Earnings Call: Q2 2021

Jul 23, 2021

Hello, and welcome to the Versella Q2 twenty twenty one Interim Report. Throughout the call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. Today, I'm pleased to present President and CEO, Kai Osamak CFO, Karina Varunan Head of IR, Polar Lemata and Chair of the Board of Directors, Villa Viper. Please go ahead with your meeting. Thank you, and welcome also from my part to Vaikov's second quarter earnings call. I am Kaijesman, the CEO of the company, and I'll walk you through the prepared remarks before opening up for questions. We had a great second quarter, excellent growth in orders and net sales and operating result margin at 10%. The recovery that started already during the first quarter of the year has continued stronger and faster than we early anticipated, and the recovery had a positive impact effect on our second quarter demand, particularly in Asia Pacific and in Europe. The recovery was visible in over all segments except aviation and in emerging markets. If we look at the geographies in China and in U. S, the economic recovery started earliest and that was clearly also visible in the orders received, especially on the Industrial Measurement side. And thanks to the strong growth in order intake, our order book now is all time high at €165,000,000 The shortage of component, which is very prevalent on marketplace today, did not affect Basel IV's delivery capability during the second quarter during the second quarter, and I'll come back to this a little bit later in the presentation. The EBIT margin was up 10% when compared to the previous year. Second quarter was 8.7% of net sales, and the operating result increased to €10,900,000 Now let's before diving into the financial figures, let's look at some of the key events during the second quarter. And I'll start with the talking about the operational excellence. We were very successful in at the pace of the increased demand, scaling up our delivery capability in a very challenging supply environment, and we were very successful in matching the demand without any hiccups on our deliveries side. And I am extremely proud of our especially on our sourcing and operations personnel and teams on making that happen in reality. The environment in terms of the component shortage is something where the established suppliers of electronics components, not only ICs, but broader also in other electronics components have had to inform us like other customers that they are unable to deliver their earlier commitments, forcing us to deal with that then evident shortage of components through acting on secondary markets, through other suppliers, through redesigning our designs to match other corresponding components And being successful in terms of delivering against the demand from our customers, especially in the increasing markets like we have experienced, is really, I think, a great proof of the excellent operational capabilities that we have in our high mix, low volume environment. The second key point I would like to take up is the fact that Financial Times listed the 300 European climate leaders of 2021, and it includes European companies that achieved with the greatest reduction of their greenhouse gas emissions reduction between 2014 and 2019, and we are very, very proud to be on the top 20 list in Europe. Our total greenhouse gas reduction during that timeframe was 94%. And we have even improved, obviously, after 2000 sorry, during the actually, during that timeframe, it was 86.9%, and we have seen since 2019, we increased that number to 94%. So I'm very proud of on our responsible investments and behavior and happy to be a leader among the leaders in terms of companies on fighting the climate change. Speaking of climate change, the weather auction systems in the face of ever increasing extreme weather conditions, especially facing the most vulnerable nations, namely Emirates. It's very I'm very happy to see that we were able to close the Ethiopia project and now have a go ahead to implement this in the coming three years together with the local authorities. I think this is an extremely important piece of infrastructure and even more important in the future in all nations around the world, but like I said, especially in emerging markets. We focus on culture and leadership practices, our ways of working and our future work to retain and recruit the best possible talent in the world. And to lead these activities, I'm very happy to note that will join we will have Timo Leskinen to join us to lead these activities in end of third quarter, beginning of fourth quarter. Vital is creating new innovations for sustainable planet. When we look at the recent events like FIT455, like I said, the very unfortunate extreme weather incidents in, for example, in Germany and Central Europe, but also around the world, it's ever more important that we carry our responsibility of fighting climate change and really building a more sustainable planet. In second quarter, we are not only I'll give you a couple of examples where we are not just talking about this, but we are actually doing this, putting our money where the market is in terms of launching new solutions and products to our customers to help them to create their operations to be more sustainable. And in second quarter, we launched several new products, all of which linked into one or more UN sustainable goals. These highlight the really the vitalized purpose and drive to create products and solutions with an impact to a better world. We are closely linked to many key megatrends today and we can play a very important role in helping as I said, helping our customers to drive their operations and decisions to be more sustainable. Example of the products solutions. In renewable energy side, we introduced a new dual LiDAR scanning LiDAR to the market, which is very important for building, especially for renewable solutions in wind parks. In the continuous monitoring system side, we launched a new combination of carbon dioxide probe and a wireless data logger, which is an example of use of this product is in vaccine research. And in air quality, the new sensor advances our offering to improve air quality monitoring and decision making capability for urban communities around the world. Now let's look at more closely into the financials during the second quarter. We had a in terms of an orders received, very strong quarter. Orders received increased by 25% compared to the previous quarter a year earlier. The increase was in both business areas And in industrial instruments, life sciences, the same market segments that led the orders received increase were industrial instruments, Life Sciences, Meteorology and Renewable Energy. Order growth continued also positively in Power Industry and Liquid Measurements and in Aviation market segments. It's worth noting, obviously, that in meteorology, this includes the earlier announced EUR 13,000,000 Ethiopia contract as well. When we look at the order book, thanks to the excellent growth in orders received, I'm very happy to note that the order book is now at the all time high of €165,300,000 This represents also a hit when we look at the quarter on quarter, it represents a 6% growth in when compared to the first quarter of this year. The increase was in both business areas. And in Industrial Measurements, the order book grew in all market segments. And in weather and environment, the order book increased in renewable energy and meteorology market segments, whereas aviation and ground transportation experienced a decrease. We had an excellent quarter also in terms of net sales. Net sales increased by 20%. If you look at the where we look at constant currencies, the net sales increase was 23%. The net sales increased most in industrial instruments, Life Sciences, Meteorology and Renewable Energy market segments. The net sales decreased in ground transportation and in aviation market segments. And then when we dive into the business areas, excellent performance continued in Industrial Measurement side. The orders received for Life Sciences as well as Industrial Instruments were very strong. And Power, Industrial and Liquid measurements were growing as well. It's worthwhile noting, while we had an excellent quarter, it's still worth noting that the second quarter comparison to previous year's second quarter obviously, the previous year's second quarter was impacted by the COVID-nineteen pandemic, which makes the percentage growth when compared year on year a bit higher. But nevertheless, I would conclude that we had an excellent performance continued in Industrial Measurements. Ments. When we look at the net sales, the net sales growth increased by 31% with increased operating result and increased EBIT percentage to an excellent 23.7% of net sales despite somewhat lower gross margin compared to the comparison quarter last year due to the slightly different mix. The gross margin was very good at 63.7%, again, slightly down compared to the previous year due to the same reason of sales mix. Net sales growth was strong in instruments, life science market segments and good in power industry. And we continue to invest in the future competitiveness in terms of R and D with 12.2% of the net sales. In weather environment business area, the strong growth in terms of our order intake continued as well. The increase in orders received was very strong in meteorology market segment, and this included, as said, earlier announced EUR 13,000,000 weather infrastructure projects in Ethiopia. The orders received increased also in renewable energy and aviation market segments And in ground transportation, the market segment decreased due to this very strong comparison period in last year's second quarter. We do not see any changes in terms of our outlook in ground transportation. The market expectation for ground transportation is expected to be stable. In well, on Environment side, the net sales growth was 14%, and net sales grew in meteorology and renewable energy market segments, The net sales in ground transportation and aviation market segments at the same time decreased. The gross margin improved by one percentage point, thanks to improved sales mix and increased volumes. And the operating result improved to EUR 1,000,000 or 1.5 percentage points of net sales. Then let's look at how this adds up when looking the first half of twenty twenty one. The first half net sales in Visalat grew by 13%. And when we if we at in constant currencies, the growth were 16%. The operating result increased following the growth in net sales. The gross margin was at previous year's level and the operating result was 9.5 percentage points of net sales. The EPS grew significantly to €0.43 and it's worth noting that the effective tax rate was low at 13%, and we estimate the effective tax rate to decline due to the ability to utilize the carry loss forwards from previously announced acquired companies. In terms of our cash flow, we had also a strong quarter strong first half, driven by excellent result, positive changes in net working capital as well as lower capital expenditures. Our financial position remains strong in all aspects. The CapEx capital expenses were down as investments to the very large building code were finished, the building project, the R And D Building here in Pampa as well as the office building in Bolivar, Colorado. The 2021 CapEx is still slightly higher than a normal year prior to these investments due to the fact that we are still investing and furnishing the laboratories here in the R And D Building here in Bangkok. Then looking at how does the rest of the year look like. We do expect that the market for high end industrial instruments to continue the growth at a strong start of the year in 2021. Life sciences and power industry markets are also expected to continue to grow as well as renewable energy in the weather environment side. Liquid measurements market is expected to continue to recover. And in meteorology markets, developing market demand is expected to continue to suffer and make recovery is expected to take longer than in developed markets, where we expect the market to be stable. And in aviation market, as you may recall, the market declined significantly during twenty twenty year twenty twenty. And the market outlook remains weak, although some market is expected to market recovery is expected to gradually to happen. This is really a tale of two cities where the domestic flying, if you look at underlying factors, the domestic flying has picked up in The U. S. And in China, whereas in Europe as well as in intercontinental or international travel remains on a very depressed or decreased levels at the moment. The ground transportation market, as I said earlier, is expected to be stable. When we look at the business outlook for this year, we raised the outlook in about ten days ago, exactly ten days ago. Based on the strong first half and despite the risks that I spoke about in terms of the component shortage, we saw an increase in it to sort of the net sales range we estimate now to be 400,000,000 to $420,000,000 and the operating result to be in the range of 40 to $50,000,000 The limited availability of components we see as expanding, and we do not see the end of this during this year, at least. And we are actively mitigating this. And as I said, we were very successful in doing this during the first half, but we are facing the same issue now during the second half. We are working with our suppliers, the secondary and tertiary sources, as well as in redesigning some of our products when needed. But especially when we have to utilize spot markets to compensate for the lack of delivery capabilities from our regular suppliers, we see that the component prices on the spot market can be many fold when compared to established supplier prices that we have. The shortage of components, therefore, has increased the material costs and the transportation costs have increased as well. And we do estimate that these will have a negative impact on the operating results during the second half of this year. Now just to summarize what I just said, we had an excellent growth continued in the second quarter with very strong profitability, and we ended up with an all time high order book of 165,000,000 This is the end of the prepared remarks. And now I'll open the floor for any questions that you may have. So operator, please. Thank you. It seems like we have no questions from the line. I will have okay. We have one question from Matti Racklan from Carnegie. Please go ahead. Your line is open. Hi, it's Matti Racklan in Carnegie. A couple of questions. First about the component and transport costs that you mentioned already in the speech. You already touched upon the topic how long you expect that to continue. But do you have any idea how long we should extend those higher costs naturally second half this year, but how long into 2022? Do you have any kind of idea how it could be? Or is it just as black box to you as it is to us? It's very difficult to say exactly when this will end. I'll give you two kind of a flat half, full half empty statements from the market the past few days. So TSMC, which is the largest supplier of integrated circuits in the world, said that they see some easing up of the supply from the side already now in the third quarter, early fourth quarter. At the same time, the CEO of Intel said, I think, this morning that he sees the shortage continue into next year. So there you go, I think, where the visibility into this is. Okay, okay. And is it so that has the component cost already affected Q2 gross margin? Or were you still relatively safe in Q2 and you expect that this price increase would take place only in the second half? Yes. So first of all, we did not see any impact of that in the second quarter numbers yet. Second comment is that there are kind of two separate issues in terms of when we talk about the price increases in terms of component prices. As I tried to allude in my prepared remarks, there's obviously kind of inflation on the marketplace and the prices like with many other things from established sources and vendors and so on. Then there's just kind of a separate item, which is more dealing with the shortage at the moment. And as I said, when one has to go to the spot market to compensate for the lack of capability to of delivery from established sources, then often you end up paying multi fold the kind of the regular prices for those components. Right. Okay. Thank you. So basically, when you had some kind of small negative impact in gross margin in the Industrial business that was just driven by the sales mix impact Yes. And nothing Okay. And technically, I just want to confirm that how it actually goes in your accounting. So when the component costs are higher, then your gross margin is affected. How is it with transport costs? Is that in the fixed costs so that we don't see all the change in the gross margin, but in the No, variable cost no, it will be above the gross margin. It's a variable cost. Okay. Okay. Good. Then related to the tax, which was extremely low, as you said, in Q2 and including those past losses becoming receivables, was this a onetime thing? Or can the tax loss carry forward still increase if you kind of see that, okay, it's even better than what you saw? So obviously, we estimated so this was an estimate of when I said the tax we estimated to have a 13% tax rate was an estimate for the entire year. And we do see that we have a possibility to benefit from the tax carry forwards or sometimes some time. Okay. Good. And then just another technicality. Were there any other unusual cost increases in Q2 except the $2200000000.02200000.0 euros cost, which was related to a previous M and A transaction? No, no, no. That's it. Okay. And then finally, if I look at your weather business numbers and particularly the order intake, which now included the Ethiopian €13,000,000 Is the weather outlook basically unchanged compared to Q1 if we just exclude the Ethiopian order? Because orders excluding that, they came down a bit. And if I interpret your comments about the outlook for weather business, I didn't see so many kind of new positives there. So is it basically unchanged? Or has it improved? It's I think it's in a big picture, I think you're right. It has not really materially changed since first quarter. As I said, we do expect the aviation eventually to recover. So a quarter of time has passed on that side since first quarter and likewise on the emerging markets. But I don't I think you're right. Your summary is fair that it has not materially changed since first quarter. Okay. And then perhaps one theme still. You discussed in the Q1 report that it's possible that some of your customers have been buying products a bit ahead of normal schedule to prepare for any kind of component shortages affecting your delivery capability. Do you still think that that would be one theme behind the kind of very strong growth in Industrial Measurement side? Or is it something that the ramp up is just being so high and strong that basically it just that was the only reason why Q2 was so strong? No. I think now when we look at the entire first half, I think the big driver on the growth behind the Industrial Measurement is that, first of all, the increased significantly increased activity, economic activity around the world and partly also the pent up demand. I mean, much of these many of these components actually go into the different processes, different facilities of our customers who are building up capacity to match today's and tomorrow's demand. Our next question comes from the line of Jonas Grondfried from Ingers. Please go ahead. Your line is open. Hi, and happy summer there for you and for the graduation for a nice result again. I'm not quite sure. I my line was a bit bad in the beginning of Matti's question. So I'm not sure if he talked and you talked about it already. But just to follow-up again on when you were hammering again market expectations and you're quite cautious being traditionally in your guidance. So again, like last quarter when we discussed, so looking now at that at the Q2 growth trend, so which things or why do you see growth slowing down in the second half that much? At least how I interpret the market comments there in the report, you see some areas in weather picking up now after the pandemic and order book is good. So first question on this, so which elements do you see slowing down in the second half? We're not really seeing any slowing down. I think part of it is if you look at comparisons to the previous year, obviously, they changed. And percentage wise, if you look at the second quarter growth, especially on the Industrial Measurement side, Industrial Measurement, we are very much hit during the second quarter of last year. So the percentage growth numbers are obviously kind of elevated due to that fact. And it really was a bad quarter last year on Industrial Measurement side, not so much in weather environment. I think then the other comment, as we've said in the when we came out with the new guidance, uncertainty in the marketplace, especially in terms of component supply is absolutely there. And as I said in my prepared comments, many, many established vendors big established electronics vendors have had to come back and tell their customers like ourselves that they are not able to fulfill their existing contracts in terms of volumes. And this is the environment that we have been we've been living now in during the second quarter and will most likely live during the second half. While we were successful in meeting the demand during the second half, this is obviously something which is kind of something we have that we have to succeed day in and day out to fulfill all the demand in the marketplace. So the component risk is only price risk. There's no risk in that you won't get any components, so you wouldn't be able to deliver. So it's purely you'll get the components. But it's on the price question. No, no. I don't think that's a fair summary at all. I don't think that's a fair summary at all. My worry, first and foremost, would be on availability of the components. And in order to get the components that may, in some cases, if you, as I said, act on the spot market that may lead into elevated costs. But the spot market is day by day dry here, let's put it that way. Okay. Okay. Then maybe thirdly, only on the Capital Markets Day. Know traditionally, you've been looking at all the or both business segments and R and D, but can you give any tiers? Or is there any specific area that you are focusing now on in this Capital Markets Day? The question you want say, great question. But no, I would not like to premarket yet or pre release anything on Capital Markets Day agenda yet. We will come back with due course of time. Thank you and congratulations for a good report again. Thank you. Thank you. We have no more questions from the line. I will hand it back to our speakers. Yes. So we have few questions also. They were already handled, yes. Johnny was on the phone line as well. They are handled, Yes. Okay. All right. So we had a few questions online, but I believe we answered all those questions as well. So with that, I would like to thank you for spending the time with us, and I wish you a very good continuation of the summer and a very good week. Thank you very much.