Hello, and welcome to the Vaisala Q2 Interim Report 2020. Throughout the call, all participants will be in listen mode only. Afterwards there'll be a question and answer session. Today, I'm pleased to present CFO, Kaarina Muurinen, and CEO, Kjell Forsén. Please go ahead with your meeting.
Thank you very much. Warmly welcome all of you on the line to listen to Vaisala Half-year Financial Report. On the line as Vaisala representatives, we have our Chairman of the Board, Mr. Raimo Voipio.
Good afternoon.
We do as well have our CFO, Mrs. Kaarina Muurinen.
Good afternoon.
We have our Head of Investor Relations, Paula Liimatta.
Good afternoon.
Yours truly, Kjell Forsén, President and CEO of the Vaisala Group. Once more, warmly welcome. This is half-year report, and especially Q2, but let's start with reminding ourselves what Q1, first quarter looked like. Basically, Vaisala was not that much affected negatively by the coronavirus in the first quarter. It was mainly only our weather business in China that was down in the first quarter. When it comes to industrial measurements, we had a record quarter in the first quarter and no visible effects of the coronavirus at all. The situation has changed now, three months later, and actually, the situation is that our weather and environment business has stood up very well to the negative effects of COVID-19, whereas our industrial measurement business has had two softer months out of three months in the second quarter.
That is a change as compared to the outcome of the first quarter. When it comes to the Vaisala's delivery capacity, it has been on a high level, actually full capacity all the time. I want to first of all thank our own employees at Vaisala in our production as well as elsewhere for being here on site. You can't do factory work remotely. You have to be in the factory, all of them. Great performance really. Also, thanks to our customers who have been very receptive to new methods of support, for instance, through video and online to help with project installations. Also great thank you to our suppliers who have done their best and been very successful in making sure to deliver all the components and parts that we need at Vaisala.
Actually, our delivery capacity has been, and also currently is on full capacity. What we did say after the first quarter was that the corona negative effect would be more significant for the top line than for our operating result. That certainly is the case as we soon shall see. First, some highlights from the second quarter. Our orders received are down somewhat or 2%, and that is an effect from industrial measurements. Orders received basically on last year's level when it comes to weather and environment. Order book is down with 4% and net sales down with 5%. Very nicely, gross margin has stood up very well and actually improved from last year. It's on a high level, and so is our operating result, which even improved from previous year.
We will go more in detail through why that is the case, but we have sort of a natural reduction in operating expenses coming from the coronavirus. Earnings per share up as cash flow is also. Let's have a bit more detailed look at orders received. Like I said, they decreased by 2%. Currency rate fluctuations did not have any material effect, basically negligible currency effect this time around. The main factor contributing to the decrease in orders received is Asia-Pacific. It's actually down with 18% of the overall Vaisala figure. One other area which sticks out positive is Europe when it comes to weather and environment, but we come back to that also in a second. Order book, as we did have a good net sales quarter, is of course, down here. Book-to-bill is precisely one here this quarter.
Order book is down 5% for weather and environment, but still on a good and strong level. Here we have then the contribution from Europe sort of being the very positive effect here. For Vaisala Instruments, order book is at last year's level. If you then switch over to net sales, that is down with 5%, and that is 5% also in comparable rates, and it's 5% down for both business areas. In weather and environment, the performance was weaker in Asia-Pacific, but also Latin America. In Vaisala Instruments, it's 5% down in EMEA and Americas region. Actually in Vaisala Industrial Measurements, Asia-Pacific had saw a growth, an increase in net sales, and especially China sticks out positively for industrial measurements in the second quarter. Kaarina, maybe you say a few words about the operating result.
The second quarter operating result have improved to EUR 8 million, which is almost 9% of net sales and an improvement of 3 percentage points from the first quarter. Gross margin of products remained at a good level, even though the volumes decreased during the quarter. Also, the gross margin in weather and environment business areas, digital services, improved. Operating expenses were lower compared to previous year by EUR 4 million, the reasons were, of course, restrictions caused by the pandemic and also the postponement of recruitment that was done in the beginning of the year. Operating expenses also included EUR 1.6 million costs that are related to the discontinuation of assessment services, which Vaisala is providing to renewable energy segment. This decision that Vaisala made during the second quarter led to costs that are related mainly to severance and contract-related expenses.
During the second quarter, we also reversed costs related to the credit loss allowance which was booked during the first quarter. The credit loss allowance that we booked during the first quarter related to one customer, open receivables was EUR 1.1 million, and now about 1/2 of that allowance was reversed based on customer payment.
Okay, Kaarina. While you're at it, maybe you have a look at the next slide as well.
About our cash flow, which was increasing during the quarter. We had higher capital expenditure, which is mainly related to the building projects that are ongoing in U.S., Colorado, Louisville, and the other building project ongoing in Vantaa, in Finland. We paid EUR 19 million dividend during the quarter after the annual general meeting. We also took a new term loan, which is EUR 40 million and improving our cash flexibility during this challenging period. The cash change during the first half is EUR 6 million positive, and the cash at the end of the quarter is EUR 62 million.
How would you then comment our financial position?
From the financial position, I would like to highlight return on equity, which is now better than 10% and clear improvement from previous year's 6%. Our cash position is strong, EUR 62 million, of course, partially due to loans. We are now having a term loan, and then we have RCF, and both are EUR 40 million. The gearing percentage is below 16%, which is excellent.
Okay. Thank you, Kaarina. Let's go over to the business areas. We have weather and environment. It is the first one. I think I already a couple of times mentioned that the orders received in the EMEA region and especially Europe really sticks out as being very positive here. Whereas orders received are weakish in Asia-Pacific region as well as Latin America. Gross margin, very nice improvement here, which I think is quite a performance considering the circumstances here. Kaarina already mentioned that the operating result includes costs related to discontinuation of our assessment consulting service for renewable energy. R&D is on 14.9%. It is important to point out here that we have not had any interruptions in our R&D undertakings, but we have continued full speed.
That is, however, not really a sustainable way to do R&D, but we have to get people back to the office. Otherwise, we will see negative effects. That is taking place as we speak. Basically, in Finland, we will be back into office in August, and Finland happens to be the main hub for R&D for Vaisala. All right. Let's go over to industrial measurement. Here we did have a decrease in orders received in all regions, but especially in the Asia-Pacific region. Order book going down is also mainly due to weak order intake in Asia-Pacific. We did see an overall decrease of net sales in industrial measurements. For power industry applications, we had a very good growth, actually a doubling of sales as compared to the previous years.
Like I believe I already said, net sales increased in Asia-Pacific and especially in China during second quarter. Gross margin remained on a high level at 64.6%, and also EBIT on a high level here. Over to half year, and maybe you, Kaarina, kick it off.
The first half orders received has declined by 12% from the first half in 2019. The decrease was coming from both business areas, but especially from weather and environment business area, where APAC and Latin America were very weak, but partially offset by the strong order intake in Europe. In industrial measurements business area, order intake was low, especially in APAC region. Net sales was almost flat compared to previous year. In weather and environment business area, net sales decreased in APAC region, but it was increasing in EMEA. In industrial measurements, the net sales slowed down in Americas and EMEA regions during the second quarter, but the net sales improved in China and was very strong during the second quarter.
Gross margin improved from previous year by almost 2 percent points. There were multiple sources for the improvement in Weather and Environment, project business and digital services were improving. In Industrial Measurements, both gross margin for products and services was improving. In addition to the gross margin improvement, also lower operating expenses were then helping to improve the operating result, which was EUR 13 million and above 7 percent points of net sales compared to four percent points during the first half of 2019.
Okay. Thank you, Kaarina. Let's go over to have a look at the market outlook and business outlook. We start with the market outlook here. What we said after the first quarter that this year it will be very hard to get large projects, capacity building undertakings from developing countries. That definitely still is the case. There will be a lack of those large projects from emerging markets, as I believe also from developed countries. There is definitely a slowdown. We have deals which were already awarded to us that were put on hold as a consequence of the coronavirus also. During the second quarter, we saw a strong flow of mid- and smaller-sized orders. We believe that will continue. On the negative side, we have the steep decline in aviation, which definitely is slowing down the airport business for us.
The wind lidar business, for instance, is slowing down because of that, as the plan was to really cross-sell wind lidars into airports as well. Currently, it's very difficult under these circumstances. For industrial measurements, we think that the demand will continue to be strong for industrial instruments from Vaisala portfolio. Of course, there will be a negative effect from the COVID-19 virus here as well. However, when it comes to continuous monitoring systems and power industry markets, we expect those to continue to grow. There is no change in the business outlook for 2020. We expect our net sales to be in the range of EUR 370 million-EUR 405 million, and the operating result, EBIT, to be in a range of EUR 34 million-EUR 46 million. That is what Kaarina and I had in mind this time. Over to your questions, please.
Thank you. If you wish to ask a question, you may do so by pressing zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Again, it's zero one on your telephone keypad if you wish to ask a question. There will be a brief pause while registered. Our first question comes from Johnny Granqvist. The floor is now open to you.
Thank you. First I'd like to tell thank you for many good reports and presentations and discussions during the years. I have a couple of questions, maybe more on the outlook side. You mentioned in the report that in weather and environment, you have some big projects that are supporting, and you also mentioned that there is maybe not that many big projects in sales pipeline. How long will these current weather and environment projects support the business? The second question on industrial measurements. You mentioned here in the call that you had two soft months. I'm curious, was the strong month in the beginning or in the end of the quarter? Thank you.
Okay. Thank you, Johnny, thank you first of all for your kind comment. I guess you were referring to the fact that I'm going to retire during the end of the year here. Kai Öistämö will take over latest 1st of October, meaning that I may be part of presenting the third quarter, it will be Kai who is the main responsible at that time. Thank you, Johnny, for that comment. Large projects. I'm not sure I heard fully your question. We did have large projects here in the second quarter, one of them ending, which is the Vietnam largest-ever project that Vaisala has had, worth EUR 20 million.
The thing is that it will be very hard to close other large deals during this year, and that probably also will then affect next year, so that as this large project takes several years to implement, we will have to compensate for that with smaller and mid-size deals this year and probably also next year. Forgive me if I did not fully hear your question.
No, that-.
What was? Yeah.
Yeah, that perfectly answers the question.
Okay. What was your point around industrial measurements?
In industrial measurements, you mentioned here in the call that you had two soft months.
Oh.
My question was the strong month in the beginning or in the end of the quarter?
The end of the quarter.
Thank you.
Thank you. Our next question comes from Matti Riikonen, Carnegie. The floor is now open to you.
Good afternoon. It's Matti Riikonen at Carnegie. A couple of questions. First of all, you commented that in the weather business, EMEA segment was very strong. Do you have any kind of explanation why it has been so strong? How was the composition of orders? Was it any larger than normal orders or just the regular flow of smaller and mid-sized orders that came to the order book?
Yeah, that is a very qualified question, Matti. I'm not able to 100% answer your question. I guess we have a really good customer relations in most European countries. We did not get any big orders, but the biggest one we got was in Europe. It was EUR 2.5 million. The bulk of the orders were below EUR 500,000, really. There's nothing special really there sticking out. Basically, this is all of Europe where we do see this very good situation.
Right. Second, you mentioned that in China, your net sales grew and in the industrial business. Do you think that that would be kind of fairly expected scenario where China was weak in Q1 because the close downs were most active up there at that time, and now in Q2, they are gradually starting to ease? That would be the kind of normal explanation for that. Would you agree that that would be the case, or is there anything other things that might do the trick in China?
Yeah. I guess you are asking if there was some special order, some sort of one-time effect taking place in China during second quarter. That is not the case. We do see a gradual effect of China getting back on track. However, we do not declare danger over as of yet. We want to see that continuing well into the third quarter. Definitely, there was an effect from China getting back to normal situation in second quarter.
All right, thank you. You mentioned that you discontinued renewable energy consulting business, I was wondering, what was that business about? What was the service that they were giving? I remember that at some of your CMDs, there were people from the U.S. telling about the kind of consulting that they were doing. Is that the business that you are now closing or was closed or something?
Yeah, Matti, as always, your memory is exceptional. Yes, it was the Seattle office doing that so-called assessment service, where we were assessing various locations, whether they are suitable for wind parks or not. It is a very qualified undertaking, there are other vendors providing that as well. We may have had the highest quality there, we did not get the price for that service that we expected. The business performance never really reached the level that we expect here at Vaisala, and we did not see that changing in the near future either.
Okay. What was the volume of the business, net sales-wise? Can you disclose that? It would have some kind of impact on the comparability in the coming quarter. It would be good to know.
Have we, Kaarina, enclosed anything about that?
The net sales in weather and environment was not material.
Okay. Thank you. Further to the consulting business, you said that you still have the kind of data service available that you continue to sell. Is it related to other than renewable energy-related data that you're selling, like the lightning detection network in the U.S., or can you utilize the data for the renewable energy industry and purposes when you are selling the pure data and not the consulting service?
Yes. Again, you are on the right track there. We do sell data, and we do sell weather forecasts for wind park operators. That is a business for us. We do also sell lightning data, not only in the U.S., but we do sell that worldwide. There is a positive development there.
If I go a bit deeper here, again, the data that you're selling for the weather forecast for renewable energy, is that the short-term data forecast that wind parks use to adjust their turbines or adjust the power that they are getting from the parks, or is it something different?
That is short-term. There we also expect the wind lidars and the latest technology in wind lidars to have a strong effect going forward.
Very good. Thank you. That was all from my side.
Thank you, Matti.
Thank you very much. Next question comes from Jonas Forslund, Evli Bank. The floor is now open to you. Apologies. There seems to be a technical error. Just as a reminder, if you do wish to ask the question, you may do so by pressing zero one on your telephone keypad.
Seems Jonas has some problem inputting the question.
Okay. Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad. Our next question is from Jonas Forslund, from Evli Bank. Please go ahead. Your line is open.
Good afternoon.
I had some technical difficulties there. I have a question, more of a long-term question now that given that weather environment is your biggest business area, and if we think that this pandemic has changed the world.
Yes, we hear you loud and clear.
Okay. Sorry. Some people think that aviation is changed permanently. Business travel will never recover to the same level it was. Perhaps also travel, in general, might take a long time to recover or perhaps never reach the same level it was previously. Now, how do you see the bigger picture, the longer picture, given your large business area, weather environment, and how sensitive are you to aviation on a whole? Could you comment a little bit on the long-term view of aviation market affecting the demand in weather environment after the pandemic? Thank you.
Yeah, thank you for the question. Of course, it may be that there is a more or less permanent effect of aviation. Still, operators and airport operators need to make whatever they can to cater for the safety at the airports and also the efficiency of airports. Our current assumption is that although volumes in aviation might go somewhat down, the effect on or the need for Vaisala's equipment would not really be affected. Also, aviation is part of what we call transportation at Vaisala. We have road there, road traffic, automotives, and we do have railways there. There is a growth in railway traffic all over the world, and there is a trend to more and more really high-speed railways. When that happens, then the railways become also very weather dependent.
For instance, in China, where we have the world's largest really high-speed railway network, we have also enjoyed very good sales to railway operators over there. As an example, how we could, in the case of a decline in aviation business, in airport business, we could probably compensate for that in other ways.
Thank you.
Thank you. There appears to be no further questions, so I'll hand back to the speakers for any other remarks.
Okay. Those were really excellent questions and thank you very much for those. We will continue to push for our business over here. Thank you and enjoy the summer.