Earnings Call: Q2 2019

Jul 19, 2019

Hello, everyone, and welcome to have a look at the Wisehall second quarter results. With me at this side of the line, we have our Chairman of the Board, Mr. Raimo Vaidjo. Good afternoon. As well as our CFO, Mrs. Gardena Mourinen. Good afternoon. Our Head of Investor Relations, Ms. Paolo Lima. Good afternoon, everybody. And yours truly, Kjell Frosehen, President and CEO of the Weismar Group. I have to say that in a nutshell, Weisler had a great second quarter, and it's really a joy to tell you about it. We had a great order intake. And, of course, the two acquisitions were recently made contributed a lot, which is a good thing. And it shows that the acquired companies do well and they are on a growth track. But also the organic growth, the growth without the acquisitions was on a high level, meaning that basically all of Wisely is doing well and growing. In the second quarter, we had some important product launches and some products we have launched earlier really as well both on a growth track like our continuous monitoring system as well as our power monitoring related equipment. But that was the introduction. Now let's see what we have on the agenda here. So this is a summary of the key figures, and you see that orders received is up 38%. Of course, book as well. Net sales up 20% and gross margin, most importantly, up 4%, getting back to the reasons why that is the case with Bayer. And you also see a very good development in the EBIT, in the operating results, going up actually 53% from 4.7% to 7.2%. Naturally, our EPS is developing favorably as well. Cash flow, however, is negative, and that is a result of the growth we do see in the second quarter and a result of the fact that invoicing or the growth really was towards the end of the quarters. We have invoiced but not yet received all the related cash. Let's go forward and look a bit more in detail at orders received after 38%. And this time around, we were also helped by favorable currency rates mainly U. S. Dollar. But even if you exclude that effect, orders received would be up 34%. And as I just said, acquisitions did well and the organic growth was good, being 18% in orders received, quite a figure. Order book, naturally up as well, 20% actually year on year and effect of acquisitions here is EUR 11,000,000. Out of this order book, some that EUR 4,000,000 is going to be delivered during current year. Corresponding figure last year was EUR 80,000,000. But you have to keep in mind that at that point in time, we didn't have the acquired companies. So figure is not really comparable in that sense. Then what about net sales? That is up with 20% and positive currency effect here, but without that, 17% in comparable rates. Organic growth nicely or roughly on the level that we state in our long term targets, it's 5%. Operating result, as I said, improved very nicely as a consequence of net sales growth. We do have this scale effect traditionally in Weiselad that we have a growing margin, the growing sales. And, we certainly see that this time around, we do have a good margin in the products we delivered and good margin in the projects we deliver as well. And I think this is quite an impressive achievement actually, this operating result, taking into account that we didn't really have this amount of amortizations last time around, a year ago. Now we have EUR 2,200,000.0 coming from amortizations related to acquisitions. And they also did terminate the product line in second quarter, and there's almost SEK 1,000,000 provisions for that. But despite these negative factors, 53% growth in operating result. Cash flow being negative. I mentioned the main reasons for that and, partners can get back to that in a minute. And let's have a closer look at business areas. And to start with better end environment, and I think this is quite quite an always received growth. You see here 49% up. And it's impressive even if you exclude the Lyosphere, the acquired company, it is up 26 in organic figures. Some positive currency effects here. And, but there's also one very notable thing here that we didn't have any of these these sort of big, huge orders that we had in the first quarter and historically, we had every once in a while. But have a flood of mid sized orders basically all below and well below €5,000,000 I believe the largest one we had was €4,600,000 or so. So, and good news is also that the growth, the orders really came from all over the world. So on weather and environment, order book is up 8% year on year, and it's quite an increase in what we delivered during this year as compared to one year ago. But keep in mind that we didn't have the acquisitions last year. Net sales is up with 17 in in flat currency rates, 15%, and good development in operating results despite the amortizations and the R and D expenditure, which at this point in time is at 15%. So quite a high level of R and D spending here. Then looking at industrial measurements, basically, it's strong result all over the place here. Orders received up 21%, 17% in flat rates and organic growth is 5%. Order book up 22%, net sales up 26%, and here the organic growth of net sales is 12%. So nicely double digit organic net sales growth here. Operating result on a high level as well, although R and D expenditure is around 40% of sales here. Gross margin up with 4%, and I maybe forgot to mention that the gross margin improvement was 4% in weather and environment as well. Well, then we have a table of financial figures here, and would you kind of say a few words around this? Yes. The first half order intake was very strong, €211,000,000, and it was equally strong in all geographical areas. In weather and environment, the order intake during the first quarter included large growth orders, whereas the second quarter, order growth was generated by medium sized orders. In Industrial Measurement, the first half order intake was very strong, and it was strong in all regions. During our first half, the order book increased by €31,000,000 including acquisitions, and the growth was 20%. And the growth of acquired companies of this €31,000,000 was €3,000,000 So the traditional wise allows generating still majority of your book growth. Then net sales was increasing 15% and with currency impact, which was about €4,000,000 the increase was a couple of percentage points lower. Our operating expenses were growing by 26%. And the reason for the increase in operating expenses is mainly expenses coming from the acquired businesses. Operating results for the first half fell short from the comparison period, and this was due to the weaker first quarter. And actually, operating result for the first half was made during the second quarter. The short mix of the operating result and main reason, the amortization of intangible assets totaling €5,000,000 And then some 2,000,000 to €3,000,000 expenses coming from the one off expense related to a lease contract termination, And that was already booked during the first quarter. And during the second quarter, we booked a provision, which is related to a decision to terminate one product line in The U. S. And our cash flow from operating activities was €2,000,000 compared to €8,000,000 previous year. And the main reason for this one is the increase in net working capital, And it was coming the difference is €9,000,000 and €4,000,000 of revenue is coming from increase in inventories and €6,000,000 is coming from the decrease in liabilities. And receivables did not change so much during the first half. So this is the reason why our operating cash flow was much lower than what it was a year ago. Then our capital expenditure almost doubled from previous year's first half, and this is mainly reason to the pending projects we are having in Finland, Vanta and the other one in Louisville in U. S. A, Colorado. Yes. Thank you, Karim. That was highly informative. Then, the market outlook, there is some slight adjustments here. But what you stated is that the market for traditional weather observation solutions remains flat. And we have some improvement in Europe and Europe did very well now in the second quarter. Possibly also in China and Americas, China being a bit more volatile. And then a flat situation in Asia Pacific, Middle East and Africa. Digital Solutions demand should develop favorably. When it comes to industrial measurements, we expect the market to grow basically in all regions. And, continuous monitoring systems, that market we see to be very healthy and positive as well. And then liquid measurements, which we entered now with the acquisition of KvaPanz, that market is also developing positively. Then also while still on Industrial Measurements, we continue to work on channel development and market inventory. We are not really as fully global in this side of our business as we are in weather and environment. The outlook, business outlook for the current year has not changed, meaning that net sales will be in the range of EUR $380,000,000 to EUR 400,000,000 and the operating result EBIT in the range of EUR 25,000,000 to EUR 35,000,000. The amount of acquisition related amortizations has a big influence on the EBIT for the full year here. So that's what we had in mind to summarize the second quarter. Now over to your questions and the operator, please. And our first question comes from the line of Jonny Grunquist of Inderes. Please go ahead. Your line is now open. Hello, it's Jonny. First of all, congratulations for the good result. I have a couple of questions. First, I would like to start with maybe just a a comment. We've seen in the beginning of the year that or or if if you compare q one, you you have organic sales decline of 44%, and and now you had an organic growth of 5%. So can you maybe start comment a bit if there are anything in the market that has changed? Well, I mean, we came into this year with a lower order book, And we had a good order intake last quarter last year, but didn't really see the effect of that yet in the first quarter. Now we are sort of delivering from the growing order book. And I would say that is the main effect really on Visalign level that we see. Okay. Thank you. And you said that it is coming from all regions. So but then a follow-up a bit on this. So do you see any reason now why why it's sort of done? You had a good order intake also in q two. So I assume that you you expect the good trend to continue. Well, we expect to stay within the guidance level that we have. So I don't see any any any reasons to change that. Oh, okay. Then maybe a final question on this. Do you see that if some part of this, like, pickup in in order intake, is is it due to synergies from the acquisitions, or or is it just that or from the projects projects that you are selling that you acquired additionally, or is this just a a pure, so to say, old portfolio growth? Well, it's both, actually. I mean, both sides are doing very, very well here. And and and as you have been following WiseLab for some time now, you you know that Federer and environment has this sort of periodic swinging with the the week here every once in a while, and this should not be one of the week here. So so that is one part of the answer to your question. But then I would say that personally, I'm most happy that some of the new product areas that have been on the market for quite some time and are mainly thinking about the power monitoring really, really had a very strong development there with a doubled sales figure in the second quarter. And then, of course, also the continuous monitoring system that I had mentioned where we had business growing to just 30% and above. That is, I think, very, very promising going forward. Okay. Thank you for your answers. Thank you, Yoni. Thank you. And our next question comes from the line of Matti Raikanen of Carnegie. Hi. Good afternoon. It's Matti. Related to the power power transmission products, which you just described, it doubled from last year. Would you say that this is kind of real improvement and indication of orders finally starting to come on? And I'm just thinking that was the comparable quarter perfectly normal a year ago, so that's doubling from that clearly indicates that there would finally be some some demand for this product. Well, that is a bit of a hard hard questions to answer. Like the famous Finnish philosopher says, it's a mid fifty sixty situation. And but since we did get these orders from from several customers, not just one, I have to say that I'm, I'm getting more and more optimistic that we are we are reaching the point where we do see real growth for power monitoring. And this is actually, if you look back on products we have introduced in our industrial segment, unfortunate market uptake tends to be slow and take many years. And, maybe it is so that we tend to forget that and get a bit too optimistic. But, basically, power monitoring follows a perfectly normal curve in terms of market uptake in industrial measurements products. Six years. All right. Then a second one related to the gross margin in Industrial business. I think you now recorded record gross margin of 64.9%. I think it was the highest quarter ever. Were there any kind of abnormal reasons why it was so so good? Or was it just kind of combination of good good sales mix and basically volumes also in improving? And then the the kind of cost increase that you have had was kind of mitigated by these more positive things and then, therefore, the gross margin was good? Or was there any exceptional items behind the good gross margin in Industrial? Well, thank you, Martin, for that comment. It would be nice to hear you repeating that a couple of times going forward. But the short answer is no. But if I expand on that a bit, there really was nothing abnormal. It was just business as usual, really. But just to make sure, we can ask how she referred to to give her point of view as well. So the the second quarter volumes in the in instrument factory were high, and that was bringing the higher gross margin that we saw in the second quarter report. We didn't have any any special cases during the second quarter. So this is kind of a normal performance from our operations. Thank you. Our next question comes from the line of Jonas Forsland of EvliBank. Please go ahead. Your line is open. Good afternoon, everybody. A really good result. Congratulations on that. Could you remind me a little bit again about the sales synergies you see with Leosphere and K Patterns? Now looking at Leosphere in this quarter, it it contributed around €8,000,000 in in sales. And now that it's part of the device on our system and the the sales channel, If not about if not only looking at this year, but maybe next year, how how much what's what sort of a growth figure, you said, you're aiming for now that it's part of the whole system? If you could give me give us some some color on that and and then the same and the same question also about the Cape assets in a way so that we can understand a little bit what you're aiming aiming to achieve with these acquisitions from a from a same synergy point of view. Thank you. Okay. Yeah. So, so far, we haven't really had any major effect of the synergies, but we definitely expect to see them going forward. And in the Leosphere side of our business, one effect will be that the traditional white solar is very strong in airports. Leosphere is not. However, in LiDAR, the Leosphere product is very, very applicable on airports. So there, we expect to see a sales growth for health care through YSelect existing sales channel worldwide. That is a very important effect. Another thing is that, like Karna mentioned, we have ended a product line in The U. S. That was a good measurement. Product area we terminated. And actually, we see that that sort of part of our business is being taken over by wind Lidars, by the LayOfShare products. So here are two examples of of sort of synergies and and cross pollination going forward, really. And then when it comes to Capatents, same applies here, so no effects really yet. But we do have common customers and we do have possibilities to combine Capatents and Wysala sensors into sort of more value adding instruments. And also the fully global Wysala sales channel will an added strength for competence that are not as global as we are. So these are some synergy effects. So we expect both companies to continue nicely on the growth path that they have had. And there are no further questions at this time. Please go ahead, speakers. So if there are no more questions, then I have to say thank you to everyone for listening to us on this very sunny, beautiful Friday afternoon. For those of you who go for vacation or maybe are on vacations, just enjoy the summer and have a good bye. Thank you. Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.