Hello, everyone, welcome to listening to Vaisala first quarter results presentation. There are four persons from Vaisala online here today. We have our Chairman of the Board, Mr. Raimo Voipio.
Good afternoon.
We have our CFO, Mrs. Kaarina Muurinen.
Good afternoon.
Our investor relations manager, Ms. Paula Liimatta.
Good afternoon.
Yours truly speaking right now, Kjell Forsén, President and CEO of the Vaisala Group. Welcome once more. We live in times when uncertainty and volatility is the current normal. Economic indicators go the wrong way all over the world. The coronavirus is not sparing anyone. No man is an island, and no company either. Having said that, Vaisala was only marginally affected by the consequences of the coronavirus outbreak in the first quarter. Net sales grew, gross margin and EBIT improved. Order intake, to be discussed more in detail in a minute, declined in our weather and environment business area, but grew in Vaisala industrial measurements business area. To me, Vaisala's performance in this quarter really shows what we are capable of. We are successfully and constantly increasing our operational excellence, as well as improving and deepening our R&D capability.
When the world gets back to normal, Vaisala is certainly prepared and in great shape for growth in new areas, as well as ready to cater for pent-up demand. Over to the actual presentation. Here we do have the first quarter in a nutshell, and I will not yet go into any details here. You can see that orders received is down, order book less so down, with 6%. Net sales is up with 4%, and quite a remarkable improvement in gross margin, more than 3% up to 56.4. Also, I would say a very nice improvement in our operating profit from zero last year to more than EUR 5 million this year. Consequently, naturally, a good improvement in earnings per share as well. Cash flow we get back to in more detail a bit later. Orders received, we have the right slide here.
Orders received is down with 21%. What about the currency effects this year? Slightly more or 22% down in comparable rates. Most importantly, we need here to realize that the comparison quarter is really a tough one. Last year's first quarter was more or less abnormal with two very large order amounting to EUR 22 million. In addition to those two large orders, we had several others also that were on the large side. As those of you who follow Vaisala very well know, the order intake, and especially when it comes to large projects, varies a lot from quarter to quarter. If you look back over time, the order intake first quarter this year does not really stick out as an especially weak one. Let's go on. What about order book then? It's down, but less so, with 6%.
I think it's important to note here that if we compare to the fourth quarter last year, we actually have a 2% increase in our order book, meaning that book-to-bill is slightly above one, which is a positive signal, actually. Some of you may remember the Ethiopia order that we actually signed last year, but which is still pending ratification of the Ethiopian Parliament. That is still the case. The Ethiopian order is not in the order book. What about net sales then? Here we have a nice growth of 4%, and it's the EMEA region that really sticks out as being particularly strong here, because the growth in EMEA was 26%. That's quite something, really. Vaisala's delivery capability was perfectly normal during the entire quarter. We do have to work harder when it comes to sourcing.
We do keep track of all our key suppliers, make sure that they are in shape, and that they have the capability to deliver what we need. We have also increased our stock to make sure that if there are disturbances when it comes to our suppliers, we can take that for quite some time without corresponding delivery disturbances. Speaking of deliveries, most of everything we deliver goes on air cargo, and we know that regular flights are basically halted. The courier services is up and running basically as normal, and so are our deliveries as well. Still on when it comes to net sales in the fourth quarter, Asia-Pacific was the weakest region here, going down with 13%, and there we might see the Corona effect. Another thing which really sticks out is the growth we have in project business.
The relative share of our project business grew with 27%. That really, in combination with an improved profitability, is quite remarkable. I'll let our CFO, Kaarina, dig into that a bit more.
The operating result of the first quarter was strong. The main reason for the good operating result is the improvement in gross margin. The improvement was about three percentage points, and we achieved a 56.4% gross margin during the first quarter, which for the first quarter is a good result. Behind the gross margin improvement, we had improved gross margin in project business as well as in our digital business within Weather and Environment business area. In Industrial Measurements, the gross margin improvement was coming from both product business and services businesses. The net sales growth and delivery growth was around 4%, so this is a very good result, improving the efficiency with the 4% net sales growth and delivery growth.
Operating expenses were on previous year's level, as due to the limitations caused by the coronavirus situation we were not able to travel and there are limitations to all events, for example, marketing events. The operating result was EUR 5.2 million, which is 6% compared to net sales. Then amortization of intangible assets is now lower than what it was a year ago. It was EUR 1.7 million as the amortization is not including order book anymore. Our cash flow for the first quarter. Change in cash was EUR 3.2 million negative, so the cash decreased, it was mainly due to the increase in investments and especially the investments to the two building projects that are currently ongoing, the other one in the U.S. and the other one in Finland, the R&D building. The building projects were totally EUR 5.5 million.
The result for the period was generating altogether more than EUR 12 million positive cash flow. Our financial position continues strong. Return on equity was 8.1% points compared with the 0.4% a year ago, and the gearing is almost zero, so -0.5% compared to the -15% a year ago.
All right. Thank you, Kaarina. Let's have a look at how the business areas did, and we'll start with weather and environment. This is where the orders received is down with 31%. A larger figure than we have for the group, as industrial measurements had improving or growing order intake. The main reasons for this then really is the very tough comparison quarter last year, the large orders I already talked about. Order book is down here with 8%. However, net sales is up with 4%. We do have a very nice improvement in operating result here as compared to last year. It's still a negative, but that's the way it usually is when it comes to weather and environment. R&D expenditure basically on last year's level. This is where we do have the strong growth in project net sales, so up with 27%.
As I already mentioned, EMEA was a strong region here, both in project and product deliveries. That then as a consequence of what Kaarina just mentioned, the improvement we have in our digital business as well as our capability these days to make project business in a perfectly profitable fashion. All right, let's go on and have a look at industrial measurements then. Well, what really sticks out here is, of course, what we have in the heading here, the EBIT. Before we get to that one, we do have a growth here in orders received up at 2% or flat in constant currencies. Order book is up at 5%, and basically we do not see any corona influence here. Net sales up at 2% and gross margin really, really strong, almost 66%. That is quite something really.
As a consequence, of course, then operating result is improved as well up to 21.4%. We did see orders received increasing in Americas and EMEA. China actually was flat in the first quarter. Net sales increased in all regions and shows really the strength we have here and the resilience, I would say, of the business as well. If we go over to the market outlook and business outlook, we did issue a new guidance we lowered our guidance for both net sales and operating profit. In relative terms, the net sales guidance was lowered more than the EBIT guidance. What are the underlying facts for that? Well, going forward, we feel that there might be a delay or postponement of really large orders on Weather and Environment business. Emerging markets are of growing importance in our weather and environment business.
Emerging markets are not really resilient to the consequences of the coronavirus outbreak. They will be, as we feel, especially hit and thereby hitting our business as well. As I mentioned in another context, the regular flights are basically stopped now, meaning that aviation is not really there. Meaning also that there's a loss of income from aviation weather services, which is important to several of our customers. We do foresee that the market for Vaisala industrial measurements will keep growing. It is where we really have the resilience. We feel that growth will be impacted and slightly smaller than last year. The new guidance we have then is for net sales to be in the range of EUR 370 million-EUR 405 million and operating result or EBIT in the range of EUR 34 million-EUR 46 million.
With that, over to your questions. Operator, please.
Thank you. Ladies and gentlemen, if you would like to ask a question, it's zero one on your telephone keypad to register. You can withdraw your question at any point by pressing zero two. Once again, that's zero one on your telephone keypad to register. Our first question comes from the line of Matti Riikonen from Carnegie. Please go ahead. Your line is now open.
Good afternoon. It's Matti from Carnegie. Two questions, if I may. First of all, when you talk about the weather business slowdown, which is part of your guidance cut fairly recently, should we expect that is mainly due to overall softness among the weather customers, plus, of course, then the kind of emerging market customers where you tend to get these large lumpy orders occasionally? Is it so that when you also mentioned the budgets that are likely to be cut, should we understand that that would work in the normal economic mode so that first you get cuts in your order intake, and then that will be reflected in your net sales probably in 2021 as lower net sales? Do you see that already this year you would see a more meaningful cut in orders which are delivered during the same year?
If you understand what I mean with the first question.
I think I do, Matti. Thank you for the question. Yes, I think both of your statements are true. Of course, the delivery time for very large projects is usually several years. If those are postponed, that then has an effect also over time. It may also be that smaller orders are affected, but to a lesser extent than also impacting this year. All of this then leads to the new guidance we have issued. It's also important to remember that we have also been able previously to compensate with a larger number of mid-sized and smaller orders for the lack of large orders. This is, of course, what we are going for this time around as well.
All right. Fair enough. The second question was related to industrial measurements, and it seems that the growth in Q1 was fairly low compared to what you usually generate, and particularly when you say that there was no coronavirus impact yet in Q1. Could you explain that, which parts of the industrial measurements were actually perhaps weaker than you expected? Would you say that the Q1 was totally normal with 1% growth?
Well, in industrial measurements, we of course, do go for higher growth than that. I mentioned that China was flat as opposed to growing in the first quarter. That then actually most likely is a consequence of the coronavirus. Although the impact of that is not huge. As I mentioned, in industrial measurements, we did see orders received increasing in both Americas and EMEA, actually a very good outcome in EMEA. We are very positive when it comes to industrial measurements here going forward as well. Did I answer your question?
Yeah. If I understand correctly, you're basically advising us to not look at the 1% growth in so detail. Basically you think that the industrial measurements demand is still pretty much at last year's level, of course, deducted by the coronavirus impact, so that there is no structural change in the demand pattern, geographically or otherwise in the Industrial, so that this one quarter just happened to be fairly low, but you don't see any kind of relation to coronavirus with that growth.
Well, as you say, we do not see any structural change here. The wording in our guidance is that we see a slowed down growth. We do still see a growth for this year in Vaisala industrial measurements.
Okay. Thank you.
Thank you.
Thank you once again. It's zero one to register for any questions. Our next question comes from the line of Joni Grönqvist from Inderes. Please go ahead. Your line is open.
Hello, I have a couple of questions. First I'd like to continue a little bit on the comments you make on the outlook and keeping in mind the good Q1 that you delivered. If I understand correctly, you're still quite confident on Q2 as well. Are you seeing then taking into account the lowered guidance? Are you expecting more in the third and fourth quarter to see the corona effects coming in?
Well, I can't really comment on one quarter level here. Guidance is for the rest of the year. Of course you are on the right path here because we do have our seasonality there. We're in a Weather and Environment business. The bulk of the business tends to be toward the end of the year. More detail than that can't really be at this point in time.
Okay. You mentioned in the report also that you found some alternative ways to deliver projects and services. Could you maybe give some examples though of what kind of ways these are? Are these something that you could also continue doing after the crisis? Thirdly, on the same topic, has this also helped in improving the gross margin?
Could you please repeat the third question?
Yeah. If we split this question, could you first give some examples of which alternative ways you found to deliver projects and services now in these corona times?
All right. If you want me to start with that one. In general, like I said here earlier on, not only related to projects, most of what we deliver goes as air cargo and actually also on regular flights, not only on sort of transportation courier flights. As things are what they are right now, basically everything goes on courier flights, and that works really well. That's not a problem. When it comes to projects, then we do have, of course, project managers who tend to travel to where the projects are being implemented. That is, of course, not possible at the moment. We have actually very nicely been able to support our representatives. You may remember that we have more than 100 representatives in both our business areas out in the world and mainly in developing countries.
Our project managers have been able to remotely support our representatives and customers to carry on with the installations and projects. Also I would say using very innovative new methods. One thing we are trying out right now, and which looks very promising, is to use augmented reality. Without going into details in that one, that is a very promising way to actually carry on the project management remotely. You also asked whether we think that this is something that we might continue to do in the future. Will we continue to work in this way? I think that is perfectly possible that we will, to some extent, that some of the good new practices we come up with due to the coronavirus actually will stay with us as positive practices.
One, I'm not sure if you referred to that one, but when I talked about the new guidance, I said that in relative terms the profitability guidance is more lowered, Sorry, the net sales is more lowered than profitability guidance. This is partly due to what we just talked about. As we are very extensive travelers, basically everything we do is export business. As we can't travel, of course, we have less travel cost, which then is actually improving our profitability. Joni, that was perhaps a slightly larger answer than what you asked for.
No, actually, I think it was the things I was looking to. Post-crisis, we could expect that you continue with this and it's actually improving your profitability. Something good also from the crisis.
Yeah. Yes. I'd really like to point out here that we do not see this profitability improvement really in the first quarter. The travel restrictions, et cetera, they caught on towards the end of the quarter. The effect of that is not really extensive in the first quarter.
Okay, thank you.
Thank you, Joni.
Thank you. Our next question comes from the line of Jonas Forslund from AB Bank. Please go ahead. Your line is now open.
Good afternoon, everybody. A question regarding the industrial measurements outlook or just a clarification when you say that this year industrial measurements is expected to grow less than last year. Last year was a very exceptional year where the top line grew quite significantly due to the acquisitions as well. Do you mean that industrial measurements will grow less than the organic growth was last year for industrial measurements?
Thank you, Jonas. That is a very good clarifying question. When we say that we will have less growth, then we are comparing with the organic growth rate.
Okay, good. Perhaps the topic that you touched upon relating to your operating expenses, for instance, you mentioned traveling less now, maybe there's less activity. Do you see any measure? Are you taking any measures right now or planning to take any additional measures to control your operating expenses so that during the crisis and due to the fact that it's quite difficult to see how things will go, but cost is something that you can sort of control a little bit. Are you taking any measures now or planning to take measures to sort of control your operating expense levels so that it could end up not growing that much this year, for instance?
Yeah, I think we'll let Kaarina answer this one.
Far, the cost reduction that we foresee in our operating expenses and also partially being part of our cost of goods sold is, of course, the travel that has almost stopped completely. Expenses that are coming, for example, from marketing events or other activities that require people being present, multiple people being present, those will be canceled for the time being. Also some external spending, like professional services, will not be on the normal level because you cannot continue these projects due to the limitations. Those are the cost savings that we foresee for the time being.
Would these then perhaps, summarizing, what kind of operating expense development would you expect to see based on these measures this year? Would you expect to have higher OpEx or approximately the same? Because in history, of course, operating expenses usually go quite nicely up all the time with sales. How do you foresee operating expenses developing?
I can comment on our R&D activity, where we have a long-term objective to continue investing in our R&D and continue the research and development activities. There, our objective is to continue all the projects that were planned for this year. We are aware that there will be difficulties, especially in testing the products in laboratories. Anyhow, we will do what is possible in order to progress as planned. Otherwise, I would say that we didn't give any guidance on the operating expense levels, how they will be developing compared to previous year.
Okay. Thank you very much.
Thank you, Jonas.
Thank you. Once again, if anyone has any questions, it's zero one on your telephone keypad to register. As we have no more questions registered, I hand back to our speakers for any closing comments.
Thank you very much for listening to us and also for the very good and clarifying questions. Thank you very much.
Thank you. Thank you.