Earnings Call: Q1 2019

Apr 24, 2019

Hello and good afternoon everyone. Welcome this very beautiful spring afternoon to have a look at first quarter results. There are a couple of Vaisala people present here. We have our Chairman of the Board, Mr. Raimo Voipio our CFO, Mrs. Karina Mudinen and Investor Relations Manager, Paolo Lima. Afternoon. And my name is Ciel Frusen, President and CEO of the Weisela Group. I think we have a very strong result from the first quarter, the result. Those of you who follow Weiselam may remember that we had issues last year when it comes to order intake. Still we managed to end last year on a high note due to very strong fourth quarter also order intake wise and last year turned out to be quite good. But how did it all then carry over into first quarter of this year? Due to the low order intake we had, the opening order book for this year was significant lower than a year before. Order intake is something that we hence have put special emphasis on. And let's see how it all worked out then. Well, orders received is up with 30%. I would say that is pretty much actually record big improvement we have here. Order book is up with 13%. Net sales is up with 10%. Now we of course have to remember that we do have two acquisitions in these figures. One of them was present last year for one quarter, the other one came from January 1. So that of course has to be factored into these figures. Gross margin, I would say quite nicely up 2% to 53%. Operating result due to amortizations, one off costs and increased R and D is on a breakeven level. Earnings per share is €0.1 this time of the year per share. Cash flow strong as usually in Baisola up from previous year. Orders received, I would say this is quite a nice letter we are looking at here. So in comparable rates, this time around we did have a positive currency effect. In comparable rates, improvement is 27% in orders received. And then if we exclude acquisitions and look at the organic growth where the currency effect is still in, the improvement is 15%. So quite a solid development I would say. Order book which I mentioned was low at the start of the year in the weather side of our business is up year on year with 13%. If you look at quarter to quarter comparing to last quarter of last year, we are up with €30,000,000 This translates into a very nice book to bill of 1.34, that's orders compared to net sales. We have both business areas improving here. And of course, we do have an effect from the acquired businesses from Leosphere and Capatence. That effect is €9,000,000 Then we do have some projects that take several years to implement. And if you look at order book schedule for 2019, that amounts to €101,000,000 at this point in time. Then over to net sales and here we do of course then have the currency impact which actually amounts to €2,000,000 which is split roughly equal between both business areas. We have Netsense growing in both business areas. If you look at it geographically, it's EMEA growing, Americas growing, Asia Pacific going slightly down here in relative terms. If you look at the volume, the business is roughly on last year's level also in Asia Pacific. And I think this is quite good considering the low order book we had to start the year with on the weather side of our business and also it is imperative to keep in mind that on a typical year, first half of the year and especially first quarter is really slow on the weather side of our business. In that sense, this is a very typical year for the weather side of our business. All right. Let's continue. Here we have the operating result, which then is on a breakeven level here roughly. And there are some factors affecting it strongly, which we haven't seen before, two of them. But the one in the middle here you see is the R and D increase. So we continue to do that. And as I have mentioned previously, this year we will invest or put more emphasis on the industrial side of our business whereas the weather R and D will be basically flat as compared to previous year. But maybe you, Karne, want to give some more details around amortizations here. Yes. As we acquired Leosphere and K Patents during the last quarter of twenty eighteen. We are now starting to do the depreciation of intangible assets. And some of those intangible assets are depreciated now during the first half of this year, like order book and the other intangible assets are depreciated over from five to eight years. And the impact of the purchase price allocation related depreciation was €3,000,000 And then we had a one off expense provision amounting to €2,000,000 that was also exceptional and was then impacting the first quarter result, which was on a breakeven level. All right. Thank you, Gareth. I think you can carry on a bit this slide as well. Yes. Cash flow was €13,000,000 higher than what it was during the first quarter a year ago. And the main reason for the strong cash flow is collection of receivables. And we had very good net sales during the fourth quarter of twenty eighteen and that resulted in strong cash flow. We have also earlier been paying the pension insurance for the whole year as a prepayment, and that's not possible any anymore and that's also positively affecting the cash flow. Okay. Thank you. And then let's go over and have a closer look at the business areas. And we start with weather and environment. And this is the area where orders received really picked up. You see the figure here of 36%. If we eliminate the currency fluctuation, growth is 34% And there are some really big orders we got during the first quarter which we didn't really see last year. Biggest one is the one we have to Argentina for 31 airports, renewal of the weather portfolio there. And that is a project which is starting last quarter of this year. So it is generating invoicing from you could say end of this year and onwards for like two years. Then the second largest we had is from Swedish road authorities, Trafikverket. They are renewing the road weather stations and replacing the current ones with Waisela weather stations, large order as well. There were other as well you could say that it was not just these two, but other large orders also to an extent we did not see during last year. So really positive first quarter in that sense. Then of course, all through the presentation need to keep the acquisitions in mind, But if we eliminate those and look at organic growth of orders, that is up 20%. Net sales however, if we then eliminate the acquisitions is down with 9% and that is due to the opening order book we had for this year. And of course also due to the seasonality which I just mentioned. All right. And then the operating expense increase is really visible here. As you can see, operating result is negative, 4,000,000 here. All right. What about industrial measurements then? Well, here we do have a quite nice increase also in orders received. It's up with 19%. However, if we eliminate K Patents, the organic growth is up with 6% and here we now have also eliminated the currency effect. Order book is up with CHF2.5 million and net sales is up 23% and that is 19% in comparable currency rates. Organic growth is 6% with the currency change eliminated. Hence quite an increase in operating expense which is then affecting the operating result which would be quite outstanding otherwise I would say. R and D as I mentioned previously is going up during the year for industrial measurements. And then we have the amortizations and the one off cost which is affecting this business area. Let's go on. And here we have a summary of the key financial figures. I'm not reading through that. I think we dealt with most of them. I just mentioned a couple which we haven't talked about such as the capital expenditure which is basically double from last year. This is the two building projects we have ongoing coming into the picture here. The depreciation, amortization and impairment that is then from the acquisitions we made of course. And cash and cash equivalents is strong as I think we previously mentioned despite the dividend payment, but that is of course then in Q2. Let's go on and have a look at the guidance here or market outlook first. Market outlook is that we are basically seeing a flat picture on the weather and environment side of our business, some variation between the areas, not really any huge movements there. We do expect a slight increase in demand for digital solutions. No changes in industrial measurements. Situation is pretty good in all regions and the business we had in the first quarter very much supports that that is really the situation. We expect the demand for continuous monitoring systems to develop positively and also here first quarter results indicate that that is really the case. Liquid markets, this is where K Patents, the acquisition we made comes into the picture. We expect that one also to develop positively. Power transmission has been a struggle. We introduced it a couple of years ago. Volumes have not been what we expected. Also this one we expect to have a fairly positive development during this year finally. All in all, commenting on the two acquisitions we have made, would say that the situation for both of them also market and demand wise is positive and we are doing well integration wise and we are going actually according to plan, so situation is positive there. Business outlook, no changes here. Net sales will be in the range of $380,000,000 to €400,000,000 and the operating result EBIT will be between 25,000,000 and €35,000,000 We have the amortizations and one off expenses affecting the EBIT quite a lot actually. That ends the presentation and now over to your questions please. Thank you, Kjell. Let's start with the questions from the live audience here in Helsinki. Hi, good afternoon. It's Matry Konnekarnegie. Maybe some housekeeping questions. First, you mentioned the rental contract provision for EUR2 million now booked in Q1. Will that be all of that kind? I think you earlier in Q4, you mentioned about 2,000,000 to €3,000,000 provision. But should we expect that, that is now the whole thing, 2,000,000? We are not aware of other one off expenses at the moment. Okay. Good. Secondly, related to the amortization, and you mentioned that part of the amortization will be done in the first half, so it's bigger in the first half, like the €3,000,000 now in Q1. And then the rest will be more evenly spread for many years. Should we expect that the €3,000,000 is a rough good proxy for the second quarter provision as well or amortization? And then how much should we expect for the second half? I would say that the amortization will decline with onethree during the second half and already some decline during the second quarter. All right. Thank you. And then finally, you are making building two buildings at the moment, and you mentioned that the building CapEx has increased CapEx level. Would you have an estimate on the building CapEx for this year just to separate it from the normal CapEx line? I don't think that we have given an estimate for this year. We gave an estimate for the whole CapEx, but not for this year. Yes. But should we expect that the CapEx in Q1 is still going to increase towards the year end definitely. Definitely because the building projects are just starting. So there will be increase in the CapEx spend for the whole year. Right. Thank you. Then turning to the Industrial business. Excluding acquisitions and FX, your growth in Industrial Measurements was 6% in Q1. Based on earlier trends, it could have been better. Was there any particular reason for it to be only 6% in Q1? And what would you say about the potential of increasing the speed towards the year end? You mentioned about the transformer business maybe improving towards the year end, but how should we look at the situation? Well, the 6% growth in Industrial Measurement system in flat currency rates. So, if we use the result of real growth and exclude the acquisition, then the growth is 10%. And I guess we will always have some currency fluctuations. So we are actually quite happy with the situation for organic growth in the first quarter. There is potential for that to go up but I wouldn't be dissatisfied with that level either. And as I mentioned, we are also really satisfied with the way the K Patents business has taken off. Ioannik Graves from Inderes. I could continue a bit relating also to how you are driving one, your fixed cost this year. So you commented here that fixed costs were just in line. So I just wanted to understand a bit. So in the top line, was there anything unexpected or negative drivers? So were you planning this kind of profitability for Q1? Well, the profitability on the Wysala level is of course now then suffering quite a lot from low net sales on the weather side. And perhaps we expected a slightly higher net sales, but this is the way the project business is. It's very hard to precisely estimate. Then maybe on the fixed cost side, could you maybe comment a bit how you are driving it like going forward? Of course, in your guidance, but is it sales? And you commented that the R and D, you increased much on industrial side, but which is the component that is more variable? Well, don't know about fixed cost or that is just part of the picture. We also have our manufacturing cost where we have our Weisela production system which is giving us a great advantage and improving our cost situation from an operations, meaning manufacturing point of view. And we expect to see continued good development in that area. Also we have a company wide lean undertaking going on, investing quite a lot into that. That is going to give us efficiencies and savings, quality improvements and what have you in many areas. So apart from R and D increased efforts, there's really not that much other sort of raising of costs going on. Would you like to complement this? Then finally, bit more on the acquisitions you made. You said that they are proceeding according to plan, but could you maybe give some more color on what kind of actions you are still you need to do in in in these two? Integration is still ongoing for both of them. Now two quarters for Leosphere, and we are really satisfied. We at the receiving end at Weisel and believe also our colleagues at Leosphere are really satisfied. We have a good spirit and also as the good order intake for Leosphere shows, business and the demand situation is good. So it's going according to plan. I would say that two quarters is a bit short time period to give any really deep estimates of how things are, but we are really happy with the way the situation is. The same is true for Cape Breton. Of course we had them now only for three months on board, but really off to a very good start. And what I said about Leosfer, about the sort of attitude and mentality and business development, it applies precisely the same for CAPATINS. In Leosfera, we are already quite far in the system integration. So we are taking the same systems into use, same ERP system and same tools for the sales organization. So that is progressing well. And when we have been finalized the implementation in Leosphere, we will continue with Capetence, implementing the same tools as well. And then from sales integration perspective, I think that, that has been progressing quite well so far. We are only six months from the purchase of Leosfer, and we already see that the synergies from the combined sales organization, we already see the first ones. Thank you. That synergy was a good answer. Thank you. Jonas Forsland from Everybank. When we're looking at your cost level and it's rising now partly due to the acquisitions, how much would you say that is related to the some 170 persons you have now grown through these acquisitions? And how much is is some other kind of investments in in in future? Majority of the cost increase in operating expenses is coming from the acquired companies with the exception that R and D expenditures we reported in industrial measurements is increasing or continues increasing. Thank you. Patrick O'Neill, Carnegie. One question more. Related to the Swedish order from the Trafikopark, the road weather system order, is that including the support decision support system and the information systems that you mentioned in the market outlook that you see higher growth in that segment for digital solutions or is there other digital solution areas where you think that you can grow your net sales? The Swedish order includes the weather stations and then network management software which does not include the decision support system. So it's basically the infrastructure and related software network management we are selling to Trafikverket. But all in all there is an improved demand for digital solutions including lightning data for instance which we have been doing for long. It's a good situation there. On the energy side, we do see things also. We're seeing demand increasing there. So all in all, it's a fairly positive situation in Digital Solutions. All right. Thank you. Now operator, I think we are ready for questions from those on the phone lines. Thank And just as a reminder, that was zero one if you want to ask a question. As there seems to be no questions at this stage, I will hand the word back to the speakers for any closing comments. Thank you. Do we have any further questions from the live audience? If no, I would like to thank everybody and and wish wish you a good day. Thank you. Thank you. Thank you.