Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Welcome to Wärtsilä Q3 pre-silent call and greetings from Sunny Helsinki. My name is Hanna-Maria Heikkinen, and I'm in charge of Investor Relations. Today, our CFO, Arjen Berends, will start with key messages. We will also show a few slides which are already available on our IR website, and my colleague, [Nora] will share a link to the chart. [Operator Instructions]. Arjen, please time to start.

All right. And let's start with these slides, if you can put them on the screen. Yes, let's start with these. It's a bit of, let's say, a reminder, you could say as well. We had good progress in our divestment of the portfolio businesses. As we already earlier announced ANCS is now no longer part of the Q3 numbers as we did the closing, let's say, earlier in the year. So that one is out, and please consider that also in your numbers. We will likely have a positive impact of about EUR 30 million. But there are still, let's say, some post-closing adjustments that need to be tuned. So let's see what the final outcome is, but I don't expect it majorly different. And whatever, let's say, happens there will lend in items affecting comparability. ANCS was the most profitable unit in portfolio business. It's about -- it was about 80% of the portfolio business, operating results just for our reference. And also, we have corrected the order book. So that the order book will be adjusted also for the remainder part of ANCS to be delivered in the future, which now, of course, goes to the new owner. And that is about, let's say, EUR 250 million, EUR 260 million. Then we also announced earlier the divestment of Marine Electrical Systems to Vinci, and that we anticipate still to close within the last quarter of 2025. So after that, that will also be no longer part of our business anymore and our numbers neither. Then we have two businesses left in portfolio business, which is gas solutions and water and waste. And okay, it's difficult to say exact timing, but hopefully, sooner rather than later, we will also be able to divest them. If we move to the next slide, it's a bit about, let's say, the volume outlook, let's say, for the second half of this year. In Marine, we have a good order book, I would say, to reach, let's say, our own internal target of the full year, and especially for equipment business. It's quite a lot of equipment that needs to go out in the second half of the year. For Energy, it's the same. We have also a good order book for the remainder of the year, but we clearly expect a peak in energy to happen in the fourth quarter. So that will clearly be the -- from a sales perspective, the heavier quarter of the two. Good to know that in Energy, let's say, we focus more and more actually on equipment deliveries, EEQ, as we use as an abbreviation, where earlier, let's say, we had actually more EPC deliveries, but that has completely shifted in a couple of years. Now the far majority of our deliveries is EEQ, which is also a different revenue recognition method is based on deliveries, completed contract method, where EPC is typically POC. So that's a change also in the way we recognize sales. One general comment and the goal both for Marine and Energy. The longer in time the order book gets, also the longer it takes to convert from order intake to sales. So good to keep in mind as well. Energy storage, similar market conditions are still there as we also saw at the end of Q2. The U.S. market is more or less on a stand-still situation, which makes that all competitors are moving to the active markets, which, of course, makes that market extremely competitive. So it remains a bit of a challenge to operate in this market. Hopefully, let's say, things will stabilize, yes, as soon as possible. If possible, but of course, with let's say, tariff discussions in the U.S., and I think you can all see how quick things change, it's not so easy to predict. Challenging market and clearly, let's say, it is all our focus as well. If we move to the next slide, which is basically the most recent Clarkson forecast that came a couple of days ago, basically. In general, not so much change in the picture. So this is basically the same picture as you could see from our Q2 interim report where we see the total, let's say, ship contracting in the top and, let's say, what is happening in our key segments. And basically, there is not any major changes, I would say, if you look at Clarkson total forecast, 2025 adjusted a little bit up 2.6%, 48 vessels by '26, was adjusted a little bit down. 1.6%, 31 vessels. Now in the total of, let's say, close to 1,900 to 2,000 vessels that is very minor. So you could say 2% to 3% adjustments either up or down, which, in my view, is basically ignorable. The trend is what counts and that has actually not changed. If you look at our key segments, I would say, good activity in cruise, ferries, very good potential, aging fleet and the pressure is building up for owners to renew basically. LNG, not so much activities today. But with, let's say, investment decision on LNG export projects coming more and more online. We anticipate this will improve over time. And offshore, not so much activity on the newbuild side, but on the service side, we see very good activities. Then specifically focused on Marine. Decarbonization continues. First of all, that is not only for Marine that also goes for Energy. In Marine, of course, the key, you could say, event on the horizon is, of course, the decision on the global carbon fee, which is due to be decided upon in October, I think in the week of the 13th of October. Let's see what happens there. Despite, let's say, the decision, I believe that decarbonization will also drive our business. Yes, certain items like carbon capture might, let's say, delay a bit because that's very unclear under this decision context of the IMO, how that will fit in into this whole carbon fee. So that might delay a bit. But otherwise, let's say, anything that improves fuel efficiency is hot in the market. And fuel efficiency, at the same time, reduces carbon output because it correlates. So yes, despite the decision, I'm still very positive about, let's say, the way forward and decarbonization will not stop. Good opportunities also in Marine on moving up the service value either. We see good traction in agreements and also in projects also better than what we saw earlier. So I'm quite happy with the development there as well. In Energy, renewable energy still remains the cheapest form of generating electricity. They are intermittent. So you need balancing power. And that's, of course, let's say, a key market where we are strong with our solution. I think we have a perfect solution for basically anybody. Then on top of that, you have the whole data center opportunity, which is a very fresh and new one. But clearly, let's say, taking on quite well. And let's say, as also Hakan reflected, earlier in his meeting on the strategy that we are working on several opportunities globally, I would say, it's not only U.S., even though that's the biggest market, but we are working with many opportunities in different places. Good to see also that the utilization rate of our installed base and energy is holding up quite nicely, around $4,000 per installation. On tariffs, so far, we anticipate limited impact. Also, let's say, our evaluation of the latest aluminum and steel tariffs. We don't foresee any major implications to Wärtsilä. But of course, with tariffs, things can change very fast. So yes, what's the situation today and tomorrow can differ quite a bit. We are currently expanding our R&D facilities in Vaasa, so creating for a potential for future growth. Not just in, say, R&D capability, but also in our manufacturing capacity and volumes in the sustainable technology of Vaasa and that is proceeding quite well according to plans. Yes, I would leave it there and give the floor for questions.

[Operator Instructions] So the first question is coming from Akash Gupta.

My question is on data center orders and regarding your announcement policy because last quarter, you announced after we had consensus poll and as we have seen after the announcement that share price was quite sensitive to that press release. So just a question on your announcement policy on data center orders because I think over the last couple of months, we have seen a very active market in the U.S. and there is a possibility that you might have landed something. So I just wanted to ask on your communication guidelines. And just because you haven't announced something, does it mean that there is something in there? Or just like there may be another scope of backdated order when it comes to your communication policy?

No, we don't have a specific communication policy for data centers. Let's say, we want to publish basically all the orders that we can publish. But of course, this is always, let's say, two parties need to agree that there is some kind of publications. Some customers don't want it. So we are depending on them. Let's say we make an announcement. Sometimes they don't want to have any news on it. Sometimes they say, okay, that is fine, even with the name. So it varies case by case. Of course, really significant orders, if you think, let's say, I think it's $400 million plus.

Yes, $500 million.

$500 million plus, then for sure, we will go out. But those we have not booked that I can tell already.

And those very significant. Those are announced as stock exchange release, press release regulation.

Yes. That will be release then.

Threshold is half of EUR 1 billion, not EUR 500 billion?

Yes.

The next question comes from Max Yates.

My question would just be around your Marine Services business. I guess one of the things that sort of one of, maybe the only things that was going less well in your business last quarter was your service orders. So they were negative in Marine. I think they were down 4%. I know we sort of talked about at length the kind of tough comps that you had in retrofits and upgrades. But I guess, to what extent would we expect that to then kind of rebound and turn positive again? And maybe just if you could talk about the kind of broader environment for servicing. Have you seen any pull forward? Has there been any change in kind of shipping routes and ton miles that may affect the service growth? Or can we be comfortable just looking back and saying that was a one-off, and we see that business kind of resuming back in growth territory?

Let's say, I mentioned before, the retrofit business. Let's say, we look at the book-to-bill ratio on a rolling 12-month basis. And let's say, at the end of the last quarter, then of course, you look Q3 to Q2. And the majority of the retrofit order intake coincidentally or not, let's say, it's always depending on timing of orders. But in 2024, 37% of the Marine order intake for retrofits fell in Q2 and 43% in Energy. And that's why the line, let's say, dropped below one.

But can I just -- because it also dropped because it went from like 70% to 75% down to 41% quarter-on-quarter. So it did drop quite significantly sequentially. Like when you look at the absolute numbers of what your retrofits are, it's not enough just to -- I guess my question still stands. Okay, sorry, sorry I interrupted. But just trying to understand, like, is there -- do we see that kind of going back to 70% and that was just a one-off basically?

I would not compare service numbers quarter-on-quarter. It's useless, in particular for retrofits and agreements, let's say, timing of orders makes such a difference. And also the delivery actually. Let's say, if you book now a lot. let's say if you book in Q2 a lot, it might be that they are all delivered in the same quarter the year after. So it's much better to look at the rolling 12-month trend. Not. at least I'm not getting nervous on, let's say, a quarter-to-quarter comparison that there is a drop, No. I'm more looking at the trend. I think that's more relevant.

So the trend is still in terms of services. Nothing's really changed, and it's still a growth business from here?

Yes. We anticipate still, let's say, moving forward on the value ladder, which also [indiscernible].

Next question . Question comes from Antti Kansanen.

Just one question for me regarding the delivery times and manufacturing capacity, especially on the Energy division side. I mea,n, I guess you have a pretty good visibility on the marine side on your core segments regarding kind of yard contracting vessels who have not yet ordered engines, but you have kind of good reasons to expect you will get those orders. But what about then when you kind of look at your slots for energy next, let's say, couple of years? Like what's the power plant delivery times right now? And you mentioned increasing a little bit the capacity also on the manufacturing side in Vaasa. So how should we think about that going forward? I mean if we continue to see really strong orders, at what point will it just lengthen your delivery times and not add additional revenue growth anymore?

That's a difficult question to answer because it depends very much on -- let's say, if all data center orders would come to us, we would be sold out tomorrow. But that's not happening. So you need to make always an evaluation of, let's say, what do you have in the pipeline? How serious are the discussions? At what time do you think it will, let's say, land basically in our books and also considering what kind of delivery time relates to it? Let's say, also, let's say, our capacity is not fully utilized yet. If you want a 200-megawatt power plant, I think you can still get, let's say, engines for Q4 next year. Not all engine types because, let's say, we are clearly, let's say, limited in what configurations you can do and cannot do. That depends on, let's say, the mix between, okay, how much Marine, how much Energy? How much is it with the generator? And how much not? So there are lots of, let's say, variations. And typically, the bottleneck in the factory is the testing capacity. So that we are trying to optimize. It's like -- it's a big puzzle basically. Its like loading a container vessel, which one goes in first and which one goes out first in the next port. So it's not so easy to manage, but I think we can still handle more. We have also possibility to overflow volume. So if we see the need, let's say, marine engines can also still be moved to the joint venture. So I think we are flexible in the near term. Of course, if sustainably, let's say, the capacity requirement is going up and up. Yes, we will for sure, take investment decisions at some point of time then as well.

Yes. I mean.

But we do we don't want to run ahead of the troops here now.

No, I get it. I mean, previously, you kind of published the megawatts that you were delivering per year, but I guess that figure is not available for last year. But is there something you would like to say regarding kind of any ballpark what we should think about your Vaasa kind of capacity in terms of that, versus what the historical reported numbers that you have had on deliveries? Because back then, you had Trieste as well. So?

No, I will not make any competitor any smarter.

The next question comes from Vivek Midha.

My question is quite similar to the last one, but it's just around the Energy guidance and how to think about that in the context of the demand you're seeing, particularly around data centers. You're guiding for relatively similar demand over the next 12 months. And I just wanted to understand more. Clearly, you've had an excellent 12 months of order intake. Should we think of your guidance as maybe a more, a conservative view based on the uncertainties around the lumpiness with these large orders? How these potentially could land? Or is it, say, a balanced assessments because, for example, as you say, you've got certain constraints on how quickly you can get things out the door. And so it's based on an assessment of when these things are going to land?

No, I think got it right, actually. Let's say, we try to be realistic in our guidance and big orders, in or out, make a big difference. So -- and I said it many times, the timing is not so easy to say. Let's say, what that happened this quarter, the next quarter or the quarter after. Sometimes you think, okay, you will book it in this quarter, but then it shifts 3 quarters out, for whatever reason. We try to be as realistic as possible and I'd rather over-deliver than overpromise.

Next question comes from Daniela Costa.

I just wanted to ask a little bit more into Marine and in terms of like the tendering and the things that are on the pipeline right now. If you can comment a bit by subsegment, across all the subsegments, especially like naval and LNG. Wondering if you're seeing any signs of a pickup in activity there right now?

Naval, yes, I think there is more activity, clearly, but I think it's really about, let's say, quoting activities. Let's say, if now of course, with the geopolitical uncertainty, let's say a lot of countries are investing in defense and maritime, navies, I mean then here. But let's say, from, let's say, an increase of budget decision to, let's say, a contract for equipment from a yard, for example, that can take several years. Because, let's say, what are you going to invest in as a country? Let's say, is it new [indiscernible] program? Or is it something else? submarines, you name it. There are many different Navy vessels. So it takes a long time to convert, let's say, increased spending decision by government to, let's say, final contract from a yard to us. And yes, because there is also all kind of test and requirements and paper working in between. It's quite cumbersome in Navy in general. So I would not be surprised 4, 5 years from now. Some go faster, some go lower, but it's not just like that. Then on your question on LNG. I think at the moment, it's like I said in the beginning, a bit slowish. And I think that's also, let's say, what Clarkson basically announces in the updated forecast. But there is more, let's say, export capacity coming online. So the outlook is more positive. And the expectation, at least that we see, or we have, is that '26 will definitely be a better year than '25. But '25 was very low. So you could almost say it cannot get worse than that.

The next question comes from Johan Eliason.

I was wondering about your net working capital development. I mean you've been highlighting a little bit that should normalize over time. And looking at your guidance, you have better in Marine and stable in Energy and better in storage. Sort of a little bit of a mixed picture. Is there any sort of immediate conclusions one should draw about how to look at the net working capital going forward?

Let's say, we have been, let's say, breaking negative records quarter-on-quarter. And I've always said that, okay, I expect it to normalize. There are clearly elements in the market today that I'm making it, let's say, I would say a normal is perhaps the wrong word. But let's say there are extraordinary items in the market today. As an example, if you have, let's say, customers, which we see quite regular, I would say, even a little bit increasing. They don't want to give, let's say, payment security in the form of LCs or bank guarantees or whatever. I'm perfectly fine with that. Then it's cash up front. And we have, in the past years, gotten quite a few of those. And we see -- I would not say it's a trend, but I would say I've seen it more than before. If I look at my history as a CFO. So that's one element, is that sustainable over time? I don't know. Is this something of today? I cannot say. But it is what it is. And will that change? That's one element where I say, okay, will that last? And if it doesn't last, it will, of course, have an impact to, let's say, the cash flow basically in the project. Another one, which is also in this respect, worth mentioning is the yard order book. Yard order book latest, I heard is 3.9 years out. And the longer it gets into the future -- and let's say, if yards and that is also a tendency wants to lock their cost as well. Okay, they can lock the cost at Wärtsilä then you need to put a purchase order to us and pay a down payment. So you get the money earlier and actually the cash out because the deliveries further and further into the future that has a positive impact to cash flow today. Will those things last? If yard order books, if you because yard capacity is expanding. If the yard order books gets shorter again, this will disappear most likely. What horizon? Difficult to say. But those are two examples of areas where I think, okay, this might be a temporary thing. Let's see how long. At least if I look, let's say, short to midterm, I think we will keep, let's say, pretty well negative working capital. Earlier, I was thinking it could be probably be slightly positive or close to 0, but I think we will have negative working capital still for quite some time forward. I will not put a let's say, a time line on it, but it looks like.

And you haven't changed your risk profile in the contracts you are taking? I mean, if it's a guarantee or if it's a cash down payment for you, it doesn't change the portfolio?

No, no. We want to have payment security in all our contracts. So that's one must have. And okay, like I said, fine for me if somebody doesn't want to open an LC, cash upfront.

The next question comes from Vlad Sergievskii.

Have you shared, or disclosed, what would be the cash proceeds for Wärtsilä from these divestments?

No.

Any indication on the multiple? Because obviously, the earnings contribution from those assets, you are referring to are quite material, right? It's EUR 20-plus million in the first half. EUR 40-plus million annualized. Any reasonable multiple would suggest there are many hundred millions of euros of contribution up there?

We are not opening that up, definitely not on the parts to be sold.

Understood. Understood. If I can try to squeeze a quick one then instead of this one. The fact that you are not expecting a material impact from this new Section 232 tariff. Is it down to the fact that the amount that is due on this tariff is actually quite small? Or it's down to the fact that your customers are kind enough to take those costs?