Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Good afternoon, everybody, and Happy New Year. I hope that the year has started well and this will be better year than the last year. Welcome to this pre-silent call. I have here our CFO, Arjen Berends. And Arjen will start with the recent trends from Q4 and then after that, he will also discuss the profitability drivers for 2023. After that, there is a possibility to ask questions, and I hope that we will have a very lively discussion. Please, Arjen.

Thank you, Hanna-Maria. And also on my behalf, everybody, Happy New Year. And as Hanna-Maria said, let's hope that it will be a better year than this last -- past year with a lot more peace in the world, I think that would be welcome to many people. First of all, a few comments on Q4. In Q4, if you look at ordering -- sorry, was that a comment on...

No.

Okay, sorry. Then...

Everybody, please mute yourselves.

Can somebody confirm you can hear us?

Can you hear us?

Yes. Yes, we can.

Very good. Okay. All right. Regarding order intake, let's say in Q4, we saw a good pipeline of orders, quite well, I would say, in line with expectations and also in line with the guidance. [indiscernible] very nice beep. Okay. Of course, timing is always a bit of a challenge, but I would say the order intake looks good. Also good to remember that, let's say, Q4 last year was Wärtsilä all-time high order intake. So that's good to keep in mind. And that's also why our guidance is, let's say, weaker than, let's say, previous year same quarter, but I would still say it's a good quarter. Also good to see that the progress in service continues on a good pace. Our installed base, both in Energy and Marine is running. And, let's say, good utilization, of course, drives service business. Agreements, as mentioned in many meetings also earlier is very important to us, and clearly, let's say, going well forward. Renewal rates, as we've also communicated earlier, are above 90% in both Energy and Marine. And this, we saw also a continuation of -- in Q4. Voyage integration has been started. Lots of work ongoing to, let's say, look into opportunities for savings and faster turnaround also in the discussions with customers, let's say, this is clearly one clear reason behind doing this integration because in service discussions, the combination of engine efficiency, propulsion efficiency and voyage efficiency is getting more and more important because the fuels of the future will likely be more expensive than the fuels of the past or let's say, current markets. Decarbonization continues with good pace. Of course, there is more than, let's say, all the multi-fuel development that we are doing. I would say on the R&D side, it moves well forward in line with our planning, and that should come for the longer -- sorry, mid to longer term, but also a lot of things are happening today on hybrid installations, hydrodynamics, slow steaming, et cetera. So a lot of good things happening there. Hybrids is, of course, as mentioned also very important to us. We have a market share of about 25%, if you measure it on installed megawatt hours battery capacity. And that is still, let's say, increasing in demand, you could say. Also decarbonization in energy makes good progress. I think a good proof point is the order that we announced in Japan where we took out a combined-cycle turbine of 100-megawatt and replaced it with 10 Wärtsilä 34SG engines. So really good to see. Also important to remind, let's say, the stock exchange release that we did on 30th of December on TVO. This will be a hit to the operating result in energy. So this will not be IAC. Cost inflation on the March order book that we have mentioned before, EUR 2.2 billion order book we have on new builds at the end of March last year when the cost inflation accelerated. And of course, that, let's say, needs to be delivered. And of course, that also impacted us in Q4, but that was no surprise. The Trieste plant doesn't change. Let's say, despite the reactivation of production, just to be clear on that one. We will still close the facilities, but we have agreed with the unions to, let's say, reactivate the production to first of all, also facility deliveries, but also facilitate discussions with potential parties that are willing or potentially willing to take over both sides and people. Some have been questioning about the Fincantieri relationship and whether that will have a consequence, let's say, our plan on Trieste, but the Fincantieri relationship is normal. So nothing extraordinary there. Operating cash flow, Q4 last year was a record high. Good to remind as well was an all-time high quarter. This year will be less good, that's obvious, but we still expect to close Q4 with a good positive operating cash flow. If we then go to 2023 and the profit drivers there. So these are quite, let's say, in the start of this year, we thought it might be good to give a bit of flavor on how do we look at 2023. Now we're entering that year. And is mainly, let's say, a generic overview comparing it a little bit to 2022. And of course, there are a lot more detailed issues with certain specific businesses like scrubbers, et cetera, but this is more to give you a bit of a generic, call it, end review of the year. If you look at supporting drivers. Clearly, we anticipate the growth in service business to continue. We had a good growth in last year. Final numbers will be communicated later in January. But I think the growth was quite good. And we also expect growth to continue in 2023. Decarbonization is clearly, let's say, more and more in focus. And I think the increase that we have seen in 2022 will continue in 2023, if not, let's say, being harder pushed. Profitability improvements. Clearly, we are working hard to improve the profitability and turn around negative businesses' storage. We have mentioned before, is a negative business in voyage as well, as you could see from published numbers. And we are clearly making good progress to turn it into a positive direction and that will clearly help us also in 2023. Cost optimization, Trieste closure is one example, but we have all kind of continuous, you could say, small or bigger restructuring items ongoing throughout the organization. And that is part of our continuous improvement and that will not stop. That as the word says is continuous. Strong order book. We entered the year with a very good order book for this year, higher than what we had 1 year ago. So good entry of the year with that in mind. Lower value of equipment orders with, call it, prewar prices. So meaning when the cost inflation accelerated, the order book that we had at the end of March, newbuild order book for delivery this year was EUR 2.2 billion. Next year is only EUR 1.2 billion. So that, of course, has a positive impact if you compare year-on-year. Of course, there are many uncertainties. Geopolitical tensions. I think nobody has a crystal ball of what's going to happen in that respect. Will there be peace in this year in the Ukraine-Russia war? Will there be new conflicts of significant impact? Difficult to say. The world is a volatile place, and I don't think that will -- at least, that's our view, it will on short-term, perhaps even midterm, not change that quickly. That also relates to potential trade restrictions and trade wars. There is much more -- now we lost a slide, I think, in sharing. Can we reshare? So trade restrictions and trade wars -- yes, now it's there. If you can put it in presentation mode. Yes, so trade restrictions and trade wars are, of course, also looming. Nobody also knows here what's going to happen. COVID is now being clearly, let go of all the restrictions in China, with some exceptions here and there, but it's released to a large extent, and we can also read all from newspapers the number of infections. And I think even what we read is not the reality. It's probably quite much worse than what is in the papers. And how will this spread out? Will there be new variants coming? Very difficult to predict. And then, of course, the recession risk. There's lots of talks about it. Will it happen? Will it happen all over the place? Will it be very regional? Difficult to say. But the general expectation is that in most of the, call it, developed worlds, what I would call it, economic blocks, economic development will decrease rather than increase. Then negative factors, which are quite clear. Wage inflation, that pressure is continuously building, so also, we feel that from many places in the world. The cost of energy, also a difficult one to predict. Gas prices have been going up and down quite significantly and then of course, also fuels that is very relevant to us, let's say, definitely for testing. We are spending a lot of fuel cost in testing environment. And of course, also, gas prices and availability will also impact, for example, our supply chain when it comes to products or components that are heavy energy-intensive production process like forgings and castings. This is just to give you a little bit flavor entering the year on what we see in comparison to 2022 that will clearly be different, either positive, negative, but also, let's say, listing the uncertainties. And with that, I stop my introduction and give the floor to questions.

Thank you, Arjen. So Panu Laitinmäki, you were the first one raising your hand. Please go ahead.

I just wanted to ask about, you mentioned that one of the positive drivers for next year is the profitability improvements in energy storage and voyage. So can you kind of quantify how much improvement would you expect? And is this coming from like higher revenue in storage or some other changes? And maybe, I don't know, if you will answer this, but how big the loss in storage was in '22?

No, we are not going to open that up as we have not done earlier as well. I can say that we have -- we are on an improving trend. If you look at on a 12-month rolling basis, the profitability is improving. We are not yet out of the negative numbers. That's also a clear fact. And we expect, and that's why I put it on the slide, that we will continue this improvement trend going forward into 2023. That's all I can say, sorry for that.

Next question comes from Johan Eliason.

Can you hear me?

Yes, we can.

Yes.

Yes. Good. I was wondering about when we are at the subject of energy storage. I mean, we saw Fluence sort of guiding for, hopefully, a positive gross margin this year and an EBITDA margin only by 2024. I think you have already said, your gross margin is positive, but your EBIT margin is not yet positive. But do you think sort of the EBITDA margin will also be positive in line with Fluence by 2024?

I'm not going to comment on that. Let's say, we have a positive gross margin. So okay, you can make your own conclusions if you compare it to Fluence, what that means in practice. And as I said before, we are on an improving trend. If we look on a rolling 12 month, if you look at quarter-by-quarter, so the trend is clearly in the right direction. That's all I will reveal right now.

Okay. Now -- and then you talked about your service business doing well in the fourth quarter. Are you also seeing this typical seasonality in your profit level that you have a lot of spare parts that's in order now at the end of the year, which makes your margin in Q4 be significantly higher than the previous margins typically are over the year. Is the pattern still there?

Typically, we have the hockey stick in Q4 and that's also, let's say, anticipated. Okay, not all the final numbers are through the system yet. But let's say that's also what we anticipate for this year. And this year, I mean, '22.

Yes, '22. Yes. Okay, good. And then just on this announcement in December, EUR 40 million hit from this nuclear power businesses. I mean you took a hit a couple of years ago when you closed down the nuclear business as well. And then we had, was it in February or early 2020, when Hakan arrived, you also took some extra project hits, et cetera. Can we really get the confidence that these type of projects hits are now the thing of the past? Or will we just have to continue to see hits like this coming every now and then still?

I would say it's hits of the past. This TVO case is an extremely old case. It's from 2013 when we booked the order and the deliveries only started -- now when was it? 5-6 years later for the first delivery. So it has been a really long, let's say, project. In 2018, you're right, Johan that we have made a provision for nuclear business when we also, at the same time, actually decided to step out of this nuclear business because we will not provide any, let's say, power backup anymore for nuclear power plants because I already said at that point of time, we cannot oversee the cost and the risk actually on those kind of projects. And it's a totally new territory for us. Making a backup power plant for a nuclear power plant is a totally different thing than in call it, an EPC power plant somewhere in the world, and it's not comparable. The restrictions -- the requirements have also, over time, been very much tightened by STUK, the Finnish nuclear authority. And that, of course, is a great or big cost consequence. On top of that, we have the acceleration that happened in the beginning of the year. And we have the verdict from the court that we need to accelerate the conversion because this goes one by one, engine by engine in order to guarantee the safety of the plant. And so all these factors here actually worked against us. And already in 2018, it was a clear decision that let's not do this anymore because we are not -- we don't know what we enter into in this nuclear business, and I would say that's this case. And since, what we did, the EUR 20 million when Hakan came in, in the beginning of last year, since then we have not had any other ones of this size. Of course, in project business, you have always pluses and minuses, but not of these magnitudes. And typically, pluses and minuses in normal project business offset each other quite nicely, actually.

Okay. And then talking about this sad development in Ukraine. I mean they are obviously in a huge need of power these days. Wouldn't that be a business opportunity for you in some way to get your power plants in there quickly?

No, let's say, should you -- of course, long term, let's say, when things are in peaceful environment, I think that might be a business opportunity. For sure, it's a business opportunity. But I think in the current situation, I don't think it's a possibility to build anything because it will be bombed the same day or the day after. Plus the fact that, of course, we also need to make sure that safety of people is guaranteed at all times. So that's difficult in the current environment. What can we do? Let's say, of course, we have certain equipment that might be useful. We have also clearly equipment in stock that, for example, generator from a canceled order that is fully written off can be used somehow. We are looking into this, but it's too early to really make final conclusions.

Next question comes from John-B Kim. John-B, you're on the chat. So his question is, Hi. On storage. Can you provide some context on how costs evolve in 2023 and 2024? Also some context on battery lithium costs will be helpful. It's too early to comment this today.

Yes, I don't think we can comment on -- I think nobody has a crystal ball on how lithium prices will develop. It relates to many developments in the world, otherwise. But I think what we can comment is that we have indexation in our contracts on lithium, for example, or other raw materials where possible. So it should not impact our margins. It's been, let's say, one-to-one passed on to customers.

John is continuing that. Is our model similar to Fluence?

What does he mean with model, business model?

Business model.

Yes, I think it's pretty comparable, actually. It's not so different. But of course, differences on the details, but I think in general we are quite comparable.

Then moving to Sven Weier.

First question -- and thanks for providing the profitability drivers. I was just wondering last year from what you said on profit, it was very clear that the margin would be diluted, right? That it would be going down by the strong equipment growth. Is it now, how should I say? I mean, is it less clear this time by given the fact that you provide that it could be both, could be up, could be down, at this stage still possible?

It's a good question, Sven. And it's good that you asked. Last year, we said clearly this year will be a newbuild year and okay, when I say this year, in this meeting, I mean in 2022, just to be clear. This year will be a newbuild year. Looking at the order book and how we see things developing, in particular the strong growth on the newbuild side, I do believe that also 2023 will be a newbuild year. The ratio will be more to new build than to service as with the knowledge of today.

Okay. And -- but then we still have to keep all these other things in mind where the, let's say, the mix within the mix maybe that is an important driver?

Correct. Correct.

And then on the backlog that you've mentioned, right, that is still prewar, the EUR 1.2 billion. I mean, is a great share of that finishing in the first half or is it going to reduce to zero at the end of the year or do you still have stuff left for 2024?

I don't have that now exactly in my head, but I would say that the majority is the first half of the year. Potentially a little bit in Q3, but I wouldn't say that Q4 should be too much of that.

And the last question I just had because the fuel cost that you mentioned, obviously, prices have come down, both on the gas side, we are below $100 again on the spot at least. Fuel prices have come down. I mean, if you take today's prices, is that still a year-on-year increase for you, given that you have long duration contracts maybe or how should we think about that?

I would say that, okay, it's unpredictable. Let's say, is it year-on-year increasing or decreasing, yes, okay, today, you might say, okay, it's lower. But what will it be in April? So it's very difficult to say. What we do see and what we also do believe during the year coming is that it will be very volatile, and there is a clear risk of higher testing costs than what we used to have. And when I say used to have, I would say, 2020 and before.

And the gas price is more on your supplier side as an issue, right? It's not for you, but it's more the suppliers where you probably don't know what prices they pay?

Of course, we also test on LNG. So let's say it's also an impact to us. And if you think testing fuels, we are talking millions a year. So it's not small money.

Next question comes from Daniela Costa.

Can you hear me? I can't turn my camera on, I'm not sure why. Okay. Perfect. I can see you. Sorry about that. I have 2 questions, one more short term and one on sort of more on the technology side. The first one is regarding sort of like your comment. Obviously, it took you a little bit to pass on the pre -- to get over the prework pricing with the headwinds on raw materials. I was wondering 2 parts. Can you help us quantify how much of a hit that was, whatever you reported so far in the first 9 months of the year. And then when we look the other way around, has discussed now lots of things starting to fall down on pricing. How much can you hold on to the post-war pricing that you've introduced? And so when would you have to start lowering your prices again basically? I'm just trying to understand sort of the headwind, the tailwind and when it fades? And then the second question, if I remember correctly, and I might be wrong on this, you were going to introduce, was it ammonia in 2023 for commercialization? Can you talk us through when you introduce a new engine type? I don't know if this is too similar to what you had before and should have -- how do we think about profitability, as you ramp up a new engine, sort of, how shall we model that going forward?

Thank you, Daniela. First of all, I will not open up, let's say, amounts on cost inflation impact. And that's not something I think we should reveal for many different reasons, being competition, suppliers and whatever. Your other question on the...

Ammonia engine.

Ammonia engine. Actually, let's say, we are not developing a specific ammonia engine. We are developing ammonia technology. The Wärtsilä 24 -- sorry, the Wärtsilä 25 engine that was introduced earlier this year, that will be the first engine to be able to run on ammonia, where we will also commercialize it. But eventually, it should be a possibility for all the engines, both new ones, but also the ones that are in the field with the retrofit packages. So it's not that we will introduce an engine that can purely run on ammonia. It will be a multi-fuel engine basically. Of course, let's say, when you switch between, for example, HFO and LNG, that's pretty simple, you don't need to modify the engine too much. But if you want to, for example, do that same engine to ammonia, there you need to modify certain components because, for example, ammonia is very corrosive. So you need different materials in different parts of the engines to make it run and make it last as well. So it's not an engine. It's a technology that we developed that can be applied on new engines, and that will be the first thing and then also later with the retrofit packages.

And in terms of mix, it makes no difference versus what you're currently doing? How we should be thinking...

I would say, profitability-wise, margin-wise, I would say it should not be that different. The engine will probably be somewhat more expensive, and that is still to be seen how much. But we are talking about 10%, 15%, in that range. Because of more robust and differently coated components, et cetera, to make sure that we, for example, deal with the corrosion. In particular, on the fuel injection systems, combustion systems, et cetera, that we need to change parts. But the majority of the engine is still, you could say, in the basis, I would say, 80%, 85% of the engine is probably still the same as a HFO or an LNG engine.

Next question comes from Antti Kansanen.