Wärtsilä Corporation FINANCIAL STATEMENTS BULLETIN 5 FEB. 2004 at 8.30 am
-Wärtsilä’s net sales EUR 2,357.5 (2,519.0) million
-Power Divisions’ operational profitability rose to 4.4% (3.2)
-Group’s operating result EUR -18.4 (188.9) million; result
burdened by restructuring provision
-Ship power systems and service defined as Wärtsilä’s growth areas
-In power plants business, focus on fewer products
-Manufacturing of propellers and marine engines to be started in China
-To reduce overcapacity, intention to discontinue production at Mulhouse, France, and Turku, Finland; consultations with personnel in progress
-Board’s dividend proposal EUR 0.75 per share
Net sales and result
Wärtsilä Group’s consolidated net sales decreased to EUR 2,357.5 (2,519.0) million. This resulted from the slow accrual of net sales by the Power Divisions in the early months of the year, coupled with unfavourable exchange rate changes. Net sales of the Power Divisions decreased to EUR 2,155.8 (2,319.9) million. Imatra Steel’s net sales grew slightly, totalling EUR 202.7 (200.4) million.
The Group’s operational EBIT improved to EUR 100.0 (77.8) million, corresponding to an operating margin of 4.2%. Including the impact of the EUR 130.0 million restructuring provision, a EUR 4.4 million writedown in connections with the sale of the Billnäs Spring Works, and a EUR 15.9 million capital gain from the sale of Polar Kiinteistöt Oyj shares, operating result was negative EUR 18.4 (188.9) million. The previous year’s figure included a non-recurring capital gain of EUR 111.1 million on the sale of Assa Abloy shares.
Net financial expenses amounted to EUR 15.9 (18.5) million, or 0.7% (0.7) of consolidated net sales. Financing items included dividends totalling EUR 6.8 (7.1) million, the largest being the dividend paid by Assa Abloy. The Group recorded a pretax loss of EUR -34.4 (170.4) million.
Taxes totalled EUR -4.0 (-47.6) million, including EUR -35.3 (-54.1) million in taxes for the financial year. Restructuring measures resulted in deferred tax assets totalling EUR +21.3 million.
Wärtsilä recorded a net loss of EUR -39.3 (121.9) million for the year. Earnings per share (EPS) were EUR -0.66 (2.05). Excluding the impact of non-recurring costs and the capital gain on the Polar shares, EPS was EUR 1.00 (0.72). Return on investment (ROI) was 0.1% (14.9). Excluding the restructuring provision ROI was 7.9%. Return on shareholders’ equity (ROE) was -4.5% (12.4).
Financing and capital expenditure
Wärtsilä’s cash flow from operating activities was a strong EUR 192.1 (55.4) million and the financial position was good. Cash reserves at the close of the period totalled EUR 150.0 (185.8) million. Net interest-bearing loan capital was EUR 353.2 (430.6) million. The solvency ratio was 35.0% (36.9) and gearing was 0.48 (0.50). Treating the convertible subordinated debentures as shareholders’ equity the solvency ratio was 36.2% (38.0) and gearing was 0.43 (0.46).
Capital expenditure in 2003 amounted to EUR 65.4 (423.3) million, which comprised EUR 62.8 (74.7) million in production and information technology investments and EUR 2.6 million (348.6) in investments in shares. Depreciation totalled EUR 156.0 (105.4) million, which included a writedown of EUR 55.0 million related to restructuring measures and EUR 27.0 million in amortization of goodwill on consolidation.
Research and development
The main emphasis in Wärtsilä’s research and development activities is on environmentally sustainable products. Co-operation with Mitsubishi on the development of the new RT-flex50C engine continued according to plan and the prototype of this engine will be started at the beginning of 2005 at the latest.
Research and development in the Power Divisions totalled EUR 68.4 (85.9) million, or 3.2% (3.7) of net sales. Imatra Steel’s corresponding expenses amounted to EUR 1.7 (1.7) million.
Operational EBIT of the Power Divisions, excluding the restructuring provision, was a clear improvement, EUR 95.0 (74.6) million, and the operating margin improved correspondingly to 4.4% (3.2). Operating result after the restructuring provision totalled EUR -35.0 million.
The total order intake was EUR 2,148.7 (1,882.8) million. The order book at the end of 2003 was slightly fuller, standing at EUR 1,245.0 (1,206.6) million, than one year earlier.
Most of the orders for new vessels in 2003 were for tankers, bulk carriers and container vessels. Demand was relatively quiet in the markets for the engines that Wärtsilä manufactures itself. With demand focused on the licensed manufacturing engines, Wärtsilä Ship Power’s net sales decreased 11.2% to EUR 686.1 (772.9) million. The full-year order intake increased 19.8%, but the order intake in the final quarter was below the previous year’s corresponding level. The year-end order book stood at EUR 606.8 (662.6) million, which was 8.4% below the previous year’s figure.
Wärtsilä delivered marine engines totalling 1,665 (2,220) MW during the year. The company’s licensed manufacturers supplied Sulzer low-speed engines totalling 1,913 (2,660) MW.
Wärtsilä share of new orders for medium-speed main engines increased to 38% (34) and for low-speed main engines to 33% (25) Wärtsilä’s share of the market for auxiliary engines was 8% (11).
The hub of the shipbuilding market has shifted to Asia. The fastest growing market of all is China. In December Wärtsilä signed an agreement with Zhenjiang CME Co Ltd., a subsidiary of China State Shipbuilding Corporation, to set up a joint venture to manufacture propellers. The aim is to begin propeller manufacturing during 2004. Wärtsilä also has plans for manufacturing auxiliary engines in China to raise its market share.
Power plant business focuses on fewer products
The volume of orders for power plants grew substantially compared to the previous year. The order intake in 2003 totalled EUR 639.3 (427.9) million. Of Wärtsilä’s main markets, Asia and Africa were particularly strong sources of new orders.
Wärtsilä continued to focus in its power plants business on fewer products and the company is withdrawing from the market for power plants based on high-speed engines.
The power plant organization further increased its flexibility to adjust costs to changing market conditions, and fixed costs were reduced by for example outsourcing power engineering service.
The total market for small power plants driven by small reciprocating engine and gas turbines remained virtually unchanged. Wärtsilä’s market share in HFO power plants was 38% (39). In gas power plants Wärtsilä’s market share rose from 5.3% to 13.6%, the highest ever for Wärtsilä in this segment.
The volume of power plants delivered by Wärtsilä in 2003 was 1,160 (1,387) MW. This comprised oil-fuelled plants totalling 847 (1,167) MW and gas power plants totalling 313 (220) MW.
Total service provider
A clear trend in the service business is the concept of total service. Net sales of Wärtsilä’s Service business increased 5.0% on the previous year but growth was slowed by the weakening of the US dollar. The bulk of sales still come from spare parts and components but service contracts of various types are accounting for an increasingly large share of the total.
Long-term service agreements and operation and maintenance (O&M) agreements cover almost 12,000 MW, or roughly 9% of Wärtsilä’s active engine base. O&M agreements have been signed for 2,289 MW, or 132 power plants in different parts of the world, representing growth of 11% on the previous year.
The Ciserv group of service companies grew with the acquisition of the Dutch marine engine service company Caltax Marine Diesel B.V. Wärtsilä will continue to expand the Ciserv group stronger aquisitions.
Engine manufacture concentrated
Capacity utilization in 2003 was lower than one year earlier. Capacity load was relatively good at the Vaasa and Trieste factories. However, a large number of employees at the Turku factory were laid off early in the year. Wärtsilä plans to discontinue the manufacture of the high-speed W200 and W220SG engines at Mulhouse, France. Consultations with personnel are in progress. On 14 January 2004 Wärtsilä announced a plan to discontinue manufacturing at the Turku factory and to move production of the W46 engine to Trieste in Italy.
The company’s aim is to adjust to low production volumes by concentrating engine manufacturing at two factories, Vaasa and Trieste, both of which have the flexibility to make several engine types according to market demand. Wärtsilä plans to put these changes into effect during 2004.
These measures will have no impact on the Group’s research and development, which will continue at its present extent in Vaasa and Winterthur.
Conditions in the special engineering steels market in Europe remained uncertain throughout 2003 as companies waited for the next business upswing. Imatra Steel’s net sales totalled EUR 202.7 (200.4) million, which was 1.2% more than in the previous year. Comparable net sales, excluding the spring business, grew 4%. The growth was derived from the company’s forging business, where both Imatra Kilsta and Scottish Stampings reported increased delivery volumes. The volume of deliveries by the Imatra Steel Works declined, however. The operating profit was EUR 0.7 million. In June Wärtsilä sold the assets and operations of the Billnäs Spring Works to Styria Group
Wärtsilä owns 7.6% of Assa Abloy’s shares. The market capitalization of this holding at the end of the financial year was EUR 261.9 million. Its book value in the Group’s balance sheet is EUR 67.4 million. In October Wärtsilä sold its holding of Polar shares, yielding a capital gain of EUR 15.9 million that was recorded in the last quarter. Wärtsilä Real Estate sold properties and shares in property companies totalling EUR 6.5 (16.8) million during 2003, generating a profit of EUR 4.4 (0.4) million.
The Group had 12 293 (12 417) employees on average during the year and 12 110 (12 459) at the year end. The Power Divisions had
10 897 (11 068) employees at the year end. The number of employees in the Service division rose due to an increase in operations and maintenance personnel and through acquisitions. Personnel negotiations related to streamlining measures are in progress that will reduce personnel by approximately 1 100. The largest planned reductions will take place in France, Finland, the Netherlands and Norway. Most of the reductions will take place during 2004.
PROSPECTS IN 2004
Demand for low-speed engines reached a record level in 2003 fuelled by the extremely sharp surge in orders for tankers, container vessels and bulk carriers. This has already resulted in a shortage of shipyard capacity. Demand for low-speed engines is expected to decline in the years ahead.
In Wärtsilä’s traditional medium-speed engine markets in cruise ships, RoPax vessels and offshore sector, demand is expected to pick up.
Interest in complete ship power systems has increased substantially and Wärtsilä’s aim is to broaden its range of complete ship propulsion systems, for example through acquisitions.
Signs are visible of a recovery in demand for power plants although the exchange rate development of the US dollar are creating uncertainty. There is increasing need in the main power plant markets for new electricity generation capacity, and at the year end the investment and financial climate showed signs of greater interest. Moreover, the recent large electricity blackouts in various countries is also creating demand for our products since Wärtsilä’s power plant solutions are ideally suited for decentralized power generation.
Compared to 2003 and Wärtsilä’s active engine base is forecast to remain at its previous level. In its service business, Wärtsilä will seek growth especially by increasing its market share in servicing of Sulzer engines. The service business will grow at the same pace as in 2003.
Net sales of the Power Divisions is expected to rise and operational profitability to improve slightly during 2004. Unfavourable exchange rate trends will increase competition on prices. The impact of capacity reductions on the company’s performance will become visible during 2005. The Power Divisions will reach the 7-8% operating profit target by the end of 2005.
Demand is expected to improve in the special steels and automotive markets during 2004. Imatra Steel’s net sales are expected to increase and its result to improve due to investments and streamlining measures.
The figures in this financial statements bulletin are not audited.
Highlights of 2003
Board’s proposals to the AGM