A pre-silent call for the third quarter of 2024 was held on 3 October 2024 with our CFO Arjen Berends. In this blog post, we summarise the main messages and questions from the call. The recording of the call is available here.
Before the Q&A session, Arjen discussed the recent development of our businesses, profitability drivers, and the overall market environment.
Key drivers for reaching our profitability targets continue to be the strategy of moving up the service value ladder, improving the new build business supported by the decarbonisation transformation, and continuing the divestments of our Portfolio Business. Cash flow has continued to be at a good level.
Good market momentum continues in the Marine business
The marine service environment continues to be stable, with the demand for service being supported by longer trade routes driven by disruptions in the Red Sea and Panama and the regulatory drive for decarbonisation-related retrofits. We see good opportunities in the cruise, ferry, and offshore segments, markets where we typically have a strong presence. In the cruise segment, new capacity is needed to secure long-term growth expectations.
Clarksons Research published their biannual estimates at the end of September. They are projecting 2,203 vessels (>2,000 dwt/GT) to be ordered in 2024. This is an increase of ~17% or 324 ships from the previous forecast from March 2024. The increase was driven by a strong investment appetite in containerships, tankers, ongoing demand in LNG, and improved demand for cruise. Newbuild order volumes for containerships have also been revised substantially for this year, up from 185 contracts to 322 contracts, as operators have continued their fleet renewal plans. The contracting forecast for containerships between 2025-2030 has been revised up as well. Overall, Clarksons expects medium- and long-term volume strength due to major fleet renewal and green transition, although uncertainty around technology and emission policy remains.
Clarksons Research expects global shipyard capacity to be on an upward trend, with a recent acceleration in announcements of projects to expand facilities, notably in China. By 2030 global capacity is projected to regain around half of the volume lost since the last shipbuilding boom, with Chinese capacity exceeding the previous high, and with global utilisation expected to remain elevated across this period.
The Energy business's long-term outlook remains good
Outlook for Energy is driven by the rapidly increasing share of renewables and the diminishing role of coal power. In the equipment business, the pipeline remains good, especially in the Americas region. We have continued to improve the quality of the earnings by moving from EPC (Engineering, Procurement, and Construction) to EEQ (Engineered Equipment Delivery). However, as we have also previously communicated, the nature of the business is very lumpy as the impact of single orders can be large. This means that order intake, but also the revenue recognition can vary significantly from one quarter to another.
In the Energy service business, the utilisation of the installed base is stable, even with the shift from baseload power to balancing power. This combined with the strategy of moving up the service value ladder provides good opportunities for services going forward.
Q&A
Regarding your financial targets and margin target: what will get you to a 12% margin, given that you were at 10.7% for the first half of the year 2024 and state that you are confident about reaching 12%?
The increase to a 12% margin will be driven by several factors. The biggest drivers are the continued strategy of moving up the service value ladder and improving the new build business supported by the decarbonisation transformation. A shift from EPC (Engineering, Procurement, and Construction) to EEQ (Engineered Equipment Delivery) deliveries supports the aims, with having a lower risk profile and higher profitability. These combined efforts in both service and new build, along with strategic shifts and operational improvements, are expected to drive the margin to 12%.
On the Marine services side, do you see that project-based services, particularly retrofits, are growing the fastest? Is there a slowdown in more transactional services due to seasonality in vessel traffic?
Yes, there is an acceleration in project-based services, especially retrofits. The need for retrofits, such as hybrid installations and energy-saving devices, has increased significantly. While transactional services might experience some seasonality, the retrofit business is expected to continue growing strongly.
What will normalize in working capital elements going into 2025 and 2026, given the current extraordinarily low levels?
Predicting working capital is challenging, but several actions have been taken to improve it over the past years, such as handling receivables, consolidation of production facilities and closer supplier relationships, educating salespeople on the importance of payment terms and cash flow management, and implementing more mid-term delivery payments and multiple payment milestones. These efforts have led to better working capital levels. Historically, the working capital to sales ratio has been around 8%, but the new normal is expected to be between 0% and 5%. Negative working capital is not sustainable long-term, and it is anticipated to normalize next year.
How would you describe the demand situation across the different segments within the Marine service business, aside from retrofits?
The demand across all segments within the Marine service business is strong. Transactional services are performing well, with no segments currently experiencing significant downturns. Low scrapping rates indicate that vessels are actively sailing, which translates to more running hours and increased service demand. The demand for offshore vessels has improved as many have been reactivated.
Can you provide more details on the adjustments made to get to the adjusted EBIT, specifically the items affecting comparability, and what to expect for the second half of the year?
The items affecting comparability have been quite low in the first half of the year. Historically, these items have included significant events such as the exit from Russia and the closure of certain operations. These costs develop over time and can include smaller items like reorganizations. For the second half of the year, no major changes are anticipated in these items. There will be some adjustments, but no significant amounts are expected.
