Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

There may be still some people joining, but I believe that it's time to start. So first of all, happy new year, everybody. I hope that the year has started well, and you enjoyed also a small Christmas break. So like earlier, Arjen Berends, our CFO, he will start with a short summary of key messages, and then we will continue with the Q&A. And I know that some of you have had problems to -- you cannot use Teams for various reasons. So in the case you have questions you want to ask, you can also send those questions to me by e-mail, so I can then raise those to Arjen in the case, those are not raised by somebody else. But let's start, Arjen, please.

Right. Thank you, Hanna-Maria and also Happy New Year on my behalf. So first of all, a few messages, okay, what did we see in Q4? We saw basically that the market sentiment remained fairly positive for us despite, let's say, more overall challenging market environment. But let's say our markets at least performed rather okay. Order intake, Q4 developed in line with our own expectations. So that's okay. Regarding our statement that EPP order intakes or engine power plant order intake in second half of this year would be higher than in the first half of the year that also holds at least by the outlook of today. Regarding sales development, I think it's important to remember that the remaining order book after Q3 for the remainder of this year was heavily tilted towards 2024 and beyond. So that, of course, has an impact to sales numbers as well. Moving on. If we look at the energy market, both in storage and thermal markets, we continue to have a good pipeline. The market for our storage solutions has continued to be active in Q4. Although, let's say competition is not easy. It's still actually quite intense, but I think that goes basically for any markets that we are operating in. But pipeline development is good. Also in power plants -- thermal power plants, as I mentioned, the second half looks to be stronger than the first half. So that's also in line with what we expected. As we communicated at the CMD, we have shifted more, let's say, the focus from EPC to EEQ that already some statistics were shown at the Capital Markets Day. And then if you look at now the situation going into 2024, we seem okay. There is still a bit, let's say, tuning, but about 80% of our order book going into 2024 is EEQ compared to 40% when we went into 2023, so one year ago. In the marine markets, the limited yard capacity, which also drives, let's say, increased costs of new ships, actually, that continues to be there. We believe that the low point of yard capacity was last year -- sorry, actually 2022, I'm still living in 2023 because of closing. But in 2022, we hear more and more, let's say, talks about extensions of capacities happening. But of course, this will take time to be really significant. If you look at Clarkson, let's say, 2023 contracting is expected to be lower than 2022, especially in our key segments. Okay, let's see what the end result is when Clarkson publishes the numbers for the last quarter, actually. But as communicated in our CMD, the expectation going forward is clearly growth, in particular for our, let's say, addressable market or key addressable markets, cruise and ferry, gas carriers, offshore and special vessels. The expected growth is about 11% annually until 2030. Service business, I would say, in both Marine and Energy moving well forward. Nothing to complain about, that goes well. What else to highlight, okay, perhaps as a bit of a reminder. As you know, we have announced, let's say, changes in the organizational structure. So this quarter will be the last time we report Marine Systems. Gas Systems or Gas Solutions as well as Marine Electrical Systems that were part of Marine Systems, they will move to portfolio business to be divested in the future. And the remaining business is Shaft Line Solutions and Exhaust Treatment will be merged into Marine Power. And actually, that is now from the 1st of January renamed to be Marine. So we have, going forward, let's say, 2 divisions, basically Energy & Marine and then portfolio business, which will over time disappear. One key milestone I would like to highlight is, of course, the launch of our ammonia engine that we did in Q4. That's a really key milestone for us in our decarbonization journey and it was well recognized by the market as well. I would say that's in short what I wanted to highlight.

Then let's continue with the Q&A. [Operator Instructions]. So first question comes from Max Yates, I guess.

Could I just ask a little bit around the comments on the sales? Because I guess you were at a very high level last year. So I mean, should our interpretation be that sort of sales are unlikely to reach the level where they were in the prior year. Is that what you're kind of trying to message? And I guess then an extension of that, I mean, there's obviously a huge amount of moving parts around margins, potentially kind of lower sales. I think mix will probably be more skewed towards equipment, but then you have less of the lower-margin backlog. So just remind us kind of how we should think maybe sort of qualitatively about the margin improvement going into Q4. Is it right to think that we get a kind of normal seasonal pickup that we've come to expect in the fourth quarter? Just some comments around that would be helpful.

Thanks for the question. Let's say the comment -- let's say, we are not guiding on margins nor sales. But of course, everybody can calculate, let's say, also historically, let's say, what was Q3 year-to-date sales and then look at the order book for this year to remain at that point of time and then see okay where is sales going to land. I would say sales is not far off from, let's say, our expectations. So in that sense, I'm quite okay with that. Like I said, I will not guide on, let's say, margin development. But clearly, let's say, the actions that we have taken, and of course, it depends a lot on mix as well, let's say, service and equipment that how it will develop. But the actions that we have taken, let's say, with 3s, okay, it's not fully bearing fruit, but also moving up the service value that clearly are supportive of margin growth as well.

And can I just ask one more question? I mean, obviously, kind of we've talked a lot about lithium costs and the cost of batteries and how that's affected kind of your business. I think the industry had -- I forget exactly when it was a bit of a reset as we had to kind of readjust the high lithium prices. How is what we're seeing at the moment affecting the storage industry? And how is that sort of coming through in conversations with customers? Are we having a sort of reset the other way?

This was about, I would say, Q2 last year, I think, when this was, let's say, a very hot item, so to say. I would say that has stabilized pretty much. Let's say, we have also, in our contracting implemented, let's say, indexes related to, let's say, lithium prices. So as we have learned the hard way, basically, we don't want to be the sponge in the middle when suddenly the prices of lithium go up and battery prices change when we have sold something. So this is mitigating that part pretty well. Let's say, with lithium prices going up or down, it should not affect our margins too much.

And it's not having a visible impact on orders or anything like that?

No. I think this is pretty much, nowadays, quite standard practice in the market actually. We are not the only one implementing indexation. I think many have done it the same way.

And if I can squeeze one more. And could you just comment on kind of since you obviously made that announcement around your storage business, can you comment at all on kind of the level of interest as your kind of phone been ringing off the hook from people in the U.S.? Or how have you characterized the reaction?

I will not comment on that.

Next question comes from Johan Eliason.

Well, I think Max nailed most of my question but I was just a bit curious about what we are seeing about the Red Sea and the ships having to go around Africa, I mean we have no clue on how long this will go on. And I'm sure it's not your key segments that are going through there anyhow, except the gas maybe. But we had this situation a few years ago with the ship that got stuck. Did that have any sort of impact on your service sales or anything else would you say if it's a short-term impact? And what could the potential long-term impact be, if any, for you?

At least I don't foresee, let's say, major impact. In fact, the vessel sailed all the way down to Africa or around Africa, basically then service business correlates with running hours. So it's more running hours. So I would rather say from that angle, it might be more positive than negative. Of course, let's say, there are items -- I think that the challenge will be more in us delivering to Asian yards, for example, or supply chain equipment that needs to come to our factories in Europe. I think that's where the disturbance is most. But, let's say, from a service/running hours perspective, I would say it's more positive than negative probably.

Okay. And is there any particular we should consider when thinking about your dividend potential, I mean your balance sheet is pretty strong, and you have your policy, there's no reason to see any deviation from that, I guess?

No, we -- let's say, like we stated in our financial targets, I think we will comply to that. And then, of course, we talk to the Board to decide in due course, let's say, how high that level is. We will, let's say, meet our financial targets.

Next question comes from Sven Weier.

Yes. First one is on service pipeline. You spoke about the project activity in Energy. I was just wondering, obviously, the last 3 years, we had very strong growth in service orders and sales. How do you see the pipeline that you can see on the service side, probably especially on the retrofits?

Yes, I would say that's developing well. Let's say, there is lots of things in the pipeline as well, the terminals, let's say, it's a bit different for Energy and Marine, let's say, what kind of retrofit projects do you see, let's say, converting from, let's say, diesel to, for example, LNG, running that can be one on retrofit. But there are other retrofits possibilities as well related to decarbonization and putting [ nergoprophins ] or other energy-saving devices, hybridization is clearly a retrofit kind of activity as well. So there are lots of different ones. I would say, in general, I think we are in front of something bigger than what it is today. And definitely thinking about decarbonization on the Marine side, I think that's mostly obvious, let's say, carbon capture and all of that and also the fact that, let's say, the fuel cost in the future will be more expensive than the fuel cost today, everybody is well aware of that. So anything that can say fuel is, I would say, high in demand. And also looking at the pipeline, we can clearly see it. Is it coming out in the big masses? I don't think so yet. And that's why I say, okay, I think we are in front of something big, but let's say, exactly when and how big, it's a bit difficult to say. But it goes well forward, I would say.

Yes. And the second question was just on the big tickets you got on the Gas Solutions side, which I guess is obviously one of the businesses you want to get out. Is that something that changes your mind, the sheer activity in the market? Or any impact?

No, it will not change our mind, no. Let's say the consideration has been made, and this is not, let's say, strategically relevant or super fitting to our strategy, which is about, let's say, decarbonization as well as, let's say, moving up the service value later. And based on those main criterias, we have said that, okay, Gas Solutions can probably find a better home somewhere else.

And would you say that the order activity outside Gas Solutions has lived up to your expectations as well?

You mean in the portfolio businesses or?

No, in the core business, the core Marine business.

Yes, yes, definitely. I think like I said, the order intake in Q4 was well in line with our own expectations. So I'm fairly okay with that, yes.

Next question comes from [ Mica Mayander ].

Happy New Year. So regarding Vaasa unit, is all engine manufacturing now centralized to Vaasa? And when should we expect to see the full positive effect of one factory solution going forward?

You could say that all manufacturing of engines is already in Vaasa when you think about Europe. So we are not producing any engines anymore in Trieste, even though, let's say, the process in Trieste, closing the whole facility is still ongoing. And I think that's also one of the, let's say, key determining factors to come to your next part of your question. That's okay, when do we see the full benefit? We need to close that one first. And it's a heavy process, taking much more time than we originally anticipated. Unfortunately, let's say, when we announced the closure of the manufacturing there, it happened at the same time as the Italian government fell. So our case became, let's say, political on domestic region and local level, which doesn't make the case easier. I think we will get it to an end. We will not reverse the decision. That's clear. But we need to make sure that we follow the steps in the right sequence in order not to get stuck. I'm pretty convinced that we will close it in 2024, but timing is extremely difficult to say. As I said in the beginning, we thought this would happen already last year. We are still working on it. Coming back to the first part of your question then. Yes, European manufacturing is mostly -- or is only centralized in Vaasa. We have, of course, also other joint venture manufacturing locations in China, 2 actually. So 2 joint ventures in China are also producing engines.

Next question comes from Akash Gupta.

I have just one, which is on storage. You said the storage was active in Q4 in terms of order activity and competition is intense. The question is on competition. Have you seen the degree of competition has gone up or stable sequentially versus, let's say, Q2, Q3 level that you have seen? And maybe if you can comment also about pricing, if you can.

I will not comment on pricing, but let's say the competition, I would say has not -- okay, has been always, let's say, already for a long time, been very fierce. We are in a growth market that are always, let's say, new parties entering as well. So you really need to be on the ball. Having said that, let's say, there is a lot of opportunity out there. So despite, let's say, heavy competition, I think we will take a fair share of the market as well. And growth numbers should show that. So I wouldn't say from Q3 to Q4, it's a huge change in competition. I think competition has been fierce already for a long time.

And maybe a follow-up. One of your U.S. competitor disclosed some legal issues with one of the customers. Do you think this is something that can benefit other companies who has better track record? And particularly, you has no issues of any thermal incident in your storage portfolio.

Yes, I think, let's say, of course, let's say, if companies have issues, that's not good for reputation. So typically, let's say, the ones that don't have the issues benefit somehow from it, let's say, to quantify it is extremely difficult to say because then you need to look into the head of customers and what are their considerations? Are they going more for reliability or low price or what is their main focus? But clearly, let's say, not having any issues is a clear benefit in the market and people see that.

Then the next question comes from Anders Roslund.

Yes. I have one question regarding Marine and the outlook here by Clarkson. If I look at your latest presentation from December, based on Clarkson outlook for September, and I look at the '22 figures, they now believe that you will have roughly 2,000 vessels ordered for '22. I'm not talking about '23. I'm talking about '22. If I go 1 year back at the presentation in December '22 and look at the similar Clarkson presentation, they had an outlook for '22 of roughly 1,400 vessels. So in 1 year, Clarkson has revised up their '22 figures from 1,400 vessels up to 2,000 vessels. I know there is an important problem this after reporting. But I assume that Clarkson should, to some extent, include after reporting in their estimates, but to miss a forecast for '22 by roughly 50% in the existing year. Why should we pay any attention to that they believe that demand will fall now somewhat in '22 versus '22, when they do have this? And we could go backwards and look at the '21 figures also presentation in the Clarkson estimates for September -- presented in September '23 and '22. So what I'm saying, that's one question. But the second question is if you see the order intake '23, do that reflect this order level of roughly 2,000 vessels '22 or what sort of order yard interacting is reflected in your order intake '23 in the Marine segment? I mean it has been stronger than expected. Most analysts have revised up the estimates for Wärtsilä based on the order intake in the Marine. So how should we think for '24 when it comes to the order intake? Okay.

It's a lot of questions and comments. First of all, I cannot comment, let's say, Clarkson, let's say, they are making their predictions. It's the best most encompassing, let's say, statistics in the market. So whether they are right or wrong, yes, that is something I have no influence on. There is, for sure, let's say, always this late ordering or late info coming to them, which they correct later on. Then to your next question, let's say, is our order intake reflected on the 2,000 vessels or something else? I cannot answer that either because, let's say, I don't know the actual statistics of that year yet, 2023. So, let's say, it's the order intake that we see and that we have booked. And it relates to whatever finally comes out as the number of contracted vessels. Is it let 1,400 today and might be revised to 2,000 later or 1,600 later. I cannot say, that I simply don't have the knowledge, not anybody else in the company has the knowledge.

No, because your outlook used to be stable when it comes to the Marine part and that was what you believed last year as well. And obviously, '23 order intake-wise has been much stronger than expected. So there seems to be quite poor visibility. And then I come to my last question here is the fact that you now and also your competitors introduce new fuel technologies and that's going to be part of the future. Could that drive growth? Could it change the behavior among shipowners to continue ordering on the new high levels?

I would say looking at the fact that, let's say, there is very limited yard capacity and to the fact that, let's say, in the whole journey of decarbonization a lot of the vessels need to be replaced. I think I mentioned in earlier meetings as well that, let's say, the average age of, let's say, the ferry fleet, for example, is 25 years plus. That needs to happen a lot in order to meet, let's say, regulatory requirements. CII has been kicking in, let's say, last year, it gives an opportunity for customers' customers to indicate one by ship or my goods to be transported with a ship classified worse; A, B, whatever they say. I think there are many indicators hinting in the direction that it -- there will be a need for replacement because a very old vessel, would you retrofit it with 5 years to go, depending on the cost, of course, what you implement, you might say that's probably not the smartest solution. Because I will not earn. So if there would be more yard capacity, I think there would be more replacement coming. But I think that's the fact that it needs to, let's say, move a little bit in the more favorable direction. And as I mentioned in the beginning, at least from what we know is that the low point of yard capacity was 2022. It has been, let's say, growing. But of course, this doesn't come overnight. Let's say, building new yard capacity outtakes typically a couple of years. So I think they are very aware. I think also yards are very well aware that there is an opportunity out there and want to catch that. So I think they are preparing for it. That's why I also say that, okay, I think we are in front of something big. Timing is difficult to say.

Then the next question comes from Antti Kansanen.

Happy New Year from my behalf as well. Just a detailed question on the energy side, something that you Arjen said about the business shifting more towards EEQ versus EPC. So kind of what's the impact on the ticket sizes? I mean, how large portion is the one that you are not making today? And just from a modeling perspective, what's the impact on delivery margins?

I would say, margins, let's say, not so different, I would say. But let's say, of course, on the sales side, it's a clear difference. Let's say, it depends a bit on, let's say, how big and large is the scope. But let's say, from a sales perspective, on a project level, we talk about 20%, 30%, delta?

Yes.

That clearly is different.

Okay. Then a follow-up on that one, when you mentioned that the demand or the orders on second half are higher. Are you referring to euros or megawatts?

Euros.

The next question comes from Erkki Vesola.

Happy New Year. Just talking about general -- possible general strike in the industry in Finland, okay, it may be short lived, but if that materializes, how is Vaasa prepared? And how long a strike could you take without meaningful impact on your deliveries and operations in general?

I must say that's a difficult one for me to answer. Let's say, if and when and how long, that's are all questions out there. So -- I'm sure, let's say that -- let's say, if it's a week or -- then I think we will be able to recover, but let's say, if it's a month, and it's more difficult. So I think the longer it takes, the more difficult it is to recover. But that's all I can say. It's too many open ends on it.

Can you prepare for this in any way?

Not okay. Let's say, if you see it coming and you have, let's say, short-term deliveries, you can potentially, let's say, anticipate. Let's say, certain, call it, testing or assembly work to be done faster in order to get something, which is really close to a deadline out. But typically, we are, I would say, pretty well in advance of a certain deadline in particular now in Vaasa because the factory is still in some kind of, let's say, ramp-up stage. So we have some safety buffers, but let's say, not too long.

So it seems that you are not too concerned at this...

I'm not so concerned at this point of time, no.

The next question comes from Johan Eliason.

Yes. I just wanted to follow up a little bit on storage. I understand you're not commenting on the process to whatever solutions that could be with this business. But just trying to understand it a little bit again. We discussed this at the Capital Markets Day to some extent. I mean, how independent is this business? Is this something you've been trying to build over the past few years, and you've needed scale to get to profitability, et cetera? And I suppose, it works like, you know, you have a key account manager at the Energy division that can sell the storage or the software or a power plant to his customers. And then I guess you can sort of sell the storage product as it is and it's sort of engineering and installation guys to an external entity. But does this entity need to be someone that already owns this utility type of clients? Can it be a PE without a sort of -- no involvement, whatsoever, et cetera? Or how independent basically is it? What is to be sold, if that is the avenue you will take eventually?

I would say it's pretty independent. Let's say, we -- let's say, if you think from a customer perspective, let's say, we have no combined contracts. So we never sell, let's say, storage in combination with thermal balancing power, for example. It's always separate contracts. It's always -- at least, I don't know of any case where it's happening at the same time so that -- and they buy storage and they buy thermal at the same time. It's always in sequence, typically for storage and then later, let's say, thermal balancing power. So in that sense, it's quite independent. And let's say, from a customer point of view, no issue. Of course, let's say, internally, we are utilizing resources, as you rightly reflected, let's say, being in salespeople, project managers, supply chain controllers, many functions, they can support, let's say, either energy or marine -- sorry, energy storage or engine power plants. And that we, of course, utilize to the max. Let's say, if there is a little bit lower load in EPP, engine power plants that use the resources on storage and vice versa. So because also, let's say, this is not static in the year either, let's say, one quarter to another, it might change already. So in that sense, there is a lot of, let's say, joint, you could say, resources. But if it must be, I think it can be separated with not too much difficulty.

And would the software business be part of it? Or would that be something you would keep? Or are there any thoughts about that part of it?

No, let's say, software and energy management software, you need on both ends. So that needs to be solved, if so.

Next question comes from Max Yates. Max, we cannot hear you. Max, we still cannot hear you. It looks like that you are unmuted, but there may be a challenge with the voice. Let's do so that Sven Weier, you can raise a question.

Hello? Sorry, can I speak on behalf of Max?

Yes. Please, please.

[Technical Difficulty]

I don't hear it.

Sorry, Max. We can't hear you.

Sorry, is that the guidance on H2 in energy orders, just thermal being up? Is it just thermal?

Yes. Yes. That's what we mentioned earlier. Yes, correct.

So it's just thermal [ really ]?

Thermal order intake energy second half is bigger than the first half in euros.