Key messages and Q&A on Half-year Financial Report January–June 2024

Wärtsilä published its Half-year Financial Report for January–June 2024 on Friday 19 July 2024 at 8:30 am EEST. Here are the key messages and Q&A on the report.

General & market environment

The market environment remained stable for Wärtsilä’s businesses during the second quarter of 2024.

In the energy market, the quarter was characterised by an increase in protectionist policies, with trade risks elevated by developments such as the recently imposed import tariffs by the US and EU. The market for engine power plants was stable, with good activity especially in the US. The rapid growth of artificial intelligence (AI) is having a sizable impact on the global electricity demand. According to the IEA, data centres consume approximately 1-2% of global electricity at present, potentially doubling in share by 2026.

In the marine market, trade flows continued to be heavily impacted by the sanctions on Russia, and attacks on ships in the Red Sea. Global trade is facing challenges from longer average shipping distances, higher transportation costs, and delays to global supply chains, which have ultimately increased the demand for ship capacity. Investments in new ships during the first half of the year were clearly higher than in the comparison period, and the uptake of alternative fuels remained at a healthy level. Despite a continued increase in shipyard capacity and output, especially in China and South Korea, newbuild ship prices continued to be high, indicating a shortage of yard capacity. Market sentiment continued to develop favourably for Wärtsilä, with momentum building in our key segments, and with decarbonisation-related retrofits and longer trade routes supporting services.

Order intake, net sales, comparable operating result and cash flow increased

Wärtsilä’s order intake in the second quarter increased organically by 12%. Service order intake increased, supported by good activity in Marine. Equipment order intake increased, supported by higher equipment order intake in Marine, Engine Power Plants, and Portfolio Business. Equipment order intake in Energy Storage & Optimisation decreased, resulting from lower battery material prices.

Net sales in the second quarter increased organically by 9%, with growth in both service and equipment. In Energy, the equipment business is lumpy by nature, which means that order intake, as well as revenue recognition, can vary significantly from one quarter to another. We expect that the equipment deliveries in the second half of 2024 will grow faster than the service deliveries. This is driven by equipment deliveries in Energy, both for Engine Power Plants and Energy Storage & Optimisation, being tilted towards the second half of 2024. In Marine, the lead times from equipment order intake to net sales are slightly longer, due to the remaining constraints in shipyard capacity.

The comparable operating result increased by 63% to EUR 176 million with a comparable operating margin of 11.3%. The comparable operating result increased in both Marine and Energy, and also in our businesses to be divested, reported under Portfolio Business. During recent years, Wärtsilä’s comparable operating margin percentage has typically reached its high in the fourth quarter of each year. In 2024, we do not expect to see that normal seasonality, given the mix impact from increasing equipment deliveries in the second half of the year.

Cash flow from operating activities significantly improved to EUR 216 million during the second quarter. The improvement in cash flow was driven by a better operating result, but also by our good working capital development. Over the past twelve months, Wärtsilä has generated over a billion euros of cash flow from its operating activities.

Marine

Wärtsilä expects the demand environment for the next 12 months (Q3/2024-Q2/2025) to be better than that of the comparison period.

Energy

Wärtsilä expects the demand environment for the next 12 months (Q3/2024-Q2/2025) to be better than that of the comparison period.

Q&A

You expect the demand environment to be “better” for the next 12 months (Q3/2024–Q2/2025) for Marine. What are the main drivers for this?

• We see good momentum and opportunities continuing in the Cruise, Ferry and Offshore segments, markets where we typically have a strong presence.
  • The major cruise operators (Carnival, Royal, Disney, Norwegian) are planning new vessels for deliveries 2028 and beyond.
  • The Ferry/Ropax fleet is ageing and replacements are needed.
  • Demand outlook for offshore remains positive.
• Earnings for ship owners and operators continue to remain strong, and the sentiment is supporting good services opportunities.
• The transition to sustainable future fuels is well underway. The adoption of alternative fuels and hybrid applications is accelerating, further strengthening our position.
• Methanol conversions for existing container vessels are picking up pace.
• In service business, the challenges in the Red Sea is leading to longer routes and thus higher operating hours which supports our service business. It is good to note that this positive impact is only temporary.

You expect the demand environment to be “better” for the next 12 months (Q3/2024–Q2/2025) for Energy. What are the main drivers for this?

• In Energy, Engine Power Plants and especially Energy Storage & Optimisation continue to have a favourable demand environment outlook. Constraints in global and energy-related supply chains have eased, which is driving demand, especially in the Energy Storage & Optimisation business.
• In the Energy Power Plants business, there is a good pipeline, and we anticipate the 2024 order intake to be good, especially in the Americas region.
• The utilisation of our Energy installed base is stable, providing good opportunities for services going forward.

Service order intake increased by 14% in Marine, was there some exceptional there?

• The biggest driver for service order intake was the increase in retrofit projects, which accounted for majority of the service order intake growth. High market interest in energy efficiency and decarbonization solutions continues to be a strong driver.

Order intake in Portfolio Business increased by 48%. What’s behind the growth and can we expect this trend to continue?

• Growth came mainly from Marine Electrical Systems, driven by a few sizeable orders with delivery long into the future.
• It is good to remember, that equipment business is lumpy by nature which can drive big fluctuations in order intake.

You mentioned that your comparable operating result in Energy increased supported by recovered new build margins. What are the factors behind this?

• The comparison period in Q2/2023 was burdened by cost inflation. In addition, the recovered profitability is driven by a higher share of EEQ project deliveries as well as improved factory utilisation on Engine Power Plants.

Do you expect normal business seasonality in 2024, meaning that the comparable operating margin in Q4 is the highest?

• We do not give guidance on profitability.
• We expect that the equipment deliveries in the second half of 2024 will grow faster than the service deliveries. This is driven by equipment deliveries in Energy, both for Engine Power Plants and Energy Storage & Optimisation, being tilted towards the second half of 2024.
• During recent years, Wärtsilä’s comparable operating margin percentage has typically reached its high in the fourth quarter of each year. In 2024, we do not expect to see that normal seasonality, given the mix impact from increasing equipment deliveries in the second half of the year.

What supported your operating cash flow and what’s the outlook for 2024? Your working capital continued to decrease, how should we think about that going forward?

• The improvement in cash flow in Q2/2024 compared to Q2/2023 was driven by a better operating result, but also by our good working capital development. Over the past twelve months, Wärtsilä has generated over a billion euros of cash flow from its operating activities.
• Since 2020 our working capital-to-sales ratio has been on a much lower level than the long-term historical average. Actions on all elements of working capital (payment terms, receivables, payables, inventories, etc.) have well supported us to keep the working capital on a low level.
• It is good to note, that the negative working capital levels recently seen have been extra-ordinary, and we do expect them to normalise going forward.

How has the price of lithium developed and does it have an impact on customer behaviour in Energy Storage & Optimisation business?

• Due to a slowdown in EV sales and a shift towards hybrid vehicles, lithium prices have continued to decline faster than previously forecasted.
• This has led to lower prices for battery modules, which is good for customers.
• The declining battery material cost has an impact on our order intake value in EUR as battery prices have declined 39% from Q2/2023. This doesn’t have an impact on our existing order book though as the price of the battery is locked in shortly after the order is booked.