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Edited Transcript of VAIAS.HE earnings conference call or presentation 28-Apr-20 1:00pm GMT

Q1 2020 Vaisala Oyj Earnings Call

Helsinki May 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Vaisala Oyj earnings conference call or presentation Tuesday, April 28, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kaarina Muurinen

Vaisala Oyj - CFO

* Kjell Forsén

Vaisala Oyj - CEO & President

* Paula Liimatta

Vaisala Oyj - Business Controller & Head of IR

* Raimo Voipio

Vaisala Oyj - Chairman

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Conference Call Participants

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* Jonas Forslund

Evli Bank plc, Research Division - MD

* Joni Grönqvist

Inderes Oy - Analyst

* Matti Riikonen

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Kjell Forsén, Vaisala Oyj - CEO & President [1]

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Hello, everyone, and welcome to listen into Vaisala first quarter results presentation. There are 4 persons from Vaisala online here today. We our have Chairman of the Board, Mr. Raimo Voipio.

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Raimo Voipio, Vaisala Oyj - Chairman [2]

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Good afternoon.

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Kjell Forsén, Vaisala Oyj - CEO & President [3]

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We have our CFO, Mrs. Kaarina Muurinen.

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Kaarina Muurinen, Vaisala Oyj - CFO [4]

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Good afternoon.

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Kjell Forsén, Vaisala Oyj - CEO & President [5]

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Our Investor Relations Manager, Ms. Paula Liimatta.

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Paula Liimatta, Vaisala Oyj - Business Controller & Head of IR [6]

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Good afternoon.

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Kjell Forsén, Vaisala Oyj - CEO & President [7]

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And then yours truly, speaking right now, Kjell Forsén, President and CEO of the Vaisala Group. Welcome once more.

We live in times when uncertainty and volatility is the current normal. Economic indicators go the wrong way all over the world. The coronavirus is not sparing anyone. No man is an island and no company either. But having said that, Vaisala was only marginally affected by the consequences of the coronavirus outbreak in the first quarter. Net sales grew, gross margin and EBIT improved. Order intake, to be discussed more in detail in a minute, declined in our Weather and Environment business area, but grew in Vaisala Industrial Measurements business area. To me, Vaisala's performance in this quarter really shows what we are capable of. We are successfully and constantly increasing our operational excellence as well as improving and deepening our R&D capability. When the world gets back to normal, Vaisala is certainly prepared and in great shape for growth in new areas as well as ready to cater for pent-up demand.

And then over to the actual presentation. Here, we do have the first quarter in a nutshell, and I will not yet to go into any details here. You can see that orders received is down. Order book, less so, down with 6%. Net sales is up with 4%, and quite a remarkable improvement in gross margin, more than 3% up to 56.4%. Also, I would say, a very nice improvement in our operating profit from 0 last year to more than EUR 5 million this year. Consequently, naturally a good improvement in earnings per share as well. Cash flow, we'll get back to in more detail a bit later.

So, orders received. If we -- yes, we have the right slide here. Orders received is down with 21%. Well, then what about the currency effects this year? Slightly more or 22% down in comparable rates. But most importantly, we need here to realize that the comparison quarter is really a tough one. Last year's first quarter was more or less abnormal with 2 very large order amounting to EUR 22 million. In addition to those 2 large orders, we had several others also that were on the large side. And as those of you who follow Vaisala very well know, the order intake, and especially when it comes to large projects, varies a lot from quarter-to-quarter. And if you look back over time, the order intake first quarter this year does not really stick out as an especially weak one.

Let's go on. What about order book then? It's down, but less so with 6%. And I think it's important to note here that if we compare to the fourth quarter last year, we actually have a 2% increase in our order book, meaning that book-to-bill is slightly above 1, which is a positive signal, actually. And also, some of you may remember the Ethiopia order that we actually signed last year but which is still pending ratification of the Ethiopian parliament, well, that is still the case. So the Ethiopian order is not in the order book.

What about net sales then? Here, we have a nice growth of 4%. And it's the EMEA region that really sticks out as being particularly strong here, because the growth in EMEA was 26%. That's quite something really. Vaisala's delivery capability was perfectly normal during the entire quarter. We do have to work harder when it comes to sourcing. We do keep track of all our key suppliers, make sure that they are in shape and that they have the capability to deliver what we need. And we have also increased our stock to make sure that if there are disturbances when it comes to our suppliers, we can take that for quite some time without corresponding delivery disturbances.

And speaking of deliveries, most of everything we deliver goes on air cargo, and we know that regular flights are basically halted. But the courier services is up and running basically as normal, and so are our deliveries as well. Still when it comes to net sales in the fourth quarter, Asia Pacific was the weakest region here, going down with 13%. And there we might see the corona effect. Another thing which really sticks out is the growth we have in project business. So the relative share of our project business grew with 27%. And that really, in combination with an improved profitability, is quite remarkable. But I'll let our CFO Kaarina dig into that a bit more.

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Kaarina Muurinen, Vaisala Oyj - CFO [8]

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So the operating result of the first quarter was strong. The main reason for the good operating result is the improvement in gross margin. The improvement was about 3 percentage points and we achieved 56.4% gross margin during the first quarter, which for the first quarter is a good result. And behind the gross margin improvement, we had improved gross margin in project business as well as in our digital business, within Weather and Environment business area.

In Industrial Measurements, the gross margin improvement was coming from both products business and services businesses. The net sales growth and delivery growth was around 4%. So this is a very good result, improving the efficiency with the 4% net sales growth and delivery growth.

Operating expenses were on previous year's level as -- due to the limitations caused by the coronavirus situation. We were not able to travel and there are limitations to all events, for example, marketing events. So the operating result was EUR 5.2 million, which is 6% compared to net sales.

And then amortization of intangible assets is now lower than what it was a year ago, it was EUR 1.7 million, as the amortization is not including order book anymore.

Then our cash flow for the first quarter. Change in cash was EUR 3.2 million negative. So the cash decreased and it was mainly due to the increase in investments and especially the investments to the 2 building projects that are currently ongoing, the other one in the U.S. and the other one in Finland, the R&D building. And the building projects were totaling EUR 5.5 million. The result for the period was generating, altogether, more than EUR 12 million positive cash flow.

Our financial position continues strong. Return on equity was 8.1 percentage points compared with the 0.4% a year ago. And the gearing is almost 0, so minus 0.5% compared to the minus 15% a year ago.

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Kjell Forsén, Vaisala Oyj - CEO & President [9]

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All right. Thank you, Kaarina. Then let's have a look at how the business areas did, and we start with Weather and Environment. So this is where the orders received is down with 31%, so a larger figure than we had for the group as Industrial Measurements had been improving or growing order intake. And the main reasons for this then really is the very tough comparison quarter last year, the large orders I already talked about.

Order book is down here with 8%, however, net sales is up with 4%. We do have a very nice improvement in operating result here as compared to last year. It's still negative, but that's the way it usually is when it comes to Weather and Environment. R&D expenditure, basically on last year's level. This is where we do have the strong growth in project net sales, so up with 27%. As I already mentioned, EMEA was the strong region here, both in project and product deliveries.

Gross margin really improved remarkably here with 4%. And that then as a consequence of what Kaarina just mentioned, that are the improvements we have in our digital business as well as our capability these days to make project business in a perfectly profitable fashion.

All right. Let's go on and have a look at Industrial Measurements then. Well, what really sticks out here is, of course, what we have in the heading here, the EBIT. But before we get to that one, we do have a growth here in orders received, up 2% or flat in constant currencies. Order book is up with 5%. And basically, we do not see any corona influence here.

Net sales up with 2% and gross margin really, really strong, almost 66%. That is quite something, really. And as a consequence, of course, then operating result is improved as well, with up to 21.4%.

We did see orders received increasing in Americas and EMEA. China actually was flat in the first quarter. Net sales increased in all regions and shows really the strength we have here and the resilience, I would say, of the business as well.

Then if we go over to the market outlook and business outlook, we did issue a new guidance. And so we lowered our guidance for both net sales and operating profit. In relative terms, the net sales guidance was lowered more than the EBIT guidance. And what are the underlying facts for that? Well, going forward, we feel that there might be a delay or postponement of really large orders on Weather and Environment business. Emerging markets are of growing importance in our Weather and Environment business, and emerging markets are not really resilient to the consequences of the coronavirus outbreak. So they will be as briefly especially hit and thereby hitting our business as well.

Then as I mentioned in another context that regular flights are basically stopped now, meaning that aviation is not really there. So meaning also that there was a loss of income from aviation weather services, which is important to several of our customers. However, we do foresee that the market for Vaisala Industrial Measurements will keep growing. This is where we really have the resilience. However, we feel that growth will be impacted and slightly smaller than last year.

So the new guidance we have then is for net sales to be in the range of EUR 370 million to EUR 405 million, and operating result or EBIT in the range of EUR 34 million to EUR 46 million.

And with that, over to your questions. So operator, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our question comes from the line of Matti Riikonen from Carnegie.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [2]

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It's Matti from Carnegie. Two questions, if I may. First of all, when you talk about the weather business slowdown, which is part of your guidance cut fairly recently, should we expect that that is mainly due to overall softness among the weather customers plus, of course, then the kind of emerging market customers where you tend to get these large lumpy orders occasionally? So is it so that when you also mentioned the budgets that are likely to be cut, should we understand that that would work in the normal economic mode so that, first, you get cuts in your order intake, and then that will be reflected in your net sales, probably in 2021 as lower net sales? Or do you see that already this year, you would see a more meaningful cut in orders, which are delivered during the same year? So it's -- if you understand what I mean with the first question.

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Kjell Forsén, Vaisala Oyj - CEO & President [3]

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I think I do, Matti. Thank you for the question. And yes, I think both of your statements are true. That -- of course, the delivery time for very large projects is usually several years. So if those are postponed, that then has an effect also over time. And it may also be that smaller orders are affected, but to a lesser extent, then also impacting this year. And all of this then leads to the new guidance we have issued. But it's also important to remember that we have also been able previously to compensate with a larger number of midsize and small orders for the lack of large orders. And this is, of course, what we are going for this time around as well.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [4]

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All right. Fair enough. And then the second question was related to industrial business. And it seems that the growth in Q1 was fairly low compared to what you usually generate, and particularly when you say that there was no coronavirus impact yet in Q1. So could you explain that, which parts of the industrial business were actually, kind of, perhaps weaker than you expected? Or would you say that Q1 was totally normal with 1% growth?

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Kjell Forsén, Vaisala Oyj - CEO & President [5]

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Well in Industrial Measurements, of course we do go for higher growth than that. But I mentioned that China was flat as opposed to growing in the fourth -- first quarter. So that then actually, most likely, is a consequence of the coronavirus, although the impact of that is not huge. And as I mentioned in Industrial Measurements, we did see orders received increasing in both Americas and EMEA. Actually, a very good outcome in EMEA. So we are very positive when it comes to Industrial Measurements going forward as well. Did I answer your question?

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [6]

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Yes. So if I understand correctly, you're basically advising us to not look at the 1% growth in so detail. So basically, you think that the Industrial Measurement demand is still pretty much at last year's level, of course, deducted by the coronavirus impact, so that there is no structural change in the demand pattern geographically or otherwise in the industrial, so that this one quarter just happened to be fairly low, but you don't see any kind of relation to coronavirus with that growth?

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Kjell Forsén, Vaisala Oyj - CEO & President [7]

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Well, as you say, we do not see any structural change here. The wording in our guidance is that we see a slowed-down growth. So we do still see a growth for this year in Vaisala Industrial Measurement.

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Operator [8]

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(Operator Instructions) And our next question comes from the line of Joni Grönqvist from Inderes.

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Joni Grönqvist, Inderes Oy - Analyst [9]

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I have a couple of questions. First, I would like to continue a little bit on the comments you made on the outlook and keeping in mind the good Q1 that you delivered. So if I understand correctly, you're still quite confident on Q2 as well. So are you seeing then, taking into account the lowered guidance, so are you expecting more in the third and fourth quarter to see the corona effects coming in?

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Kjell Forsén, Vaisala Oyj - CEO & President [10]

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Well, can't really comment on 1 quarter level here, guidance is for the rest of the year. But of course, you are on the right part here because we do have our seasonality there, where in our Weather and Environment business, the bulk of the business tends to be toward the end of the year. But more detailed than that, I can't really be at this point in time.

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Joni Grönqvist, Inderes Oy - Analyst [11]

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Okay. Then you mentioned in the report also that you found some alternative ways to deliver projects and services. So could you maybe give some examples of what kind of ways these are? And are these something that you could also continue doing after the crisis? And thirdly, on this same topic, so has this also helped in improving the gross margin?

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Kjell Forsén, Vaisala Oyj - CEO & President [12]

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Could you please repeat the third question?

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Joni Grönqvist, Inderes Oy - Analyst [13]

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Yes. So it's -- or if we split this question. So could you first give some examples of which alternative ways you found to deliver projects and services now in these corona times?

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Kjell Forsén, Vaisala Oyj - CEO & President [14]

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All right. If you want me to start with that one, in general, like I said here earlier on not only related to projects, most of what we deliver goes as air cargo and actually also on regular flights, not only on sort of transportation courier flights. But as things are what they are right now, basically, everything goes on courier flights, and that works really well. And so that's not a problem.

Then when it comes to projects, then we do have, of course, project managers who tend to travel to where the projects are being implemented. And that is, of course, not possible at the moment. But we have actually, very nicely been able to support our representatives. And you may remember that we have more than 100 representatives in both our business areas out in the world and mainly in the, sort of, developing countries. So our project managers have been able to remotely support our representatives and customers to carry on with the installations and projects.

And also, I would say, using very innovative new methods. One thing we are trying out right now, and which looks very promising, is to use augmented reality. Without going into details in that one, that is a very promising way to actually carry on the project management remotely.

And you also asked whether we think that this is something that we might continue to do in the future. So will we continue to work in this way? I think that is perfectly possible that we will, to some extent that some of the good new practices we come up with due to the coronavirus actually will stay with us as positive practices.

And one other -- I'm not sure if you referred to that one, but when I talked about the new guidance, I said that in relative terms, the profitability guidance is more lowered -- sorry, the net sales is more lowered than profitability guidance, and this is partly due to what we just talked about. So as we are very extensive travelers -- basically, everything we do is export business -- and as we can't travel, of course, we have less travel cost, which then is actually improving our profitability.

So Joni, that was perhaps a slightly larger answer than what you asked for.

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Joni Grönqvist, Inderes Oy - Analyst [15]

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No, actually. I think it was -- the things that I was looking to. So post-crisis, we could expect that you continue with this, and it's actually improving your profitability. So something good also from the crisis.

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Kjell Forsén, Vaisala Oyj - CEO & President [16]

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Yes. Yes. But I'd really like to point out here that we do not see this profitability improvement really in the first quarter. So with the travel restrictions, et cetera, they caught on towards the end of the quarter. So the effect of that is not really extensive in the first quarter.

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Operator [17]

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Our next question comes from the line of Jonas Forslund from Evli Bank.

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Jonas Forslund, Evli Bank plc, Research Division - MD [18]

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A question regarding the Industrial Measurements' outlook or just a clarification when you say that this year, Industrial Measurements is expected to grow less than last year, and last year was a very exceptional year where the top line grew quite significantly due to the acquisitions as well. So do you mean that Industrial Measurements will grow less than the organic growth was last year for Industrial Measurements?

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Kjell Forsén, Vaisala Oyj - CEO & President [19]

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Thank you, Jonas. That is a very good clarifying question. So when we say that we will have less growth, then we are comparing with the organic growth rate.

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Jonas Forslund, Evli Bank plc, Research Division - MD [20]

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Okay. Good. Good. Then perhaps the topic that you touched upon relating to your operating expenses, for instance, you mentioned traveling less now, maybe there's less activity. But how do you see your -- do you see any measure -- are you taking any measures right now or planning to take any additional measures to control your operating expenses so they will -- due to the crisis and due to the fact that it's quite difficult to see how things will go, but cost is something that you can sort of control a little bit? Are you taking any measures now or planning to take measures to sort of control your operating expense level so that it could end up not growing that much this year, for instance?

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Kjell Forsén, Vaisala Oyj - CEO & President [21]

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Yes. I think we'll let Kaarina answer this one.

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Kaarina Muurinen, Vaisala Oyj - CFO [22]

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So, so far, the cost reduction that we foresee in our operating expenses and also partially as being part of our cost of goods sold is, of course, the travel that has almost stopped completely. Also expenses that are coming, for example, from marketing events or other activities that require people being present, multiple people being present, those will be canceled for the time being. And also some external spending like professional services will not be on the normal level because you cannot continue these projects due to the limitations. Those are the cost savings that we foresee for the time being.

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Jonas Forslund, Evli Bank plc, Research Division - MD [23]

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Would this then, perhaps summarizing, would they result in a -- what kind of cost operating expense development would you expect to see based on these -- these measures this year? Would you expect to have higher OpEx or approximately the same? Because in history, of course, operating expenses usually go quite nicely up all the time with sales, but how do you foresee operating expenses developing?

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Kaarina Muurinen, Vaisala Oyj - CFO [24]

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I can comment on our R&D activity, where we have a long-term objective to continue investing in our R&D and continue the research and development activities. And there, our objective is to continue all the projects that were planned for this year. And we are aware that there will be difficulties, especially in testing the products in laboratories. But anyhow, we will do what is possible in order to progress as planned.

Otherwise, I would say that we didn't give any guidance on the operating expense levels, how they will be developing compared to previous year.

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Operator [25]

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(Operator Instructions) And as we have no more questions registered, I'll hand back to our speakers for any closing comments.

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Kjell Forsén, Vaisala Oyj - CEO & President [26]

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Thank you very much for listening to us and also for the very good and clarifying questions. Thank you very much.

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Kaarina Muurinen, Vaisala Oyj - CFO [27]

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Thank you.

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Paula Liimatta, Vaisala Oyj - Business Controller & Head of IR [28]

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Thank you.