General/market environment
The second quarter of 2022 was characterised by uncertainty in the global business environment over economic development. The sanctions on Russia, supply chain bottlenecks, cost inflation, and Covid-19 related lockdowns in China have put the global economy under pressure and caused challenges in our business as well. However, while the market was challenging, we were able to grow our order intake.
The energy market continued to be volatile. However, the demand for balancing power is growing, and we received important orders for both thermal power and energy storage solutions. The service business in Energy performed very well, and is further supported by the recent launch of our Decarbonisation Services. In this, we utilise our sophisticated power system modelling and optimisation tools, alongside Wärtsilä’s in-house expertise, to reduce power system emissions and to ensure power availability with the lowest levelised cost of electricity.
The service business also developed well in the marine markets, thanks largely to fleet reactivation, especially in the cruise segment. Around 90% of the cruise fleet capacity was active at the end of June, and cruise port calls have reached pre-covid levels. One notable example of our success in the service business was the renewal of the optimised maintenance agreement with Maran Gas Maritime, covering their fleet of 21 LNG carriers. The newbuild market was more challenging due to rising costs and limited yard capacity, and investments eased from the previous year’s level. However, the ambition in Europe to break away from Russian pipeline gas continues to drive the contracting of LNG carriers. Our market leading position in hybrid solutions was confirmed by an order to supply hybrid propulsion systems for three new RoPax vessels, two of which will be the largest hybrid vessels to date. High fuel price drives the demand for fuel efficiency and energy saving solutions.
Order intake
Total order intake increased by 25% and service order intake by as much as 36%. The service business is growing, driven by higher utilisation of vessels and power plants. We saw very good development in services in both Marine Power and Energy, as cruise activity increased and customers showed interest in long-term service agreements. The demand for energy storage solutions supported equipment orders.
Net sales and operating result
Net sales increased by 24%, driven by growth in energy equipment deliveries as well as services in both our end markets. Our comparable operating result increased by 20%, supported by higher sales volumes. Profitability continued to be burdened by cost inflation and a less favourable sales mix between equipment and services.
Cash flow and financial position
Wärtsilä’s cash flow from operating activities in April–June amounted to EUR -90 million (245). The negative cash flow was primarily due to a low amount of milestone payments received during the quarter. More milestone payments are expected in the third quarter in accordance with customer agreements.
Wärtsilä’s asset-light business model, strong cash generation ability, and high service volumes deliver overall operational stability.
Outlook (near-term)
Wärtsilä expects the demand environment in the third quarter to be better than that of the corresponding period in the previous year. However, the prevailing market conditions make the outlook uncertain.
What was the value of Russia related projects taken out of your order book, and which businesses were they related to?
The approximate value of orders removed from the order book was EUR 240 million, of which the majority was for Marine Power.
How much of the MEUR 240 order book correction related to Russia was for delivery in 2022?
About 40% of the order book correction relates to 2022 delivery, the rest relates to delivery in 2023 or later.
You expect the Q3 demand environment to be “better” y-o-y – what kind of an increase in order intake in % would that translate into, and what are the drivers behind the improvement?
There are more positive signs in the market today (energy storage demand booming, an increased need for thermal balancing power, a good opportunity in marine hybrid installations, the cruise market coming back, etc.) compared to one year ago. However, it is still difficult to put a number on it, due to many uncertainties in the market. We have seen an acceleration of cost inflation, which may slow down order intake. The global economic development is also difficult to predict. Finally, the timing of large value orders can have a big impact on stand-alone quarterly figures.
What are your assumptions for inflation going forward? Have we reached the peak?
This is naturally very difficult to estimate and varies between cost items and businesses, but we believe that the highest increase is behind us.
Do you see any signs of a recession in the marine market?
In the marine market, slowing economic growth would typically be visible in the merchant segment, and there have been some easing trend this year in the earnings for containerships and bulkers specifically, indicating the demand for tonnage has maybe seen its peak. However, this is the result of various other drivers contributing to the matter, not recession as such. Also, with the still on-going congestion at ports, any signs of a recession might come more visible with a longer than usual delay.
Why is the comparable operating result margin of Marine Power declining, while sales is growing?
Negative impacts arose from under-absorption of factory capacity costs, increased fuel costs in engine testing, increased material and transportation costs, and the ramp-up of the new Sustainable Technology Hub in Vaasa, Finland.
Is the margin decline in Marine Power coming from the equipment side or from the service business?
It is coming from the equipment side due to a longer order book. In a situation with high cost inflation on transportation, material cost, component availability we have limited or no possibility to improve our margins for projects in the order book. For new order intake on the equipment side we are targeting to cover the cost inflation. In the service business we have normally a very short order book on the transactional side (spare parts and field services), and we are mitigating the cost inflation with price increases.
Why is the comparable operating result margin of Marine Systems declining, while sales is growing?
The main reason is that the share of equipment sales from total sales increased.
Why did the comparable operating result margin of Voyage decline?
The comparable operating result declined compared to prior year as Voyage started missing sales in Q2 from its Russian operations, while the cost base remained until the completions of the ramp-down activities. The result was also negatively impacted by the ramp-up of R&D capabilities outside Russia.
Why did the comparable operating result in Energy increase?
The sharp growth in net sales (+52%) was not reflected in the overhead cost base development to the same extent, which had a positive impact on the overall profitability of the Energy business. Moreover, improved manufacturing capacity utilisation contributed to the improved operating result.
How did cost inflation and supply chain bottlenecks impact the Energy business? What are you doing to mitigate the negative impacts?
Cost inflation is impacting many of our suppliers, and we are seeing price increases across the value chain. Transportation costs, lead times, and availability of some materials are also causing challenges. Mitigation actions include price increases in new contracts, utilisation of indices in contracts, and customer renegotiations. Longer lead times and restocking present some of the mitigation actions on the availability side.
How much did energy storage contribute to orders, net sales, and EBIT?
Energy storage represented around 70% of total energy equipment orders in Q2 (MEUR ~240 vs. MEUR ~130 in Q2/21), while it represented around 30% (MEUR ~110 vs. MEUR ~30 in Q2/21) of total energy equipment sales. The profitability of energy storage business is currently negative.
