Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Hello, everybody, and welcome to the Pre-silent call. My name is Hanna-Maria Heikkinen. I'm in-charge for Investor Relations; and I have our CFO, Arjen Berends, here as well. So Arjen will start with a brief summary regarding the recent development, and then we will continue with the questions. [Operator Instructions] everybody, please mute themselves. Okay. Thank you. That helped already. Okay. Arjen, please, let's get started.

Thank you, Hanna-Maria. Sorry, was there a comment on...

No, I don't think it...

Okay. Anyhow. First of all, I'd say, market sentiment has remained fairly positive overall, I would say. Of course, the difference per segment as well. So let's say, it's not that everything is always the same. Let's say some go up, some go down. But overall, I would say it's fairly positive still. Service business continues on a good level, clearly supported by our strategy of moving up the service value later. So we see, let's say, good progress there already as we also saw in the first part of the year. Decarbonization and fuel efficiency remain the top 2 topics being discussed with our customers. Decarbonization because all customers want to meet and be compliant to, let's say, regulatory requirements and fuel efficiency because all understands that the future fuels will be more expensive than the fuels of today. And even the fuels of today being more the fossil related fuels will, in due course, be burdened by carbon taxes. So people, customers understand that, let's say, fuel efficiency is increasingly important going forward, which, of course, brings, let's say, good opportunities for us. The EUR 1.2 billion order book that was hit by cost inflation coming from the, let's say, beginning of last year, when the war Ukraine-Russia started. We have said earlier that by the end of Q3 this year, this will be out of our books, and that is majorly done, so that's good. Cost inflation. Overall, we saw still a bit of an upward trend in Q1. But since Q1, I would say, it's more or less a stabilized on an overall picture. If you look at products with high energy content or higher raw material content, that is typically let's say, trending a little bit down by castings and forgings. If you think about other components, it's more trending up. But in the overall picture, since Q2, it's fairly flattish in the mix, you could say. Logistics is trending down, except for all transports that is not, let's say, trending down yet, but still quite flattish, I would say, still on a high level. Interest rates trend is up, no big impact to our long-term loan portfolio. On the customer side, we have seen material approval of business cases, which then, of course, means that it delays a bit in the booking of the orders, and this is mostly on the energy side. We have still good pipelines in both Energy and Marine. In engine power plants, we stated earlier this year that -- we believe that the second half will be better than the first half of the year, when it comes to order intake. We have those seen that auctions are moving more forward. So more, let's say, right in time. But we still believe that H2 could be higher than H1. It's now more about how much higher it could be. Pipeline is good. Timing is difficult to say. I would say in the Marine sides, this is probably my final comment. What is a bit of headwind is, of course, the slot capacity at yards. We still have a good pipeline also for orders that are already in order at the yard. But where the yard still needs to order the equipment. So that's a good pipeline for us still ongoing. But let's say, new ships that are being ordered at yards, that's, of course, hampered by slot's availability. And by the -- yes, the limit, it's slot availability, then it's of course, there is more demand for ships then, let's say, the yards can supply, that has an impact to price as well. So prices of new ships is trending up. That's a bit on general sentiment now during Q3.

Thank you, Arjen, and we will continue with a question. First question comes from Sven Weier.

Just to follow-up, Arjen, on what you just said on the timing of the big-ticket orders. You said they're moving forward. Did you mean they are delayed or they're moving ahead? I'm not sure I fully understood.

Let's say, let's say, we, of course, have certain conditions for taking an order into our order book. That's, of course, a signed contract being one, but less we also typically want to notice and proceed on a down payment in addition. We have contracts signed, where we don't have, for example, yet to the notice to proceed or down payment. So let's say, it's more moving in time. It's not that they are canceled. It's more, let's say, the momentum is shifting.

But is it still in line with what you had in mind in Q2? Or is it taking longer?

It's taking somewhat longer because auctions are, let's say, moving right. So let's say, timing is shifting right at the same time. We still believe that H2 can be higher than, let's say, H1. So that I -- fairly confident with. The good question is, let's say, how much higher it will be. And there, it depends very much on timing, let's say, how much rights do things shift. We saw shifts from Q3 to Q4. It will then also shift from Q4 to Q1, then that's, of course, out of the year. But I'm still fairly confident to say that H2 will be higher than H1.

And that is just explicitly to this thermal engine part and doesn't relate to storage?

No, storage is clearly, let's say, very active. I don't see any problems there at all.

And maybe 1 final question, just to follow-up, were these thermal order is important for earnings still this year? Were they in for outer orders, fast delivery orders? Or did they not play a role for full year? So what's more for the order intake guidance, which is more on a 12-month forward basis anyhow?

Correct. Correct.

Thank you, Sven. Next question comes from Antti Kansanen.

Arjen, I was about to ask pretty much the same questions as Sven. But maybe a follow-up on the power plant side. I mean you've been previously talking about some of the Asian countries, some of the Latin American countries. And are these kind of orders related to a bigger energy transition programs that these countries are planning. So is it an interest rate kind of project recalculation that is shifting forward? Or is it a political process that is being delayed? If you can open up it a little bit further.

Now you're over-asking me. Sorry to -- I cannot say that in that detailed level. I do honestly not know.

Okay. But you are talking about orders that you have already kind of made the calculation, and you're just waiting for the signature of the adopted plant, yet?

The final bit of it, yes.

Okay. Okay. That makes sense. And then kind of -- if we see kind of further delays on this front, and it will continue to impact the workload situation on the engine manufacturing. What kind of options do you have to kind of protect your profitability? I assume that on the Trieste side, they are already furloughs in place. So what are your kind of plan Bs going forward?

As you said, basically, we have -- not all engine production concentrated in 1 place. And of course, anything relates -- let say, the energy volumes also relate to, let's say, what the marine volumes do. And then I would say, so far, I think we have a pretty decent load in the factory. It can always be more. The bottleneck factor in the factories, most of the time, the -- let's say, the engine testing facilities. I think that's not a bottleneck today, although there is still some, let's say, early ramp-up related issues, but I would say that these are very, very minor. I believe that, let's say, if -- of course, let's say, if it gets really bad, which I don't think we are in that stage yet, of course, we can also implement temporary layers in Finland in Vaasa. That's clearly possible. We have done it before.

Thank you. Next question comes from Panu Laitinmäki.

Just wanted to ask about Q3 kind of revenues. I think in energy, you mentioned timing of deliveries in Q2. So does it imply that Q3 should be better? And is that related to storage or also the power plants?

Very sorry to say this, but I'm going to say, I'm not going to comment on the result of Q3. I think that will come at the end of October. I will comment on trends. So let's focus on that.

Okay. I was -- the second question is just turn on the margin drivers. Can you comment anything on them, like the voyage turnaround, it was quite significant loss a year ago. So what's happening there? And then also on the Marine Power side, the factory consolidation, I understood that at least compared to first half, it should be better for your earnings now. And a year ago, you were ramping up the smart technology hub. So any comments on those?

Let's say, in voyage clearly, and that's also, let's say, confirming what we have said earlier. We avoid business as a separate division last year. I think the full year result was about EUR 42 million, EUR 43 million negative. We have said earlier before, and I can repeat that quite firmly that, let's say, this year as a result, if you combine then the piece that we merged back into Marine Power, is, let's say, the piece that we put in the portfolio business for divestments. If we put that together, that is based on the voyage goal, the result is significantly better. Clearly, so I can reconfirm it. When it comes to, let's say, factory cost and margin, of course, when you are in the call it, relocation mode, let's say, moving production from Trieste to Vaasa but also from the old factory in Vaasa to the new SDH factory, that's, of course, giving a lot of disturbance. I would say most of it is done, let's say, in particular, when it comes to Vaasa moving from the old factory in Vaasa to SDH, is basically done. There is still some, let's say, testing activities on the R&D side, but that's not related to manufacturing. When it comes to Trieste, okay, it's a cumbersome process. I think, we have earlier also updated you on a regular basis how that is going. It's not going easy. It's been like 2 steps forward 1 step back kind of progress, but we are making progress. We still believe that we can execute it within the frame of the items affecting comparability that we launched some time ago. But yes, I think it's not so easy to predict what the timing will be. With the current outlook, I would say it will not close in this year. I think it will close in the first half of next year. The Trieste case.

Okay. But if I ask it in that way, that is it a headwind for margins compared to what you did last year?

I clearly believe that today's situation is a lot better than last year, yes.

Thank you, Panu. Next question comes from Johan Eliason.

Just a question on this Marine, you talked about a good pipeline for ships at the yard. Is that still a cruise in that number and LNG? Or -- what segments or ship classes are we talking about here?

The [indiscernible] yards are full or pretty full, actually. But I would say container vessels, tankers, bulkers, also cruise to a certain extent, but it's more than, let's say, the smaller sized cruise vessels than anything else. And of course, let's say gas carriers as well, offshore wind farm installation vessels. There are certain, let's say, segments that are still very active, but let's say, new ordering of ships even though it happens. And I think it's also the fact that yard capacity due to the fact that there is a lack of slots is being extended. Let's say, there are clearly yards in China that are extending their capacity as well. So it's not a new yard, but it's more extending the existing yards, which we have also seen in the offshore boom time, so it can also go rather quickly. That, of course, opens up opportunities. But short term, it's very difficult to find a slot. If you want, for example, an LNG carrier, you have to wait until 2027, 2028 before you get it delivered. So it's pretty long out.

But you have still an opportunity for the ordered ships in the yard in LNG and cruise then, et cetera.

Typically, yards wait until the last moment or pretty late. Let's say, if the ship is being to be delivered, let's say, '27 from a yard, let's say they will not order the equipment today. They will order the equipment in a, let's say, a year before delivery or something like that. It depends a bit on the building schedules in order to have the latest technology as well.

So a year before delivery is where you should see your orders now from that side?

You're right about that, I think you can calculate that.

Okay. And then on ESS, you mentioned the problem is still growing well there. Is the competitive picture changing in any way there? I mean you talked about Fluence and Tesla, et cetera. And -- but now I saw, for example, the Chinese Sangro taking a big order in Chile, I think it was. How is the competitive picture changing in the, obviously, still growing ESS market?

Maybe it is, let's say, these new entrants like Sangro. They are quite aggressive on the price. They want to really take a big share of the market as well. There is a lot of demand. So I think there is plenty for all of us basically to grow. We have already decided quite some time ago to be much more selective in what we take and what we don't take. It's not an absolute must for us to grow equally fast as the market. We are selective in the approach. We want to be very short, but let's say, we can deliver what we commit to in order not to, let's say, run into delivery issues or technical issues or whatsoever. Right risk/reward balance, let's say, we prefer EEQ over EPC, clearly. Sometimes it doesn't work. So then you need to do a good risk assessment on an EPC contract. Do you want to take it or not? But clearly, let's say, growth is part of the ways to, let's say, bring us to profit and okay, look at the trend that we have also shown now, since the end of last year, we also gave out, let's say, EBIT percentage rolling 12. I think that has been trading very well in the last, let's say, 3 quarters that we communicated it. And I believe that we will be the first storage business in the world with bright numbers. So I'm very positive with the approach that we've taken. And yes, there are new entrants, they are more price aggressive. They want to take a share. But I think our reputation is also helping us quite a bit. And also, for example, our safety record with that. We are the only 1 with a URL 9540, I think, is the number, 5 certificate, which is very highly recognized in the market as well.

Our profitability on the ESS is important for you. And the player like Sangro they report 30% gross margins, probably helped by the fact that they are a big inverter supplier, which is a big part of the ESS system is -- since there are a significant issue on price. I mean, I suppose your gross margins on your ESS systems must be way below this 30% at Sangro's report. So there should be quite a big leeway for them to be aggressive on prices going forward?

Yes, I cannot comment on their margins. I don't know. It can be like that. I think, let's say, but of course, like I said, they can be as aggressive as they want. If they have, indeed, let's say, 30% margin, they can go a long way versus do they want to go that way. And also, let's say, do customers at some point of time because, let's say, so far, they are not delivered. So you also need to deliver, if you have issues in your delivery, I think it will backfire quite a bit time. But not saying that it will happen in this case. But like I said, we are very selective. Let's say we want to grow, we need to grow also to further grow our profitability, but we take the selective approach. And so far, I think that has brought us good improvement on profitability and we will continue.

Excellent. We'll see it end of the month then.

Thank you, Johan. Next question comes from Tom Skogman.

It's Tom Skogman from Carnegie. You mentioned power auctions and you still say that you have won orders already. So -- I don't really understand this vocabulary. I mean if it's auctions doesn't -- I mean, if they have not been held, how can you have won the orders and in what countries are these power auctions?

No, that's not what I said. Let's say the auctions are moving right. So let's say, we had also anticipated to get orders from there. They can turn quite quickly, actually. But there are also other orders. It's not only related to the auctions.

And what other countries, where you have these auctions now?

The auctions are mainly, I would say, South America. Also, let's say, Asia, where we see a right shift.

Okay. Then I'd like to ask a bit about the service growth sentiment because you had very difficult annual comparisons in the second quarter and still you showed double-digit growth, and that proved in the Q2 reporting season to be quite unique. Many other engineering companies had good growth in Q1, but almost no growth or negative growth even in the second quarter, while you continue to grow. So I'm just a bit curious, was there some special things, contract renewals or so boosting the service order growth in the second quarter that we should understand when we do our estimates for the third quarter? Or why are you growing so much faster than almost all other engineering companies in service at the moment?

Because we have a very good strategy of moving up the service [ regularly ] at the top. I cannot say, why other stay behind, that I cannot say. But I do believe that, let's say, our strategy is really paying off. Let's say, I -- on your question, is the 1 single big issue that I can highlight in Q2. No, I think we saw growth basically in basically all the revenue streams in service, being in spare parts, field service agreements and projects. So just to pick out one, yes, I would not even know what one to pick, actually.

But is it so that the offshore fleet is coming back into use, and you see kind of a lot of incremental growth this year from that, and that continues now in the third quarter? Or is there something you should just understand in these dynamics?

Yes, yes. But -- okay, I see, where you're coming from. Let's say offshore is clearly, let's say, very active, and it has been growing throughout the year. Well, at the same time, let's say, merchant is going down. So in the mix of things, it's, of course, what you look at in service as well. Yes, in the mix, we are still doing perfect trend, and that's good. And hopefully, we can keep that going as long as possible. And as I said before, clearly, let's say, our strategy of getting more agreement coverage, increasing the share of wallet, et cetera, I think that's a working format. Of course, everything depends on activity in the market. If the ships are not sailing, then of course, this will not continue. So far, let's say, where 1 segment goes down, the other goes up. And in the mix, it's still quite good, actually.

And I guess the spare parts and wear [ partners ] also this dynamic with price increases. So I don't know when you had your big price hikes last year and this year and whether that has an impact on just short-term momentum. I guess a lot of engineering companies have the last round of price hikes in March, April, which boosted Q1 and then turned into a setback in the second quarter? Is there something you want to highlight there?

We are okay, in the long-term past, I think we used to do price -- spare part price at dates once, sometimes 2 times a year. I think those times are long gone, also learning by experience, you could say, our bet experience with all this excessive cost inflation. I would say now the lines between our supply chain or people working in the supply chain with our suppliers, first are the people that are quoting, quoting departments and the quoting systems is much more shorter. So if we smell of some kind of, let's say, price increase coming somewhere then we reflect that immediately into our quotation systems.

Thank you, Tom. Next question comes from Erkki Vesola.

You said storage market is clearly very active. Just a more general question. Are there any bigger projects in the funnel right now that you could still book in '23?

Yes, there are. Tap a little open up more.

Okay, okay. And then regarding that kind of change in competitive landscape, have you been able to retain your pricing on previous levels in storage?

I would say we are always had a quite good pricing level. Of course, let's say, when it was not good, that was basically when we had an order book for storage and then the price escalation hit us. But let's say, since we implemented indexation I think it has been really a good thing for us. We are not sponging anymore. Of course, I would say, we are not gaining any more either, if we have fixed the price and the macro material goes down. But I had that rather than having this big risk that has been hitting us, let's say, last year so hard.

So it's still very much a volume game in the kind of cost structure that they're staffing more and more to that or?

Absolutely. And then also given my earlier comment on, let's say, these new entrants, they are very price aggressive. So really good chances of increasing the price are limited.

Next question comes from Sven Weier.

First follow-up is on storage, also I was just wondering the projects where there is a lot of pricing pressure. Is there pricing pressure because these projects are less sophisticated, lower spec and you can't really benefit as much, for example, from the Greensmith software? Or are these also higher spec projects where there is more price competition?

I would say, it's basically in both. I'm not aware of any, let's say, specific projects on the high end or the medium end or low end. I think we see Sangro and the likes, let's say, other entrants as well in various projects. But let's say, it varies a bit, let's say, in some projects, you compete with Tesla and Fluence and Sangro. And in another project, you don't see Sangro. So it is -- I cannot really say that these projects, they are and these projects, they are not. At least I don't have that information.

Yes, I think I was just wondering because I think in the past, you said your expertise is obviously building these projects anywhere in the world, in the middle of nowhere. You have -- you know the different assets. You know the interplay, you have the Greensmith software and that's really the edge, right? But some storage projects might be not so remote and might be not so sophisticated and may be more prone to price pressure. That's why I was asking.

Yes. That's a good question. I can [indiscernible] question internally as well. But I'm not aware of any such.

The other question I had just in terms of trends, right? I mean, if we go pre-pandemic, there was always a bit of a seasonality in Q3 in terms of the orders, right, and a bit slower summer, of course. And we heard that also this year from other companies. I mean it's something we should keep in mind or in general, back to seasonality or?

That's a good question and not an easy 1 to answer, frankly speaking. I think, let's say, on the service side, I think we will see the normal seasonality, which we have always seen. I don't think that has been very different. If you go to newbuilds I think the, let's say, the typical, let's say, big Q4 or big Q3 and Q4 or big second half, you could say, I think big second half is -- a bigger second half is probably still there. I'm not sure if it's hockey stick, newbuild Q4. I think that trend is already for a few years, not so much there anymore. So I hope that answers a little bit that.

Yes, I mean, we probably also right that the big ticket order announcements were fewer in all the activities, right? And I just wondered if that's just seasonality or the fact that you couldn't announce that yet or whatever?

It was very difficult to exactly say because if you go to, what was it, 2021, when we booked in Q4, let's say, certainly EUR 400-plus million Mexico. Yes. Okay. That seasonality, I'm not sure if it's seasonality or just coincidence that it was in Q4.

Yes. And lastly, just on the old contracts that you said are phasing out in Q3. I mean, was there still a tiny part left? Or how should we look at that? Or was it equal parts in Q1, Q2 to Q3?

Okay. We are not, let's say, giving any opening on, let's say, the timing. We have always said that by the end of Q3 this year, it will be out, and I can confirm it is out.

Next question comes from Antti Kansanen.

Wanted to follow-up a bit on the comments on storage being an active market. You obviously haven't announced a lot anyways during Q3. So is this more like permission thing? Or is it more of a collection of smaller deals that you are now getting? I mean the previous quarter was great, but it was only 1 order. So just trying to reflect what should be a good comparison time period?

No. I can clearly say it's more than 1 order this time. It's also more than 2 orders they ship at this time that I can also say. Yes. Why don't we announce, let's say, announcements are always, let's say, you need to get the confirmation from the customer. Do they want to announce the order? Are they giving us permission to do that? What we don't want is to announce an order, where the customer has not given permission because that would clearly destroy a relationship. So that has always been a challenge. But quarter 1 -- sorry, quarter 3 will not be 1 order, it means more than 1 order, clearly.

Okay. Okay. And then maybe a bit about profitability. I mean it's been trending well last 12 months, but the growth on the revenue side, on the volume side has been good as well. So from here onwards, is that continuing to be the primary driver? I mean, are there any scope of improving your gross margin by being more selective or by whatever it would be? Or is it -- for you still a volume gain to continue the margin expansion?

You're talking storage now?

Yes, storage specifically.

Okay. Yes, let's say, I think it's a combination of things. Let's say, it's -- yes, as I said before, we need to grow the volume. That's part of our plan to get to, let's say, black numbers. But of course, we are also working on, for example, the R&D side, the ease of installation, ease of commissioning and the likes. We're also working with the supply chain to get, let's say, still better prices, even though, let's say, the batteries are indexed, you can still negotiate okay, what's the starting point, but also all the other equipment around it, like the quantums and the modules and et cetera. So it's not just volume, it's volume as well. It's also being more selective, better risk reward balances in project during execution. Yes, I would say that combination actually should get us there.

Okay. And I guess you probably won't comment on this, but any kind of progress on the local content side in the U.S. storage market securing supply? Or how do you look at it?

Clearly, we are working also to get, let's say, U.S. supply cut from where we are today. So that's the only thing I will comment.

How do you actually see it kind of progressing in a sense that when do you think it's going to be meaningful enough to actually differentiate before getting deals? I mean it's a long road to build up that supply chain and have it in place.

Yes. I know, of course, I would almost say that all battery manufacturers are somehow starting to be active in the U.S. to chip in on the IRA. We are talking to several of them, to also, let's say, get supplies from the U.S. I don't think we are very different from, let's say, the Fluences and other competition as well in that -- so that's the same we do.

Next question comes from Panu Laitinmäki.

I just wanted to ask on the power plants and -- kind of that sales pipeline that you see for the next 12 months. You had now commented on what you expect in Q3. But -- like, can you kind of comment where do you see the projects? And how much is balancing and how much baseload are in the cases where you are discussing? And any kind of traction of engines gaining more market share, gas turbines and in balancing?

That's a lot of questions in one. I will not -- let's say, give now, let's say, the guidance as we see it by the end of Q3. Let's say, I think for now, I think you need to go with the guidance that we gave, I think, in Q2, which is basically, let's say, similar. I still believe that, that is a good number. As I explained earlier on the volatility, let's say, auctions moving and then decisions, look, it is still a very lumpy business. But of course, it includes also storage, which can be very large orders as well. So it's a very difficult combination to be very, very exact. I just want to conclude, basically, let's say, we have a good pipeline, and -- we had also a good pipeline. So I think that has not really changed. But as also said many times before, and I wish I could be more clear on it myself as well. It would be much easier in planning, timing is difficult to say. And let's say, if you have a EUR 200 million order in this quarter or the next quarter or the quarter after, yes, it makes a big difference on the numbers. But -- what is good to see is that we are not seeing any cancellations. We also don't see too much loss cases, either. So, yes, we lose, of course, every now and then something, but, let's say, it's not a major thing. We are working on many projects at the same time in parallel.

Next question comes from Johan Eliason.

I was just thinking, you talked about hockey stick here. I was wondering about your margin hockey stick. I mean, in the years before the pandemic, there was always a very strong hockey stick in the fourth quarter in terms of margin that you reported. During the pandemic, we haven't really seen that to any significant impact order of Q4 tends to be the best quarter still. Now when we hear the low margin backlog should be done by Q3, ESS seems to have been potentially profitable very soon now, et cetera, and it gives us the feeling that there could be a hockey stick coming. Is there something in your accounting that has changed or something else that has made this effect disappear?

No, we have not changed any accounting rules. Let's say, basically, the majority of our contracts are completed contract method. And if you think more like the EPC kind of contracts, they have percentage of completion. And what we applied, let's say 3 or 5 years ago, let's say, on that rule, let's say, do we apply percentage of completion or completed contract method, those same rules applies still today, no change.