Key messages and Q&A on Interim Report January–September 2024

Wärtsilä published its Interim Report for January–September 2024 on Tuesday 29 October 2024 at 8:30 am EET. Here are the key messages and Q&A on the report.

General & market environment

The market environment for Wärtsilä’s businesses remained stable during the third quarter of 2024. However, geopolitical risks have amplified in recent months, adding uncertainty to the macroeconomic outlook.

The energy market continued to be influenced by protectionism and elevated geopolitical risks. Despite the uncertainty surrounding the pace of the global energy transition, renewable energy sources have remained dominant in new capacity additions. The increasing need for balancing power to support the growth in renewable energy deployments has resulted in improved demand for engine power plants compared to last year. The grid balancing capabilities of Wärtsilä’s engines ensure that customers can maintain a consistent and reliable energy supply while progressing towards decarbonisation.

In the marine market, geopolitical conflicts continued to affect trade flows around the globe. Sanctions on Russia and attacks on ships in the Red Sea have resulted in longer average shipping distances, higher transportation costs, and delays to global supply chains, driving the need for additional ship capacity. Despite growth in shipyard capacity and output, especially in China but also in South Korea, newbuild shipyard capacity utilisation remains high, indicating that a shortage of yard capacity still exists. The market sentiment for Wärtsilä was positive, with robust momentum in key customer segments for new vessels, while decarbonisation-related retrofits and longer trade routes supported the demand for services. Investments in new ships increased compared to last year with a positive trend in the interest for alternative fuels. In addition to LNG and methanol, ammonia has emerged as a promising alternative fuel as the shipping industry looks for more sustainable options.

Improved net sales, profitability and cash flow

Wärtsilä’s order intake in the third quarter increased organically by 4%. Service order intake increased driven by good activity levels in Marine. Equipment order intake decreased slightly overall but grew clearly in Engine Power Plants. Equipment orders were lower in Marine, due to a strong comparison period, as well as in Energy Storage & Optimisation where some project closings were deferred to later quarters. The average size of projects in Energy Storage & Optimisation has increased, which has contributed to the lumpiness of the business. Overall, we continue to see growing demand for Energy Storage & Optimisation solutions.  

Net sales in the third quarter increased organically by 21%, with growth in both equipment and service. As we have previously communicated, equipment deliveries especially in Energy are tilted towards the second half of the year in 2024. This had a positive impact on equipment net sales in the third quarter. In Marine, the lead times from equipment order intake to net sales are slightly longer, due to the remaining constraints in shipyard capacity and longer shipyard orderbooks. 

The comparable operating result increased by 41% to EUR 177 million with a comparable operating margin of 10.3%. The comparable operating result increased in all three businesses. 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. However, this is dependent on the volume of equipment deliveries that will be realised in the fourth quarter. 

Cash flow from operating activities ended strong and significantly improved to EUR 296 million during the third quarter. The improvement in cash flow was driven mainly by a better operating result. It is important to note that the current negative working capital levels are unusual for our business, and we expect them to normalise going forward. Still, our active work on all elements of working capital has continued and has supported us in keeping working capital at a clearly lower level than the long-term historical average.  

Marine

Wärtsilä expects the demand environment for the next 12 months (Q4/2024-Q3/2025) to be better than that of the comparison period.

Energy

Wärtsilä expects the demand environment for the next 12 months (Q4/2024-Q3/2025) to be better than that of the comparison period.

Q&A

You expect the demand environment to be “better” for the next 12 months (Q4/2024–Q3/2025) for Marine. What are the main drivers for this?

• In Marine, 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 continues to remain 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.
• In service business, the challenges in the Red Sea are 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 (Q4/2024–Q3/2025) for Energy. What are the main drivers for this?

• The Energy business continues to have a favourable demand environment outlook. Constraints in global and energy-related supply chains have eased, which is driving demand.
• While the macroeconomic environment has made project financing difficult, decreasing inflation and interest rates are expected to encourage investment decisions in the mid- to long-term.
• There is a good pipeline in both businesses, especially in Energy Storage & Optimization. In Engine Power Plants, the sales pipeline is particularly strong in North America.
• The utilisation of our Energy installed base is stable, providing good opportunities for services going forward.
  

Your comparable operating margin (%) improved despite weaker equipment-service mix compared to Q3/2023, why is that?

• The comparable operating margin improved in all businesses supported by recovered equipment margins.
• Equipment net sales increased by 32% while the service net sales increased by 6%
• Better operating leverage stemming from higher volumes was a supporting factor both for Energy and Marine. In Energy, improved profitability in Energy Storage & Optimisation also supported the margin.

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 Q3/2024 compared to Q3/2023 was supported mainly by a better operating result. 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.

What is your expectation for the Q4 comparable operating profit margin percentage, as you have previously mentioned that Q4 will not be the highest? Are you more positive than three months ago?

• We expect that the equipment net sales in the second half of 2024 will grow faster than the service net sales. 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. However, this is dependent on the volume of equipment deliveries that will be realised in the fourth quarter.
• We are in a project business and delivery times might change last minute, which has an impact on the percentage of completion recognition.
  

Orders in Energy Storage are on a low level, why?

• As the average size of projects has grown, so has market lumpiness.
  • Battery prices have declined rapidly in 2024, which impacts the order intake EUR values. Measured in MWhs, the order intake decreased, but %-wise less than the EUR value. Comparing Q3/23 and Q3/24 order intake values in EUR, the decline is 80%, whereas from a MWh point of view the order intake decreased less, by 59%, in the same period. On the other hand, on January–September, order intake values in EUR declined -34% whereas the decline in MWhs ordered was only -7%.
• The market for utility-scale battery energy storage solutions is solid and growing both globally and in our core markets. The pipeline for Q4 is strong and we expect significantly higher order intake in Q4 compared to previous quarters during 2024.
  

Your order intake in Marine didn’t grow this quarter, why is this?

• Service order intake increased by 11% while equipment order intake decreased by -14%.  It is good to remember, that there can be fluctuation between quarters due to the timing of orders. The comparison period was supported by higher ferry equipment orders.
• In general, the outlook for Wärtsilä’s key customer segments in marine is positive.
  

How much would the US election outcome impact Wärtsilä?

• The exact outcome is impossible to predict beforehand, but it is important to remember that while federal policies play a crucial role, states have significant autonomy in setting their own energy policies.
• Many states, especially those with strong renewable energy commitments, are likely to continue their green initiatives regardless of potential federal changes. Despite the election outcome, renewables is still the cheapest form of generating electricity.