Good day, and welcome to today's Vaisala first quarter 2023 conference call. At this time, I'd like to hand the call over to Kai Öistämö, CEO. Please go ahead, sir.
Thank you. This is Kai Öistämö. I'm the CEO and President and CEO of Vaisala. I'm joined here with our CFO, Kaarina Muurinen, our Chairman of the Board, Ville Voipio, and our Head of IR, Paula Liimatta. I would like to welcome everybody on this call on Vaisala's first quarter. Vaisala's first start of the year was characterized by strong demand, and this all despite the market activity remaining high, or the market activity remained high despite all the uncertainties in the marketplace and in the business environment overall.
I would like to remind you all on the reported numbers now on orders received and in order book that we, as we announced earlier, as of beginning of 2023, we changed our reporting so that Weather and Environment business areas, subscription sales are excluded from orders received as well as from order book. Now we are separately reporting in this aggregation of net sales as subscription sales. Now, looking at the really the numbers, orders received, as said, grew nicely by 11% and order book ended in EUR 164 million.
The operating result decreased due to the investments that we did during last year, in sales and marketing and into R&D, focusing on the long-term competitiveness of the company. I'll come back to this in a few slides. The cash flow returned to what I would characterize as normal first quarter for Vaisala. Last year was burdened by a few things in, first of all, the shortage of components which led in more capital tied into component inventory than typical, as well as then the acquisition of, or the closing of the acquisition of AerisWeather. Now we are back on a good track on a cash flow as well.
Looking little bit deeper into the numbers, first quarter orders received, as said, grew by 11%. The orders received grew in both business areas. When I look at the different product segments or market segments that we serve, the orders received increased strongly in meteorology, roads and automotive, as well as industrial instruments. As said, order book reached almost 164 million EUR at the end of the quarter, at 3%, 14% increase to first quarter 2022. Nice increase on that well. Again, the increase in industrial instruments as well as power and energy markets in Industrial Measurements market segments and in Weather and Environment side in all market segments contributed to this.
In terms of a net sales, similarly, growth by 11% compared to the same time previous year. This time, there was no significant impact on currencies. We are only actually noting on, it will be same constant currencies or real currencies, 11% on both. The net sales grew in both business areas, very strongly in Industrial Measurements business area, and very strongly in industrial instruments, life science, and power and energy market segments. As said, the operating result was burdened by the investments in sales and marketing and R&D that we did during the year of 2022.
These investments for long-term competitiveness, both in terms of our offering as well as our reach and building that. On top of that, it's worth noting that the gross margin was at previous years level, at 61%, despite the fact that component spot purchases had a minus 1.3 percentage points negative impact on the gross margin and whereas the year before, say first quarter, it was only 0.4 percentage points negative impact. The other thing worth noting on the operating expenses is the continued renewal of our IT systems, as we've previously indicated, this continued during the first quarter as it will continue throughout this year.
Moving little bit into the two business areas that we have, starting with Industrial Measurements. Good demand during first quarter. The orders received increased by 9% and order book by 10% compared to the same time previous year. Orders received grew in Industrial Instruments, Liquid Measurements, as well as in Power and Energy market segments. If we look at the net sales, very strong net sales growth 19% year-on-year. Driven really by all market segments. Very strong growth in Industrial Instruments, Life Science, as well as Power and Energy market segments. Looking at the gross margin, it decreased from previous year, now being 62.6%.
Here, the spot purchases, the additional market, material costs related to the spot purchases had a 1.7 percentage point negative impact on the gross margin, or as compared to the 0.6 the year before. The operating result was slightly above last year, being EUR 50 million in terms of a relative operating result, being the 23.8% of net sales. Moving on to Weather and Environment. Again, strong growth in orders received being 13% year-on-year. This driven by meteorology as well as roads and automotive market segments. The order book ended at the end of first quarter at EUR 125 million that represents 13% increase to year before.
Here, just again, reminding you that when you look at the years 2020 and 2019, the this accounting change and reporting change that I was alluding to, where the subscription sales are now separately reported. They are excluded from the orders received in for year 2021 and 2022, but not the years before. Net sales wise, the year-on-year growth was 5% for Weather and Environment driven by automotive and renewable energy market segments. Gross margin improved from previous year now being 50.2 percentage points, despite the fact that again, the components of both purchases had a negative 0.9% impact on gross margin compared to the 0.2 the year before.
The improvement really came from improved mix in Weather and Environment. The operating result being on the negative side, 1.7 million EUR, again, driven by the investments that we did really throughout last year, into building the competitiveness, especially in Weather and Environment case, especially the growth areas, being as we described earlier, the renewable energy market segments as well as then the subscription sales-related activities. Take a look at the first quarter financials, and a bit of a look into cash flow. The cash flow from operating activities increased as a result of decrease in trade receivables.
As I said in my opening, we returned to kind of a normal first quarter behavior in Vaisala. Overall, the strong financial position that Vaisala enjoys continued throughout the first quarter. Looking at the market development and business outlook, this remains unchanged. We expect the growth from most of the market segments that we serve. The only exceptions as the market segments being meteorology and aviation, which we expect to be stable throughout the year. There are no changes in the market development we anticipate for this year. Similarly, no change in the business outlook for 2023.
Net sales wise, our expectation is that It will be in the range between EUR 530 million and EUR 570 million. In terms of operating result, in the range between EUR 70 million and EUR 85 million. As a summary, before opening up for Q&A, strong demand continued in the first quarter. The orders received and net sales grew both by 11%. Order book ending up in a good result. Operating result somewhat burdened by the long-term investments that we have been doing throughout last year. The cash flow from operating activities clearly improved from previous year. With that, operator, I would like to open up for Q&A.
Thank you, sir. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. Please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll now take our first question from Matti Rikkola from Carnegie. Please go ahead.
Hi, good afternoon. It's Matti Rikkola, Carnegie. I have a couple of questions. I would like to take them one by one. first of all, in Industrial Measurements, the gross margin declined year-over-year, and the decline was not totally explained by the spot component composition. The underlying gross margin, excluding these, was a bit softer. Not much, but a bit. Can you explain why that was the case? Has there been perhaps a growth in the delivery organization in a stepwise manner so that I think remember that has happened sometimes in the past? Is it just normal volatility between different quarters?
Hey, Matti. Good to hear you. Yeah, it's the latter one. It really is explained, all explained by the mix. It's a, it's a normal seasonality. As you may recall, we often have a slightly lower gross margin in Industrial Measurements during the first quarter when, like that, at least that has been the history.
All right. The fixed cost increased, like you said in the report, and as you have flagged already before. I'm just wondering how much of that increase, which was roughly EUR 11 million plus, how much of that is kind of permanent increase going to your sales and R&D organization, and how much is the kind of non-permanent, let's put it that way, going to ERP projects, et cetera? Can you make that split? It would be easier to kind of, estimate what will be left, let's say, next year.
Yes. I would say this way, it's a good question, and then I would say this way that the majority of that number is really kind of permanent, is, as you put it, permanent increases into sales and marketing and R&D. As kind of a clearly a small portion of that goes into ERP and other systems that we are upgrading. Obviously, you know that even if our plan is that the ERP is going to be going live at the turn of the year or early next year, these kind of a big projects will have a tail in them as well. You may wanna take that into account in your, in your model as well.
Okay, good. Regarding the order backlog, which increased, and, the part that is scheduled for delivery for this year actually was quite a bit bigger than last year. I mean, the delta is over 3%, assuming that that would come to top line this year, it is of significance. Did you anticipate this type of kind of quicker deliveries or the delivery schedule being different than last year when you gave this year's guidance? How well is this embedded in your top line guidance for this year?
Of course, it's embedded in our top line guidance as we have not changed the top line guidance. Yes. It. Part of, obviously, as the business grows, you know, the underlying order book for any given year, as long as we continue to grow, should grow as well. That's part of the answer. Part of it is also a bit of a seasonality, as you know, especially in the Weather and Environment side, you know, projects come and project go. Part of it is also that kind of orders sometimes come in a little bit earlier, kind of when you go, especially when you compare quarter-on-quarter of, or a year-on-year kind of quarters.
Yes, we are obviously a better position than as we should be compared to last year.
All right. Finally, the subscription sales, the new line that you announced that you will report, that grew fairly nicely year-over-year. What kind of seasonality should we expect between quarters? Is this a SaaS type of revenue that we should be expecting to grow basically from quarter to quarter, at least to some extent? Do you see that there is some seasonality in the
Excellent. Yeah, excellent question, thanks for asking that. As you know, in a normal, like, well, you know, normally, you would expect, obviously, that there is no seasonality in subscription sales. In our case, there is a slight seasonality as part of the subscription sales is related to winter maintenance related activities. Kind of for obvious reasons, winter maintenance is less in the summer months. That causes slight seasonality in the numbers as such.
Basically, the winter months are supposed to be a bit better than the rest of.
Yeah. Like, maybe kind of what I just said requires a little bit more explanation. It's a volume-based pricing. The volume is higher, obviously, in winter months than summer months.
All right. That was all from me. Thank you.
Thanks, Matti.
Thank you. Our next question comes from Pauli Lohi from Inderes. Please go ahead.
Hi, this is Pauli Lohi from Inderes. I would like to ask about price increases. There have been a period of higher inflation last few years, maybe the situation is getting better with component availability and so on. Have you been still doing material price increases in Q1? How long should we expect price increases from last year to boost your growth going forward?
Yeah. Hey, Pauli. Good question. We did price increases again, like we did last year during the first quarter. I would say this way that the price increases did not have yet a significant impact on the first quarter numbers, as tends to be so that there's a kind of a older orders are in and kind of some of the deliveries for the, for the things that got sold and billed during the first quarter. The impact kind of gets through first quarter and with a kind of a fuller impact now in the second quarter and so on. No change as such from previous years.
Kind of going forward, it's too early to say, kinda all depends on the inflationary environment and so on, how do we need to think about, how do we look at the marketplace and so on, the environment again at the end of the year. We tend to do these pricing changes only very selective times of the year instead of all the time hiking up the prices. Part of it being kind of being a reliable, predictable supplier and a partner to our customers.
Thank you. Secondly, I would like to ask about. Could you give some additional update regarding the growth plans in Xweather and the subscription-based revenue? How is the business progressing, and should we expect the growth to accelerate when all the new employees actually will get started?
Yeah. Obviously we have high hopes on kind of a short-term, long-term on this. We have to say that if you look at last year, the performance was very good. Now and when we expect that we will have a good performance during this year as well. Obviously, you need to find win that in the marketplace every day and so on. You know, the percentages are obviously getting tougher as business grows and as the base number grows. That's part of when the business grows, we need to be investing into the business as well.
You know, in to ensure that the, both the offering as well as then the reach through sales and marketing remains in such a way that it supports the growth plans that we have.
Yes. And finally, what are your plans for new recruitments or other growth-related expenses? Are you still increasing your fixed cost base during 23?
I'll remind you that we are a growth company, and in order to be a growth company, you need to be investing into the future in a continuous basis. That all being said, I think if you look at last year's expansion in sales and marketing and in R&D in relative terms, I think it was faster and bigger than what we've done in the past years and probably little bigger than what we will be doing going forward as well. I think the pace will be somewhat slower, all depending on obviously how the market develops and the opportunities that we see.
Okay. Okay. Thank you. That was all from me.
Thank you.
Just a reminder, to ask a question, please signal by pressing star one. Our next question comes from Arttu Heikilä from Evli. Please go ahead.
Hello, how are you?
Hey, good to hear you.
I have few questions. First, growth in Americas was quite strong compared to other regions. Could you mention the growth drivers in that region?
I think it came from various different parts. Life Science being a good contributor to it, but by far not the only one. I think in both business areas, actually, we had a good year in Americas. We had good projects in Weather and Environment side and in the Industrial Measurements side. As I said, Life Science was a good driver, but there were other segments which grew as well. Too early to say really the insourcing as kind of how much of an impact on the macro side it has. Certainly it's a trend that we are benefiting from that as new manufacturing is being established in North America, and new economic activity is established in North America.
Obviously, that drives the demand. Maybe one more other thing, kind of worthwhile, you know, it's, not a, kind of a major part of it, but worth noting is obviously the acquisition of AerisWeather, which actually was during last year, believe all about North America.
Yes. About orders of renewable energy. They declined for the second time in a row. I'm just wondering if the comparison figures were that high, that, or was there some extraordinary peak in the sales last year? How do you see the underlying market growing compared to Vaisala, trajectory it going forward?
Yeah. Yeah. We expect it to continue to be a growth market segment. As we said in the guidance, we say expect it to grow this year. There's some seasonality in clearly in where, seasonality may be a wrong word, but there's. Because it's, really can't say which quarters are bigger than the other ones. Not seasonality in that sense, but a seasonality in the sense that different quarters are slightly different from each other, coming also from various different geographies. Worthwhile noting also in Renewable Energy that during last year, we really clearly expanded the market presence now being in all geographies.
This related also the investments into wind energy in different parts of the world, and the use of the wind lidars being broader and accepted throughout the globe rather than, it all started, if I go two years back, in Asia-Pacific more than anything else.
Okay. Yes. About spot purchases, component spot purchases. To what extent do you, believe that the spot purchases will continue going forward?
The volume of spot purchases is already clearly lower than it was a quarter ago and a quarter ago. It was just lower than the quarter before. We are clearly seeing the market normalizing. Part of when you look at our numbers, you have to remember that, you know, the way we report the numbers is the usage of the components that we have purchased from the marketplace, not the purchase itself. There are still some specific component, especially on the older component side, where, you know, like the shortages are not completely over, but the volumes and the absolute values are clearly lower already than before.
This is all related, if you think about the semiconductor vendors, the capacity investments first came through newer processes, higher value silicon products, and gradually now going through like older processes and many of the industrial components are in the older process, based on the older processes. Some of our products are having very old components, and obviously that market is the last one where the capacity improvements are going to be visible.
Okay. There is still spot components in your balance sheet which gonna be used-
Yes.
in the coming quarters?
Yes. Yes, yes. You should expect that it's a declining number.
Okay. About your cash flow, which was supported by decreased trade receivables. Could you open the reasons behind decreased trade receivables?
Yeah. I tried to do it a little bit already in my prepared remarks. When you compare to result, as I said, it really looks like with an exception of first quarter last year, the first quarters tend to look at Vaisala. We tend to have a lot of deliveries during the first quarter, which then get paid. some of them, lots of orders in and lots of deliveries done, get paid in the first quarter. That helps. That's normal seasonality in terms of the kind of supported trade receivables. That's kind of what you are seeing. Last year, when you look at the comparison period, there were a couple of kind of extraordinary things happening.
One being really the market being very tight in terms of a component, and therefore meriting for more of a investment into the components and component inventories throughout the first quarter last year. The AerisWeather acquisition, which we closed during first quarter, and that had a cash impact as well.
Okay. Your market outlook was left the same. Have you seen any signs of customer uncertainty that or have customers delayed their decisions or postponed orders, et cetera?
We have no such nothing to report on that. The market uncertainty remains on a high level as it has been throughout the first quarter and some time already, and it kind of we like to recognize a high inflationary environment and the uncertainties, the overall uncertainties in the world. Nothing extraordinary that I can report.
Okay. The Xweather was talked. I would like to follow comment back. First, is the business profitable? If it's not, how long do you think that it's Xweather could make money exactly?
So we are not commenting on the profitability, but I'll answer your question this way, that it's the gross margins of that business are very healthy subscription sales gross margins. On the same level as you would expect on well-run Data as a Service, Software as a Service business. Then when we look at the profitability on that business, obviously it's a question of how much do we invest into the business itself? How do we see the it meriting the future investments? And that will then determine in a way the profitability. When you look at the profitability. When you ask about the profitability itself.
It's a balance on obviously how long, how much do we invest into it versus kind of how much cash does it generate by kind of underlying. The health of the business, I want to just emphasize, the health of the business is very good.
Yes. I'm just wondering how long does it take to, you know, impact on Weather and Environment profits?
Yeah.
You cannot disclose that. Yeah.
No.
yeah. That's all my side. Thank you very much.
Exactly.
Thank you. Because there are no further questions in the queue, with this, I'd like to hand the call back over to Kai Öistämö for any additional or closing remarks. Over to you, sir.
Thank you, everybody, for participating. If you have any further thoughts, or further questions, you know how to reach us. kind of, just, ping Paula, and we will get back to you, and we are happy to give you more color or ask any questions you may have. Thank you, and have a great weekend.
Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.