Vaisala Oyj (VAIAS) Earnings Call Transcript

Hello, everyone, and welcome to Vaisala's Third Quarter Results Webcast. I'm Niina Ala-Luopa from Vaisala's Investor Relations. Vaisala has today published its January-September Interim Report. And during the next hour, our CEO, Kai Oistamo; and CFO, Heli Lindfors, will present our third quarter and full year year-to-date results. And like always, after that, we have time for questions. But now without further ado, I will hand over to Kai.

Thank you, Niina. Welcome, everybody. I'll start with the statement that is on the slide. We had an excellent quarter with a record-high profitability and orders received. Really was a very good quarter. And let's look at a little bit deeper into what made the quarter. So in terms of numbers, what made it excellent? Orders received up 38% compared to a year ago, resulting a significant increase in order book compared to the beginning of the year or end of last year. The net sales grew 6% when we look at the company level. And here, you have to remember, especially under the Weather, Energy, and Environment side, very high comparable on the third quarter last year where we've had the Spanish radar projects in a full delivery mode. So the revenues on Weather, Energy and Environment on third quarter last year were on a high -- very high level. And all this kind of success in terms of getting sales in and the mix then resulted in very high profitability as well. So, almost 25% EBITA margin in a quarter. I think that's something to be very proud of. So, where did it come from a business side? Industrial Measurements once again performed in an exceptional way, driving the group's results. Xweather continued to grow steadily, 9% year-on-year growth. And then Weather, Energy and Environment achieved a strong order intake. I think even on the performance side, yes, some decline compared to last year because of the very -- as I said, very high comparable. But if you kind of take that out, I think we can be quite satisfied on the profitability and the performance on Weather, Energy and Environment. And obviously, the Indonesia deal kind of was a big event in the quarter. During the quarter also, we updated our annual guidance. We updated in October 2012. And we narrowed our net sales guidance to EUR 610 million to EUR 630 million. And then we changed our EBITA guidance to be now EUR 110 million to EUR 120 million. Before going any further, I just want to remind everybody on our strategy. So, our mission statement is taking every measure for the planet, what we do with instruments and intelligence for climate action. We are situated very, very nicely in major megatrends in the world; energy transition, decarbonization on one hand, AI everywhere, another one and resilient societies being third. Resilient societies, meaning, not only the different kind of geopolitical things, trade wars, even wars, but also resilience to more and more frequent tougher and tougher extreme weather events to the climate change or possibly also health challenges and aging populations. Our key strategic drivers remain same as what they have been, expanding and accelerating in industrials. It is lead in weather across from instruments and observations to insights, driving recurring revenue and services business and then transforming with AI and transforming with AI means obviously a lot of things. It's about having AI at the front and center in many of our products and solutions, transforming how we operate kind of with AI and improve our ways of working, kind of making us more effective, but also listening to our customers, how does AI change their life and their realities and how can we be part of that and help them taking benefit of what AI brings to their business. If we look at the progress on the strategy now in light of what I just said during the third quarter, I'll pick a couple of events on the quarter itself. First of all, I said growing with industrials, we really had that, I mean, at a full force during the third quarter, really a broad-based growth in Industrial Measurements boosted by the AI-driven investments. It was a very kind of a broad growth across all geographies, all our end market segments. But obviously, one needs to highlight data centers, one needs to highlight semiconductor, one needs to highlight power and battery manufacturing as well. And not only that, we continue to strengthen our offering across the board. And here, maybe I'll just highlight one specific example of this, which would be the productized offering for services for data centers, which I'm particularly excited about what the opportunities that bring in the coming months and quarters. On Xweather side, as I said, we continue to progress steadily on the sales side, but not only that, a couple of interesting points there, kind of proof points during the quarter, one being the announcement with NVIDIA, where we showed together with NVIDIA, how much we can, with our data, improve the leading AI weather forecast and weather model that NVIDIA has developed, how much we can improve the accuracy. And it really kind of is a clear proof point what a moat we have with our proprietary data and access to data and fusion of the data inside of Xweather. The other example here on the slide would be the Chicago Mercantile Exchange, which has launched now a weather derivatives and options scheme based on Xweather data and again, proving position -- leading position that we have on kind of interesting relevant weather data for businesses. And then part of leading weather across observations and insights was also the observation side. So, well progressing on Weather, Energy and Environment. The Indonesia -- big Indonesia deal, the EUR 25 million airport weather modernization project gives us a good basis for the coming years. It's a big deal, which we plan now to deliver over the next three years. And like I said, gives us a good kind of a basis for planning and executing come next year and the few years to come. Maybe with this, I'll invite Heli to go through the financials.

Thank you. Good afternoon from my part as well. If we take a look at the financials a bit, as Kai mentioned, our Q3 was excellent, record high order intake, solid net sales growth and very strong profitability. Our orders received increased by 38% year-on-year, coming from both the Industrial Measurements as well as Weather and Environment side. This boosted our order book to EUR 215 million, 16% above the level of the -- at the end year of 2025. ARR also increased to EUR 60.9 million, 9% up from Q3 '25. Net sales then increased by 6%. There, the driver was Industrial Measurements by 28% and then Xweather by 9%. And the Weather, Energy and Environment side declined 11% on a strong quarter, as mentioned by Kai earlier. The net sales growth then improved our gross margin as well to 61.5 percentage points. Here, we have the EUR 9 million impact on the gross margin -- sorry, EUR 4 million impact on the gross margin. Without the U.S. tariff refunds, the gross margin would have been at 59 percentage points. So, still a very strong gross margin driven by the Industrial Measurements' growth and gross margin development. That also boosted the EBITA to 24.9 percentage points of sale. It would have been 22.5% without U.S. tariff refunds. If we then look at the return on capital employed, that was 23.3%, driven by the result as well as the strong cash flow. On the Industrial Measurements side, quarter ago, I said that it was a record quarter and a strong quarter in many fronts, and it was the same now in Q3. Orders received increased by 24%, coming from a wide base from all regions and all market segments. And that also boosted the order book to EUR 54.5 million. Similar to Q2, we did receive larger data center and power orders that are shaping the order book to be a bit longer rather being coming from weeks to a few orders then being on month level as well. The net sales increased by 28% and there, the Q2 order intake was visible and started the growth. Q2 growth was only 10%, whereas now we saw the 28% growth. And there, the growth was driven by data centers, semiconductors, battery manufacturing and power industries. So the base is very wide. The gross margin improved to 65.8 percentage points, coming really from the scaling impact of the net sales as well as the favorable sales mix. This gross margin improvement does not have the tariff refunds. Those are only at group level. The EBITA then was also record high, above 30%, with 31.7 percentage points and really coming from the strengthened gross margin. On the Xweather side, the growth continued steadily at 9 percentage points. It was driven by the insurance industry as well as sales to developers and API customers. The gross margin also improved, following the net sales growth and similar to the EBITA percentage also improved to 9.4 percentage points from 6.9 percentage points. As mentioned, the acquisition of the Atmo, Inc., as announced in Q2 is progressing as planned, and the transaction is expected to close now during Q4. Then on the Weather, Energy and Environment, very strong orders received was the highlight of the quarter with the EUR 25 million airport project from Indonesia. Even without that, the orders were growing, which is a positive side on the Weather and Energy side. And the net sales, they decreased by 11%, following the strong comparisons of Q3 2025. The decline came from the project sales. As you can see from the reported figures, both the product sales as well as service sales grew in Q3. The gross margin then improved, following the sales mix, more products, less projects, and that also shielded the EBITA slightly. So they declined -- EBITA declined to 17.3% following the net sales decrease. If you look at the Indonesian order, it's good to note that the EUR 25 million order intake, we expect to generate sales in the next 3 years to come. So it is not a one-off sales, but rather during the 3 next years. Then if you look at the cash flow side, our cash flow was very strong, following the increased net result, the tariff received as well as timing of tax payments. Cash flow from operating activities during January, September amounted to EUR 84.4 million compared to EUR 58.9 million. If we look at the year-to-date development, net sales have grown by 6 percentage points in constant currencies. Now in Q3, the FX impact was already fairly minor, whereas in the beginning of the year, it was higher, and that is also why we still see the impact in the year-to-date figures. Operating expenses have increased by 5% compared to the previous year, and the growth is driven by the investments in Industrial Measurements as well as Xweather. The corporate and non-operative items, they were minus EUR 2.2 million compared to minus EUR 7.2 million last year. This is from 2 points, the difference and the positive impact from the U.S. tariff refunds that improved our gross margin by EUR 4 million. And in addition, we had some restructuring costs last year in Q3 that also made the cost higher then. The high profitability, EBITA 18.5% against 15.7% last year is a strong EBITA for us. And as I said before, it is really coming from the increase in sales, increase in gross profit as well as the tariff refunds. If you look at then the financial income and expenses, it's only 1/3 of what it was a year ago in the first 9 months, and that is coming from the fact that the FX rates have been less volatile this year, and we have had less loans. Those are the 3 key drivers there on that side. Then we have the heading of this slide, strong financial position. It is actually the same heading we have now had for 26 quarters in a row. So, this is already a legacy. We cannot change this anymore. And our net debt also kind of following the strong cash flow. Our net debt is negative by EUR 20 million. And as such, we have the kind of strong financial position. If we look at the CapEx, that is lower than last year. Last year, we were building the automated logistics center, which boosted the CapEx back then. And this year, we don't have the same. If we then look at the market outlook for this year, we expect the development on the Industrial Measurements and Xweather to continue growing. And then we expect also the metrology and aviation to continue stable. Of course, here, the order intake was strong in the aviation side this quarter, but overall, the market is stable in our view. We did change the renewable energy to decline as a market outlook. And there we have seen the difficulties continue this year and as we kind of now put it to decline. This ends -- actually, there is still business outlook, of course. As already mentioned by Kai, we updated our business outlook on October 12. Now it's EUR 610 million to EUR 630 million in sales and operating result to be EUR 110 million to EUR 120 million in EBITA. But this now concludes the prepared remarks, and I will ask Kai to join us for the questions. And I think the lines are now open.

Yes.

[Operator Instructions] The next question comes from Nikko Ruokangas from SEB.

It's Nikko Ruokangas from SEB. I have a couple of questions, and I'd like to start with Industrial Measurements. And the gross margin was strong there, but we also saw quite high increase in fixed cost year-on-year. So, should we first extrapolate those fixed cost increases going forward? And then on the other hand, the gross margin you also used in the report word exceptional when talking about Industrial Measurements' profitability. So, does that mean that there was something one-off items in gross margin? Or did you mean just that it was very strong?

I believe that we meant that it was very strong. But of course, it's good to note the seasonality we have in our gross margin. So, Q3 is always the strongest -- well, not always, but usually the strongest of the quarter. So as such, that also explains part of the gross margin. And on the cost side, you asked part of the costs are growth driven. So, we do have to make investments also to kind of support the growth there. So as such, those are investments we do.

All right. So, we should expect also costs continue growing. All right. Then on tariff refunds. A bit more technical question. Are all the tariff refunds you expect to receive already in your Q3 numbers? Or should we expect also more in Q4 or later?

Most of the tariff refunds we expect to get have now been received.

Okay. Then one last from me at this point on Industrial Measurements' order book structure. So as you mentioned that there are a couple of orders that have a bit longer delivery time than you used to have in Industrial Measurements. So, do you think that this kind of a structure where you have a couple of these kind of orders will remain? Or do you kind of see going forward with data centers and related industries growing that the order book structure will continue to be longer going forward or even longer than this one?

I think there's kind of 3 things that will have an impact on the shape of some of the order book that there's still kind of a strong element of sales, which is within the month and so on. So, that has not changed. But the things that you mentioned, bigger projects, data centers would be a good example of that. Bigger share of the bigger projects really like has been so far typically on life sciences, now more and more on data centers. Power has a bit of a similar kind of a thing that it may be -- especially when it's a larger deal and multiple like transformers in question may have a little bit of a similar kind of an impact. And thirdly, I would like to highlight also bigger services deals that then, of course, have a different kind of a shape in terms of -- then delivery might not be even months. It may be a year or maybe kind of in some cases, even longer.

In the release, we actually comment on how much of the order book we will deliver still this year. And in the Industrial Measurements side, it was 69% of the order book was still to be delivered within this year.

The next question comes from Matti Riikonen from DNB Carnegie.

It's Matti Riikonen here. A couple of questions. First of all, the tariff refund question was already asked. So, you said that you have basically -- you collected all the refunds in the Q3 number. Is that correct, the EUR 4 million? Or did you get already something in Q1, Q2 time, which was not kind of separately reported as a one-off?

In Q3, we received all that was related to 2025. Earlier, we have received some that were related to this year.

Okay. Good. Then going forward, as the tariffs have now been lowered and you are getting some extra benefit compared to previous year when you had the tariff increase, what happens to that extra money? Are you returning now it to your customers? Or are they demanding that to be returned? Or is it something that you can keep for yourself?

We certainly plan to keep it to ourselves.

All right. In that case, what is the kind of gross margin increase coming from the money that -- or the tariff that you keep to yourself compared to what was paid? So, I'm just thinking that what is the gross margin increase due to the tariff change for the positive?

I would actually say that as we reported the tariff refunds related to last year, we have reported them in group items, so they are not visible in the business figures. So the business figures, that includes the kind of our current pricing and the current tariff level and all the such items. So, I would actually use that as the figure as it is.

Okay. So, you're not willing to discuss that how much of kind of extra boost to your gross margin, which is now reported in IM, for instance, is coming from the kind of lower tariff, which was forced by the U.S. courts to be lowered?

No, we haven't commented.

No. No.

Okay. Then I'll stick to the gross margin question because, of course, your IM gross margin seem to be quite nice at the moment. I was just wondering that, are there big differences between different customer segments when it comes to gross margins? And could you give us some light what kind of variations within the IM gross margin you have depending on customer groups? I'm not asking you to specify any particular groups, but just how many percentage points could there be variation between customer groups?

There is some variation on some cases, obviously, if I take kind of a -- maybe a silly example like services, it has obviously a different gross margin structure than typically the probes. But if I take kind of one group like probes, whether we sell them to life sciences or data center or some other kind of environment, there's not really a difference in terms of -- if I look at the customer groups per se that it's quite similar. Of course, different products have different gross margins that may vary as well between the products, but not the customer segments per se.

Okay. Okay. And then finally, you released an interesting piece of news related to the NVIDIA corporation. And I was just wondering that is this new net revenue for you coming from this cooperation agreement? Or is it kind of embedded in something that you already have done?

It's not really a net revenue or anything that we can speak of. It's more like a showcase of capability and part of kind of other collaborations that we have with them.

Okay. And what type of cooperation is this? Is it a revenue share deal? Or is it something that you just sell the data, both for new and historical data and get the fixed fee, but you don't participate in the business model that NVIDIA seems to be?

To my understanding, NVIDIA does not, at the moment, sell weather forecasts or anything like this. So there's no -- not really revenue to be shared at this stage. I think from both sides, this is kind of a capability -- like shows the capability and the potential that can be done in the future. What then kind of actual business then becomes in the future, the future will tell.

Okay. So, there is no service yet to be sold.

No, no.

It is just a testing of capabilities.