Interim report January - June 2007

Wärtsilä Corporation
  • Stock exchange release
3 August 2007 at 3:01 AM E. Europe Standard Time

STRONG ORDER INTAKE CONTINUED – MARKET EXPECTED TO REMAIN ACTIVE

HIGHLIGHTS OF THE SECOND QUARTER APRIL-JUNE 2007

  • Order intake EUR 1,369 million (1,190), growth 15%
  • Net sales EUR 797 million (845), -6%
  • Operating result EUR 73 million (70)
  • Profitability 9.2% (8.3)

    HIGHLIGHTS OF THE REVIEW PERIOD JANUARY-JUNE 2007

  • Order intake EUR 2,526 million (2,214), growth 14%
  • Order book total EUR 5,460 million (3,772), growth 45%
  • Net sales EUR 1,558 million (1,437), growth 8%
  • Operating result EUR 136 million (106), growth 29%
  • Profitability 8.8% (7.4)
  • EPS 0.98 (2.15; comparable EPS 0.75)
  • Cash flow continued to be strongly positive

OLE JOHANSSON, PRESIDENT & CEO:

“Good demand continued in the markets boosting new orders and resulting in yet another all-time high order book of EUR 5.5 billion. Slight decline in net sales during the second quarter is due to the timing of the power plant deliveries. The Services grew strongly at 23%. Profitability developed as expected. The enlarged manufacturing capacity in Vaasa, Trieste and China will support continuing growth prospects.”

WÄRTSILÄ’S PROSPECTS IN 2007

Demand in the ship power and energy markets looks likely to remain active for Wärtsilä for the next two quarters. Based on the strong order book, Wärtsilä’s net sales are expected to grow this year by around 15%. Profitability will exceed 9%. Wärtsilä’s profitability varies considerably between the quarters as will also be the case this year. Wärtsilä sees further possibilities for growth in 2008.

ANALYST AND PRESS CONFERENCE

An analyst and press conference will be held on Friday 3 August 2007 starting at 10.45 a.m. Finnish time (8.45 a.m. UK time) at the Wärtsilä headquarters in Helsinki, Finland. The combined web- and teleconference can be viewed on the Internet at the following address: http://194.100.179.98:80/wip/directlink.do?newbrowser=1&pid=1592175. To participate in the teleconference and have the possibility to ask questions, please call: +358 9 8248 6642 and enter the PIN-code 657020. To only listen to the teleconference call the same number and enter PIN-code 831966.

An on-demand version of the conference will be available on the company website later the same day.

Wärtsilä Corporation

Raimo Lind                                Eeva Kainulainen

Executive Vice President & CFO            Vice President, Corporate Communications

Wärtsilä in brief

Wärtsilä enhances the business of its customers by providing them with complete lifecycle power solutions. When creating better and environmentally compatible technologies, Wärtsilä focuses on the marine and energy markets with products and solutions as well as services. Through innovative products and services, Wärtsilä sets out to be the most valued business partner of all its customers. This is achieved by the dedication of more than 15,000 professionals manning 130 Wärtsilä locations in close to 70 countries around the world.

INTERIM REPORT JANUARY-JUNE 2007

The figures in this interim report are unaudited.

SECOND QUARTER 4-6/2007 IN BRIEF

MEUR

4-6/2007

4-6/2006

Change

 

Order intake

1 369

1 190

15%

 

Net sales

797

845

-6%

 

Operating result

73

70

4%

 

% of net sales

9.2%

8.3%

 

 

Profit before taxes

72

204 1)

 

 

Earnings/share, EUR

0.54

1.60 1)

 

 

 

1) The April-June 2006 result includes Wärtsilä´s share of Ovako´s profit after taxes EUR 8 million and a capital gain of EUR 124 million from the sale of Assa Abloy B-shares.

REVIEW PERIOD JANUARY – JUNE 2007 IN BRIEF

MEUR

1-6/2007

1-6/2006

Change

2006

Order intake

2 526

2 214

14%

4 621

Order book, 30 June

5 460

3 772

45%

4 439

Net sales

1 558

1 437

8%

3 190

Operating result

136

106

29%

262

% of net sales

8.8%

7.4%

 

8.2%

Profit before taxes

132

244 1)

 

447 2)

Earnings/share, EUR

0.98

2.15 3)

 

3.72 3)

Cash flow from

operating activities

129

49

 

302

Interest-bearing net debt at the end of the period

178

293

 

55

Gross capital Expenditure

112

116

 

193

 

1) The January-June 2006 result includes Wärtsilä’s share of Ovako’s profit  after taxes, EUR 15 million and a capital gain of EUR 124 million from the sale of Assa Abloy B-shares.

2) The 2006 result includes Wärtsilä’s share of Ovako’s profit after taxes, EUR 67 million, and a capital gain of EUR 124 million from the sale of Assa Abloy B shares.

3) The January–June 2006 result also includes deferred tax assets totalling EUR +26 million relating to previously recognized restructuring expenses.

MARKET DEVELOPMENT

Ship Power

The shipbuilding market during the first half of 2007 was very active despite a somewhat slow start at the beginning of the year. Measured in number of vessels  contracting was above the level of the corresponding period last year with 1,676 (1,566) vessels registered. Measured in deadweight tons, the order level was also higher than in the same period last year especially due to the very high volume of dry bulk vessels ordered.

The shift in focus from smaller to larger vessels and revitalization of the container vessel market have evened out the differences between the  geographical shipbuilding markets. China remains the biggest beneficiary having a share of 42% in the number of vessels ordered. Korea has closed the gap from the beginning of the year, raising its share to 33%. Europe received 8% and Japan 9% of the new orders.

Wärtsilä’s market shares in Ship Power

The total market volume for medium-speed main engines for the last 12 months at the end of the second quarter 2007 was 9,400 MW. Wärtsilä’s share fell slightly from a very high level to 42% (46% at the end of the previous quarter). The change in the order mix from big engines to smaller ones was the main factor behind this development. The low-speed main engine market grew to 29,400 MW (27,700). Wärtsilä’s market share in this market was 15% (14% at the end of the previous quarter). In auxiliary engines Wärtsilä´s market share was 5% (6% at the end of the first quarter of 2007).

Power Plants

Demand in the Power Plant market remained high and all segments relevant to Wärtsilä – baseload production, industrial self-generation and grid stability – were active during the review period. Markets continued to be globally active.

Demand for oil-fired power plants was strong during the review period, especially in Africa and the Middle East. The order intake for power plants running on renewable fuels, which includes among others liquid bio-fuel power plants, continued actively especially in Italy. Demand for gas-fired power plants, remained at a good level.

Wärtsilä’s market shares in Power Plants

Wärtsilä has a strong foothold in the market for heavy fuel oil (HFO) power plants and holds approximately a third of the market in Wärtsilä’s power range. In the market for light fuel oil (LFO) power plants, including liquid biofuels, Wärtsilä has approximately a quarter of the market. The gas power plant market is a growing market where Wärtsilä sees good growth potential. Wärtsilä’s current market share in gas power plants is approximately 8% of the relevant market.

ORDER INTAKE AND ORDER BOOK

Wärtsilä´s order intake continued strong showing growth of 15% in the second quarter and amounted to EUR 1,369 million (1,190). In the Ship Power business the April-June period marked an all time high quarter with the order intake amounting to EUR 673 million (660). The Power Plants order intake for the second quarter amounted to EUR 326 million (243) representing growth of 34%.

In the review period January-June Wärtsilä´s order intake totalled EUR 2,526 million (2,214), representing growth of 14%. The Ship Power order intake grew further by 3% from the high level in the corresponding period last year (1,161) and was EUR 1,194 million.  Offshore vessels and platforms continued to dominate the new orders. One of the landmarks was a contract to supply an entire power, automation and propulsion system for a well-testing FPSO vessel for Brasilian Dynamic Producer Inc. In the cruise ship segment Wärtsilä received an order for the second vessel in the project Genesis for Caribbean Cruise Ltd. Delivery will consist of the main engines and transverse tunnel thrusters.

The Power Plants order intake for the review period was 41% higher than during the corresponding period last year and totalled EUR 537 million (381). The largest oil-fired power plant orders were received from Pakistan, Senegal and Aruba. Success in the liquid bio-fuel power plants continued during the second quarter and Wärtsilä received three orders with a total output of 114 MW in Italy. The largest gas power plant orders were received from Russia and Bangladesh.

At the end of the review period Wärtsilä’s order book stood at an all-time high of EUR 5,460 million (3,772), representing growth of 45%. Some 30% of Wärtsilä´s total order book is due for delivery in 2007. The Ship Power order book was EUR 3,681 million (2,505), corresponding deliveries for approximately two years. The Power Plants order book stood at EUR 1,361 million (887), roughly half of which is due for delivery in 2007.

ORDER INTAKE, SECOND QUARTER 4-6/2007

MEUR

4-6/2007

4-6/2006

Change

Ship Power

673

660

2%

Services

369

286

29%

Power Plants

326

243

34%

Order intake, total

1 369

1 190

15%

 

Order intake Power Plants

 

 

 

MW

4-6/2007

4-6/2006

Change

Oil

313

377

-17%

Gas

236

177

33%

Renewable fuels

114

17

554%

 

ORDER INTAKE REVIEW PERIOD 1-6/2007

MEUR

1-6/2007

1-6/2006

Change

2006

Ship Power

1 194

1 161

3%

2 270

Services

792

668

19%

1 322

Power Plants

537

381

41%

1 027

Order intake, total

2 526

2 214

14%

4 621

 

Order intake Power Plants

 

 

 

 

MW

1-6/2007

1-6/2006

Change

2006

Oil

443

549

-19%

766

Gas

358

283

27%

1 232

Renewable fuels

317

159

99%

353

 

ORDER BOOK

MEUR

30 June 2007

30 June 2006

Change

2006

Ship Power

3 681

2 505

47%

3 020

Services

416

377

10%

357

Power Plants

1 361

887

53%

1 061

Order book, total

5 460

3 772

45%

4 439

 

NET SALES

During the second quarter Wärtsilä´s net sales decreased by 6% due to the timing of power plant deliveries. Ship Power net sales grew 24% and Services net sales by 23%. Organic growth in Services accounted for 17%. Power Plants net sales decreased by 62%.

Wärtsilä’s net sales for the review period January-June totalled EUR 1,558 million (1,437), growth of 8%. Ship Power net sales grew strongly by 42% to EUR 561 million (397), representing 36% of Wärtsilä´s total net sales. Power Plants net sales amounted to EUR 262 million (432), 17% of total net sales. The net sales from the Services business increased to EUR 726 million (604), growth of 20% on the corresponding period last year. Organic growth represented 15% of Services net sales growth. Services net sales accounted for 47% of total Wärtsilä net sales.

NET SALES 4-6/2007

MEUR

4-6/2007

4-6/2006

Change

Ship Power

305

245

24%

Services

374

304

23%

Power Plants

112

292

-62%

Net sales, total

797

845

-6%

 

NET SALES REVIEW PERIOD 1-6/2007

MEUR

1-6/2007

1-6/2006

Change

2006

Ship Power

561

397

42%

985

Services

726

604

20%

1 266

Power Plants

262

432

-39%

934

Net sales, total

1 558

1 437

8%

3 190

 

FINANCIAL RESULTS

In the second quarter the operating result rose to EUR 73 million (70) and the profitability increased to 9.2% (8.3). In the review period 1-6/2007 the operating result improved to EUR 136 million (106), representing profitability of 8.8 % (7.4).

In the review period 1-6/2007 the financial items amounted to EUR -5 million

(-1). Net interest totalled EUR -6 million (-7). Dividends received amounted to EUR 6 million (8). Profit before taxes was EUR 132 million (244).

Taxes in the reporting period amounted to EUR 37 million (41). Taxes in the comparison period included deferred tax assets totalling EUR +26 million relating to previously recognized restructuring expenses.

Earnings per share for the review period were EUR 0.98 (2.15).

BALANCE SHEET, FINANCING AND CASH FLOW

Liquid reserves at the end of the period amounted to EUR 133 million (137). Net interest-bearing loan capital totalled EUR 178 million (293). The solvency ratio was 44.3% (44.0) and gearing was 0.18 (0.25).

Cash flow from operating activities for January-June 2007 was strong and totalled EUR 129 million (49).

HOLDINGS

Wärtsilä owns 7,270,350 B shares in Assa Abloy, or 2.0% of the total. This holding has been booked in the balance sheet at its market value at the end of the reporting period, EUR 119 million.

CAPITAL EXPENDITURE

Gross capital expenditure in the review period totalled EUR 112 million (116), which comprised EUR 43 million (72) in acquisitions and investments in securities and EUR 69 million (44) in production and information technology investments. Depreciation amounted to EUR 37 million (35).

Due to the strong volume growth the total capital expenditure for 2007 is expected to be approx. EUR 200 million.

STRATEGIC ACQUISITIONS AND JOINT VENTURES

In January Wärtsilä and Hyundai Heavy Industries Co. Ltd (HHI) signed an agreement to set up a 50/50-owned joint venture in Korea to manufacture dual-fuel engines for LNG (liquefied natural gas) carriers. The total equity of the company will be EUR 58 million, Wärtsilä´s share being EUR 29 million. The joint venture will manufacture Wärtsilä 50DF dual-fuel engines for the Korean, Japanese, Chinese and Taiwanese shipbuilding markets. The first engine will be delivered in the second half of 2008. The Trieste delivery center in Italy will continue to manufacture Wärtsilä 50DF dual-fuel engines for the marine markets outside East Asia and for the growing worldwide power plant market. In June the European Union competition authorities cleared the joint venture and the permits from different authorities have been received to start the business.

In February Wärtsilä acquired the Swedish company Senitec AB. The company is specialized in environmental technology products for separating waste such as oily water and sludge in power plants, harbours and ships. This new business gives Wärtsilä the possibility to expand its offering of environmental solutions in waste management.

In February Wärtsilä acquired the entire business of Marine Propeller (Pty) Ltd in Cape Town, South Africa. Marine Propeller (Pty) Ltd focuses mainly on repairing propellers.

In May Wärtsilä continued extending its service offering in Propulsion services with the acquisition of UK-based propeller repair company McCall Propellers Ltd. The acquisitions complement Wärtsilä’s propeller services.

The total acquisition price of the acquisitions mentioned above is EUR 25 million out of which EUR 17 million is reported as goodwill.

In May Wärtsilä signed an agreement to acquire the marine business of Railko Ltd. in the UK, a company specializing in stern tube bearing technology. The acquisition will improve Wärtsilä´s competitive position in oil-lubricated bearing systems and adds water-lubricated bearings to the product portfolio. Railko’s products are used on all types of vessels, from cruise ships to cargo vessels. The acquisition was closed at the beginning of July.

OTHER STRATEGIC ISSUES

In January Wärtsilä announced a public offer to the minority shareholders of Wärtsilä India Ltd to acquire 1,240,599 shares, or 10.3% of the share capital. The offer period expired on 23 March 2007. The delisting offer was successful and pursuant to the offer 7.3% of the total shares were acquired. This implies a consideration of EUR 10 million, of which EUR 7 million was recognised as goodwill. Wärtsilä Corporation holds directly or indirectly 97.0% of Wärtsilä India shares. The shares of Wärtsilä India Ltd were delisted from the Bombay Stock Exchange on 18 June 2007.

To improve marine customer service in the rapidly growing Chinese markets Wärtsilä opened a large reconditioning workshop in Shanghai in March. In May Wärtsilä also opened a service workshop close to Saigon port in Ho Chi Minh City and an office in Hanoi to serve the growing Vietnamese shipping, shipbuilding and power industries.

The demand for training services is steadily rising and Wärtsilä opened a new training centre in Korea to provide customer training in the world’s largest shipbuilding country.

MANUFACTURING

The investment programmes for enlarged production capacity of medium-speed engines in Vaasa and Trieste to meet the growing market demand are proceeding. The full capacity increase will be in use during the second half of 2007 as planned. Wärtsilä’s worldwide supplier network has continued to build up capacity and most of these investments made by the suppliers will also be operational during 2007.

In May Wärtsilä and Vietnam Shipbuilding Industry Corporation (Vinashin) signed a licence agreement for the manufacture and sale of certain types of Wärtsilä low-speed engines in Vietnam. The first engine delivery is scheduled for the beginning of 2010.

Wärtsilä’s joint venture company in China, Wartsila CME Zhenjiang Propeller Co Ltd, opened its new fixed pitch propeller factory in June. The new factory doubles Wärtsilä’s capacity to manufacture this type of propeller.

The manufacturing and technology activities of the propulsor business are being merged with the engine manufacturing into an Industrial Operations organization. The target of the new structure is to further strengthen untilization of core competences.

R&D

Wärtsilä is further increasing its focus on combustion research and engine performance technology development by making new investments in this area.

The current Hercules programme aiming at reduction of fuel consumption and CO2 emissions ends in September 2007. The main parties in the present programme, Wärtsilä and MAN Diesel, are preparing the next phase of the project. The proposal for the next phase was submitted to the EU Commission at the beginning of June.

Testing of the Wärtsilä Auxpac 26 engine began during the review period with positive results. This product will enhance the Auxpac product range to meet market demand for bigger auxiliary engines.

PERSONNEL

Wärtsilä had 14,791 (12,650) employees on average during the reporting period and 15,180 (12,918) at the end of June. The largest personnel increases took place in the Services business where the personnel increase was close to 19% compared to the correponding period 2006. At the end of the period the Services business employed 8,937 (7,537).

SHARES AND SHAREHOLDERS

SHARES ON HELSINKI EXCHANGES

 

 

 

30 June 2007

A-share

B-share

Total

 

Number of shares

23 579 587

72 223 078

95 802 665

 

Number of votes

235 795 870

72 223 078

308 018 948

 

 

 

 

 

 

Number of shares traded

 

 

 

 

1-6/2007

868 828

57 218 179

58 087 007

 

 

 

 

 

 

1 Jan.- 30 June 2007

High

Low

Average 1)

Close

A-share

50.50

38.05

45.80

47.80

B-share

51.40

38.44

46.38

48.90

1) Trade-weighted average price.

 

 

 

 

 

 

 

 

Market capitalization

 

30 June 2007

30 June 2006

 

EUR million

 

4 659

3 110

 

 

 

 

 

 

Foreign shareholders

 

30 June 2007

30 June 2006

 

 

 

32.6%

28.8%

 

 

CHANGES IN OWNERSHIP AFTER THE REPORTING PERIOD

On 3rd of July Varma Mutual Pension Insurance Company increased its holding in Wärtsilä Corporation. Following the transaction Varma owns 2,795,615 A shares and 1,188,691 B shares giving a total holding of 3,984,306 Wärtsilä shares or 4.16% of Wärtsilä’s share capital and 9.46% of the total votes.

On 3rd of July Sampo plc decreased its holding in Wärtsilä Corporation. Following the transaction Sampo owns 584,668 A shares or 0.61% of Wärtsilä’s share capital and 1.90% of the total votes.

OPTION SCHEMES

During the review period Wärtsilä had two option schemes. The 2001 option scheme ended on 31 March 2007. The 2002 option scheme will end on 31 March 2008. Based on the option schemes altogether 197.952 shares, representing 0.2 % of the share capital remained unsubscribed at the end of the review period. 

DECISIONS TAKEN BY THE ANNUAL GENERAL MEETING

Wärtsilä’s Annual General Meeting on 14 March 2007 approved the financial statements and discharged the company’s President & CEO and the members of the Board of Directors from liability for the financial year 2006. The Meeting approved the Board of Directors’ proposal to pay a dividend of 1.75 euros per share.

Wärtsilä’s Annual General Meeting decided that the Board of Directors shall have six members. The following were elected to the Board: Ms Maarit Aarni-Sirviö, Mr Heikki Allonen, Mr Göran J. Ehrnrooth, Mr Antti Lagerroos, Mr Bertel Langenskiöld and Mr Matti Vuoria.

The firm of authorized public accountants KPMG Oy Ab were appointed as the company’s auditors.

AUTHORIZATIONS GRANTED TO THE BOARD OF DIRECTORS

The AGM authorized the Board to issue new Series A and/or Series B shares in one or several instalments. The share issue can be executed on the conditions and at the price determined by the Board.

Under this authorization at most totally 9,555,434 new shares may be issued. Within this total amount of shares

- at most 2,357,958 new A shares and at most 7,197,476 new B shares are issued to the shareholders in proportion to their existing holdings, and/or
- at most 9,555,434 B shares are issued, disapplying the pre-emptive right of the shareholders provided that the Company has important financial grounds for doing so.

The authorization may be exercised, within the restrictions listed above, to develop the company's capital structure, to broaden its ownership base, as consideration in acquisitions or when the company acquires assets related to its business. The rights issue may also be executed as payment in kind or by using the right of set-off.

The authorization remains in force until the following Annual General Meeting.

ORGANIZATION OF THE BOARD OF DIRECTORS

The Board of Directors of Wärtsilä Corporation elected Antti Lagerroos as its chairman and Göran J. Ehrnrooth as the deputy chairman. The Board decided to establish an Audit Committee, a Nomination Committee and a Compensation Committee. The Board appointed from among its members the following members to the Committees:

Audit Committee:
Chairman Antti Lagerroos; Members Maarit Aarni-Sirviö, Heikki Allonen and Matti Vuoria.

Nomination Committee:
Chairman Antti Lagerroos; Members Göran J. Ehrnrooth and Matti Vuoria.

Compensation Committee:
Chairman Antti Lagerroos; Members Heikki Allonen and Matti Vuoria.

RISKS AND BUSINESS UNCERTAINTIES

The very high demand has led to a short supply of certain key components. Examples of bottlenecks are castings and forgings where global demand exceeds supply. Wärtsilä has taken several measures to ensure the availability of these key components. Investments have been implemented by many of the company’s suppliers and most of these will be operational during 2007.

MARKET OUTLOOK

The outlook for the global world economy remains strong and is expected to remain favourable in the near future. The shipping and shipbuilding industries continue to be active. The freight market has remained strong and freight rates are still at historically high levels. Slightly higher interest rates and inflation have not affected the shipbuilding market. However, the increase in deliveries of new ships has become faster than growth in demand for new tonnage and this is expected to start affecting the freight market in the medium term. The market is expected to continue active at least for upcoming six months. Also offshore investments in both vessels and various production units are expected to remain at a high level for at least half a year.

In the Power Plant market the situation remains good. Order intake is expected to remain high during the reminder of the year with particularily good prospects in South Asia, Africa and the Americas.

WÄRTSILÄ’S PROSPECTS FOR 2007

Demand in the ship power and energy markets looks likely to remain active for Wärtsilä for the next two quarters. Based on the strong order book, Wärtsilä’s net sales are expected to grow this year by around 15%. Profitability will exceed 9%. Wärtsilä’s profitability varies considerably between the quarters as will also be the case this year. Wärtsilä sees further possibilities for growth in 2008.

WÄRTSILÄ INTERIM REPORT JANUARY – JUNE 2007

This interim financial report is prepared in accordance with IAS 34 (Interim Financial Reporting) using the same accounting policies and methods of computation as in the annual financial statements for 2006. All figures in the accounts have been rounded and consequently the sum of individual figures can deviate from the presented sum figure.

Use of estimates

The preparation of the financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the valuation of the reported assets and liabilities and other information, such as contingent liabilities and the recognition of income and expenses in the income statement. Although the estimates are based on the management’s best knowledge of current events and actions, actual results may differ from the estimates.

Amended and new International Financial Reporting Standards (IFRS) as of 1

January 2007:

  • IFRS 7, financial instruments: Disclosures
  • Amendment to IAS 1, Capital disclosures
  • IFRIC 8: Scope of IFRS 2
  • IFRIC 9, Reassessment of Embedded Derivatives
  • IFRIC 10, Interim financial Reporting and Impairment.

The adoption of the new and revised standards and interpretations does not have any material affect on the interim financial report.

This interim report is unadited.