General/market environment
Although facing continued uncertainties in the operating environment, we successfully delivered growth and higher profitability. The global economic headwinds continued despite some improvements, including the reopening of China and decreasing energy costs. Cost inflation continued to burden the order backlog of our new equipment business.
In the energy market, the investment environment remains uncertain, especially for new power plants. Price pressure on fuel and raw material cost has eased during the beginning of the year, but rising interest rates have caused further uncertainty. On the other hand, investments in the energy transition have been at a high level, and supportive policies regarding battery energy storage and clean hydrogen has continued to develop during the first quarter of the year. Notably, we signed a contract to provide an energy storage system to the United Kingdom, the first project in the world to deliver stability services using a transmission-connected battery system. The service business in Energy continued to develop positively, and we signed several service agreements.
In the marine market, economic headwinds continued to limit growth, as rising newbuild prices combined with limited shipyard capacity continued to hamper newbuild ordering activity. Nevertheless, the market sentiment remained positive for Wärtsilä’s key segments with improving utilisation rates. Decarbonisation continues to be a major driver for our customers. As an example, we will supply the engines for Celebrity Cruises’ new ship, capable of operating with methanol fuel in addition to two other conventional fuel types. We thus continue advancing the use of alternative fuels for the cruise industry.
Order intake
Our order intake increased by 26% supported by good development both in services and equipment. Service order intake increased by 21%, supported by growth in Energy and Marine Power. Equipment order intake increased by 31% with growth in all businesses.
Net sales and operating result
Net sales increased by 19% with growth in Marine Power and Energy. Service net sales increased by 17%, driven by growth in all businesses. Equipment net sales increased by 22%, driven by growth in Energy and Marine Power.
The good development in services has supported our profitability and our comparable operating margin improved to 6.0%. Nevertheless, cost inflation continued to burden the order backlog of our new equipment business.
Cash flow and financial position
Cash flow from operating activities totalled EUR 145 million (-122), supported by a better result and improved working capital. Wärtsilä’s asset-light business model, strong cash generation ability, and high service volumes deliver overall operational stability.
Outlook (near-term)
Marine
Wärtsilä expects the demand environment for the next 12 months (Q2/2023–Q1/2024) to be similar to that of the comparison period.
Energy
Wärtsilä expects the demand environment for the next 12 months (Q2/2023–Q1/2024) to be similar to that of the comparison period.
Although our operating result margin is still clearly below our target, we are taking actions to improve our profitability step by step. As we have seen in the first quarter, we continue to grow our service business and deliver the part of our order backlog that has been significantly impacted by cost inflation. The turnaround of our energy storage business continues in the right direction and the decarbonisation transformation will have a positive impact on our business going forward.
You expect the demand environment to be “similar” for the next 12 months (Q2/2023–Q1/2024) 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, but in the engine power plants business, the gas shortages and price volatility has slowed down decision making mainly in Europe & Asia. In Marine, limited yard capacity at the moment and high ship building prices and long lead times may postpone customers’ decision making. Demand for service and decarbonisation solutions is expected to remain good.
What is the plan B in the case you do not get more power plant orders in H2?
We expect order intake to be slower in the first half of the year, and for it to pick up in H2. As always, we monitor the situation closely and will adjust our capacity if needed.
What are the biggest opportunities and headwinds in terms of orders and 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:
There are recession fears in the market. What is your plan B, if the world lands in a recession in 2023?
We have a good order backlog, which gives certain visibility. In addition, our service business is a fairly stable business. Naturally, in case demand and order intake severely weakens, we need to adjust our cost base accordingly.
What are your assumptions for cost inflation going forward? Have we reached the peak and are costs already coming down?
This is very difficult to estimate and varies between cost items, geographies, and businesses. Salary inflation pressure is very different in different geographies depending on cost of living, governmental support, and labour market conditions.
Your cash flow improved in Q1. Can we expect similar development to continue in 2023?
Cash flow in Q1 was supported by better result and improved working capital.
In 2022 cash flow was weak mainly due to negative working capital situation in the start of the year, driven by large customer payments coming 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 optimising 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 Q1? 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 to end-to-end optimisation of port and fleet operations and capturing synergies with Performance Services, will be part of Marine Power. ANCS (Automation, Navigation and Control Systems) will be moved to Portfolio Business. Implementation of organisational changes will be completed during Q2/2023 and cost savings are implemented in parallel. Customers express that they are understanding the logic of this strategic move.
How are you proceeding with the energy storage turnaround plan?
The turnaround is progressing. The plan is to a great extent based on higher volumes, better cost leverage as well as improved product costs. The solid order intake in Q1 as well as the order pipeline supports our plan.
