Earnings Call: Q3 2019

Oct 24, 2019

Warmly welcome, everybody, to have a look at the Third Quarter of Ysala. We have the usual Ysala team present here with our Chairman of the Board, Mr. Raimo Voipio our CFO, Mrs. Karina Murinen our Head of Investor Relations, Ms. Paolo Li Matta and yours truly, Ciao Forsen, President and CEO of the Weissler Group. At Weissler, we are really proud to present the third quarter this year. We phrased the second quarter as being a strong quarter. Well, the third quarter is even stronger, so we call it excellent. And you may hence ask yourselves, is there something special, something unique in this third quarter that is boosting revenues and profitability? Looking back over history, there has been such quarters in Weisler where we have gotten basically almost out of the blue large orders with very high profitability. But this time around, there is nothing like that. This is in a way a business as usual quarter. This is a result of continuous improvement and an achievement of our skilled and committed workforce all over the globe. Also, would say that this strong third quarter is a manifestation of Weisler strategy working well and us also implementing the strategy quite well. And speaking of those large single orders with very high profitability, I don't think we are going to see more of those going forward. These days the sourcing capabilities of our governmental customers all over the world are really on a high level, very professional and skilled. They plan well in advance. And I think what the kind of business we see in this quarter is the way it is going to be going forward as well. If you then dig a bit into the results, what you see ahead of you now, the summary of the third quarter I think is quite remarkable. Have during my tenure as Head of Weisel, I had the pleasure of presenting many strong and great quarters, but I think this is really the one that we are most proud of and in a way the best quarter so far. And we do have some positive currency effects, but it's in this quarter, it's $2,000,000 divided equally between the business areas. It's $2,000,000 in net sales, a tad more in orders received. So that's not the explanation for the great outcome of the quarter. It's contributing, but it's not explaining it. Gross margin is roughly on the last year's level, a tad down. We will touch more upon that in a minute. Operating result in absolute terms on Ycello level is up, which is quite an achievement considering that we have made three acquisitions. So we have a significant amount of amortizations that we are doing. But we will dig into all of these more in detail. I'd just like to add while we are talking on a general level that from October 1, have the latest acquisition on board, Foraker, Foraker business to business part. We did not acquire Foraker's business to consumer part and we are not getting into any consumer business. We are strictly in business to business. And also with the acquisition of Foraker, we do set up Wisely a digital unit, who is then active in software and service business, standalone software. So not really sort of, for instance, firmware, which is highly dependent upon WiSolar products. This is standalone software we do have in this unit. We do have renewable energy as a customer there. We have the transportation sector for instance and in general data driven business to weather dependent customers. Also after the third quarter, we did sign a contract with the state of Ethiopia, euros 13,000,000 contract, which is an example of the capacity building we are going for, especially in developing countries. This contract when it is realized starting next year will give Ethiopia the capability to see the extreme weather they are very much suffering from as a consequence of climate change. And they certainly need this kind capability and so do many other emerging markets in Africa and elsewhere as well. This Ethiopian project, however, is still subject to approval of the Ethiopian Parliament and they expect to get that in the near future or at least during this year. Okay, let's go forward. Here we have orders received. In third quarter, it's up with 37% and it's up in both business areas. And like I said, it's 2,500,000 or so coming from currency. Currency effects here. So in comparable rates, we are still up 35%. And if you then exclude the acquisitions, we are up 20% in orders received. And you could in a way say that the weather and environment business area is one who is faring even stronger in this quarter. Then if you look at the order book, that is up as well, but not as much as we have been delivering quite successfully, which you will see in the net sales figure. However, order book is up with 29 year on year and the acquisition part of that amounts to EUR 14,000,000. Then if you look at net sales, that is very nicely up with 25% and with comparable rates 23%. If you exclude the acquisitions, then the growth rate is 12. And you see that Products and Projects, both of them are growing very nicely here. Looking at it from a geographical point of view, you see that the relative share of Americas is slightly down. There's EMEA has been very strong now both actually in order intake and in net sales. Could you kindly say a few words about the operating result? Yes. Financial and operating result increased by about EUR 2,000,000 reaching EUR 16,300,000.0 and the increase was following the excellent net sales growth that was 25%. Of course, the operating result and the net sales growth required also additions in operating expenses and the increase in operating expenses came two thirds from acquired companies including also amortization of EUR 2,000,000 of intangible intangible assets. Additionally, it included EUR 1,000,000 costs, which were related to the reorganization and refocusing our digital business. Overall, the operating result percentage was 15.5%, which is 2% points down from previous year, but still more than 3% above our long term objective, which is to exceed 12%. Thank you. The cash flow seems to develop favorably as well. Yes. So, Weissar's cash flow was $16,000,000 on the third quarter and it was coming from the excellent operating result. Net working capital change did not have an impact on the cash flow as it was on the same level as previous year. Okay. Thank you, Karino. Let's go forward and dig into the business areas. And we start with weather and environment here. And you can see that there's quite a figure here for orders received, increase is 45%. That's quite something. Of course, we have to remember also that order intake was a bit on the low side last year, so we need a high order intake in weather environment to get back to a good business level here. But still, this is really quite an outstanding result. And also, it's quite remarkable, like I sort of started with that we do not really see these very big single orders, but what really is growing the number of midsized orders and coming from all geographies really I think we had two orders in the that were in the magnitude of EUR 5,000,000 or so on both sides of it. The rest is really mid sized and small orders, which is a good sign and showing sort of the global presence and strength of Visal. Order book up at 30% year on year, that's just up 27% or 25% in comparable rates. And operating result is improving as well. R and D, the sort of cornerstone of Visalign this quarter is at 11.4%. Organic growth, we do have a big acquisition here on the weather environment side, Lindsberg. If we exclude that, we do see that organic growth of net sales is 14%. And of course, Leosfer is also then bringing or adding a lot of operating expenses. If you exclude the amortizations, the OpEx coming from BlueSphere here is around EUR 3,000,000. Then let's go forward to Industrial Measurements. And this is actually from a net sales point of view, the highest ever quarterly results we have. Also orders received is up very nicely with 23% or 19% in comparable currency rates. Order book very nicely up as well. And net sales up at 22% or 19% in comparable rates. We have enjoyed a good operating result in this business area for quite some time and that is not changed. We do still have that. And we do also add operating expenses here. We have one acquisition on board, Kaypatents. We have their OpEx here. R and D is up roughly $1,000,000 in this quarter, 700,000 or so coming from Old Weissala and $300,000 from Kaypatent's Air. Excellent operating result margin really. Cardinal, would you want to say a few words about the key financials? I would like to focus on the cumulative figures for the first nine months. So net sales has been growing 19% during this year and the growth is coming nicely from both business areas, whether an environment business area has been growing 16% compared to previous year and industrial measurements business area growing as much as 24%. And our gross margin has been improving to 54.3%, which is 2% points improvement from previous year. Part of the reason is the increased deliveries, higher volumes bringing us advantages utilizing our products and capacity, but also the higher share of product business is of course increasing the average gross margin. Our operating result was EUR23.5 million, which is EUR1.4 million decline from previous year. But still the result is good because the operating result is including €3,600,000 expenses that are related to shutdown of a product line in our U. S. Factory, then terminating a lease contract and also then the reorganization of the digital business. And in addition to this EUR 3,600,000.0, we have also EUR 7,200,000.0 amortization of intangible assets related to the acquired companies. So the operating result margin 8.2% taking into consideration these bit more exceptional expenses is very good achievement for this year. Capital expenditure is up by EUR 6,000,000 and the increase in capital expenditure this year is mainly related to the two building projects, R and D building in Finland, Vanta and then an office building in Louisville in USA. Okay. Thank you, Cardinal. Let's go forward and look at the market outlook for the rest of the year, that much left. But anyway, we have simplified our statements here a bit. And what we say is that we expect the demand for better observation solutions to improve somewhat in the relative terms a bit less in Americas. And also in the demand for our newly formed digital solutions unit, we expect that demand to improve moderately. No changes on the industrial measurement side. We expect demand for industrial measurement solutions to continue to grow in all regions And also, we expect a positive development in demand for continuous monitoring systems, liquid measurements and power industry applications. We have not changed our guidance for the year. So business outlook for 2019 is that net sales is in the region of EUR380 million to EUR400 million and operating result EBIT is in the range of EUR25 million to EUR35 million. And including the amortizations coming from the acquisitions. And now over to your questions, please. Thank you, Karina. And Kjell, let's start from the live audience questions. Good afternoon, Matricon and Carnegie. If we kind of exclude the very large weather orders that you mentioned in the report, that's Bahamas, Vietnam, Argentina and Sweden, how is that kind of base load of let's say more regular sized orders developed? So is that also growing nicely? And then you have added the big project on top? Or how would you kind of characterize the kind of base demand when it comes to quite normal orders? So the base demand on the weather and environment side has been good in the third quarter and we have not gotten these large orders. So the ones you just mentioned, they are have been sitting in our order book for quite some time. And so the bulk of the orders really since sort of mid sized, well below EUR 5,000,000 that we have gotten in the third quarter. A good flow of mid sized orders. And then secondly, you mentioned some issues with the wind LiDAR factory startup. Is that kind of a severe thing or just a postponement of weeks or months? I guess that is what was really to be expected. So we have built a new factory. We have moved production from the old one to the new one and we are still in the process of sort of tuning and tweaking the new production facility. There have been some delays in deliveries. However, order intake has been very good. We expect to catch up now when it comes to deliveries during the rest of the year. Okay. Then regarding guidance, I think one can be a bit puzzled that even though your Q2 and Q3 have been particularly strong, you still stick to your guidance for this year. And basically, of course, the question is what kind of threats do you see in Q4 that it could still kind of enter a situation where you actually are in line with your own guidance? So what can happen in Q4? Well, we take a we form our guidance really based on what we have in the sales funnel and what we are going to deliver. And when we look at that picture, it shows that we will stay in within the range of our guidance for this year. Okay, fair enough. Finally, mean, your quarters tend to be very different. But has there been any kind of surprises during 2019 compared to what you expected when you gave the guidance and started the year? And if I can understand that some large orders have been positive surprises, Has there been nothing anything on the negative side? Or otherwise, the year been like you expected it to be? Well, the variation you referred to that is normally coming from the weather and environment side of our business. And like I mentioned, order intake was low last year. It has been good this year and to some extent it has been better than we expected on the weather and environment side. But I would say that is pretty much the only surprise, and it's a positive surprise during the year. This is a very normal year in in many ways. Alright. Thank you. Thank you, Matti. I would like to first continue also on this year. You mentioned a bit that there's not big changes that you see now to Q3, but I still wanted to go into the order book and maybe the profitability quality. So could you maybe comment on that? Do you see any change in the order book quality on profitability going into Q4 versus Q3? So there shouldn't be any big orders, but looking at the other sales mix components, is there any bigger change? Karin, I can continue, but I'll start. So in the third quarter, gross margin on Wiesler level was slightly down. That's coming from weather and environment where the share of projects was larger and that we have those with this larger lower gross margin. However, they contribute nicely. I think there will be quite a high share of projects in the fourth quarter as well. But Karsten, would you like to fill in something? I haven't seen any changes in the orders that we are getting that there would be changes in the expected gross margin levels. We have this year been improving our gross margin level based on I would say based on our performance. So volumes and utilizing the same capacity for the higher volume and also of course now the share of product business being higher has been helping us with the gross margin improvement. So I don't see that there would be major changes for that. So Waldo, I just said that the margin is lower for projects. The margin of projects has gone up also. So we are more and more skilled in delivering the demanding projects to wherever in the world. And then we do have a very good scale effect and volumes grow, especially in Industrial Measurement, giving them a good development in gross margin for Industrial Measurement. I'll get back to this soon also, but just to make sure on the order book, you mentioned last week or you said about IPO template, that's not booked in the order book. Right? No. Mhmm. Then continuing on the scalability question you were starting with. What do you feel like going into next year, you've been increasing your OpEx now. I think you if I understood right organically about around 8% and then you're growing organically a bit faster. Do you think this trend will continue that you'll not increase OpEx as fast as you grow organically? So the change this year as compared to I would say the entire history of Weissler really is that we are not growing the investment into R and D as much as we have used to in weather and environment. However, we continue to invest significantly into industrial measurements. And while I'm not yet commenting on next year, I would be surprised if we did not continue that next year as well. Thank you for those answers. Thank you. No more questions here. So operator, please do we have questions to those listeners on the phone lines? Could you please repeat? We didn't hear. It just doesn't It just doesn't matter. That was zero one. Okay. Go ahead. See what asking. Which you're asking. Okay. More questions from the live audience? If not, Kjell, any closing words? Well, like I said, we are really happy about this quarter and we'll do our best to continue in the same way. Thank you for your great questions.