This quarter’s pre-silent call was held on 14 June with CFO Arjen Berends. In this blog post, we summarise the main messages and questions from the call. If you would like to listen to the entire call, the recording is available here.
Before the Q&A session, Arjen discussed the recent development of our businesses, profitability drivers for 2023, and opportunities in the service business.
Parts of Voyage, including NACOS Navigation, NACOS Automation, Dynamic Positioning and Sensors, and Marine Electrical Systems were moved to Portfolio Business. Later, we aim to unlock their value through divestments or other strategic alternatives. A press release about the restated financial figures related to the topic can be found here.
Anders Lindberg, the new President of the Energy business and member of the Board of Management started at the beginning of June.
Service business is a key driver for both profitability and growth. Moving up the service value ladder is giving us a lot of opportunities in increasing the share of wallet in both marine and energy. Services can therefore be considered an important contributor to our future. Wärtsilä Investor Relations organized a Service themed call on 6 June. For more information about the Service business, see the recording of the call here and a summary of key messages in the IR Blog here.
In the Q1 report, we guided the demand environment for the following 12 months to be similar to that of the last 12 months, in both Marine and Energy. We see a good pipeline in Energy for both energy storage as well as engine power plants. In power plants, we see that the final stage from negotiation to contract is shifting more towards the second half of the year.
Outlook in Marine is mixed per segment. Ferries still have a lot of capacity running, but progress is slow on the new build side. The pressure for decarbonisation measures offshore is increasing and the focus is on securing the energy supply. We do not expect demand for newbuilds to increase in a short time frame, but if the trend continues at the end of 2023 and the beginning of 2024, there is a chance for an increase. Also, more offshore wind turbine capacity is being installed, which supports the demand for support vessels. Gas carriers had extremely high volumes last year in contracting, and we do not expect it to be on the same level this year. However, there are good opportunities since not all the vessels that have been contracted at yards, have ordered equipment yet. A lot of container vessels are in the pipeline currently, that will come to the markets to be utilised in, for example, slow steaming. Slow steaming also means that if the same number of goods are to be transported, more vessels are needed. However, the outlook for new container vessels will not be as high as in a few past years. Interest in alternative fuel vessels, including LNG, will improve and bring new opportunities for Wärtsilä in the long term.
What gives you the confidence that the thermal orders will materialize in the second half of the year?
Nobody knows the exact timing for the orders, but we are positively looking at the orders that we do estimate to come in during the second half of the year. At the beginning of the year, the estimates were higher, but already in Q1 we communicated that the estimate was modified towards the second half of the year. The orders will therefore be a bit less than what we originally thought at the beginning of this year.
Regarding energy storage and the US IRA local content requirements, is there any new insight, progress, or thoughts on that?
Not really, the picture is still the same as we communicated at the end of Q1. There is a lot of push for localisation, and we are looking into that with our supply chain. The progress will not happen overnight. It takes time to build up the capacity for batteries or inverters in the US.
Is the energy storage order momentum in Q2 largely focused on the US or also on other regions?
All markets where we are active in energy storage, are doing well.
Regarding the picture of pricing and input costs, is there a need for you to raise prices in the second half of the year?
Depends on what we are talking about; spare parts, transactional, labour rates, newbuild contracts, or others. When the price escalation kicked in March last year, we had a high order book and still have an order book for delivery this year that is affected by the high price increase where we could not change the price to the customer. We have from that point in time implemented indexation for newbuild contracts.
As an example, if the battery raw material cost is declining, the price for the customer also declines, because the indexation is following the trend up or down.
Then, if field service labour, as an example, becomes more expensive then we definitely need to adjust our prices for that labour.
Regarding the phasing of legacy contracts, the last communication was that you expect the remaining 1.2 billion to be mostly out of the door by the third quarter of this year, any comments on that? Are these projects loss-making?
By the end of Q3, these should be more or less out. Regarding profitability, it is mixed depending on the business and project. There is a lot of variation. Some of them are loss-making, and some with positive margins.
Do you have any more visibility about the timing of the large energy storage order you announced a while ago, will it fall into Q2 or Q3?
There are certain requirements that need to fall into place to make it effective. Because of those, we need to see whether it falls into Q2 or Q3.
Since energy storage is a new business, what kind of risks there are from your perspective, and what promises do you give to customers about warranties and performance guarantees? Is there any reason why you would like to slow down the growth in order to avoid bigger risks?
We are not holding back in booking energy storage orders and we have already delivered quite many projects. The sites are performing well according to the technical specifications and what we promised. However, the business is new, and we are taking only the orders that suit well our performance target of getting the business profitable the fastest possible way.
On the order momentum, there is a lot of activity in the pipeline, but similarly as in Energy engine power plants, typically we are working with the orders for quite a while. It is challenging to exactly say in which quarter the orders will fall, but there is high demand in the market.
How successful Wärtsilä has been on projects that combine both energy storage and engine power plants?
The sales force is combined in many countries. However, we do not want combined contracts because the liabilities are different on both ends. Typically, it happens in smaller steps, where the customer starts by adding renewables, then adds short-term balancing (battery storage) and then decides to also add longer-term balancing (engine).
How has the profitability turnaround proceeded in Voyage?
It is a bit early to expect too much because not much time has passed since Voyage was moved to Marine Power. If we combine the old Voyage and what we now have in the Portfolio Business from Voyage and look at the profitability estimation for the full year, it is significantly better than the performance of Voyage last year. Significant improvement means at least more than half.
Are there some aspects that we need to consider regarding seasonal earnings skewed to Q4?
In most years, the Q4 margin has been driven by very good service volumes. We expect a similar trend this year.
Are the interest rates impacting the customer buying pattern?
I would not say that there is a very strong and direct link between interest rates and customer buying patterns. Interest rates have been high earlier, and our order intake still performed well. It is more about the key drivers in the market, such as decarbonisation. Because of the regulations that are coming, actions are needed, whether the interest rates are high or not.
Do you see any reasons why the energy storage business could have structurally different profitability longer term than engine power plants?
Structurally, energy storage margins are expected to always be less than engine power plants because there are no rotating parts, etc. so the service volume is lower.
Regarding the market outlook on marine, and especially on the Navy, do you see some momentum in the pipeline?
Typically, in Navy orders, there is a long journey from momentum to order. The standards for safety and security are high, and that takes time. The initiation to order can take five years, and then a couple of years of building time. On the services side, the Navy typically maintains the equipment rather well.
I am hearing that the aftermarket has continued to be strong, would you agree with that?
Yes, absolutely. That is also the reason behind the strong growth in service volumes, in addition to moving up the service value ladder.
How is working capital developing this year?
Cash flow has been a challenge. Last year, we ended up with a negative operating cash flow, and I do anticipate a clear improvement this year. Q2 will be more challenging than Q1 because we are building up working capital for the deliveries after the summer and the rest of the year. We are taking good actions to bring down inventory levels. Typically, the second half of the year is higher in volume than the first half, which impacts working capital.
