Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Good morning, and welcome to this news conference for Wartsila Q3 results. 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 and then followed by the business performance. After that, our CFO, Arjen Berends, will continue with the key financials. After the presentation, there is a possibility to ask questions. You may have recognized that we also announced our new financial targets this morning, but we will kindly ask you to leave the questions regarding financial targets to our Capital Market Day, which will take place next week. So all of you, you are warmly welcome to our Capital Market Day. But now starting with the results. Please, Hakan.

Thank you, Hanna-Maria, and welcome, everybody. I think we have had a really strong Q3, both from an order intake perspective, but also on our journey to continued improved profitability. So continued increasing profitability and continued strong order intake momentum. So order intake increased by 33% to EUR 2.4 billion. Actually, it's up 41% organically. Service order intake increased by 11% to EUR 950 million, and we are now at an all-time high order book of close to EUR 9.9 billion. Service continued the rolling book-to-bill above 1. So now we are at 1.1. Net sales increased by 7% to EUR 1.5 billion. And we continue to improve our profitability. Comparable operating results increased by 19% to EUR 212 million, and that's 14.2% of net sales. Operating results increased by 4% to EUR 222 million, which corresponds to 14.9% of sales. And cash flow, we continue to have a strong cash flow from operating activities amounting to EUR 583 million. And on our ROCE journey, return on capital employed, we are now at 94%. So let's look a little bit deeper into the numbers. And if we start with Q3, we see order intake is up 33% to EUR 2.4 billion. You can see that service order intake is up with 11% to EUR 950 million and equipment up 53% to EUR 1.4 billion. The increasing order intake is primarily driven by Energy. We now stand at an order book at EUR 9.9 billion. Net sales up 7% in the quarter from EUR 1.4 billion to EUR 1.5 billion. Services is a bit flat, EUR 850 million to EUR 802 million, so minus 2%, but I would say flat. Equipment up 19% from EUR 580 million to close to EUR 700 million. Book-to-bill continuously improving from 1.27 to 1.59. And we are translating the sales to increased profitability. Comparable operating result up 19% from EUR 179 million to EUR 212 million, and that corresponds to 14.2% of net sales, improving from 12.8%. And on the operating results, up also 4% to EUR 222 million, which is 14.9% of net sales. If we just quickly look at some of the key numbers for the full year, so to say, we -- order intake is up 26% from EUR 5.6 billion to EUR 7.3 billion. Net sales is up 2%. Organically, it's actually up 9%. So from EUR 4.4 million to EUR 4.5 -- and then if we look at the comparable operating results, up 12% from EUR 558 million to EUR 623 million, EUR 13.9 million, also very close to the operating results, which lands at EUR 13.8 million. So good development, I would say, in all key figures. If we look quickly on Marine and Energy, the market. On the Marine side, the market sentiment remains supportive of our key segments. And shipping has remained resilient despite the macroeconomic headwinds caused by the Middle East conflict. The number of vessels ordered increased to 2,500, up from 1,200 last year. The Middle East conflict has certainly lengthened the shipping routes continues to do so, supporting demand and improving earnings. And the market sentiment remains supportive and ordering appetite continued to be on a good level in vessels key segments. Contracting in these segments is expected to remain well above the 10-year average levels. The service market remained active and overall vessel utilization stayed at a good level. Increased fuel prices reduced short-term service spending in some segments, while higher shipping rates led to postponements of some service activities. And you've seen -- you will see that on our service Marine service order intake is impacting that. In January to September, 446 orders were for new alternative fuel capable ships, which is about 30% of the capacity of the contracted vessel. That also reflects the mix of the vessels. On the energy side, clearly increased demand drives energy transition investments. I mean we see a structural shift here in general electricity demand and that translates into a very strong market for Wartsila. Electricity demand grows, and future projections have increased substantially, creating market opportunities for equipment providers. Two key themes have stood out in the recent macroeconomic development: load growth and increased tariff-related uncertainty. The diverse set of load growth drivers includes electrification of industry, transportation, cooling, and heating, as well as data center. We see it as a structural growth. It's not only data centers that are driving this growth. In engine power plants, market demand for equipment has been strong. The base load segment remains a consistent source of demand for thermal power, while the drivers for balancing demand are also expected to continue to develop favorably. Renewable energy investments continue to shape energy markets, with investments outside of China at record levels in the first half of the year of 2026. We, as Wartsila, we continue to see a strong demand from data centers globally with a dynamic pipeline of opportunities. The resulting growth in the installed base also support, as we talked about before, a significant lifecycle services business that will extend well beyond 2030. So looking at the numbers in graphs, the organic order intake increased by 41%, order intake increased by 33, marine order intake remained stable, whereas energy order intake increased by 121%. Very strong. Equipment order intake increased by 53%, and the organic equipment order intake was up 66%. Service order intake increased by 11%, and the organic service order intake growth was 13%. We have a strong order book development. Rolling book-to-bill continues to be well above one, and the order book is at an all-time high, driven a lot by energy, and it's the same theme as we talked about before. The order book is building further and further out in the future, and we have broken it down here on marine and energy, where the existing order book will generate sales that are distributed further and further in the future. You certainly see here to the right side for energy, later deliveries is really building up. This, we will come back to at the Capital Markets Day. You also see on marine, there is a buildup of later deliveries. Organic net sales increased by 16%. Net sales increased by 7%. Marine net sales increased by 5%. Energy net sales increased by 52%. Equipment was up with 19%. On the organic equipment, net sales growth was 39%. Service net sales remained stable. Also, the organic service net sale remained stable. On the profitability side, we continue our journey of improving our profitability. Net sales increased, as we talked about before, by 7%, comparable operating results increased by 19%, and comparable operating margin 12-month rolling are now at 13.8%, up from 12.2%. On technology and partnerships, some interesting orders and cooperations in the latest quarter. First of all, Australia. We will deliver Australia's largest-ever engine power plant to support the country's energy transition. As you might know, Australia is on a journey of reducing coal power and building up renewables. They have invested a lot in battery storage. We have been there with our battery storage business, but they have also realized that you need this mix that Wartsila has been talking about for many years. You need both batteries and reciprocating engines to provide the balancing power. We will see a market breakthrough in Australia here going forward for balancing power. Maybe also for data centers, but certainly for balancing power. We are talking about flexible and highly efficient 46TS engines that will be supplied to Australia's largest-ever reciprocating engine power plant. It's 300 megawatts that will provide critical grid balancing and system security in Australia. The fast-starting, flexible capacity provided by our engines will enable greater integration of renewables into the power system. It's really about balancing power, and we booked the order in the third quarter. Now, in different parts of the world, we received an order to integrate and optimize Aruba's generating assets for reliable and sustainable energy. This is, you could say, a microgrid application where we have signed an agreement with WEB Aruba, the Caribbean island's energy provider, to advance decarbonized operations through the integration, optimization, and control of Aruba's power-generating assets. This comprehensive solution includes engineering, procurement, and construction work, as well as service agreements. We booked this order in the third quarter. The final taking over is scheduled in the second quarter of 2028. Now, looking a little bit closer on Marine and then Energy and Development. On the Marine side, comparable operating results increased. Equipment order intake declined due to periodization of orders. You know there is lumpiness both in Energy and Marine, and we continue to see good growth opportunities, but order intake was rather flat due to the periodization of orders. While the service order intake remained stable. You see the order intake minus two, net sales continue to grow at 5%. We see the comparable operating results up to 13%. On the positive side, we certainly see better operating leverage, higher equipment sales, and better joint venture results also. Now, what is dragging us down, but I think for very good reasons, is we continue to increase our R&D efforts to continue to be the technology leader in the industry. If we look at the Marine service book-to-bill, it continues to be above one, and our Marine service order book increased by 10% compared to the third quarter in 2025. And if we see the last 3 years, we have had 6% CAGR, and we will see continued growth going forward. You also see to the right, the graphs of the different disciplines in services. And here, we can see the big swings. We see the curve that has been deep in the red, and that's the retrofits and upgrades. It really comes back now. We talked about, it's lumpy. Many of these retrofit contracts are rather big. And when they come, they have not come, they have a big impact. And on the agreements lately, we have been down a bit. On the energy side, looking closer there, Order intake, net sales, comparable operating results all increased and the equipment order intake increased supported by strong demand, both from data centers and balancing applications. So order intake, up 121% net sales up 52%. And you can also see the comparable operating result at 16%. And here, we have same positive driver, better operating leverage, higher equipment sales. And I would like to highlight this one, solid project execution. We have an energy today that is really world-class in executing. And solid project execution means basically we deliver our projects at lower cost than we had budgeted for, and then we can improve our profitability. So really good team work by the energy business. Overall, Energy Service book-to-bill continues to be above 1, and Energy Service order book increased by 28% compared to the third quarter. That is, as you can see to the right, very much driven by retrofits and upgrades. And here, we have had a couple of very big orders coming in, in the third quarter. So you could say that those are type of onetimers. But we also say it comes back making the point that the retrofit and upgrade business, it can swing quite a lot. If we look at the -- to the left on the journey over 3 years, we have had 4% CAG in the Energy Service business. The bridge of the comparable operating result from Q3 last year to Q3 now, we see we are going from 12.8% to 14.2% we see Marine is down a little bit from 12.4% to 12.1%. Energy, a big step up from EUR 15.9 million to EUR 17.5 million. And then we have a bit of a -- still an impact of portfolio business, but that's the last year. We have now closed portfolio business, divested 11 business units. So comparable operating results increased by 19%. And Arjen, over to you on the key financials.

Yes. Thank you, Hakan. I'm very happy to present the other key financials. If we start with operating cash flow, after a very strong, let's say, Q2, very close to EUR 500 million. Now in the third quarter, we realized EUR 583 million. And as far as we could trace it back, this is an all-time high Q3 for Wartsila. Good support from the profitability, but also very, let's say, good development in the working capital, as you can see also here on this slide. In the working capital, I would say the main 2 positive ones are, let's say, the payments from the customers basically, so the advances as well as the receivables. On the negative side, let's say, inventories went up, but that is logical. We are building, let's say, our deliveries for the future. So that takes money and investment and time to build. Looking at the return on capital employed, ROCE, very strong improvement. We had just over 70% at the end of last quarter. Now it's 94.1%. Also solvency clearly improving, let's say, from 38.2% to 39.4% now. As you can notice, we have 2 lines for earnings per share at the bottom here. One is, let's say, the total, you could say that's the first line, and the other one is the continued operation. The delta is basically the energy storage joint venture named Valo that is now booked as discontinued operation, and that has a $0.07 impact, as you can see on the earnings per share. If we look at the trends, let's say, both cash flow as well as working capital trends move and continue to move basically in the right direction. Working capital at the end of, let's say, Q3 ended at around EUR 1.6 billion negative. Advances received was about EUR 2 billion. So if you exclude that, you end up positive EUR 400 million-ish about. On that level, so working capital, excluding advances, a lot of good efforts are continuously being done. Over the past 3 years, that level has decreased. So working capital, excluding advances has decreased EUR 300 million, actually, while sales went up EUR 1.3 billion. So really good developments also in other areas than just the advances, not having -- not wanted to make the comment that advances are bad, they are very good, and we should continue that. Looking at the, let's say, the 5-year average working capital to net sales ratio, 5.2% right now. So clearly, let's say, on a negative level. And we also anticipate working capital to stay negative for years to come. Then on the financial targets, and this is probably the last time we will show this as you have noticed and also commented by Hakan, we have launched our new financial targets this morning as well. But looking at this graph and for the last time, first of all, on the left side, let's say, organic growth, 14% year-on-year for Marine and Energy combined, 6% is actually Marine and 28% is actually energy. Profitability, 14.2% now on a rolling 12-month basis, which is up, let's say, from 14.0% actually in Q2. Group gearing continues to be deep low negative, so not much to add to that. And also for the dividend, I would say also nothing new to that as well because that's already for a long time, above, let's say, the financial target of 50% of EPS. With these words, I hand it back to you, Hakan, on the outlook.

Thank you, Arjen. Cash is strong. So if we look at the outlook, and this will also be the last time we communicate outlook in this format because as you've also seen in our press release this morning, we are changing our guidance principle as we go into next year. But -- so for the last time, we are looking at the demand environment for the coming 12 months. And both in Marine and Energy, we regard them to be similar to that of the comparison period, basically 12 months before. We also highlight that following the high order intake quarters, the outlook reflects a continued strong demand environment, especially on the energy side. Okay. So that was a quick summary.

Thank you, Hakan. Thank you, Arjen. And now we are ready for the Q&A. So as a gentle reminder, this is about Q3 results, and we -- I kindly ask all of you to join our Capital Market Day next week to discuss our new financial targets. So handing over to the operator, please.

[Operator Instructions] The next question comes from Daniela Costa from Goldman Sachs.

I have 2 quick questions. The first one, just wondering sort of on Marine services on sort of the slight delays that you mentioned. If you just see the comeback of that kind of concentrated still into if it's more likely to spread to next year, how much can you help with any quantification on how much is being kind of like held up on that pattern? And then the second question, maybe I've missed this. I'm sorry if that was the case. But I think last quarter, you commented on the gross margin backlog evolution in the backlog of the 500 basis points over the last 12 months. Just wondering how Q3 has contributed to that trend, if you could also help quantify there.

Shall I answer first let's say, on the service net sales, I would say that's not a real concern. Let's say, the key thing is, let's say, the book-to-bill ratio stays above 1. And if you look year-to-date, let's say, on service net sales, both for Energy and Marine, actually, let's say, we saw in the book-to-bill graphs that book-to-bill last year, let's say, was very down on the retrofits on the service projects. And of course, that translates into sales, let's say, typically half year to a year later, and that's what we are seeing now. So the slowdown is really in the project services net sales. But as you could see from the graph, in particular now for, let's say, energy, let's say, the big swing up. So that will come to sales, let's say, probably half year to a year from now. So that's the big swinging item. Other revenue streams are pretty okay actually.

And on the 500 basis points on the new build order book for energy, we will not come back and guide every time how it is going. But I can say we continue to have good price realization. And you've seen the new financial targets. We can talk more about them in a week's time. I think that also indicates the direction we are going in.

The next question comes from Akash Gupta from JPMorgan.

I got 2 as well. My first one is on energy and particularly the outlook. I think you confirmed demand environment to be similar to last 12 months given the strong demand we have seen. Wondering if you can talk about what shall -- how shall we translate this demand environment into Wartsila orders? Because when I look at your last 4 quarter orders, we have $4.8 billion in orders. And let's say, if that EUR 4.8 billion translate into revenues in a few years down the line, we are already at your medium-term target for the segment. So my question is that we have seen a big increase in lead times. So is it realistic for us to this EUR 4.8 billion-ish order intake in the next 12 months? Or maybe you could have some demand constraint and because of that, despite favorable environment just because of your capacity constraint, you might see lower order intake. So any thoughts on that one? That's the first one.

Yes. So I think it's correctly spotted. I mean we are building our order backlog that stretches further and further out in time. And we have done -- we have sold forward now quite a lot during this year. And of course, there is always a balance how far you can sell out in the future. Then in parallel, we are ramping up our capacity. But we have basically sold out or if you are a new customer that comes to Wartsila today and asking for when we can deliver, we are into the 2030s. So there is clearly a balance of how far we can stretch out the time and also the capacity that we have available.

And my second one is on your Slide #8 on your energy backlog. So when I look at energy backlog, I think at this point, you have more than EUR 600 million higher 2027 than what you had at this stage for 2026. Again, I mean, I think there is a bit of growth that we have in consensus for next year. And when we look at your production output, I think you're already at 100% in STH this year and the next production growth will come in 2028. So I mean, I'm wondering like if you can talk about what is helping this higher revenues or higher deliveries in 2027. Is it just that some of the engines that are used in 2026 might be recognized in revenues in 2027 when you deliver it or maybe something else? So any commentary on growth in backlog despite production volumes will be likely flattish in '27 versus '26?

I think there are several reasons, not let's say, one reason, I would say. First of all, I want to mention scope. Let's say, as we have been talking a lot about, let's say, euro per kilowatt in the past, let's say, scope is a really big difference. So it's not just engines that we do. Let's say, we -- of course, we do engines, but let's say, if we deliver additional scope with the engines, that's also additional sales, and that's also in part of our order book. Secondly, let's say, there is on the EPC part, there's a percentage of completion. So that will vary by year. It depends how the project progresses. And then, let's say, there is -- it's always linked to delivery. So on your latest comment, let's say, when we deliver the engines, that's when we take, let's say, the sales. But let's say, if other equipment comes later, then it's let's say, if that goes into '28 or actually, it can also be the other way around that certain equipment, which is not engines is delivered in '27 and the engines only come in January, for example. So this depends a bit, but it's those 3 reasons mainly.

And maybe lastly, a housekeeping question. I know Anna Maria told us not to ask about midterm, but maybe on this IFRS 18 headwind, can you quantify how big or small it can be? Because I think that has been one of the key differences on how people are interpreting this new medium-term target.

It's, of course, an estimate, but both for Energy and Marine, if you look at the last 12 months, it's an estimate now of about 0.6, 0.7 percentage points.

On EBIT...

On EBIT. Yes.

And we will talk more about that in the CMD.

Correct. Restatement...

The next question comes from Uma Samlin from Bank of America.

So first from me is a follow-up from the previous question. I guess you mentioned that the backlog is now stretching into the 2030s. So does that mean that your 2029 is now fully booked? And also, I guess, given the very tight energy market, would you potentially consider further capacity expansion on your current footprint?

So I mean, when we have something in our order backlog, there are a number of prerequisites that needs to be fulfilled. We need to have a signed contract that needs to be down payment that needs to be noticed to proceed. So what is in the backlog, those are firm orders. So for 2029, we are in advanced stages of closing, but it's not recognized into our order backlog. That's why we like to talk about if a new customer comes, what's the best delivery date you can offer me, then it's in the 2030s.

And in terms of capacity expansion, is there any some indication for you on the market that you would consider further capacity expansion?

So we have taken several, I would say, major steps. I mean we have first step coming in beginning of 2028 and second step of beginning of 2029. But we will have this step-wise approach also going forward. So we will continuously reassess the market situation, and we could expand even further. But we have to come back to that if and when we take those decisions.

Critical is the supply chain here.

Absolutely. I mean, to ramp up now, it's, of course, our facility in Vassa, and that's one element. But to ramp up a robust supply chain, that is also critical in this equation, so to say.

That's super helpful. My second question is on the life cycle service opportunities. So would you be able to give us some update on that, especially on the energy side? I remember you had previously mentioned that we could start seeing this by the end of this year. Is that still what you're expecting? And how should we expect those service agreements to roll in, in terms of orders?

Yes, let's say that's still the expectation. So the answer is a simple yes. Let's say, we expect the first orders to be taken still within this year, but they are not in yet.

The next question comes from Antti Kansanen from SEB. The next question comes from Vlad Sergievskii from Barclays.

First one, could I please ask a follow-up on energy orders? You booked 4.7 gigawatts of energy orders over the past 12 months, predominantly driven by data center-related projects. Did I understood you correctly that you might not be able to book another 5 gigawatts or so over the next 12 months due to the extended lead time? That's the first one.

Yes, I think that's clearly so because there is a limitation on how far in the future that the market is transacting, so to say. So there is a balance. We are, of course, ramping up our capacity, but there is a balance on how much new order intake that we can take in. Then I would say predominantly, we have a lot of balancing order intake as well. So I just want to adjust that. It's a combination of both data centers and balancing power. This year's order intake.

It's all a matter of acceptance of the customer. Do they accept long delivery times or not? That's the key question.

Absolutely clear. And then related to that question, please. In light of that, how competitive do you think your lead times right now are given your comments that you are not able to deliver before 2030 for your customers, but there are probably about 10 power gen engine and smaller turbine suppliers who actually can deliver significantly earlier than that. And if your lead times has become less competitive because of your success in bookings, what could you -- and what do you plan to do about that?

So I mean, first of all, I would say that the current status is kind of a proof point that we are very competitive because people are willing to wait if you compare them, you're saying that somebody else can deliver earlier. And I'm sure there are some that can, but people are still contracting with us then further. Why do they do that? Because of energy efficiency, fuel, the flexibility of our assets, no water consumption, et cetera, et cetera. And that, for me, is also my long-term reflection. I mean, we have a very competitive technology. When we talk about the sweet spot of this type of power plants, we are more fuel efficient than the high speeds. We are more fuel efficient than the industrial gas turbines and the aero derivatives. We don't require any water. We don't derate at hot temperature. We don't date at high altitude, and you know this, Vlad. And on top of that, in the medium speed segment, we have the best fuel consumption. We have the strongest service network, and we have a team that know how to deliver projects on time and with the right quality. So therefore, I am fairly confident also long term when the market rebalance because it's about being competitive.

Correct and deliver on execution.

And the duration of your backlog is a proof point...

The next question comes from Sven Weier from UBS.

Two questions from my side, please. First of all, on the marine orders, you talked about phasing. I was just wondering in terms of where you are in terms of taking container vessel orders. Obviously, this year, we've seen a boom in feeder container vessels, which I guess should be favorable for you. I mean, have you already booked those orders? Or is there -- what kind of delay are you seeing there? That's the first question.

No, we clearly see, let's say, that feeder container bookings. Yes, we have booked those, and we have also still some in the pipeline. So the answer is yes. Yes.

We should acknowledge on the container side. For us, it's mostly about auxiliary engines. Correct. And this we do through our JVs.

And is that also for the feeder vessels, the smaller just auxiliaries?

Yes. Primarily, yes. There is also potential for hybrid electric in the future, but that is further. I mean that's an innovation in the segment. So there is -- so far not yet a commercial breakthrough. So for now, it's primarily auxiliaries, yes.

But not all is going through the joint venture. So it's also through our books. It depends on the fuel type.

The second question I had is just a technical question on Chart #7. I'm sorry if you commented on this already, but I was just wondering, you say the order book is adjusted to exclude energy storage, but does this also -- that doesn't hold true for the previous years, right? It's just for the backlog as of the end.

It has been consistently corrected.

So I don't know if my math is right, if I add up the energy and marine bars for the previous years, I get to a lower number than for the group.

It should not be.

But to me, it seems storage is still in there, but maybe...

Let's check that and I think Investor Relations can come back to you. To my knowledge, it has been corrected.

The next question comes from Max Yates from Morgan Stanley.

So a couple of questions. The first one is just around your data center customer base. And obviously, the market is taking, I think, quite a different view to the availability of financing for hyperscalers versus N clouds versus colocation companies. So I was wondering if you could give us a feel simplistically, how much of your data center orders by percentage are to going to hyperscaler customers versus some of the more kind of neo clouds like COI and Nebius. If you could give us a feel for that, please? That's my first question.