Vaisala Oyj

OMXH:VAIAS

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and welcome to today's Vaisala First Quarter 2023 Conference Call. At this time, I'd like to hand the call over to Kai Oistamo, CEO. Please go ahead, sir.

[Kai Öistämö, executive]

Thank you. This is Kai Oistamo. I'm the CEO and -- President and CEO of Vaisala. I am joined here with our CFO, Kaarina Muurinen; our Chairman of the Board, Ville Voipio; and our Head of IR, Paula Liimatta. I would like to welcome everybody on this call on Vaisala's first quarter. Vaisala's first -- start of the year was characterized by strong demand, and this all despite the market activity remaining high -- the market activity remained high despite all the uncertainties in the marketplace and in the business environment overall. I would like to remind you all on the reported numbers now in orders received, and in order book that we, as we announced earlier.As of the beginning of 2023, we changed our reporting so that Weather and Environment's business area -- Weather and Environment business area's subscription sales are excluded from orders received as well as from order book, and now we are separately reporting in this aggregation of net sales as subscription sales.Now looking at really the numbers. Orders received, as I said, grew nicely by 11% and order book ended in EUR164 million. The operating result decreased due to the investments that we did during last year in sales and marketing and into R&D, focusing on the long-term competitiveness of the company. And I'll come back to this in a few slides. The cash flow returned to what I would characterize as normal first quarter for Vaisala. Last year was burdened by a few things. First of all, the shortage of components, which led in more capital tied into component inventory than typical, as well as the acquisition of -- or the closing of the acquisition of AerisWeather. Now we are back on a good track on our cash flow as well.Looking a little bit deeper into the numbers. First quarter orders received as said, grew by 11%. The orders received grew in both the business areas. And if I look at the different product segments or market segments that we serve, the orders received increased strongly in meteorology, roads and automotive as well as industrial instruments. As said, order book reached almost EUR164 million at the end of the quarter. That represents a 14% increase to the first quarter 2022, so a nice increase on that well. And again, the increase in industrial instruments as well as power and energy markets; in Industrial Measurement market segments and in Weather and Environment side in all market segments contributed to this.In terms of net sales, similarly, growth by 11%, compared to the same time previous year. This time, there was no significant impact on currencies, so we are only actually noting on -- [ will be saying ] constant currencies, or real currency is 11% on both. The net sales grew in both business areas, very strongly in the Industrial Measurements business area and very strongly in instruments, life sciences and power and energy market segments.As said, the operating result was burdened by the investments in sales and marketing and R&D that we did during the year of 2022. These investments for long-term competitiveness both in terms of our offering as well as our reach and building that, on top of that, it's worth noting that the gross margin was at previous year's level at 61% despite the fact that component spot purchases had a minus 1.3 percentage points negative impact on the gross margin and whereas the year before say first quarter, it was only 0.4 percentage points negative impact. The other thing worth noting on the operating expenses is the continued renewal of our IT systems as we've previously indicated has continued during the first quarter as it will continue throughout this year.Then moving a little bit into that 2 business areas that we have, starting with Industrial Measurements, good demand during the first quarter. The orders received increased by 9% and order book by 10% when compared to the same time previous year, and orders received grew in industrial instruments, liquid measurements as well as in power and energy market segments. And if we look at net sales, very strong market -- net sales grows 19% year-on-year, driven really by all market segments, very strong growth in industrial instruments, life science as well as power and energy market segments.Looking at the gross margin, it decreased from previous year and now being 62.6%. And here, the spot purchases, the additional market -- material costs related to the spot purchases had a 1.7 percentage point negative impact on the gross margin as compared to the 0.6% the year before. The operating result was slightly above last year, being EUR15 million in terms of a relative operating result being 23.8% of net sales.Then moving on to Weather and Environment. Again, strong growth in orders received being 13% year-on-year, this is driven by meteorology as well as roads and automotive market segments. The order book ended at the end of first quarter at EUR125 million that represents a 13% increase to a year before. And here, just again reminding you that when you look at the years 2020 and 2019, this accounting change and reporting change that I was alluding to where the subscription sales are now separately reported. They are excluded from the orders received in full year 2021 and 2022, but not the years before.Net sales-wise, the year-on-year growth was 5% for Weather and Environment, driven by automotive and renewable energy market segments. Gross margin improved from previous year now being 50.2 percentage points despite the fact that, again the components spot purchases had a negative 0.9% [ negative ] impact on gross margin, compared to the 0.2 the year before. And the improvement really came from improved mix in Weather and Environment. The operating result being on the negative side, EUR1.77 million (sic) [ EUR1.7 million ], again, driven by the investments that we did really throughout last year into building the competitiveness, especially in Weather and Environment case, especially the growth areas being as described earlier, the renewable energy market segments as well as the subscription sales related activities.And then, if we take a look at the first quarter financials and a bit of a look into cash flow. The cash flow from operating activities increased as a result of decrease in trades receivables. So as I said in my opening, we returned to kind of a normal area -- normal first quarter behavior in Vaisala, a clear improvement from first quarter last year. And overall, the strong financial position at Vaisala enjoys continued throughout the first quarter.And then looking at the market development and business outlook. This remains unchanged, so we expect the growth from most of the market segments that we serve, and the only exceptions as the market segments being meteorology and aviation, which we expect to be stable throughout the year. So there are no changes in the market development we anticipate for this year. And similarly, no change in the business outlook for 2023. So net sales wise, our expectation is that it will be in the range between EUR530 million to EUR570 million; and in terms of operating result, in the range between EUR70 million and EUR85 million.So as a summary, before opening up for Q&A, strong demand continued in the first quarter. The orders received and net sales grew both by 11% order book, ending up in a good result. Operating result, somewhat burdened by the investment -- long-term investments that we have been doing throughout last year. And then, the cash flow from operating activities clearly improved from previous year.With that, operator, I would like to open up for Q&A.

[Operator]

Thank you, sir. [Operator Instructions]. We'll now take our first question from Matti Riikonen from Carnegie.

[Matti Riikonen, analyst]

It's Matti Riikonen at Carnegie. I have a couple of questions. I would like to take them one by one. So first of all, in Industrial Measurements, the gross margin declined year-over-year, and the decline was not totally explained by the spot component composition. So the underlying gross margin, excluding these was a bit softer, not much, but a bit. So can you explain why that was the case? And has there been perhaps a growth in the delivery organization in a step-wise manner, so that I remember that has happened sometimes in the past? Or is it just normal volatility between different quarters?

[Kai Öistämö, executive]

Matti, good to hear you. Yes, it's the latter one. It's really to explain it all explained by the mix. It's a normal seasonality. And as you may recall, we often have a little slightly lower gross margin in Industrial Measurements during the first quarter when that -- at least that has been the history.

[Matti Riikonen, analyst]

All right. Then the fixed cost increased, like you said in the report, and as you have flagged already before. And I'm just wondering how much of that increase, which was roughly EUR11 million plus -- how much of that is kind of permanent increase going to your sales and R&D organization? And how much is the kind of non-permanent, let's put it that way, going to ERP projects, et cetera. Can you make that split? It would be easier to kind of then estimate what will be left, let's say, next year?

[Kai Öistämö, executive]

Yes. So I would say this way, it's a good question. And I would say this way that the majority of that number is really kind of permanent -- as you put it, permanent increases into sales and marketing and R&D, and as kind of clearly a smaller portion of that goes into ERP and other systems that we are operating. And obviously, you know, that even if our plan is that the ERP is going to be going live at the turn of the year or early next year, these kind of big projects will have a tail in them as well. So you may want to take that into account in your model as well.

[Matti Riikonen, analyst]

Okay. Good. Then regarding the order backlog, which increased. And the part that is scheduled for delivery for this year actually was quite a bit bigger than last year. I mean the delta is over 3%. So I assume that, that would come to top line this year, it is of significance. So did you anticipate this type of kind of quicker deliveries or the delivery schedule being different than last year when you gave this year's guidance, so how well is this embedded in your top line guidance for this year?

[Kai Öistämö, executive]

Of course, it's embedded in our top line guidance as we have not changed the top line guidance, so yes. So it -- but obviously, as the business grows, the underlying order book for any given year as long as we continue to grow, should grow as well. So, that's part of the answer. And part of it is also a bit of a seasonality, as you know, especially in the Weather and Environment side, project come and project go and part of it is also that, that kind of orders sometimes come in a little bit earlier, kind of 1 year ago, especially when you compare quarter-on-quarter or year-on-year [ instead of ] quarters. But yes, we are obviously a better position than as we should be compared to last year.

[Matti Riikonen, analyst]

All right. Then finally, the subscription sales, the new line that you asked that you will report that you grew fairly nicely year-over-year, but what kind of seasonality should we expect between quarters? Is this a SaaS type of revenue that we should be expecting to grow basically from quarter-to-quarter, at least to some extent? Or do you see that there is some seasonality in the [indiscernible]?

[Kai Öistämö, executive]

Excellent. Yes, excellent question, and thanks for asking that. In a normal -- normally, you would expect obviously, that there is no seasonality in subscription sales. In our case, there is a slight seasonality, as part of the subscription sales is related to winter maintenance-related activities. And for obvious reasons, winter maintenance is less in the summer months, and so that causes a slight seasonality in the numbers as such.

[Matti Riikonen, analyst]

So basically, the winter months are supposed to be a bit better than the rest of [ quarters ]?

[Kai Öistämö, executive]

Yes. Yes, yes. So it's still equally kind of maybe kind of what I just said, it requires a little bit more explanation. So it's a volume based pricing. So the volume is higher obviously in the winter months than in summer months.

[Operator]

And our next question comes from Pauli Lohi from Inderes.

[Pauli Lohi, analyst]

This is Pauli Lohi from Inderes. First, I would like to ask about price increases. There has been a period of higher inflation in the last few years, but maybe the situation is getting better with competent availability and so on. So have you been still doing material price increases in Q1? And how long should we expect price increases from last year to boost your growth going forward?

[Kai Öistämö, executive]

Yes. Hey Pauli, good question. So we did price increases again like we did last year during the first quarter. I would say, this way that the massive price increases did not have yet, say, significant impact on the first quarter numbers as it tends to be, so that there is a kind of older orders are in kind of some of the deliveries for that -- things that got sold and billed during the first quarter, so the impact kind of gets through the first quarter and then we therefore going to have a fuller impact now in the second quarter, and so on. No change as such from previous years.And then kind of going forward, it's too early to say kind of it all depends on the inflationary environment and so on, how do we need to think about, how do we look at the marketplace and so on in the environment again at the end of the year. We tend to do these pricing changes only very selective times of the year instead of all the time hiking up the prices. Part of it being, kind of being a reliable, predictable supplier and a partner to our customers.

[Pauli Lohi, analyst]

Secondly, I would like to ask about could you give some additional update regarding the growth plans in Xweather and the subscription-based revenue. How is the business progressing? And should we expect the growth to accelerate when all the new employees actually will get started?

[Kai Öistämö, executive]

Yes. So obviously, we have a high hopes on a short-term, long-term on this. And we -- I have to say that if you look at last year, the performance was very good. Now -- and we expect that we will have a good performance during this year as well obviously, you need to find [ and ] win that in the marketplace every day and so on. And the percentages are obviously getting tougher as business grows, and as the base number grows and that's part of when the business grows, we need to be investing into the business as well. And to ensure that the both the offering, as well as then the reach through sales and marketing remains in such a way that it supports the growth plans that we have.

[Pauli Lohi, analyst]

Yes. And then finally, what are your plans for new recruitments or other [ crowd ]-related expenses? Are you still increasing your fixed cost base during '23?

[Kai Öistämö, executive]

So we -- I'll remind you that we are a growth company. And in order to be a growth company, you need to be investing into the future in a continuous basis. That all being said, I think if you look at last year's expansion in sales and marketing and in R&D, in relative terms, I think it was faster and bigger than what we've done in the past years and probably a little better than what we will be doing going forward as well, so I think the pace will be somewhat slower. All depending on obviously how the market develops and the opportunities that we see.

[Operator]

Our next question comes from Arttu Heikura from Evli.

[Arttu Heikura, analyst]

I have a few questions. First, the growth in Americas was quite strong compared to other regions. Could you mention the growth drivers in that region?

[Kai Öistämö, executive]

I think it came from various different parts. Life Sciences being a good contributor to it, but by far not the only one. I think, in industrial -- in both business areas, actually, we had a good year in Americas. They had good projects in Weather and Environment side, and in Industrial Middlemen side. As I said, life sciences was a good driver, but there were other segments as well. Too early to say really the insourcing as a kind of how much of an impact on the macro side it has, but certainly it's a trend that we are benefiting from that as new manufacturing is being established in North America and the economic activity is established in North America, and obviously that drives that demand. Maybe one more other thing kind of a worthwhile it's not a major part of it, but worth noting is obviously the acquisition of AerisWeather, which actually was during last year believe all about North America.

[Arttu Heikura, analyst]

Yes. Then about orders of renewable energy, they declined for the second time in a row. So I'm just wondering if the comparison figures were that high that -- or was there some extraordinary peak into sales last year? And how do you see the underlying market growing compared to Vaisala's trajectory, going forward?

[Kai Öistämö, executive]

Yes. So we expect it to continue to be a growth market segment. And as we said in the guidance, we say expect it to grow this year. There is some seasonality in -- clearly in -- where seasonality may be 1 word, but there is -- because it's really -- can't say which quarters are bigger than the other ones, not seasonality in that sense, but seasonality in the sense that different quarters are slightly different from each other. But coming also from various different geographies, worthwhile noting also in renewal that during last year, we really clearly expanded the market presence now being in all geographies. This related also the investments into wind energy in different parts of the world, and the use of the wind lidars being broader and accepted throughout the globe, rather than it all started if I go 2 years back in Asia Pacific, more than anything else.

[Arttu Heikura, analyst]

Okay. Yes. Then about spot purchases component -- spot purchases. To what extent do you believe that spot purchases will continue, going forward?

[Kai Öistämö, executive]

The volume of spot purchases is already clearly lower than it was a quarter ago. And a quarter ago, it was lower than the quarter before. So we are clearly seeing the market normalizing. A part of when you look at our numbers, you have to remember that [ more ] the way we report the numbers is the usage of the components that we have purchased from the marketplace, not the purchase itself. And there are still some specific components, especially on the older components side, where the shortages are not completely over, but the volumes and the absolute values are clearly lower already than before.So it is all related, if you think about the semiconductor -- semiconductor vendors, that the capacity investments first came through newer processes, higher-value silicon products and gradually now going through like all the processes, and many of the industrial components are in all the process -- based on all the processes, and some of our products are having very old components. And obviously, that market is the last one where the capacity improvements are going to be visible.

[Arttu Heikura, analyst]

Okay. So there is still spot components in your balance sheet, which is going to be used in the coming quarters?

[Kai Öistämö, executive]

Yes. Yes, yes. But you should expect that it's going to get -- it's a declining number.

[Arttu Heikura, analyst]

Okay. Then about your cash flow, which was supported by decreased trade receivables. Could you open the reasons behind decreased trade receivables?

[Kai Öistämö, executive]

I tried to do a little bit already in my prepared remarks. So when you compare [ to lots -- ] as I said, it really looks like with an exception of first quarter last year, the first quarter tend to look at Vaisala. We tend to have a lot of deliveries during the fourth quarter, which then get paid some of them, lots of orders in and lots of deliveries done, they get paid in the first quarter. So that helps. And that's a normal seasonality in terms of the kind of support the trade receivables. So that's kind of what you are seeing.Last year, when you look at the comparison period, there were a couple of kind of extraordinary things happening, one being really the market being very tight in terms of the component, and therefore, meriting for more of a investment into the components and component inventories throughout the first quarter last year, as well as then the AerisWeather acquisition, which we closed during the first quarter and that had a cash impact as well.

[Arttu Heikura, analyst]

Okay. So your market outlook was left the same. But have you seen any signs of customer uncertainty that or have customers delayed their decisions or postponed orders, et cetera?

[Kai Öistämö, executive]

We have no such -- nothing to report on that. The market uncertainty remains on a high level as it has been throughout the first quarter and some time already, and it kind of we like to recognize a high inflationary environment and the uncertainties -- overall uncertainties in the world. But nothing extraordinary to be, that I can report.

[Arttu Heikura, analyst]

Okay. The Xweather was talked, and I would like to follow and comment back. So first, is the business profitable? And if it's not, how long do you think that it's Xweather could make money exactly?

[Kai Öistämö, executive]

So we are not commenting on the profitability. But I'll answer your question this way, that it's -- the gross margins of that business are very healthy subscription sales gross margins. On the same level, as you would expect on well-run Data-as-a-Service, Software-as-a-Service business. Then when we look at the profitability on that business model, there's a question of how do we -- how much do we invest into the business itself. How do we see the -- it meriting the future investments and that will then determine in a way that from when you look at the -- when you asked about the profitability itself. So it's a balance on obviously how long, how much do we invest into it versus kind of how much cash does it generate kind of underlying, but the health of the business, I want to just emphasize, the health of the business is very good.

[Arttu Heikura, analyst]

Yes. I'm just wondering how long does it take to -- the impact from Weather and Environment profits? But you cannot disclose that, yes.

[Kai Öistämö, executive]

No.

[Arttu Heikura, analyst]

So yes. That's all from my side.

[Operator]

Thank you. And it appears there are no further questions in the queue. With this, I'd like to hand the call back over to Kai Oistamo for any additional or closing remarks. Over to you, sir.

[Kai Öistämö, executive]

Thank you, everybody, for participating. And if you have any further thoughts or further questions, you know how to reach us. Just ping Paula and we will get back to you and we are happy to give you more color or ask any questions you may have. So thank you, and have a great weekend.

[Operator]

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.