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Edited Transcript of VAIAS.HE earnings conference call or presentation 19-Jul-19 10:30am GMT

Half Year 2019 Vaisala Oyj Earnings Call

Helsinki Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Vaisala Oyj earnings conference call or presentation Friday, July 19, 2019 at 10:30:00am 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 of the Board

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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 have a look at the Vaisala Second Quarter Results. With me at this side of the line, we have our Chairman of the Board, Mr. Raimo Voipio.

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Raimo Voipio, Vaisala Oyj - Chairman of the Board [2]

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Good afternoon.

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

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As well as 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 Head of Investor Relations, Ms. Paula Liimatta.

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

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Good afternoon, everybody.

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

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And yours truly, Kjell Forsén, President and CEO of the Vaisala Group.

I have to say that in a nutshell, Vaisala had a great second quarter and it's really a joy to tell you about it. We had a great order intake, and of course, the 2 acquisitions we recently made contributed a lot, which is a good thing, and it shows that the acquired companies do well and they are on a growth track, but also the organic growth, the growth without the acquisitions, was on a high level, meaning that basically all of Vaisala is doing well and growing.

So in the second quarter, we had some important product launches and some products we have launched earlier really as well got on a growth track, like our continuous monitoring system as well as our power monitoring-related equipment.

But that was the introduction and now let's see what we have on the agenda here.

So this is a summary of the key figures and you see that orders received is up 38%. Of course, order book as well. Net sales, up 20%; and gross margin, most importantly, up with 4%. We'll get back to the reasons why that is the case a bit later.

And you also see a very good development in the EBIT, in the operating result, going up actually 53% from EUR 4.7 million to EUR 7.2 million.

Naturally, our EPS is developing favorably as well. Cash flow, however, is negative and that is a result of the growth we do see in the second quarter and a result of the fact that invoicing -- or the growth really was towards the end of the quarter. So we have invoiced but not yet received all the related cash.

Let's go forward and look a bit more in detail at orders received. Up with 38%, and this time around, we were also helped by favorable currency rates, mainly U.S. dollar. But even if you exclude that effect, orders received would be up with 34%.

And as I just said, acquisitions did well and the organic growth was good, being 18% in orders received, quite a figure.

Order book naturally up as well, 20% actually year-on-year, and the effect of acquisitions here is EUR 11 million.

Out of this order book, some EUR 94 million is going to be delivered during the current year. The corresponding figure last year was EUR 80 million, but you have to keep in mind that at that point in time, we didn't have the acquired companies. So figure's not really comparable in that sense.

Then what about net sales? That is up with 20% and positive currency effect here, but without that, 17% in comparable rates net sales growth.

Organic growth is precisely or roughly on the level that we state in our long-term targets, it's 5%.

Operating result, as I said, improved very nicely as a consequence of net sales growth. We do have the scale effect traditionally in Vaisala, that we have a growing margin with growing sales. And we certainly see that this time around, we do have a good margin in the products we delivered and good margin in the projects we delivered as well.

And I think this is quite an impressive achievement, actually, this operating result, taking into account that we didn't really have this amount of amortizations last time around, a year ago. Now we had EUR 2.2 million coming from amortizations related to the acquisitions, and we also did terminate a product line in second quarter and here's almost EUR 1 million provisions for that. But despite these negative factors, 53% growth in operating result.

Cash flow being negative, I mentioned the main reasons for that and Kaarina is going to get back to that in a minute.

Then let's have a bit closer look at the business areas. And we start with Weather and Environment, and I think this is quite an orders received growth we see here, 49% up. And it is impressive even if you exclude Leosphere, the acquired company, it is up 26% in organic figures.

Some positive currency effect here, and -- but there's also one very notable thing here, that we didn't have any of these sort of big, huge orders that we had in the first quarter and historically we had every once in a while. But we had a flood of midsized orders, basically all below and well below EUR 5 million. I believe the largest one we had was EUR 4.6 million or so. So -- and good news is also that the growth -- the orders really came from all over the world.

So on Weather and Environment, order book is up with 20% year-on-year, and it's quite an increase in what to deliver during this year as compared to 1 year ago but keep in mind that we didn't have the acquisitions last year.

Net sales is up with 17%; in flat currency rates, 15%. And good development in operating result here despite the amortizations and the R&D expenditure, which at this point in time is at 15%. So quite a high level of R&D spending here.

Then looking at the Industrial Measurements. Basically, it's strong result all over the place here. Orders received, up 21%; 17% in flat rates; and organic growth is 5%.

Order book, up 22%; net sales, up 26%; and here, the organic growth on net sales is 12%. So nicely double-digit organic net sales growth here.

Operating result on a high level as well, although R&D expenditure is around 14% of sales here.

Gross margin, up with 4%, and I maybe forgot to mention that the gross margin improvement was 4% in Weather and Environment as well.

Well, then we have a table of financial figures here, and would you, Kaarina, say a few words around this?

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Kaarina Muurinen, Vaisala Oyj - CFO [8]

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Yes. The first half order intake was very strong, EUR 211 million, and it was equally strong in all geographical areas.

In Weather and Environment, the order intake during the first quarter included large project orders, whereas the second quarter, order growth was generated by medium-sized orders.

In Industrial Measurements, the first half order intake was very strong and it was strong in all regions.

During our first half, the order book increased by EUR 31 million, including acquisitions, and the growth was 20%. And the growth of acquired companies of this EUR 31 million was EUR 3 million. So the traditional Vaisala was generating still majority of the order book growth.

Then net sales was increasing 15%, and with the currency impact, which was about EUR 4 million, the increase was a couple of percentage points lower.

Our operating expenses were growing by 26% and the reason for the increase in operating expenses is mainly expenses coming from the acquired businesses.

Operating result for the first half fell short from the comparison period and this was due to the weaker first quarter. And actually, the operating result for the first half was made during the second quarter. The shortage of the operating result, main reason being the amortization of intangible assets totaling EUR 5 million. And then from EUR 2 million to EUR 3 million expenses coming from the one-off expense related to a lease contract termination and that was already booked during the first quarter. And during the second quarter, we booked a provision, which is related to a decision to terminate one product line in the U.S.A.

Then our cash flow from operating activities was EUR 2 million compared to EUR 8 million previous year. And the main reason for this one is the increase in net working capital and it was coming -- the difference is EUR 9 million and EUR 4 million of that one is coming from increase in inventories and EUR 6 million is coming from the decrease in liabilities. And receivables did not change so much during the first half. So this is the reason why our operating cash flow was much lower than what it was a year ago.

Then our capital expenditure almost doubled from previous year's first half, and this is mainly reason to the building projects we are having in Finland, Vantaa and the other one in Louisville in U.S.A., Colorado.

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

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Okay. Thank you, Kaarina. That was highly informative.

Then the market outlook and there is some slight adjustment here. But what we state is that the market for traditional weather observation solutions remains flat. Then we have some improvement in Europe and Europe did very well now in the second quarter. Possibly also in China and Americas, China being a bit more volatile, and then a flat situation in Asia Pacific, Middle East and Africa. Digital solutions demand should develop favorably.

When it comes to Industrial Measurements, we expect the market to grow basically in all regions. And continuous monitoring systems, that market we see it to be very healthy and positive as well. And then liquid measurements, which we entered now with the acquisition of K-Patents, that market is also developing positively.

Then also, while still on Industrial Measurements, we continue still to work on channel development and market entry. We are not really as fully global in this side of our business as we are in Weather and Environment.

The outlook, the business outlook for the current year is not changed, meaning that net sales will be in the range of EUR 380 million to EUR 400 million, and the operating result EBIT in the range of EUR 25 million to EUR 35 million. And the amount of acquisition-related amortizations has a big influence on the EBIT for the full year here.

So that's what we had in mind to summarize the second quarter. Now over to your questions. And operator, please?

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Questions and Answers

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Operator [1]

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

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Joni Grönqvist, Inderes Oy - Analyst [2]

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It's Joni here. First of all, congratulations for the good result. I have a couple of questions. First, I would like to start with the -- maybe just a comment. We've seen in the beginning of the year that -- or if you compare Q1, you had an organic sales decline of 4% and now, you had an organic growth of 5%. So could you maybe to start comment a bit if there's anything in the market that has changed?

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

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Well, I mean, we came into this year with a lower order book and we had a good order intake last quarter last year, but didn't really see the effect of that yet in the first quarter. Now we are sort of delivering from the growing order book, and I would say that is the main effect, really, on Vaisala level that we see.

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Joni Grönqvist, Inderes Oy - Analyst [4]

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Okay. And you said that it is coming from all regions. So but -- then a follow-up a bit on this. So do you see any reason now why it should slow down? You had a good order intake also in Q2. So I assume that you expect the good trend to continue.

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

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Well, we expect to stay within the guidance level that we have. So don't see any reasons to change that.

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Joni Grönqvist, Inderes Oy - Analyst [6]

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Okay. Then maybe a final question on this. Do you see that -- is some part of this like pickup in order intake, is it due to synergies from the acquisitions? Or is it just that -- or from the products that you are selling that you acquired additionally? Or is this just a pure, so to say, old portfolio growth?

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

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Well, it's both, actually. I mean both sides are doing very, very well here. And as you have been following Vaisala for some time now, you know that Weather and Environment has this sort of periodic swinging with a weak year every once in a while. And this should not be one of the weak years. So that is one part of the answer to your question. But then I would say that personally, I'm most happy that some of the new product areas that have been on the market for quite some time, and I'm mainly thinking of the power monitoring, really had a very strong development here with doubled sales figure in the second quarter. And then, of course, also the continuous monitoring system that I've mentioned, where we had business growing with, well, 30% and above, that is, I think, very, very promising going forward.

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Operator [8]

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

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [9]

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It's Matti. Related to the power transmission products, which you just described that it doubled from last year, would you say that this is a kind of real improvement and indication of orders finally starting to come on? And I'm just thinking that was the comparable quarter perfectly normal a year ago so that doubling from that clearly indicates that there would finally be some demand for this product?

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

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Well, that is a bit of a hard, hard questions to answer. Like the famous Finnish philosopher says, it's a bit 50/60 situation. But since we did get these orders from several customers, not just one, I have to say that I'm getting more and more optimistic that we are reaching the point where we do see real growth for power monitoring. And this is actually -- if we look back on products we have introduced in our industrial segment, unfortunately, market uptake tends to be slow and take many years. And maybe it is so that we tend to forget that and get a bit too optimistic. But basically, power monitoring follows a perfectly normal curve when it comes to market update in Industrial Measurements products. Takes years.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [11]

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All right. Then a second one related to the gross margin in industrial business. I think you now recorded a record gross margin of 64.9%. I think it was the highest quarter ever. Were there any kind of abnormal reasons why it was so good? Or was it just a kind of combination of good sales mix and basically volumes also improving? And then the kind of cost increase that you have had was kind of mitigated by these more positive things, and then, therefore, the gross margin was good? Or was there any exceptional items behind the good gross margin in industrial?

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

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Well, Thank you, Matti, for that comment. It would be nice to hear you repeating that a couple of times going forward. But the short answer is no. But if I expound on that a bit, there really was nothing abnormal. It was just business as usual, really. But just to make sure, we can ask our CFO to give her point of view as well.

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Kaarina Muurinen, Vaisala Oyj - CFO [13]

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So the second quarter volumes in the instrument factory were high and that was bringing the higher gross margin that we saw in the second quarter report. We didn't have any special cases during the second quarter. So this is kind of a normal performance from our operations.

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Operator [14]

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

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Jonas Forslund, Evli Bank plc, Research Division - MD [15]

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A really good result. Congratulations on that. Could you remind me a little bit again about the sales synergies you see with Leosphere and K-Patents? Now looking at Leosphere in this quarter, it contributed around EUR 8 million in sales. And now that it's part of the Vaisala system and the sales channel, it's not about -- it's not only looking at this year but maybe next year. How much -- what sort of a growth figure is it you're aiming for now that it's part of the whole system? If you could give us some color on that then. And the same question also about K-Patents in a way so that we can understand a little bit what you're aiming to achieve with this acquisitions from sales synergy point of view.

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

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Well, thank you. Yes. So, so far, we haven't really had any major effect of the synergies, but we definitely expect to see it going forward. And in the Leosphere side of our business, one effect will be that the traditional Vaisala is very strong in airports, Leosphere is not. However, wind lidars, the Leosphere product, is very, very applicable on airports. So there, we expect to see a sales growth for Leosphere through the Vaisala existing sales channel worldwide. That is a very important effect. Another thing is that, like Kaarina mentioned, we have ended a product line in the U.S. That was a wind measurement product area we terminated. And actually, we see that, that sort of part of our business is being taken over by wind lidars, by the Leosphere products. So here are 2 examples of sort of synergies and cross-pollination going forward, really.

And then it when it comes to K-Patents, same applies here. So no effects really yet, but we do have common customers and we do have possibilities to combine K-Patents and Vaisala sensors into a sort of more value-adding instruments. And also, the fully global Vaisala sales channel will be an added strength for K-Patents. They are not as global as we are. So those are some synergy effects. So we expect both companies to continue nicely on the growth path that they have had.

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Operator [17]

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And there are no further questions at this time. Please go ahead, speakers.

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Kjell Forsén, Vaisala Oyj - CEO & President [18]

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So if there are no more questions, then I have to say thank you to everyone for listening to us on this very sunny, beautiful Friday afternoon. For those of you who go for vacation or maybe are on vacations, just enjoy the summer and have a good time. Thank you.

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Kaarina Muurinen, Vaisala Oyj - CFO [19]

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Thank you.

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Paula Liimatta, Vaisala Oyj - Business Controller & Head of IR [20]

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Thank you. Thank you.

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Operator [21]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.