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Edited Transcript of VAIAS.HE earnings conference call or presentation 12-Feb-20 2:00pm GMT

Q4 2019 Vaisala Oyj Earnings Call

Helsinki Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Vaisala Oyj earnings conference call or presentation Wednesday, February 12, 2020 at 2:00:00pm 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 - Independent 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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All right. Warmly welcome all of you to have a closer look at Vaisala's 2019 last quarter and full year results. We have a group of Vaisala people in the room. First of all, our Chairman of the Board, Mr. Raimo Voipio.

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

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Hello. Good afternoon.

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

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And 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, Paula Liimatta.

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

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Hello.

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

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And yours truly, Kjell Forsén. And it will be me and Kaarina who'll do the presenting here today.

I have to say that I and we are really happy to present the outcome of last year because as you can see from the heading here, it was a truly excellent year, including the last quarter. And I really have to point out that there are no quick wins in last year. What we have achieved in terms of net sales amounting to EUR 403 million with good profitability, that is the result of long-term systematic renewal and improvement. A result of that hard work is the very well-working foundation in Vaisala, a foundation for our business. And with that, I refer to our capability to create a winning product portfolio, our R&D machine, the benchmark-level Vaisala Production System, our market reach and channel, Vaisala's ability to do business in all corners of the world and also implement complex projects all over the world. And we do all of this in a sustainable and responsive way.

Now that may, of course, sound very good but perhaps not overly exciting really. But consider what business Vaisala is doing. What is the business where Vaisala is? In this area of climate change, with all its consequences such as extreme weather, consequences of that, the ambition to get rid of fossil fuel, renewable energy and the other global megatrends such as urbanization, deforestation, right, so mega cities; technology-wise, big data, artificial intelligence, Vaisala is really in the crossing point of all these strong megatrends in the world. And what we do and what we stand for is extremely relevant and meaningful for mankind and for the good future for this planet.

We got several good demonstrations of that last year. Some of them, unfortunate, you could say, the main one being the Hurricane Dorian that hit Bahama Islands half year ago with devastating consequences. However, the Bahama Islands are prepared for that by ordering and installing a nationwide weather infrastructure network from Vaisala that gave Bahamas the capability to issue warnings and for the authorities to take the necessary actions, thereby saving lots of human lives and property. That is sort of everyday business in Vaisala. That is what we do and stand for.

But with that introduction, let's have a look at the results, what did we achieve. And let's -- we'll start from the fourth quarter of last year. And I won't read through the slides here. I'm going to pick some main points here.

A year ago, we went into the new year with a -- what we thought was a thin order book or it was a thin order book on the weather side of our business. And we felt that it's a bit uncertain what we will achieve on the Weather and Environment side during the year. We didn't see really any big, big things coming our way in the sales funnel. But we have had very good orders received all through the year, and we end the year and go into the current year with a 15% higher order book than we did a year ago.

We have had very good net sales. So our delivery capacity has been very good, net sales up 9%. And most significantly really is the development you see in the gross margin which is up from 54% to 56%, contributing significantly to the profitability in Vaisala. Operating result in the fourth quarter being 15%, our net sales really on a good level especially considering the amortizations we do as a result of our acquisitions. Consequently, our earnings per share is up to 41%. And cash flow, we get back to later.

So last quarter was a bit slower in the growth of orders received. It was up with 2% in comparable rates. So last year, currency rate development was positive from Vaisala's point of view, contributing to our net sales some EUR 8.5 million or so. Organically, in the last quarter, we actually went down with 3% in orders received here.

Then I just mentioned the higher order book. And of course, it came significantly down as compared to the third quarter due to our very high delivery volumes and basically all units in Vaisala having high delivery volumes in the fourth quarter, but nevertheless up 15% year-on-year. And one -- talking about climate change and consequences, so that one contract directly resulting from that is the Ethiopian nationwide infrastructure contract from last year, which is not in our order book as it's still expecting and waiting for the Ethiopian parliament ratification before we enter it into our order book. We expect that to take place during this year.

Still on the fourth quarter of last year, net sales, as I said, up 9%. I think quarter-on-quarter, we had a very beautiful development during last year. And on this slide, we have our business separated in products, projects and services. And you can see the good development we have here. And we also have your geographical distribution here where you can see how it developed. And you can see Asia Pacific being slightly down here net sales-wise and Americas being flat here.

Net sales increased 9%, in comparable rates 7% and 2% organically. So acquisitions really added a lot to Vaisala business last year.

This might be a bit busy slide here, but you can see our improving operating result here and actually being on a very good level following net sales growth and then the aforementioned gross margin improvement. Amortizations in fourth quarter, EUR 2.4 million as a result of the acquisitions and then the 2% better gross margin contributing here.

And Kaarina, perhaps you say a few words about the cash flow.

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Kaarina Muurinen, Vaisala Oyj - CFO [8]

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Yes. We had during the fourth quarter very good operating cash flow. And it was generated by the excellent operating result as we didn't have any changes in our net working capital level. So only the good result was generating the cash flow.

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

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Okay. Thank you. And then let's have a bit more detailed look, so how did the business areas, respectively, do in the fourth quarter, and we started with Weather and Environment. Here, we actually have orders received going down with 3%. And that is because no large projects hit came our way in the last quarter. However, orders received is on a good level. We are in no way disappointed with the order intake in the fourth quarter here.

Order book is up with 17%. And it was the Weather and Environment order book which was a bit on the thin side a year ago. So now it's up with 17%. Net sales was up with 5%, organically 4% in last quarter. And operating result, of course, improving as a consequence of net sales growth and better gross margin.

All right. Perhaps that were some main point from this slide, but really significant, the gross margin improvement we have here despite complex and difficult projects to fulfill.

Industrial Measurement in the fourth quarter, very strong quarter both in orders received and net sales. Orders received actually up with 19%. And here, we have the K-Patents acquisition. Organically, growth of orders received was 8%, also good. And order book up with 7%. Net sales up a whopping 18% here. And even in constant currencies, it would be a very good 15% there. Also here, K-Patents, the acquired company, contributed very well as organically growth of net sales is 5%. Gross margin is really high here, almost 64%. I think that's the highest level we have seen so far.

Then over to the full year 2019. And here, you can have, for the 3 last years, orders received and net sales development. And you can see that mainly due to the weather order intake fluctuating quite a lot because of the big orders for projects we occasionally get. It's not a linear curve in orders received, but it's a very, very solid development than on the net sales side. And comparing to last year, on full year level, we do have a very good growth in net sales here. I think it is this 15%.

Of course, we do have significant growth in operating expenses as well. And here, we have to keep in mind that not only do we ourselves invest all the time more and more into R&D and sales and marketing to go for growth, we also now have added the OpEx from the acquired companies from both of them. So that is important to keep in mind really.

CapEx is up here significantly, and that is mainly because of the building projects. We have 2 of them, one in Finland, one in the U.S. going on. And parts of this, we get back to later.

Full year for Weather and Environment, really excellent sales performance here. Of course, also, order received is really good development here. Order book, we talked about. And the gross margin, if you look at the gross margin development over the last 3 years, 47%, 48%, almost 50% gross margin, really solid development here. So sort of the machine is working better and better with higher productivity. This is the solid foundation I was talking about. Operating result on a very good level.

Industrial Measurement then, excellent performance also in financial terms here with good growth and good profitability. The high gross margin I mentioned, also here, we see the jump from 62% to almost 64%. OpExes are up here significantly. So in relative terms, we do invest more of the growth investments more on the Industrial Measurements side to organic investments we do. And that is because the leverage, in a way, is better on the Industrial Measurement due to the higher growth rate and the high profitability on this side of our business.

And Kaarina, perhaps you walk us through our financial position.

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Kaarina Muurinen, Vaisala Oyj - CFO [10]

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Yes. So I picked up a couple of the KPIs that are describing last fiscal year. Return on equity has been improving year-by-year, and in 2019, it achieved 17.7%.

Our capital expenditure has been increasing from previous year by EUR 12 million, and that's mainly due to the 2 building projects, the other one ongoing in Finland, Vantaa, the R&D building; and the other one in U.S.A., the office building in Louisville.

And then our gearing percent is now minus 2.4%. And the change is mainly due to decline in cash with about EUR 13 million -- EUR 12 million, EUR 13 million and some increase in interest-bearing liabilities mainly coming from the change in the lease accounting. So we have the lease liabilities included in here.

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Kjell Forsén, Vaisala Oyj - CEO & President [11]

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Okay. So what's the plan then when it comes to dividend?

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Kaarina Muurinen, Vaisala Oyj - CFO [12]

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Yes. The Board is now proposing a dividend of EUR 0.61, which is an increase of EUR 0.03 per share to be paid for fiscal year 2019.

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Kjell Forsén, Vaisala Oyj - CEO & President [13]

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So that's the proposal to the AGM.

Okay. What about the outlook for the current year for 2020? In broad terms on Weather and Environment, you could say that the markets are either stable or slightly growing, basically all of them here. And we have basic drivers in place. I mentioned at the introduction a couple of them such as climate change and increasing amount of extreme weather. We have the renewable energy. We have the development in transportation and so on that drive the markets there. But still, they are either flat, stable or slightly growing, whereas on the Industrial Measurements side, we do see basically all markets continuing to grow, including then continuous monitoring systems where we do have a new offering in place as well as power industry where we have made good advances during last year.

And this leads to the following business outlook. Net sales in 2020 will be in the range of EUR 400 million to EUR 425 million, and the operating results will be in the range of EUR 38 million to EUR 48 million.

That concludes the presentation. And now over to your questions, please.

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Questions and Answers

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Paula Liimatta, Vaisala Oyj - Business Controller & Head of IR [1]

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Thank you, Kaarina and Kjell. Let's start with the questions from the live audience here in Helsinki.

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Joni Grönqvist, Inderes Oy - Analyst [2]

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Joni Grönqvist from Inderes. Firstly, congratulations for the nice Q and excellent full year. A couple of smaller questions. Maybe to start with orders received, you mentioned here in the report that the Weather and Environment area, there was no larger orders received in Q4. Can you comment on this? So is the pipeline as normal still and you just didn't close any bigger deals now in Q4? Or is there anything you can comment on this?

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

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Yes, I would say that your conclusion is right. There's nothing special. Large orders fluctuate quite a lot. There may be even several quarters in a row with no large project orders. However, in the fourth quarter, we had a nice volume of midsized orders.

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Joni Grönqvist, Inderes Oy - Analyst [4]

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So we could interpret that the sales mix is quite good in the order book.

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

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I would say it's normal.

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Joni Grönqvist, Inderes Oy - Analyst [6]

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Then on the R&D investments that you increased already last year, could you maybe a bit elaborate on how you feel about like increasing? Are you increasing in the same pace as sales growth or below or what's your thoughts regarding the investment levels?

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

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Well, we don't really compare it that way like you just stated. But we just go for the projects that we feel that there is a good business case for them. We reviewed each of them individually. And if we think there is a good reason for going for it, then we go for it. And some of the projects may take quite some time from start to finish as we have this sort of unique capability to develop new technology as well. So sometimes in our R&D undertakings, there is a portion of R, really the research part, before we get into the development part. And those take longer time to hit the market. But if you do just the development part, then it's a fairly quick turnaround time actually.

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Joni Grönqvist, Inderes Oy - Analyst [8]

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Maybe to continue on this a little bit still because it's been -- you emphasized it quite much in recent year. You made your R&D process more efficient as well. So is there -- how much do you feel like is there some special areas that you still try to be more efficient? So is there improvement potential in this sense?

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

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I think there is definitely improvement potential. And one thing we have done for a couple of years but we really intensified the efforts last year is to implement Lean, the Lean methodology also in R&D. And we made advances there last year, and I think there's a lot of potential in there. And I think also that we have buy-in into R&D organization to go for this. Also, there are other ways to increase efficiency, such as really carefully going through what should we do ourselves and what could we let other parties do for us.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [10]

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It's Matti Riikonen, Carnegie. Related to your guidance for 2020, it seems that the market estimates are already at fairly high level, basically at the high end of your guidance. And I was just wondering, what are you thinking when you put the range in? So is it mainly the kind of neutral look at the sales mix or some perhaps additional fixed costs that you are thinking that would land at the midpoint of your guidance? Or is it purely just a function of top line growth and then the resulting margin can be really at the high end of the range and, of course, vice versa?

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Kjell Forsén, Vaisala Oyj - CEO & President [11]

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Well, when it comes to the net sales guidance, it really comes from what we see ahead of us, what is in the order book for this year and what do we see in the sales funnel. And as we all learned from last year, it's a bit hard to really estimate and predict the Weather and Environment side of our business. I think we can see a fairly sort of linear development in Industrial Measurements side. Weather and Environment does fluctuate a lot and is hard. But the figure we have now, the range we have now is purely based on sort of order book plus sales funnel outlook.

And maybe you, Kaarina, can comment on the EBIT range.

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Kaarina Muurinen, Vaisala Oyj - CFO [12]

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So we have currently much better order book entering 2020 than what we had a year ago. But when we look at the large orders in Weather and Environment side, we have been recognizing revenue quite a lot for all of the big orders we have had in the order book for now for a couple of years. And we did not get in any new large orders during the last quarter. So that, of course, is then making us a bit more cautious about the guidance.

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Matti Riikonen, Carnegie Investment Bank AB, Research Division - Financial Analyst [13]

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All right. And if I then continue, you have had quite a sizable order bonanza, if you could say, in many large weather deals in recent years. How would you kind of say, is that the normal state of affairs? Or is there -- has there been something unusual so that many projects perhaps cooking in the sidelines suddenly turned out to be materializing in the past couple of years? And then -- or is the -- has the customer behavior changed or customer needs, have they changed in a more kind of nontraditional way so that they would be -- actually, you could see that also in the future, the orders would be improving?

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

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I think there can be -- there are several aspects in your question there really. So what we have stated publicly is that we very actively go for these capacity-building projects, like the one we had in Vietnam and like the one we will have in Ethiopia where we deliver a nationwide weather infrastructure to a developing country. That is something that we are really focusing on and going for, and we have unique capability to do that with our portfolio and with our project skills.

And I think the world has come to realize that this is -- due to climate change really, there is an accelerating need for this. And -- but the problem is that these countries typically can't really do the financing themselves. So we need that element as well. And I think there might be sort of a growing readiness in the developed part of the world to cater for this financing. So hence, we should be able to take roughly on the average one capacity-building project per year, which is then really big.

But then we have had large orders, and I guess you refer mainly to this, like Argentina, their airports there or then the road weather systems to Sweden. And of course, we very actively go for this as well, and not many others can do large projects like this. However, those are sort of more an opportunistic nature. It's not every day, it's not even every year when projects like that are up for grabs. So Weather and Environment remains a bit fluctuating hence.

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

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Jonas Forslund from Evli Bank. A question relating to Leosphere and K-Patents, which now, according to the report, are fully integrated, and you have close to a year maybe experience with them now, more or less. Now would you say that you are happy with their performance if you would consider them sort of as a stand-alone? So I know they're integrated now, but they did have a big contribution to your growth, but they would have anyway when you add a new business on to your top line. But if you would consider them more stand-alone, could you see already some acceleration in their growth based on what kind of figures they were posting before they were part of the Vaisala platform?

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

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Yes. I think Kaarina looks like she wants to answer.

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Kaarina Muurinen, Vaisala Oyj - CFO [17]

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Okay. So concerning both acquisitions, their sales performance has been meeting our expectations last year, so definitely performing according to the expectations. And due to the successful integration of our ERP, our processes, they have been both performing in profitability-wise even better than what our expectation for the first year was.

So definitely, the integration has already shown us that we can achieve synergies by doing a good integration with our systems and processes.

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

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That is definitely the case. And as you know, we have made loads of acquisitions over the years. And I would -- personally, I strongly feel that the 2 acquisitions you just referred to are the ones we have been able to integrate better than any others.

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Jonas Forslund, Evli Bank plc, Research Division - MD [19]

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Well, continuing on this acquisition path then, you have some -- quite a lot of capital expenditure this year relating to your building out the buildings. But how do you view the M&A option? Or how does the M&A pipeline look for -- look at this moment given you have a lot of CapEx already in place? And what would you say are the likelihoods of increased more M&A this year? And in which case, would it be then in the Weather and Environment to sort of try to change the profile a little bit on that business area or in the more faster-growing Industrial Measurements?

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Kjell Forsén, Vaisala Oyj - CEO & President [20]

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Well, there's not that much we can say about M&A, of course, and -- but we are always looking for acquisition objects. We always have a couple of them sort of in the pipeline that we study further actively, and I think we have gotten fairly skilled even at evaluating possible acquisition objects.

When it comes to sort of what part of our business is especially looking for that, I would say it is on the Industrial Measurements side of things. And to be more specific, the liquid measurements side of our business is really interesting. But time-wise, there are no predictions I can make.

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Paula Liimatta, Vaisala Oyj - Business Controller & Head of IR [21]

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Thank you for the good questions. Operator, please, we are now ready for the questions from the people on the phone lines. Thank you.

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Operator [22]

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(Operator Instructions) And as there are no questions on the phones, I'll hand it back to the speakers.

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Paula Liimatta, Vaisala Oyj - Business Controller & Head of IR [23]

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Thank you. We still have questions from the live audience.

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Joni Grönqvist, Inderes Oy - Analyst [24]

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A short follow-up on the acquisitions you did in 2018. Now when you had them on board for a year or so, have you discovered any new synergy potential that hasn't been realized yet but you expect to realize in this year or coming years?

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Kjell Forsén, Vaisala Oyj - CEO & President [25]

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Well, I think we have had Leosphere on board now for 1 year and a quarter. K-Patents, we have had for 1 year. And I think during the current year, there are still some synergies that we can gain.

Do you want to add something to that? No.

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Paula Liimatta, Vaisala Oyj - Business Controller & Head of IR [26]

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I think we have heard all the questions today. I would like to thank everyone and wish good rest of the Wednesday. Thank you.

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Kjell Forsén, Vaisala Oyj - CEO & President [27]

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Thank you.

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Kaarina Muurinen, Vaisala Oyj - CFO [28]

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Thank you.