General/market environment
The market sentiment remained fairly positive during the second quarter of 2023, and we succeeded to improve our performance. The continued growth in service and positive development in the energy storage business supported our profitability improvement.
In the energy market, higher interest rates, volatile gas prices and longer permitting times continued to hamper new projects, especially in the power plants business. In Energy storage, the decrease of battery raw material prices during the first half of the year has resulted in orders being postponed as certain customers wait for even lower price levels. Interest in balancing technologies remains high as supportive energy and climate policies around the world continue to evolve towards decarbonisation targets. The Energy service business continued to develop well.
In the marine market, the increasing cost of new ships and limited capacity at shipyards continued to limit the investment appetite in some segments. However, the market sentiment remained positive in Wärtsilä’s key segments due to continued investments in new Liquefied Natural Gas (LNG) terminals, improving sentiment in the passenger travel segment, and the continued growth in demand for offshore assets.
Order intake
Q2 order intake increased by 17%, supported by good development both in equipment and services. Service order intake increased by 13%, driven especially by growth in Marine Power. Equipment order intake increased by 23%, driven by growth in Energy and Marine Power.
Net sales and operating result
Net sales increased by 3% with solid growth in services and decline in equipment. The comparable operating result increased by 26% with the comparable operating margin amounting to 7.4%, with strong contribution from services and energy storage. We managed to improve our profitability despite taking a 19 MEUR provision in a single turnkey project in the Gas Solutions business unit belonging to Marine Systems. Gas Solutions stopped offering turnkey projects several years ago.
Cash flow and financial position
Cash flow from operating activities amounted to EUR 75 million (-90), driven by the good level of received customer payments.
Outlook
Marine
Wärtsilä expects the demand environment for the next 12 months (Q3/2023–Q2/2024) to be similar to that of the comparison period.
Energy
Wärtsilä expects the demand environment for the next 12 months (Q3/2023–Q2/2024) to be similar to that of the comparison period.
Q&A
You expect the demand environment to be “similar” for the next 12 months (Q3/2023–Q2/2024) for Marine and for Energy – what kind of a development in order intake in % would that translate into, and what are the drivers behind it?
In Energy, both storage and engine power plants have a good pipeline. In the Engine Power Plants business, higher interest rates, volatile gas prices and longer permitting times slow down decision-making. The nature of energy business is lumpy, meaning that the impact of single orders can be large. In Marine, the increasing cost of new ships, limited yard capacity, and longer lead times may postpone customers’ decision-making. Demand for service and decarbonization solutions is expected to remain good.
What are the biggest opportunities and headwinds in terms of EBIT for 2023?
We are not providing guidance for the margins, but if we look at positive and negative drivers, we can say the following:
EBIT should be supported by growth in service, continued decarbonization push in both the energy and marine markets, profitability improvements in Energy Storage and (the former) Voyage Business, and continued footprint and cost optimization. We have a strong order book both in new equipment and services and the order book includes an overall lower value of new equipment orders sold before the acceleration of cost inflation in the beginning of 2022.
On negative side, we have wage inflation as well as lower engine production volumes for Energy due to delays in order intake.
It is also fair to say that there are lots of uncertainties: geopolitical tensions, potential trade restrictions / trade wars, risk of recession / economic slowdown (although the messaging around this is changing frequently).
What are your assumptions for cost inflation going forward? Have we reached the peak and are costs already coming down?
We monitor development closely, but this is very difficult to estimate as the situation varies a lot between cost items, geographies, and businesses. We have seen certain costs declining such as battery raw material costs and some are increasing like salaries.
Please elaborate the impact of declining battery prices on your energy storage business.
Pricing for battery storage projects is subject to a raw materials index which eliminates pricing volatility, both upside and downside, from changes in battery pricing. As such, in general, Wärtsilä is not exposed to the volatility of battery costing.
You mentioned that you have pre-war priced orders worth EUR 1.2 bn in your order book for this year. How much of that was recognised in H1 and how much is still left?
We are not commenting on the exact timing of this part of the order book. We expect this order book to be delivered by the end of Q3. It is worth noting that a significant portion of the 1.2 BEUR order book is recognized through percentage of completion.
Your cash flow improved in Q1 and Q2. Can we expect similar development to continue in 2023?
Cash flow in Q1 and Q2 was supported by good level of customer payments received. Inventories increased somewhat to support near-term deliveries.
In 2022 cash flow was weak mainly due to negative working capital situation in the start of the year, driven by large customer payments received in December 2021. In addition, working capital in 2022 was burdened by increased inventories due to the ramp up of the spare part business and to secure the timely availability of parts, as well as to support a smooth ramp up of STH and related footprint changes.
For 2023, we do not foresee such a big impact of extraordinary items (Russia, factory activity transfers) to our cash flow in 2023 as we have seen in 2022. We have high focus on cash flow and we continue to work on optimizing our working capital related processes (inventories, collection, sourcing). Our expectation is that 2023 cash flow will be clearly better than 2022.
How was the progress in Voyage in Q2? Is the integration done and cost savings achieved? How have the customers reacted?
Voyage integration has progressed according to plan. Voyage Services business unit, focusing on end-to-end optimization of port and fleet operations and capturing synergies with Performance Services, is part of Marine Power. ANCS (Automation, Navigation and Control Systems) was moved to Portfolio Business. Implementation of organisational changes has been completed by end of Q2/2023 and cost savings have started to materialize. Customers are seeing a clear logic in this strategic move.
What could trigger better demand in power plants in H2, i.e. what will change in H2?
A number of auctions & tenders are under planning in several countries and are expected to materialise later in 2023 or beginning of 2024. The demand is driven by the need for flexible short- and longer-term solutions as renewable deployment is increasing.
Are you already seeing the positive impact of the Inflation Reduction Act in the US on energy storage demand?
Customers have expressed a positive sentiment related to the introduction of the IRA, which extends tax credits to stand-alone storage facilities. Battery energy storage projects in the US are expected to clearly increase, and BloombergNEF and S&P Global have increased their forecasted installations as a consequence.
How are you proceeding with the storage turnaround plan?
The turnaround is progressing, and the operating profit of the business is improving. The comparable operating margin was -1% for the last 12 months.
Capital Markets Day 2023
Wärtsilä will host Capital Markets Day on November 9 in Helsinki. Save the date on your calendar. More information will be published later.
