Interim report January-March 2007

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

ORDER INTAKE CONTINUED STRONG – MARKET EXPECTED TO REMAIN ACTIVE

FIRST-QUARTER HIGHLIGHTS

  • Order intake EUR 1,157 million (1,023), growth 13%
  • Order book total EUR 4,860 million (3,415), growth 42%
  • Net sales EUR 761 million (592), growth 29%
  • Operating income EUR 63 million (36), growth 77%
  • Profitability 8.3% (6.1)
  • EPS 0.44 (0.55)

OLE JOHANSSON, PRESIDENT AND CEO:

“The robust order book and continued good demand in all markets boosted net sales to grow at 29% in the first quarter. The long term measures to improve profitability in combination with good demand and a favourable sales mix contributed to improved operating profit as expected”.

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 be the case also this year. Wärtsilä sees further possibilities for growth in 2008.

ANALYST AND PRESS CONFERENCE

An analyst and press conference will be held on Friday 4 May 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=1437901. To participate in the teleconference and have the possibility to ask questions, please call: +358 9 8248 6348 and enter the PIN-code 2160. To only listen to the teleconference call the same number and enter PIN-code 390911.

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                  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 14,000 professionals manning 130 Wärtsilä locations in close to 70 countries around the world.

INTERIM REPORT JANUARY-MARCH 2007

The figures in this interim report are unaudited.

REVIEW PERIOD JANUARY – MARCH 2007 IN BRIEF

MEUR

1-3/2007

1-3/2006

Change

2006

Net sales

761

592

29%

3 190

Operating income

63

36

77%

262

% of net sales

8.3%

6.1%

 

8.2%

Income before taxes

60

40 1)

 

447 2)

Earnings/share, EUR

0.44

0.55 3)

 

3.72

Cash flow from

 

 

 

 

operating activities

79

-2

 

302

Interest-bearing net debt

 

 

 

 

at the end of the period

179

435

 

55

Gross capital Expenditure

42

40

 

193

 

  1. The January-March 2006 result includes Wärtsilä’s share of Ovako’s profit after taxes, EUR 7 million.
  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–March 2006 result includes deferred tax assets totalling EUR +26 million relating to previously recognized restructuring expenses.

MARKET DEVELOPMENT

Ship Power

During the first quarter of 2007 the shipbuilding market remained active, although at a somewhat more moderate level than during the previous two years. During the review period 785 (988) new vessel orders were registered, which corresponds to the order levels of 2003 and 2004. The bulk carrier segment and specialized tonnage such as the offshore and ro-ro cargo ship segments kept or even increased the pace of new orders compared to 2006. Demand in the container and tanker segments was significantly slower during the review period.

China continued to grow in the shipbuilding market during the first quarter of 2007. In terms of new orders, measured in number of vessels, China clearly dominated the market with a 45% market share, followed by Korea with 24% and Europe 13%. Japan had a market share of approximately 9%. China was also the dominating player in terms of deadweight tonnage during the first quarter of 2007 with a share of 51%, compared to Korea’s share of 27%.

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 first quarter 2007 was 8,800 MW. Wärtsilä’s share of this market remained at a very high level at 46% (51% at the end of the previous quarter). In the low-speed main engine market Wärtsilä’s market share was 14% (16% at the end of the previous quarter). Wärtsilä retained its volumes but the market grew to 27,700 MW (26,600). Wärtsilä’s market share in auxiliary engines remained at 6% (6% at the end of the fourth quarter of 2006).

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. Demand remained evenly spread around the world, reducing the risks associated with single markets and geographical concentration.

Demand for gas power plants was strong during the review period, power plants running on renewable fuels, in which liquid bio-fuel power plants are included, continued to offer opportunities for Wärtsilä especially in Europe. Demand in oil-producing areas, such as Africa and the Middle East, 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 relevant 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

The order intake for the review period totalled EUR 1,157 million (1,023), representing growth of 13%. Order intake in the Ship Power business remained, as expected, at a high level at EUR 521 million (501), 4% higher than during the corresponding period in 2006. During the review period the offshore segment in particular continued to be very active, accounting for more than 50% of the Ship Power order intake. Orders were booked for semi-submersible rigs, drill ships, floating production units as well as for various supply vessels.

The Power Plants order intake for the review period amounted to EUR 211 million (138), 53% higher than one year earlier. Demand for oil-fired power plants was high and the largest orders were received from Mayotte, French Polynesia and Italy. During the review period Wärtsilä received 10 orders for liquid biofuel power plants with a total output of 172 MW in Italy. The largest gas power plant orders were received in the USA and Russia.

At the end of the review period the total order book stood at 4,860 million (3,415), representing growth of 42%. Some 42% of the order book is due for delivery in 2007.  

Order intake by business

 

 

 

 

MEUR

1-3/2007

1-3/2006

Change %

2006

Ship Power

521

501

4

2 270

Services

423

383

11

1 322

Power Plants

211

138

53

1 027

Order intake, total

1 157

1 023

13

4 621

 

Order intake Power Plants

 

 

 

 

MW

1-3/2007

1-3/2006

Change %

2006

Oil

130

172

-24

766

Gas

122

106

15

1 232

Renewable fuels

204

142

44

353

 

Order book by business

 

 

 

 

MEUR

31.3.2007

31.3.2006

Change %

2006

Ship Power

3 285

2 080

58

3 020

Services

433

388

12

357

Power Plants

1 140

943

21

1 061

Order book, total

4 860

3 415

42

4 439

 

NET SALES

Wärtsilä’s net sales for January-March 2007 totalled EUR 761 million (592), growth of 29%. Ship power net sales grew by 69% to EUR 256 million (152), representing 34% of total net sales. Power Plant net sales totalled EUR 150 million (140), 20% of total net sales. Net sales from the Services business increased to EUR 352 million (300), growth of 17% on the corresponding period last year. Organic growth represented 13% of Services net sales growth. Services net sales accounted for 46% of total net sales.

Net sales by business

 

 

 

 

MEUR

1-3/2007

1-3/2006

Change %

2006

Ship Power

256

152

69

985

Services

352

300

17

1 266

Power Plants

150

140

7

934

Net sales, total

761

592

29

3 190

 

FINANCIAL RESULTS

The operating income rose to EUR 63 million (36) for January – March 2007, which is 8.3% of net sales (6.1).

Financial items amounted to EUR -4 million (-3). Net interest totalled EUR -2 million (-3).  

Income before taxes amounted to EUR 60 million (40).

Taxes in the reporting period amounted to EUR -17 million (12). Taxes in the comparison period included deferred tax assets totalling EUR +26 million relating to previously recognized restructuring expenses.

The earnings per share were EUR 0.44 (0.55).

BALANCE SHEET, FINANCING AND CASH FLOW

Liquid reserves at the end of the period amounted to EUR 148 million (115). Net interest-bearing loan capital totalled EUR 179 million (435). The solvency ratio was 42.4% (41.9) and gearing was 0.19 (0.41).

Cash flow from operating activities for January-March 2007 was strong and totalled EUR 79 million (-2). 

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 124 million.

CAPITAL EXPENDITURE

Gross capital expenditure in the review period totalled EUR 42 million (40), which comprised EUR 12 million (17) in acquisitions and investments in securities and EUR 30 million (23) in production and information technology investments. Depreciation amounted to EUR 18 million (18).

Due to strong volume growth the total capital expenditure for 2007 is expected to be appr. 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. Focusing on assembly and testing of the engines, the joint venture is scheduled to deliver its first engine in the second half of 2008. The Trieste factory 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. The deal is subject to approval of the relevant regulatory authorities.

In February Wärtsilä signed an agreement to acquire 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 the South African company Marine Propeller (Pty) Ltd in Cape Town, South Africa. Marine Propeller (Pty) Ltd focuses mainly on repairing propellers. This acquisition expands Wärtsilä’s offering in South Africa to include propeller repair.

The total acquisition price of the two acquisitions is EUR 3 million out of which EUR 2 million is reported as goodwill.

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 about 6.9% of the total shares will be acquired. This implies a consideration of approximately EUR 9 million. After the completion of the offer Wärtsilä Corporation will hold directly or indirectly 96.6% of Wärtsilä India shares. The actual delisting will take place in about three months.

MANUFACTURING

The investment programmes to increase production capacity for medium-speed engines in Vaasa and Trieste are proceeding according to plan and will achieve the full capacity increase during the second half of 2007. 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.

Hitachi Zosen joined the family of Wärtsilä Corporation licensees to manufacture Wärtsilä RT-flex electronically-controlled common-rail marine engines. Hitachi Zosen was awarded a contract in March 2007 to build four six-cylinder Wärtsilä RT-flex50-B engines for ships to be built in China. The first of the ships will be delivered in the second quarter of 2009.

R&D

The engine testing of the Wärtsilä Auxpac 26 began during the review period. This product enhances the Auxpac product range to meet market demand for bigger auxiliary engines.

In the area of Fuel Cells, the Large-SOFC (Solid Oxide Fuel Cell) project has been started. Wärtsilä is a key participant in the project with other European players in this field such as VTT of Finland, Forschungszentrum Jülich GmbH, Topsoe Fuel Cell A/S and Rolls-Royce Fuel Cell Systems Ltd.

The current Hercules programme aimed at reduction of fuel consumption and CO2 emissions ends in September 2007. The main parties in the present programme, Wärtsilä and MAN Diesel, are now preparing a the next phase of the project.

PERSONNEL

Wärtsilä had 14,583 (12,286) employees  on average during the reporting period and 14,754 (12,605) at the end of March. The largest personnel increases took place in the Services business where the personnel increase was close to 20% compared to the correponding period 2006. At the end of the period the Services business employed 8,746 (7,388). 

SHARES AND SHAREHOLDERS

SHARES ON HELSINKI EXCHANGES

31 March 2007

A-share

B-share

Total

 

Number of shares

23 579 587

72 123 010

95 702 597

 

Number of votes

235 795 870

72 123 010

307 918 880

 

 

 

 

 

 

Number of shares traded, 1-3/2007

439 000

33 485 382

33 924 382

 

 

 

 

 

 

1 Jan.- 31 March 2007

High

Low

Average 1)

Close

A-share

49.74

38.05

44.38

45.75

B-share

50.80

38.44

44.87

46.29

1) Trade-weighted average price.

 

 

 

 

 

 

 

 

Market capitalization

 

31 Mar. 2007

31 Mar. 2006

 

EUR million

 

4 417

2 879

 

 

 

 

 

 

Foreign shareholders

 

31 Mar. 2007

31. Mar. 2006

 

 

 

30.5%

27.2%

 

 

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 298,020 shares, representing 0.3 % 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 Heikki Allonen, Maarit Aarni-Sirviö 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 worked hard to overcome the situation and several measures have been taken 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 freight market has remained robust 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. Although the start of the year has been slower than last year, overall expectations for the full year are still good.

High energy prices have led to continued investments in the offshore segment. Offshore investments in both vessels and various production units have increased during the first quarter of 2007 and are expected to remain at a high level.

In the Power Plant market the situation remains good. Increased environmental concerns favour efficient power generation solutions. All segments relevant to Wärtsilä are expected to remain highly active. Geographically demand is distributed evenly, reducing any dependency on single markets.

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 be the case also this year. Wärtsilä sees further possibilities for growth in 2008.

WÄRTSILÄ INTERIM REPORT JANUARY – MARCH 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.