Earnings Call: Q1 2021

Apr 29, 2021

Welcome to the Vesala Q1 twenty twenty one Interim Report. Throughout the call, all participants will be in a listen only mode. And afterwards, there'll be a question and answer session. Today, I'm pleased to present Kai Ostomy, President and CEO CFO, Karina Morinen Head of IR, Paulo Lemaitre and Chair and Board of Directors, Villa Vorpio. Please go ahead with your meeting. Thank you, and welcome from my side as well. This is Kai Esteman. So good afternoon or good morning, depending on which part of the world you may be. So if we look at the first half, how did the first quarter come together, I would summarize it that we had a strong start of the year. The market environment turned out to be more favorable. The economic recovery visible then through multiple of our segments was very visible except for aviation and emerging markets. The economic recovery was especially strong in China and in U. S, but it was clearly visible in other parts of the world as well. And based on the increased visibility and the strong first quarter that we have, we have now narrowed our business outlook for the year. And I'll come back to that a little bit later in the presentation. The renewal of our product portfolio continued very well, and we proceeded well despite the COVID-nineteen situation, which our especially our personnel have had to fight through. We launched several new products such as Sailometer, which is in the picture here, which is a LiDAR based measurement device which enables us or the users to measure the heights of clouds, the contents of the cloud, and overall gives a very, very accurate and good visibility into the atmosphere above us, very important for the meteorological customers of ours. Also, our new R And D Building is now fully open, and it's already partly populated and now waiting for the pandemic situation to ease up for to be fully having everybody on-site. Our work and our products are closely linked to several of the megatrends and contribute to several of the United Nations' sustainable development goals. And when we look at the first quarter, we saw an especially strong performance in Life Sciences and at Wind Lidar business, which are very closely connected to the health and well-being SDG as well as the renewable energy SDG respectively. On renewable energy and talking about renewable energy and renewable electricity, several companies aim to move fully to renewable electricity within the upcoming years, within five to fifteen years. We are very proud to be a forerunner in this space. We are very happy to report that we are now 100% renewable energy. We reached the target during the first of validated the results now during the first quarter and reached the actual target already in the last year. We were first technology company here in Finland to reach such a goal and overall the second company in Finland out of all companies. We have now reduced our scope to emissions, that means our own emissions by 97% from 2014 baseline and continue this work going forward. But even more importantly, I would bring up that our work in sustainability is really where we contribute to through our handprint, I. E. The products and services to our customers which enable them to reduce their footprint and thus creating a very positive impact to the world. The other very, very exciting event during the first quarter was obviously the landing of Perseverance in Mars, carrying that vital as relative humidity and pressure sensors. So not only did they land suddenly on Mars, but now are being used on Mars and now we are actually being what is being built is the first ever meteorological observation network on another planet. We think that this is a great, great showcase on how reliable, stable and accurate our products really can be in a very difficult environment. If this is not a very good proof point how well when it works in Mars, it really will work in any environment also here in planet Earth. Moving on to the numbers on first quarter. So orders received increased by 18% year on year. The increase was in both business areas. And when we look at different market segments, it was increasing in renewable energy, ground transportation, life sciences and industrial instruments, whereas in aviation markets due to the COVID-nineteen situation and slowdown in travel, the weakness continued. And if we looked at in terms of the constant currencies, it would have been 23% growth in constant currencies. When we look at the order book in first quarter, that increased 10% year on year. Again, the increase came in both business areas. The increase was in all market segments in industrial instruments and weather environment, was in renewable energy transportation and meteorological market segments. There was a decline in large orders in weather environment for the projects that there will be a delivery into next year and the year after, and that is visible also in our numbers. If you look at the order book beyond 2021, it really mainly consists now long term service contracts in Industrial Measurement side. Moving on to net sales. They grew by 9% year on year. If we take the constant currency, it will be 9% growth year on year. The growth came from industrial measurements whereas weather environment was flat year on year. And from a market segment side, the growth came from life sciences, renewable energy, industrial instruments and ground transportation. The aviation and liquid measurements declined year on year. And noteworthy also is that net sales of large projects year on year declined reflecting again on weaker order intake during last year on the larger projects. Then if we look at into the business areas, first, Industrial Measurements, I would say we had an excellent performance during the first quarter in Industrial Measurements. The orders received increased in all market segments. It's worthwhile also noting that the I talked about the economic recovery around the world. The economic recovery, especially in China, boosted the growth of the sales and the orders received in China for us. When we look at the also in terms of the order book length, there was worth noting also is the strength in China was seen also that there were some or and bigger orders, some annual orders in China, which were received during the first quarter, and then obviously the longer and larger orders come from a bigger success in power industry and the monitoring systems side. When we look at the net sales, net sales grew by 12% year on year, and that then led into an increased operating profit as well. The result was 9.4% compared to 7.6 I'm sorry, 9,400,000.0 compared to €7,600,000 corresponding time last year being now 23.8% of net sales. Net sales growth was strongest in life sciences and industrial instruments in absolute terms. And in relative terms, industry offering grew very well as well, whereas liquid measurements declined reflecting the disappointing order intake during the past few quarters. Then if we move on to weather and environment side, also a strong growth in orders received. The order growth was strongest in renewable energy and ground transportation both in absolute terms and in relative terms. The order growth in meteorological segment was flat. In developed countries, we saw some increase in orders received during the first quarter. However, the level of orders was still very low and the market really hasn't started to recover. You should look at this as a quarterly change in volatility in terms of how the orders come in. And as I said earlier, the weakness in aviation continued due to the lack travel of due to the COVID-nineteen situation. The operating result in weather environment increased as a result of lower operating expenses. The operating result was minus $800,000 in first quarter, which was compared to $2,400,000 loss in the corresponding time previous year. And then when we look at the net sales, net sales growth strongest in renewable energy and aviation sorry, renewable energy, whereas again the aviation declined year on year again due to their lack of travel and due to the COVID-nineteen situation. The OpEx was slower compared to the previous year due to the more efficient ways of working and lack of travel triggered by the COVID-nineteen situation. And worth noting also that the R and D activities continued according to the plan and the new, as I said, new R and D facility was taken into use step by step during the first quarter. Now if we move on financials, the first quarter operating result was 8.8% of net sales. The drivers for increased operating results were net sales growth and lower operating expenses. As mentioned, the gross margin decreased due to the product mix on one hand and appreciated euro on the other hand. The OpEx decrease was due to more efficient ways of working triggered by the COVID-nineteen situation, as I explained. Maybe And it's also worth noting that the comparison period last year included a onetime credit loss allowance booked by €1,100,000 related to our one customer project and which was then later reversed during the year last year. In terms of EPS, we grew to $0.17 and financial position overall remained. If we look at the net working capital, we had a very good cash flow during the quarter, mainly contributed by increase in trade account payables and advanced payments from customers increase and thus leading into input cash flow. And it's also worthwhile that as we indicated earlier, the CapEx level now north during the first quarter after the building project that we had during last year were completed. Now, moving on into the market development and business outlook, how does the world look for the rest of the year? We see the COVID-nineteen pandemics will still cause us a significant uncertainty for this year. While the situation has improved in developed world, it's still in alarming levels in many of the emerging markets. If you just look at the terrible news we hear day by day from India, for example. We do despite all the COVID-nineteen situation that the global economy is going to continue to recover during 2021. And we will see a growth in high end instruments, in life sciences, in power industry and in renewable energy, whereas meteorological segment in developed countries we expect to stay stable whereas in developed countries stay on a weaker level due to the COVID-nineteen situation and the financial challenges caused by COVID-nineteen into the emerging markets. And the aviation markets, we expect to remain weak, although we expect some early recovery towards the end of the year. Now based on the strong performance during the first quarter and increased visibility into the year, we have narrowed our business guidance for this year. From a net sales perspective, we have raised our bottom end of our estimates by €10,000,000 So our estimate now for the full year net sales is from €380,000,000 to €400,000,000 And correspondingly, we raised our operating the bottom end of our operating result guidance so that it now reads 35,000,000 to €40,000,000 expected for this year. So if I summarize the first quarter, we had a very strong start for the year. The market environment was more favorable than we expected, resulting from stronger strong recovery, especially in China and U. S. And then we felt that strong order intake across multiple market segments. And now given the strong first quarter and increased visibility, we narrowed the business guidance for the year. That's the end of the prepared remarks. I would like now hand over to any questions that you may have. Operator, please. Operator, can you hear us? Just a minute. We will try to reach the operator. Thank you. Sorry. Can you hear me clearly? Yes. So please open the line for questions now. Thank you. And our first question comes from Jean Luc Gramfist from Indes. Please go ahead. Your line is now open. Yes. Hi. Thank you for taking the questions. I've got three questions. And starting with the guidance, looking at the strong Q1, your guidance feel cautious. And even though you hired lower end, and I understand your visibility is usually quite low in the beginning of the year. But taking into account the current trend and orders, don't you agree that if the trend continues, your upper end is also cautious? Or which risk new risk do you see as the COVID and aviation headwinds were already in the comparables? Yeah. If I kind of answer so hey, Yuni. If I answer the first question, so as I said in my prepared remarks, the visibility to the COVID-nineteen situation is poor to the year. We hear about the new virus variants and so on. It's very unpredictable how how the how the virus will behave and and and not giving us hesitation in terms of, again, and visibility into into how the market overall will will develop towards the end of the year. The second point I would maybe just remind you is that especially on the Industrial Measurement side, while our order book increased well during the first quarter, it still is a short term type of a business. About half of the order book is through the next month and then very rapidly declines after that, that there is some length in terms of I I mentioned the the China orders. The the there is the service contracts and some length in terms of the power power power orders, but it's still mainly a very short term type of an order book. And and thus, while we are very happy on the level where it is today, it's still we need to win in the marketplace every day to perform well for it. The second point maybe just to highlight is that the the slow or order intake during last year and now also in the in the first quarter in the sort of big projects in weather and environment side is something that, again, gives a little bit less predictability in terms of net sales for the longer term. And then maybe one other thing, which was not in my prepared remarks, as we all know, the electronic component shortage is well documented and well discussed in the world. While on one hand, given our high mix, low volume type of a situation where where a single component is not an epidemic problem to our our our business, where we are very different from many other companies. This obviously is something we, just like any other company, needs needs to kind of see that that, how well can we secure that the component supply through the year. So far, we've performed very well, but this is obviously something that that every company in the tech industry needs to kind of break at ease. Yeah. That was actually partly my second question. But if I continue on the component, do you see any inflation there? And how do you believe if there will be, how well are you able to push it forward to customers, the price increases? So, so far, we have not felt price increases in in terms of the the components. Now speculating the future, anytime there is a kind of short shortage on any commodity or any any component, there always is a pressure to higher prices and it's fully to be expected. We are trying to manage that as well as we can. And then I'll just remind you, especially on the industrial measurement side, we have been able to through the increased value added that we bring to the marketplace, we have been able to raise prices on on at least on on a selective selective basis. So so I think we are in a, relatively speaking, in a good position to to manage this. But, obviously, it's something to watch. Obviously, it's something to watch. Yeah. Then, lastly, I'll take again the question that I took six months ago. Now you've been here a while on board, do you have any or and know the company better have you seen or recognized any specific areas that where you see improvement potential or more improvement potential? Yes. So as I I think that's the question more or less the same last time. Let's see. So one thing is to secure the long term growth. And my objective is number one that how do we make sure that we do the right things in such a way that we not only grow this year and next year but we will also do all the right that we have a very much of a long term growth for the company. I think there's a lot to do and there's a good pipeline of innovation for years to come in the industrial measurement side. And if I look at one improvement area and a potential for longer term growth is the digital side of the business that we have been very well streamlining over the past year, year and a half. The profitability of that is in the right level and it contributes nicely to our gross margin right now. But here is something that we have so far been unable to grow in a meaningful way. I think that could be in terms of when I talk about long term in terms of a long term area to focus on. Okay. Great. Thank you for taking the questions. Thank you. Our next question comes from Jonas Fosland from EvliBank. Please go ahead. Your line is now open. Thank you very much for taking my call, and congrats to to the whole Weiselat team for a really, really good results, especially a good q one result for you. I also had some questions regarding the outlook and given that you have such a strong performance, but I feel that we we did cover that topic fairly well here in your previous answers. So I'll I'll take another another another question instead. I noticed that in your report, industrial measurements came before weather and and environment in the in the in the report order. Should we can we conclude something from this, or is it just purely semantics? I would not read into it into it too much. It's it's more we try now to be consistent on on on that order. There's no kind of a secret or hidden messaging and all that. Alright. Very well. Then, a more detailed question. Liquid measurements, which which was acquired a company a few years back, and you said that they had disappointing new orders in the last last year. Could you give us a little bit more color into what's what is the situation there within liquid measurements? Has there been any challenges, unforeseen events? Or and how do you see this part of the industrial measurements developing here in the near term? Yeah. So we did have challenges in terms of our order intake during the past quarters or in past months until now fourth quarter now in the first quarter, very happy to see that it turned into a positive number. So we saw an increase year on year in terms of order intake. Liquid measurements is out of any segment in our measurement portfolio the one where the COVID-nineteen situation hit the hardest. The products are such that it really requires presence in the customer premises and with the travel restrictions and restrictions to our customers' premises, it has been clearly more challenging to turn the pipeline into actual orders and we have been working on that very hard and now very, very happy to see that we have at least in the first quarter now we see positive numbers on the short measurements. We continue to be very happy with the acquisition and see that it is a growth opportunity not only for industrial measurements but for the in the company as well. Very well. Life science now with the vaccine programs everywhere, do you see this the positive sort of tailwind that you're getting now, do you see that carrying even past this year and into next year? I would say this way that if I look at the market segment and the market dynamic, I think the investments if you look at global investments into Life Sciences market overall continues to be strong. And it's not only driven by the COVID nineteen situation. Certainly, that has had a big impact on it, but it's not only that. And I think that those investments will continue during this year and and at least this year and probably a little bit longer as well. We have been successful in with our continuous monitoring, especially our continuous monitoring systems, not only with that, but but especially with that in in the marketplace. And obviously, therefore, we are well positioned with that if the market continues to grow. Okay. Thank you. That's all from me. Thank you. Thank you. Okay. As there appear to be no further questions, I return the conference to you for any closing remarks. Thank you everybody and I look forward to discussing you in hopefully not so distant future. Thank you everybody.