To improve the quality and equality of our IR communications, we have started to organise open quarterly pre-silent calls with our CFO Arjen Berends. This quarter’s call was held on 30 September. 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 provided a summary of the recent development.
First of all, our guidance for better demand y-o-y in Q3 still holds. We see good demand both in service and new build businesses. Energy storage is also moving forward after the price reset that we talked about in Q1-Q2 this year. However, there are also concerns, which apply to other capital goods companies as well. The cost inflation that we thought was starting to flatten towards the end of Q2, is now coming back again through higher energy prices and we see it especially through our suppliers that have energy intensive production processes such as forgings and castings producers. Another concern is salary inflation, which we are trying to mitigate in pricing and continuous improvement efforts. In terms of operating cash flow, we had two negative quarters in the beginning of the year but I’m confident it will be better this quarter.
In marine markets, the vessel contracting is down, but Clarksons is anticipating that it will go up next year. Despite the market being down, I think our order intake is still developing pretty ok. Most of the cruise vessels are sailing (6-7% of the vessels were idle at the end of August), which helps to move our service business forward. Running hours correlate with service business in both marine and energy. We do not see new cruise vessel orders in the horizon, especially for big cruise vessels. Contracting for LNG carriers is solid, supported by the Qatar expansion project. We see more activity in offshore oil and gas, especially on the service side. Fuel price spread has gone down since July, but is still at a high level, driving the demand of scrubbers.
Although the energy markets are moving slowly but steadily from baseload to balancing power, we see that the engine running hours are increasing. Energy storage is developing well and the pipeline is good. We will see some good energy storage orders in Q3 and also going forward.
Below some highlights from the Q&A session.
Are you able to pass through the cost inflation in energy storage?
If we talk about the existing contracts, there are challenges but in new contracts we have been able to raise the prices. Actually, the whole energy storage market has accepted the new price level quite well.
Are you in the turbocharging business? Does ABB’s turbocharging business spin-off have any implications for your business?
ABB turbo is a key supplier to us and we have quite tight collaboration with them, but they are not our only supplier. Are we interested in acquiring them? I would say no, as that would be backward integration for us.
How is the wage cost inflation affecting your legacy contracts?
For EPC contracts we typically already have contracted our subcontractors, so I do not see too much of an issue there. But when it comes to the cost inflation of the components that are used in an engine (and there are of course thousands), it is an issue over time. However, it is good to note that everyone including our competitors are increasing prices, so the issue does not apply only to us.
Do you already see the effects of the Inflation Reduction Act to your energy storage business?
We will surely benefit from it and we can already clearly see the stimulus for investments in our customer negotiations.
Will we see more energy storage deliveries in H2 with respect to H1?
Yes.
How exposed is your supply chain to Europe?
Key components such as forgings mostly come from Europe and there are only a few suppliers. Majority of our supply chain is European.
How is your service business in Energy?
Very good. Our installed base’s running hours are on a high level and have been increasing. We are also moving up on the service value ladder.
Could the strong dollar have a positive impact on your service revenue?
I will not go into too much detail here but in general strong dollar is positive for us because most of our capacity is in Europe and we sell also in dollar. However, we are hedging many our new build contracts.
Is your energy management system GEMS a significant driving force for your energy storage business?
Yes, GEMS is a very critical selling component and is making or breaking the economics for the customer. The software optimises the lifetime of the equipment together with the economics.
Is strong dollar a problem for your clients in the emerging markets?
No, we are not seeing that currently.
What does cruise, gas carrier or containership order mean to you in monetary value?
It’s difficult to say, because it depends a lot on what is in the scope. For cruise vessel or gas carrier it can be several tens of millions, and for a containership less, below 10 million.
Is similar growth seen in thermal balancing as in energy storage? Do customers order thermal balancing with energy storage?
Typically, the orders are not happening at the same time, and we have no contracts where energy storage and thermal balancing would be combined. What we have seen though is that the customers that have ordered energy storage, are now coming back for balancing power. We see growth in the thermal balancing power as the coal is being switched off and customers need another solution for longer time backup power. The batteries can only handle shorter intermittency times.
How do you monetize the value of GEMS?
We do not sell GEMS as a standalone product, so it is typically coming with an energy storage deal and in certain cases we have also combined it with thermal balancing contracts. When the software is implemented, software fees are implemented as well but they are minimal compared to the equipment part of the contract. GEMS is a differentiator for us.
