Vaisala Oyj

OMXH:VAIAS

Earnings Call Transcript 2022-Q1

[Operator]

Hello and welcome to the Vaisala Q1 2022 Interim Report. [Operator Instructions] Today, I am pleased to present President and CEO, Kai Oistamo; CFO, Kaarina Muurinen; Head of IR, Paula Liimatta; and Chair of the Board of Directors, Ville Voipio. Please go ahead with your meeting.

[Kai Öistämö, executive]

Thank you. So this is Kai Oistamo. I'm the President and CEO of Vaisala and as the operator said, I'm joined here with our Chairman of the Board, Ville Voipio, our CFO, Kaarina Muurinen and Head of IR, Paula Liimatta. So as usual, I will make some prepared comments and then we'll open up the line for Q&A.

Before I go into the numbers, maybe worth to note that one market environment on during the first quarter, which proved to be very, I would say surprising and somewhat disappointing in terms of the war breaking out in the middle of Europe. So the Ukraine war and other events around the world like the COVID in China were obviously not foreseen and the surprising events, especially the war in Ukraine, very disappointing and a shocking event.

And we hear quite a lot we -- very much immediately once the news broke out, we assessed the situation and decided that we were not comfortable to continue the business in Russia or in Belarus and we suspended that part of the business immediately. And it's worth to reiterate that that side of the business traditionally has not been that sizable for Vaisala the past 5 years. The net sales from that region all in all has been between 1 to 2 percentage points on an annual level. So not very meaningful in terms of the size to overall in -- at Vaisala.

So despite all that, we did have an excellent start of the year. Excellent in terms of net sales growth, very strong in both business areas, excellent in terms of an operating results which doubled and more than doubled compared to the -- a year before. The order book ended up at EUR 169 million, which is all-time high for us and the orders received also grew very, very nicely on both business areas.

Now before diving into that -- into the numbers, I would like to highlight a few points that happened here on strategy execution and -- at Vaisala. Two points on renewing our offer according to our plans. Firstly, I'd like to highlight the automotive weather service deal that we made with Volkswagen. Volkswagen, as you know, is the second largest automotive company in the world.

And what we provide for Volkswagen just as much as many of the other car partnerships that we have is hyperlocal weather service and forecasts specification information and weather warnings shown on the infotainment screen on the car. And this deal just strengthens our very strong leading position in the automotive weather service. And we do see this as a great in the years to come.

On the other side of the business, we renewed and expanded our product offering intended for data center customers. Data centers as you know is a big increasing business and we have been having a very solid business and offering. In that segment we have enjoyed a good market growth in that side. Now we completed our offering so that we can serve as a one-stop shop so to say for -- in our say with our offering to these very, very important customers.

Sustainability is at the heart of our strategy and 2 important events during the quarter I would like to highlight. First thing is that we announced that we commit to the science-based target initiative to reduce our emissions. So we will do the assessment on science-based on our -- all our emissions, direct and indirect, during this year and make a concrete plan and then work to reduce those according to the science-based target initiative by 2030.

We also got a very nice recognition from Financial Times. So Financial Times creates this Global Climate Leaders list annually and in this -- and in this year's list, we ranked as #5 on that list on all the companies in terms of how much they have been able to reduce greenhouse gas emissions between 2016 and the present day. So very, very proud of what we have been able to do and I think it's a great highlight also on our strategy execution on this part.

Then moving on into the actual numbers on -- during the first quarter. So if I look at the orders received increased by 18%. Very happy with that. The orders received came from both -- strongly from both business areas. And if I look at the market segments which I would like to highlight would be renewable energy, aviation, industrial instruments, and life science market segments. Those were the strongest contributors, but there was a growth in many other market segments as well.

Then going into the order book, it increased by 8% when compared to the first quarter of 2021. The increase came from largely the same market segments in industrial instruments and life sciences market segment, in industrial instruments side and aviation and renewable energy in the weather and environment side. And we have to reiterate that we ended -- with the order book we ended up with the all-time high size of order book at the end of the first quarter.

Then we move on to net sales. Net sales grew 29% year-on-year, very strong growth on both business areas. Again, if I look at the market segment side, renewable energy, meteorology, industrial instruments and life sciences market segments were the strongest contributors to the growth. It's worth noting also that this time around the strengthening dollar helped a bit the comparables, so if I look at in constant currencies, the growth would have been 25%, very strong number that as well.

Diving into the 2 business areas. Starting with Industrial Measurements, excellent performance in all aspects or as we see it increased very strongly and when we look at the order book compared to last year, we ended up 41% higher in terms of the orders received during the quarter, 19% increase [Technical difficulty] this year.

Looking at net sales, net sales growth of 34%, which then increased the operating result to excellent 27.5% of net sales. Also gross margin improved to 64.3%. During the quarter there was additional market -- material costs so that from purchases on the -- from the spot market, so that the component challenges continued during the first quarter as we anticipated the -- although in this quarter the impact on gross margin was less than the quarter before. And this is really caused by fluctuation between the specific components on the market -- goes -- market changes and the component in shortage changes as well as the suppliers who have a shortage changes kind of a dynamically from quarter-to-quarter. It's also worth noting when we look at the gross margin that year before there were no spot purchases in the comparable number in first quarter of 2021.

In weather environment side, orders received were at the excellent level. It was driven by -- specially by renewable energy and aviation market segments and we ended it with the order book of EUR 133.54 – EUR 133.4 million, which is good growth from last year and in terms of an orders received increase of 17% when we compared to the first quarter of 2021. And in terms of operating result environment it increased to 4.4% of net sales.

You may recall that due to seasonality and other things typically the first quarter is difficult for weather and weather environment. In many past years, we have been at breakeven or even below breakeven in terms of operating results. So having a operating result of 4.4% of net sales, it's makes me very happy and I think it's a very good performance by the business area.

The net sales growth was driven by renewable energy, meteorology market segments as well as current transportation. Gross margin was on a very healthy level and here also there were additional material costs related to components spot purchases, but on a lower level than in during the fourth quarter as they materialized. And when I look at the entire company going to how we fared as a company on during the first quarter, the operating result again, an excellent level 14.8% of net sales, net sales growth of 29% and if I look at on the -- we'll make the comparison on constant currency it would have been 25%.

Gross margin was at -- on the previous year's level, slight increase there. And here I want to maybe emphasize again the spot purchases, we actually did make a significant commitment into spot purchases also during this quarter even if then the actual impact on the numbers during the quarter was clearly less than what the commitments in this quarter were. And this is really due to the fact as I said earlier that the components in question the vendors in question they fluctuate from quarter-to-quarter and -- that the shortages which come and go at that relatively rapid motion kind of changed from quarter-to-quarter, even month-to-month.

And then if we don't result into EPS during the quarter, it translates into EUR 0.38 compared to EUR 0.17 the year before. in terms of cash flow from operating activities. It decreased somewhat due to negative impact on networking capital, this really was kind of a biggest impact on this was the change in accounts receivable and this was due to the fact that the business grew significantly compared to last year. And when we compared to the comparable period last year, actually that we just emerged out of the COVID-19 slump in -- during 2020, so it's all -- the way I would read the changes in the cash flow is related really to that strong growth in terms of our business.

If we look at our financial position I was characterized that as continues to be very strong. And maybe I'll go into maybe more interesting, which is then the market development and the business outlook for the year. Here I'll go back to maybe the how I opened the session in terms of what happened in the quarter, the war broke out in the Ukraine, a COVID-19 lockdowns in China many things happening in the world, which makes it unpredictability in the world, to be on a very high level and transparency or on the markets overall to be quite challenging.

So uncertainty for the rest of the year in terms of I would say second order and third order impacts in terms of what does the impact on inflation to real economic and what does in energy prices especially in Europe and what is the impact on lockdowns in China? For those the real economy in China as well as consequential potentially into logistics, which already strained and so on. The uncertainties significantly grow during the quarter. That all being said, we did not change our outlook and our view on market development.

We continue to see that high end instruments life sciences, power industry, liquid measurements and renewable energy clearly are growth segments. The aviation very much supported by the numbers also during the first quarter is in a recovery mode towards pre-COVID-19 levels. It's still kind of a way to go there. But clearly recoveries is seen in the marketplace. And on the other hand, meteorology and ground transportation we see to be stable market segments.

And in terms of a number, which translates into no changes in our business outlook. We see that our net sales for the full year are in the range between EUR 465 million to EUR 495 million and the operating result is between EUR 55 million to EUR 70 million.

So just to summarize and then conclude my prepared remarks. Excellent start of the year in a dynamic market situation. Strong net sales growth in -- throughout the company. Very good operating results and very strong order book. So good start of the year despite the fact that the world around us is in -- experiencing all kinds of uncertainties and shocks.

That concludes my prepared remarks. And operator, if you would open up the line for any questions.

[Operator]

[Operator Instructions] So we have the first question from Pauli Lohi from Inderes.

[Pauli Lohi, analyst]

I have 2 questions. First, I would like to ask about the strong sales development in the weather and environmental business area. Do you see any particular operation was so strong in Q1? Do you believe it's continue also in the following quarters?

[Kai Öistämö, executive]

So very good question, Pauli and I would note 2 things. First thing is that the weather environment business has -- is less prong to pre or some and same kind of seasonality than some other businesses have during the year. So the quarters to some extent, go up and down depending on what orders came in at what time, both in terms of our orders received and in terms of net sales. So there is kind of a part of this is within the natural fluctuation between the quarters.

That being said, we are very happy with the renewable energy, both net sales and the orders received. So that's obviously is a market segment, which we do believe that also when we look at longer term and probably go -- is going to grow and probably now with the war in Ukraine, the consequential investments especially in Europe to alternative energy sources is going to probably going to strengthen that trend longer term. That probably is going to turn into kind of actual investments, not this year, but in the years to come. But nevertheless, I think it's a good foundation for a longer-term growth also.

[Pauli Lohi, analyst]

Then my second question is related to the component shortage and additional costs related to spot market purchases. So do you actually see that there will be some extra costs in the following quarters? Or is that just a risk that we need to take into account, but it's uncertain if that materializes?

[Kai Öistämö, executive]

I do think that there is -- there are going to be costs when we need, do need to act on the spot market as we have been acting on the spot market. And like I said, the actual -- what materializes in a given quarter kind of fluctuates as we have seen, if you look at this quarter compared to the, for example, the previous couple of quarters. But the market situation has not changed and, if I would say anything, some of the uncertainties that I raised at least raise a question on what kind of an impact they may have longer term in the component availability side. And then maybe a second notion, I would say that the spot market itself, obviously, the longer this lasts more difficult it is to act on it, and then the market is getting smaller from where to pull from as the situation continues.

[Operator]

So we have another question from Matti Riikonen from Carnegie.

[Matti Riikonen, analyst]

Couple of questions. I will take them one by one. First of all, the gross margin resilience that you now enjoyed in Q1, less than 1% impact compared to the 3% impact, if I recall correctly, in Q4. Is there any way to kind of have the range of potential outcomes when it comes to this gross margin impact because it's pretty big. And of course, 3% sounds big, but my question is that, could it be perhaps even bigger in a particular quarter?

And then again, if we look at the positive side, is it possible that in some quarters, it actually might be 0? So I understand that it depends on the component mix and selection and naturally depends on the market prices. But do you yourself have any kind of idea where the gross margin volatility where it could be kind of what are the positives and negatives at the extreme sides and where we kind of are in that respect?

[Kai Öistämö, executive]

Thanks, Matti, for a very difficult question to be kind of specific on. As I said, the changes on the component supply side changed relatively rapidly. And if anything, it's probably more rapid now than from a component perspective and individual vendor perspective. They tend to kind of that go from goods to bad in relatively -- relative rapid motion. How long will that continue? Also, it's hard to say, probably depends on little bit on the individual vendor itself. The -- and then therefore and part of it is also from our sales mix. What happens to be kind of what customers want to pull. And -- but by -- and then on the other hand, what happens to be that the supply situation for those specific products on that specific quarter.

So as you can see now from kind of a -- at present quarter and the previous quarters, this tends to kind of fluctuate and giving you kind of a exact range on what kind of between what kind of numbers this is. I don't feel confident enough to give you an exact guidance other than and maybe give you the elements on what impact the actual result. Obviously, then the one thing to add on what I just said in terms of what impacts the actual results. Obviously, how much can we move so that the cost to our prices, and therefore, kind of mitigate the impact on the cost of a margin.

[Matti Riikonen, analyst]

I guess we just need to kind of look and see what happens. But thanks for the explanation. I remember that you mentioned something about redesign of some components, perhaps earlier, if I don't totally misremember. How is that going forward? And at what stage of the year do you think that you would have addressed the issues with most critical components that you have already kind of anticipated?

[Kai Öistämö, executive]

Good question. And here, again, I have to emphasize the dynamic nature of the market. So that was the supply situation. So we are constantly like on a daily and weekly basis looking at what's the supply situation, how there was the outlook for the coming months? Where can we actually mitigate the potential shortages by changing the components, where can we change it by negotiating with the customers or suppliers, where can we change it by changing potentially our offering in terms of complementary of other products.

So changing the demand from one product if that may have a shortage of component to something which is similar or close to within our offering. So it's both direct in the demand. It's changing the components and then acting on the shortages by negotiating with the vendors and then mostly the spot market purchases. And it's really -- we are actively pulling -- it's not a onetime thing. This is an active ongoing process and ongoing activities that we do every day. And we do this kind of changing the components, kind of market goal approach have been ongoing, but some completed and other ones ongoing as needed.

[Matti Riikonen, analyst]

Okay. Have you been able to deliver all orders that you were supposed to deliver in Q1? So has that -- has the component shortage affected your ability in that respect?

[Kai Öistämö, executive]

I would say that there is no impact on the net sales of that kind of lost sales from not being able to deliver during the first quarter.

[Matti Riikonen, analyst]

Okay. Good. Then to another matter, the Volkswagen partnership. Does that include kind of all new models that go out of production? Or does that also include some kind of older models that are already in traffic? And is it possible to just change the software in the way that it would be possible to utilize your weather systems or the weather information there. How does it work in practice? Are you kind of in all new Volkswagen models from this moment on?

[Kai Öistämö, executive]

It's new cars and then it's up to -- would -- I would say this way that it's then Volkswagen's decision on where they have slight kind of facelift where they might have still an old software, for example, and it might be to come somewhat costly or whatever to update their infotainment system. It's kind of -- I would explain this way that it will eventually, I think, ambition at least is that it will come in, in all new cars at a certain point, but if the rollout starts now.

[Matti Riikonen, analyst]

Okay. And then final question, of course, related to the guidance. If we think about the headwinds that you embed in the guidance when you basically keep it intact, -- are they mostly known risks or known headwinds that you already see that will happen? Or is it more estimated headwinds that you see that might have an impact on the rest of the year? So how -- what kind of composition in the guidance? What does it consist of?

[Kai Öistämö, executive]

Yes. So obviously, it's kind of a -- there's both. So obviously, the known headwinds are kind of taken into account when we kind of guide the range. So it gives the upper boundary and the lower boundary. That being said, what I tried to communicate as well that now there's a whole host of unknown headwinds, which we need to estimate when we look at the guidance due to the fact that from multiple given levels that I would say the market is really in a difficult to predict and difficult to forecast, especially towards the end of the year due to all the things that I mentioned during my prepared remarks, China, Ukraine more energy prices inflation. What happens we said in their right interest rate increases and tightening the monetary policy in the U.S. and so on. So there's multiple different things that just need to be also as estimated here.

[Matti Riikonen, analyst]

Okay. The reason for asking is that I think we had a similar situation last year where there was a lot of uncertainties in the beginning of the year and you started with a fairly conservative guidance in the beginning of the year and then you ended up raising that quite many times. So I'm just thinking about...

[Kai Öistämö, executive]

I understand, Matti, but I think it's fair to say that the uncertainty in the marketplace is on exceptionally high level at the moment.

[Matti Riikonen, analyst]

Sure. Totally agree. That was all from my side.

[Operator]

So we have another question from Paul de Thierry from Arke Advisers.

[Paul de Thierry;Arke Advisers, analyst]

Congratulations on good set of results. Can I just pick up on something you mentioned recently concerning component supply, where you said that you've actually managed to -- although you took a hit to the gross margin in Q4, you'd actually managed to pick up some new customers. Has that continued into Q1? And I assume just by an answer to the previous question that you haven't lost any customers as a result of your inability to supply or component issues. But have you continued to take any market share?

[Kai Öistämö, executive]

So to answer the second part of the question, I don't think have we lost any customers kind of it's kind of implied that we have been able to -- we did not lose any net sales to our -- due to capability or not having a capability to deliver. So the answer would be easy no. On -- have we been able to continue to increase market share, especially on the industrial measurement side? I would say, yes. And here, a big part of this is really our capability to deliver, which is superior to our competitors has been at least.

[Paul de Thierry;Arke Advisers, analyst]

And then just going back to the automotive agreement with Volkswagen. Could you just expand a little bit more on how the agreement works? And are the agreements similar to like you're working with -- you're already working with BMW, Hyundai, Mercedes. Could you just expand a little bit on that, please?

[Kai Öistämö, executive]

Yes. So without going into the kind of deal structure itself, it's kind of -- it's a similar kind of we think about it, it's a similar kind of the agreement and what we have with -- what we have announced earlier, for example, with BMW. So it's the same kind of a functionality and same kind of capabilities that Volkswagen acquires this partnership.

[Operator]

So we have no further question. [Operator Instructions]

[Kai Öistämö, executive]

If no further questions, thank you for the audience, for the interest. And I want to remind also that for any further questions, Paula is the right contact and we would be very happy to have further discussions with any of you. So thank you, and have a good weekend.

[Operator]

This now concludes our...