Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to this news conference for Wärtsilä half year financial report. My name is Hanna-Maria Heikkinen, and I'm in charge of Investor Relations. Today, our CEO, Hakan Agnevall, will go through the group highlights, segment performance. And then after that, our CFO, Arjen Berends, will continue with key financials. After the presentation, it's a possibility to ask questions, and let's take one question at time. Hakan, please?

Thank you, Hanna-Maria, and a warm welcome, everybody, to a summary of the second quarter, that was definitely a step in the right direction. So improved profitability, and we continue to grow in services side. So order intake up by 17%, net sales increased by 3%, and we continue to see the good progress in services. So service order intake up by 13% and service net sales up by 16%. Comparable operating results increased by 26% and is really supported by the good development in services and also a positive journey on energy storage. A challenge, a headwind on the operating result was the EUR 19 million provisions that we needed to take in Marine Systems for a single sizable turnkey project in Gas Solutions that has suffered from a combination of supplier quality issues and cost inflation. Cash flow from operating activities also improved. So overall, a step in the right direction. If we look a little bit further into the numbers, so order intake up from EUR 1.4 billion close to EUR 1.7 billion, up 17%. Organically, it was actually up 21%, and we continue to see the growth both in services and in equipment. And I think the positive thing here is that all businesses our growing order intake and they are growing order intake in both equipment and services. So really good. If we look at the net sales, up from EUR 1.4 billion to EUR 1.45 billion, 3%, organically, up 7% and we continue to see a good growth on the services side up 16%, a little bit more down on the equipment, priotization, down 9% from EUR 700 million to EUR 650 million. Book-to-bill continues to develop in the right direction in a very good way, I would say, and this is actually the ninth consecutive quarter where we have a 12-month rolling book-to-bill above one. So going in the right direction. And then if we look at comparable operating results, we do see improvements in our profitability up to 7.4% compared to 6.1% same period last year. If we look at the marine market, and we start overall, I think we see higher prices in new ships and also challenges with the availability of shipyard capacity. There is a lot of ships -- vessels being built and that limits the growth in new build investments. However, for Wärtsilä , our market sentiment remained positively for our key segments. Overall, the number of vessels ordered in the review period, looking at the 12 months increased with increased to 773 compared to 701 in corresponding period last year. The uptake of alternative fuels remain more limited now with 187 orders reported which was 24%, down from 34% of overall contracted vessels. But that is mostly driven by a changed mix of contracted vessels. The further investments into LNG Liquefaction capacity continues to drive demand for LNG carriers despite activities easing off from record levels in 2022. Still the projections are it's going to be higher than 2021. Demand for new cruise ship capacity remain limited as cruise lines are focusing on managing the current order book and deleveraging their debt levels. But in general, the cruise industry has a very strong patronage so to say. And volumes -- cruising volumes are back and supersede 2019 volumes. Service demand was supported by increased activity -- increased active capacity in key vessel sectors. If we look at the energy market outlook, I think we have seen some solid long-term opportunities, more short-term commodity markets are easing while interest rates arise. Looking at the 2023 1st half year, it has brought relief in some commodity prices, especially in the battery raw materials, while the rising interest rates increase uncertainty. Global natural Gas prices continued decline despite a slight price rebound in June, but prices are still above historical levels. The trend in transition to renewable energy sources continues. And being a key driver in the development of the battery energy storage and the thermal balancing technology. And we can see that there is a good market activity and outlook in leading energy storage and thermal balancing markets, such the U.S., U.K. and Australia. Order intake, as we said, increased by 17% overall, 21% organically. Equipment up with 23%, service up by 13%. And we have a strong order book and rolling book-to-bill continues above 1. One thing that we really would like to point out that the remaining order book for the current year is lower than last year. So that needs to be considered. Profitability continued to improve in a good way, I would say. Net sales increased by 3%, 7% organically, and comparable operating results increased by 26%. Net sales, we talk about it. Equipment net sales decreased by 9%, Service Net Sales increased by 16%. If we look at technology and partnerships, really on the road to enable the decarbonisation of marine and energy, And we -- some recent examples. We are taking the next step in the energy storage fire safety technology. I would say that is becoming one of the strengths of our storage business. We have a very strong thermal incident track record. So far, we haven't had any thermal incidents, and we have a strong focus on being on the front load -- front line of thermal stability. And now we have qualified our GridSolv quantum for the test NFPA 69 standards. This safety standard is about requirements for explosion prevention and provide security and confidence for this type of authority having jurisdictions, fire service and other stakeholders. On the engine side, related to the engine side, but this is more how we deal with the systems that needs to support the engines. We have the WARMS, Wärtsilä Ammonia Release Mitigation System. We have received now the approval of principles from DNV for this. It's an innovative system that mitigate the risk associated with ammonia release, which is, of course, a substance, so to say, and with this, you can deal with leaks and in a green and safe way. And it's really an alternative to venting by diluting with air or bubbling in dirty water tanks. So this is quite innovative cracking the ammonia and reducing the risk for leakage. Let's move into the different businesses and how they are performing. If we start with Marine Power, we had a very good development in the comparable operating results. Good service performance continues. You can see order intake up 21%. Net sales also up 21%. And if we look at the journey to double-digit EBIT here, I think the good service performance is a major driver. And still, we have a headwind in that we are still absorbing cost for the transformation of our manufacturing footprint. We have Trieste, we have 2 factories in Warsaw,and we are consolidating. So in spite of this, we are making a very positive journey. Service agreements continues to develop in a very good way. So the net sales from installations under agreement is strongly increasing. We have about 29% are installed fleets is now under agreement. And you can also see here in the graph that the net sales from agreements is clearly trending in the positive direction and it's also clearly above the pre-COVID levels. Agreements are signed across multiple segments. LNG carriers, for instance, the agreements grew by 28% in the past 4 years. Cruise slightly declined because some of the capacity has been scrapped out. But I think the key metric here is the renewal rate, i.e., customers that have used these services coming back. And we have a renewal rate of over 90%. That is a very strong testimony that we are adding value to our customers. Also the decarbonisation journey when it comes to the fuel -- new fuels continues. So here, we have the latest cooperation with Stena , we will convert some of the Swedish ferry operators vessels to operate on methanol fuels. And the conversion will include the fuel systems supply, engine modifications and integrating the new installations with the ship's existing systems. And the contract will equip the vessel with unmatched fuel flexibility and therefore, making an important milestone in the Stena's journey towards becoming a leader in sustainable shipping. And the conversion is scheduled to take place in 2025. One of many examples to come. Marine Systems, we love our equipment. Marine Systems order intake increased, but the comparable operating result declined due to provision taken in a single sizable turnkey project in Gas Solution. So order intake, you can see up with 21%. Net sales is down with 36%. We see good development on the services side, but of course, 19 million provisions in a single sizable turnkey or has a significant impact. Now we are not doing, since several years, we are not doing turnkey projects anymore in Gas solutions. So this is a legacy from the past before we took that decision. And we are working this project out, and we're going to finalize it. But we will not enter into new turnkey project solutions for Gas Solutions. Energy, the order intake and comparable operating result increased. Good also here, good development in services that continues. Order intake up with 15% net sales, a bit flat and partially related to periodization. If we look at the EBIT drivers, good service performance, improved profitability in the energy storage business. On the headwind side, we have an inefficient capacity utilization because we are a bit low, as you have seen in our thermal sales and this leads to an efficient factory capacity utilization. What I would say is on the order intake for thermal, we do see a more active second half year, I would say, for order intake. If we look at energy storage, the journey continues. The positive journey continues. So when we look at the rolling 12-month comparable operating result, we are now at minus 1 , so in Q3, minus 3, we started minus 4, minus 3, minus 1, and we are continuing in a positive direction. And if we look a little bit closer on the positive development in Energy Services, here, you can also see on the graph how we have grown the percentage of our fleet under coverage. We're also now actually 29% coverage also in energy, and you see the growth trajectory there. And to give one of the many examples here, it's a very important long-standing relation with the Brazilian customer, Gera Amazonas. We have renewed an existing agreement 2-year renewal with a Gera Amazonas. So they can meet their power purchase obligations. So the agreement covers the Ponta Negra power plant in Manaus and it's a plan that has been in place since 2006. And the plant is basically running 24/7 and our obligation is to ensure that we have high uptime, high reliability, and that is maintained at all times. We have many of these types of businesses. Here is the bridge for the development of the EBIT from 6.1% to 7.4%. You can see Marine Power, double-digit now EBIT margin. Of course, Marine Systems negative impact, but you can also see that energy is improving and portfolio is also improving. As we said, comparable operating result increased by 26%. Arjen other key financials.

Yes. Thank you, Hakan. So if we start with operating cash flow, good performance. I would say, in quarter 2 as well as in the first half of this year, definitely, if you compare it to previous year, the same period, they were all deep negative. The cash flow was very well supported by both improved profitability as well as, let's say, changes in net working capital. We have to increase our inventory somewhat, but we got a lot of money also from the customers. Net interest-bearing debt improved, so went down actually compared to the end state of last year. Financial debt leases somewhat increased, but we definitely got more increase in the cash, so making the net interest-bearing debt going down. Gearing stayed more or less on the same level as at the end of last year, around 0.23, and so obviously, went somewhat down in the first half of the year, mainly due to the fact that we accounted dividend into the equity in the first half of this year. Basic earnings per share, a little bit lower on the quarter compared to, let's say, previous year the same quarter, of course, related to the impairment that we had to do in portfolio business. And also good to remember that on the minus EUR 0.16 that had first half last year, we took a 200 million provision in that for the related to the exit from Russia. If I move to the next slide, cash flow from operating activities. As mentioned, good performance in this quarter, clearly trending up. definitely after a negative operating cash flow. Last year, this is a very welcome trend and we, of course, aim to continue that good trend. Working capital to sales ratio on a good level, I would say, definitely comparing it to long-term historical levels. We are around 2% now. And by it's the same as we had at the end of Q1 and also very close to what we had at the end of last year. And let's say, long-term historical average was 9%. So I think we are on a good track here. Of course, it doesn't stop us from further improvements. We are working with operating working capital elements all the time in many different ways. But with these words, I give it back to you, Hakan.

Thank you, Arjen. So if we look at the prospects, demand environment. So we expect the demand environment for the next 12 months to be similar to the comparison period for Marine and also for energy. So it's the same outlook, the demand environment to be similar for both marine and energy. So that wraps up the presentation.

Thank you, Arjen. So now we will continue to Q&A. So let's take one question at a time, please.

[Operator Instructions] First up is Max Yates from Morgan Stanley.

I guess if it's just one question, I'll focus on the energy storage margin because that looks to have been a sort of pretty important driver of the energy profitability. I mean if I try and kind of back out of that rolling margin, it looks like you're at sort of low single-digit margins in the second quarter for energy storage. I guess what I wanted to understand was is there anything exceptional in that or is that a kind of reasonable estimate for how we should think the rest of the year should continue? .

We don't give specific guidance, but I would say we are on -- I mean we communicated the plan is to turn storage around -- and I think we are executing on that plan, and we are seeing that it's giving result also on bottom line, and we will continue to see storage moving in the right direction.

Okay. So there was just -- there was nothing exceptional though that you'd call out that means that shouldn't be -- a level that we were at isn't sustainable?

No, I think this is -- the journey that we see is part of our turnaround program.

Next up is Vivek Midha from Citi.

Hakan, Can you hear me?

Yes.

So I have a question on the margin side. So excluding the provisions, you appear to have shown a strong sequential margin improvement over Q1. How should we think about margins going into the second half and the moving parts within that? So for example, how much is left at the legacy backlog deliver and so on.

Okay. So we don't give guidance for margins. But of course, if we look at how our business will evolve going forward, we continue to see strong growth on services, and we know that's normally a very strong generator of profitability. And also, to your point, we are working through, as you know, we -- still this year, we said we had EUR 1.2 billion of order backlog from all of we took before the big inflation set in, so to say. And we have earlier communicated that the majority of this, we will have worked through by Q3. So that still holds. And the turnaround program in storage, you can see yourself, we are on the right way. And then turnaround in Voyage, yes, it has been delayed. That was one of the reasons why we have made the structural changes, as you know. And we do see that the -- if we look at combination of Voyage services, which is now in Marine Power and ANCS that is now in portfolio business. If we bring them back, so to say, we can see that the turnaround program is now actually in speed and is going in the right direction.

Next up is Sven Weier from UBS.

My question is on the outlook statement, which you kept stable despite somewhat tougher comps when we look at the current quarter, I was just wondering how you see the outlook between the equipment and the service side?

Well, I would say that I mean both with -- the demand for cash relates to both. I think when we still keep the similar level it's related to the level of uncertainty we see looking 12 months ahead. I dont know Arjen if you want to....

No, let say, I think that's exactly as you say, let's say we see a very active, let's say, service business. So that we also believe that we'll continue to be a good business going forward, at least in the near term. But of course, let's say, single big newbuild projects, let's say, we have a couple of hundred new build in or out, that may change the mix quite significantly on a certain, let's say, definitely on a short-term horizon. So it's very difficult to give an answer to this. It can swing a little bit lumpy on the newbuild side, that makes it difficult. But services remains solid. .

And you said on the thermal side, right, you said you expect these orders to come in at the end of the year, beginning of next year. I mean -- as a development during the quarter that has raised less confidence relative to last quarter?

So I think what we are saying is that during the second half year, we do see a stronger pipeline on the tendering side in some of our core thermal markets.

Next up is Antti Kansanen from SEB.

Hello, Hakan and Arjen I hope you're hearing me well. I had actually a follow-up question on the profitability side. If we think about the second half and knowing that you don't give for margins. But on the equipment side, we should see benefits from fading off those legacy projects. But at the same time, I guess, the fixed cost absorption is trending a bit down. So should we kind of think about the normal seasonality going into Q4 a little bit higher, a little bit lower, how should we balance out 2 things in the equipment side?

Yes. So not giving any guidance, as I said, but I think we will see the normal seasonality with a lot of activities in Q4. .

The Hockey stick.

Next one is Panu Laitinmäki from Danske Bank.

I wanted to ask about these legacy projects begin. I'm just wondering like how did they play out in Q2 like in a year-on-year comparison because you don't mention them as a driver for the result in any of the divisions. So was it like similar profitability still compared to what you had last year and then there should be an improvement going forward? Or how was it...

I think -- I mean if you look at Marine Systems, where we made this EUR 19 million provision, so it's related to one specific project, and that is a kind of a one time related to, you could say, a turnkey business, which we are not doing turnkey anymore. So it's...

Sorry, I actually meant with the legacy projects, I meant is like the EUR 1.2 billion is related to inflation.

Okay. Sorry, I misunderstood... Okay. Can you -- then I missed your question. Can you restate your question? Because I misinterpreted you -- sorry about that.

Yes, yes. The question was that we have been discussing these projects for several quarters. But then if I look at your slides, you do mention them as a driver for the operating result in year-on-year comparison. So the question is basically that was the profitability of this business similar in Q2 as last year? And then should we expect kind of the improvement going forward? Or how does it play out?

Well, as we invoice these projects, they are currently impacting our -- they are drag on our profitability. And what has happened after you could say, first quarter in 2022 because this is where we set the line is, of course, we have adjusted our price levels on the new orders that we have taken on the equipment side, so to say.

Right? And yes, we had a big impact of cost inflation in Q2 last year, and we have also a big impact on cost inflation this year. So in that sense, it's not significantly different, otherwise, we would have mentioned it.

Next up is Erkki Vesola from Inderes.

Yes, just a clarification, how many Gas Solutions legacy projects are there still in the Marine systems backlog? I mean how do you see the risk similar provisions being made in the coming quarters on to this EUR 19 million?

So I would say that this particular project is rather exceptional in the portfolio business in the business portfolio. Of course, Marine Systems, there is a lot of project in that project portfolio. And in project business, you will always have some project that performs a bit better than expected, some that performs a bit worse. But this particular one is an exceptional one. So I would say that the rest of the portfolio is more within the -- what you would expect from a normal project business.

And was this -- would you like to disclose how big is this turnkey and Gas Solution that turned out to base our was?

I will not go into those details. Sorry.

But it was -- this turnkey project was part of this EUR 1.2 billion low-margin backlog.

Well, that those parts were taken before -- way, way before. So you could say, yes, it could be -- yes, you could say that. It's part of the inflation impacted projects, correct.

Next up is John Kim from Deutsche Bank.

Good morning, everybody. I wanted to chat a little bit about storage. In the statement in the quarter, you talked about customers delaying deliveries on batteries due to lithium or battery pricing. Can you give us a sense of how prevalent that is, and is that a problem that's clearing? Should we expect this on an ongoing basis? And how does that affect your, call it, profitability? Do you have take-or-pay losses in these contracts?

So basically, the mechanism here is that the raw material prices for battery sales have been coming down. And we have material price indices. So it's a pass-through for us. And of course, some of our customers, they see this trend. And then they -- some of the customers, they say, "Well, I will wait to place my order, and firm it up until I've got confidence that the raw material prices have bottomed out. So that's the kind of mechanism. So it's not impacting our profitability because in storage because we are covered by the indices, so to say. Now how prevalent is this? it's a mix, so to say. And how long will it be there? Well, I think the answer to that is what type of volatility we will see on the raw material price side. And I think that is hard to predict.

I think that's what it is. And of course, with the indexation, of course, if prices go up, let's say, the raw material price, our costs actually go up then let's say, our price goes up. And equally so, it goes down when it goes down. And of course, in that sense, we are secured with our margins. Anything that's critical for us. But of course, customers, at least certain customers, not all customers, but certain customers wait for an opportunity, perhaps if they have the time to wait, then they might wait a month and think that the price might further go down.

Next up is Sean McLoughlin from HSBC.

Can you hear me .