwind that you're getting now, do you see that carrying even past this year and into next year?

[Kai Olavi Öistämö, President & CEO]

I would say this way, that if I look at the market segment and the market dynamic, I think the investments, if you look at global investments into life sciences, market overall continues to be strong. And it's not only driven by the COVID-19 situation. Certainly, that has had a big impact on it, but it's not only that. And I think that those investments will continue during this year and at least this year and probably a little bit longer as well. We have been successful in -- with our continuous monitoring, especially our continuous monitoring systems, not only with that, but especially with that in the marketplace. And obviously, therefore, we are well positioned with that, if the market continues to grow.

[Operator]

[Operator Instructions] Okay. As there appear to be no further questions, I'll return the conference to you for any closing remarks.

[Kai Olavi Öistämö, President & CEO]

Thank you, everybody, and I look forward to discussing you in, hopefully, not-so-distant future. Thank you, everybody.

[Kaarina Muurinen, Chief Financial Officer]

Thank you.