Warmly welcome, everybody, to have a look at the third quarter of Vaisala. We have the usual Vaisala team present here with our Chairman of the Board, Mr. Raimo Voipio.
Good afternoon.
Our CFO, Mrs. Kaarina Muurinen.
Good afternoon.
Our Head of Investor Relations, Ms. Paula Liimatta.
Hello.
Yours truly, Kjell Forsén, President and CEO of the Vaisala Group. At Vaisala, 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. 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 Vaisala where we have gotten basically almost out of the blue large orders with very high profitability. 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.
I would say that this strong third quarter is a manifestation of Vaisala's strategy working well and us also implementing the strategy quite well. 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. 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 dig a bit into the results, what you see ahead of you now, a summary of the third quarter, I think is quite remarkable.
During my tenure as head of Vaisala, 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. We do have some positive currency effects, but in this quarter it's EUR 2 million. It's divided equally between the business areas. It's EUR 2 million in net sales, a tad more in orders received. 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 last year's level, a tad down. We will touch more upon that in a minute. Operating result in absolute terms on Vaisala level is up, which is quite an achievement considering that we have made three acquisitions. We have a significant amount of amortizations that we are doing.
We will dig into all of these more in detail. I'd just like to add while we are on talking on a general level, that from 1st of October, we have the latest acquisition on board, Foreca. Foreca business-to-business part. We did not acquire Foreca's business-to-consumer part, and we are not getting into any consumer business. We are strictly in business-to-business. Also with the acquisition of Foreca, we do set up Vaisala Digital unit, which is then active in software and service business, standalone software. Not really sort of, for instance, firmware, which is highly dependent upon Vaisala 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.
After the third quarter, we did sign a contract with the state of Ethiopia, a EUR 13 million 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. They certainly need this kind of 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. Let's go forward. Here we have orders received in the third quarter. It's up with 37%, and it's up in both business areas.
Like I said, it's two and a half million EUR or so coming from currency effects here. In comparable rates, we are still up 35%. If you then exclude the acquisitions, we are up 20% in orders received. You could, in a way, say that the Weather and Environment Business Area is one who is faring even stronger in this quarter. 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 million. 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%.
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. EMEA has been very strong now, both actually in order intake and in net sales. Could you, Kaarina, say a few words about the operating result?
Yes. Vaisala's operating result increased by about EUR 2 million, reaching EUR 16.3 million, 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, the increase in operating expenses came two-thirds from acquired companies, including also amortization of EUR 2 million of intangible assets. Additionally, it included EUR 1 million costs, which were related to the reorganization and refocus in our digital business. Overall, the operating result percentage was 15.5%, which is 2% points down from previous year, 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. Vaisala's cash flow was EUR 16 million 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, Kaarina. Let's go forward, dig into the business areas. We start with Weather and Environment here. 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. We need a high order intake in Weather and Environment to get back to a good business level here. Still, this is really quite an outstanding result. Also it's quite remarkable, like I sort of started with, that we do not really see these very big single orders. What really is growing the number of mid-sized orders and coming from all geographies really. I think we have two orders that were in the magnitude of EUR 5 million or so on both sides of it.
The rest is really mid-size and small orders, which is a good sign and showing sort of the global presence and strength of Vaisala. Order book up with 30% year-on-year. Net sales up 27%, or 25% in comparable rates. Operating result is improving as well. R&D, the sort of cornerstone of Vaisala in this quarter, is at 11.4%. Organic growth, we do have a big acquisition here on the weather and environment side, Leosphere. If we exclude that, we do see that organic growth of net sales is 14%. Of course, Leosphere is also then bringing or adding a lot of operating expenses. If you exclude the amortizations, the OPEX coming from Leosphere here is around EUR 3 million. Let's go forward to industrial measurements. This is actually from a net sales point of view, the highest ever quarterly result we have.
Orders received is up very nicely with 23%, or 19% in comparable currency rates. Order book very nicely up as well, net sales up with 22%, or 19% in comparable rates. We have enjoyed a good operating result in this business area for quite some time, that is not changed. We do still have that, we do also add operating expenses here. We have one acquisition on board, K-Patents. We have their OPEX here. R&D is up roughly EUR 1 million in this quarter, EUR 700,000 or so coming from old Vaisala and EUR 300,000 from K-Patents here. Excellent operating result margin really. Kaarina, 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. Net sales has been growing 19% during this year, and the growth is coming nicely from both business areas. Weather and Environment Business Area has been growing 16% compared to previous year, and Industrial Measurements Business Area growing as much as 24%. Our gross margin has been improving to 54.3%, which is two percentage points improvement from previous year. Part of the reason is the increased deliveries, so higher volumes bringing us advantages, utilizing our production capacity, but also the higher share of product business is, of course, increasing the average gross margin. Our operating result was EUR 23.5 million, which is EUR 1.4 million decline from previous year.
Still, the result is good because the operating result is including EUR 3.6 million expenses that are related to a shutdown of a product line in our U.S. factory, then terminating a lease contract, and also then the reorganization of the Vaisala Digital business. In addition to this EUR 3.6 million, we have also EUR 7.2 million amortization of intangible assets related to the acquired companies. 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 million, and the increase in capital expenditure this year is mainly related to the two building projects, R&D building, in Finland, Vantaa, and an office building in Louisville in U.S.A.
Okay. Thank you, Kaarina. Let's go forward and look at the market outlook for the rest of the year. Not that much left, but anyway. We have simplified our statements here a bit. What we say is that we expect the demand for better observation solutions to improve somewhat, in relative terms, a bit less in Americas. 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 the demand for industrial measurement solutions to continue to grow in all regions. 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.
Business outlook for 2019 is that net sales is in the region of EUR 380 million-400 million and the operating result, EBIT, is in the range of EUR 25 million-35 million, including the amortizations coming from the acquisitions. Now over to your questions, please.
Thank you, Kaarina and Kjell. Let's start from the live audience questions.
Good afternoon, Matti Ruonakangas 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 has the kind of base load of, let's say, more regular-sized orders developed? Is that also growing nicely, and then you have added the big project on top? How would you kind of characterize the kind of base demand when it comes to quite normal orders?
The base demand on the weather and environment side has been good in the third quarter, and we have not gotten these large orders. The ones you just mentioned, they have been sitting in our order book for quite some time. The bulk of orders really is sort of mid-sized, well below EUR 5 million that we have gotten in the third quarter. A good flow of mid-sized orders.
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. 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. 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. Basically, of course, the question is what kind of threats do you see in Q4 that it could still enter a situation where you actually are in line with your own guidance? What can happen in Q4?
Well, we form our guidance really based on what we have in the sales funnel and what we are going to deliver. When we look at that picture, it shows that we will stay within the range of our guidance for this year.
Okay, fair enough. Your quarters tend to be very different. Has there been any kind of surprises during 2019 compared to what you expected when you gave the guidance and started the year? I can understand that some large orders have been positive surprises. Has there been anything on the negative side, or otherwise, has 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. 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. 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 many ways.
All right. Thank you.
Thank you.
Matti.
Hi, Jan Granroth from Inderes. 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. Could you maybe comment on that? Do you see any change in the order book quality on profitability going into Q4 versus Q3? There shouldn't be any big orders, but looking at the other sales mix components, is there any big change?
Well, Kaarina can continue, I'll start. In the third quarter, gross margin on Vaisala level was slightly down. That's coming from Weather and Environment. There, 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. Kaarina, 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, I would say, based on our performance. Volumes and utilizing the same capacity for the higher volume. Also, of course, now the share of product business being higher has been helping us with the gross margin improvement. I don't see that there would be major changes for that.
Although I just said that the margin is lower for projects, the margin of projects has gone up also. We are more and more skilled in delivering the demanding projects to wherever in the world. We do have a very good scale effect and volumes growth, especially in industrial measurement, giving then 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 there. You mentioned last week or you said about the Ethiopian project, that's not booked in the order book as far as you know?
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, 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?
The change this year as compared to, I would say, the entire history of Vaisala, really, is that we are not growing the investment into R&D as much as we have used to in weather and environment. However, we continue to invest significant into industrial measurements. 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. Operator, please, do we have questions, those listeners on the phone lines? Could you please repeat? We didn't hear.
It just doesn't look like that was zero one. Okay, go ahead. You wish to ask, Jan. As there's no coming to stop either, because of the speech.
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.