Wärtsilä’s financial statements bulletin 2006

Wärtsilä Corporation
  • Stock exchange release
6 February 2007 at 2:01 AM E. Europe Standard Time
RECORD NUMBER OF NEW ORDERS – PROFITABILITY ON TRACK
DEMAND EXPECTED TO REMAIN ACTIVE, 2007 PROFITABILITY WILL EXCEED
9%

HIGHLIGHTS OF THE REPORTING PERIOD 1-12/2006
- Order intake EUR 4,621.1 million (3,491.1), growth 32,4%
- Order book total EUR 4,438.9 million (2,905.7), growth 52.8%
- Net sales from comparable operations EUR 3,189.6 million
(2,520.3), growth 26.6%
- Operating income from comparable operations EUR 261.6 million
(202.5), growth 29.2%
- Profitability 8.2% (8.0)
- Capital gains of EUR 173.2 million from sales of Assa Abloy
shares and Ovako
- EPS increased to EUR 3.72 (1.80), 1.49 euros refers to capital
gains
- Strong cash flow from operating activities EUR 302.4 million
(76.0)

- The Board of Directors proposes a dividend of EUR 1.75 per
share.

FOURTH-QUARTER HIGHLIGHTS
- Order intake EUR 1,317.6 million (1.100,5), growth 19.7%
- Net sales from comparable operations EUR 985.9 million (773.5),
growth 27.5%
- Operating income from comparable operations EUR 99.2 million
(86.1), growth 15.2%
- Profitability 10.1% (11.1)

OLE JOHANSSON, PRESIDENT & CEO:
“Market activity continued strong resulting in yet another record
year in order intake. Net sales grew almost 27% and operating
income over 29%. Based on the all time high order book growth will
continue in 2007 and profitability will improve. With actions
taken to increase capacity we see growth continuing also in 2008.
The company is financially well prepared to have an active role in
the further development of the world’s ship power markets.”

WÄRTSILÄ’S PROSPECTS IN 2007
Demand in the ship power and energy markets looks likely to remain
active for Wärtsilä for at least the first half of 2007. Based on
the strong order book, Wärtsilä’s net sales are expected to grow
this year by around 15%. Profitability will exceed 9%. Wärtsilä
sees further possibilities for growth in 2008.

ENCLS:    Board of Directors’ proposal to the Annual General
Meeting

ANALYST AND PRESS CONFERENCE
An analyst and press conference will be held on Tuesday 6 February
2007 starting at 10.45 a.m. Finnish time (8.45 a.m. UK time) at
the Wärtsilä headquarters in Helsinki, Finland. The conference can
be viewed on the Internet at the following address:
http://194.100.179.98:80/wip/directlink.do?newbrowser=1&pid=143790
1
To participate in the teleconference, please call: +358(0)9 8248
3733 and enter the PIN-code 1036. To only listen to the
teleconference call the same number and enter PIN-code 278470. An
on-demand version of the conference will be available on the
company website www.wartsila.com later the same day.

FINANCIAL STATEMENTS BULLETIN

The figures in this financial statement bulletin are unaudited.

RECORD NUMBER OF NEW ORDERS – PROFITABILITY ON TRACK
DEMAND EXPECTED TO REMAIN ACTIVE, 2007 PROFITABILITY WILL EXCEED
9%

HIGHLIGHTS OF THE REPORTING PERIOD 1-12/2006
- Order intake EUR 4,621.1 million (3,491.1), growth 32,4%
- Order book total EUR 4,438.9 million (2,905.7), growth 52.8%
- Net sales from comparable operations EUR 3,189.6 million
(2,520.3), growth 26.6%
- Operating income from comparable operations EUR 261.6 million
(202.5), growth 29.2%
- Profitability 8.2% (8.0)
- Capital gain of EUR 173.2 million from sales of Assa Abloy
shares and Ovako
- EPS increased to EUR 3.72 (1.80), 1.49 euros refers to capital
gains
- Strong cash flow from operating activities EUR 294.7 million
(76.0)

- The Board of Directors proposes a dividend of EUR 1.75 per
share.

FOURTH-QUARTER HIGHLIGHTS
- Order intake EUR 1,317.6 million (1.100.5), growth 19.7%
- Net sales from comparable operations EUR 985.9 million (773.5),
growth 27.5%
- Operating income from comparable operations EUR 99.2 million
(86.1), growth 15.2%
- Profitability 10.1% (11.1)

REVIEW PERIOD JANUARY – DECEMBER 2006 IN BRIEF

Wärtsilä’s business comprises the Ship Power, Services and Power
Plants businesses. Imatra Steel, reported as the company’s second
business segment in 2005, was transferred to Oy Ovako Ab. For
comparability reasons net sales and operating income below are
presented without Imatra Steel.

The acquisition of Total Automation Pte Ltd was closed on 30 June
2006. Total Automation has been consolidated as of 30 June 2006.
The acquisition price was EUR 59.4 million. Goodwill of EUR 37.4
million has been recognized.

STRATEGY AND OBJECTIVES

Wärtsilä’s strategic goal is to strengthen its leading position in
its field. This is done by providing customers with the best
lifetime efficiency and reliability in the market through an
integrated offering that meets their business needs throughout the
world. Wärtsilä will also grow by adding to the offering new
products and services that will help customers operate their power
systems more efficiently and safely. Wärtsilä will increase its
capabilities in automation, as well as strengthen its offering of
solutions for environmentally safe and reliable power system
operation through a combination of organic growth, partnerships
and acquisitions.

Strategic measures in 2006

Wärtsilä took several steps during 2006 to support its strategic
goals:

- In February Wärtsilä acquired Aker Kvaerner Power and Automation
Systems AS (AKPAS) from Aker Kvaerner.
- An alliance between Wärtsilä Automation Norway and the US
company Emerson Process Management.
- In March, Wärtsilä and the BLRT Grupp of Estonia agreed on a
joint venture to service ships in the Baltic area.
- In June the acquisition of the entire business and all
subsidiaries of Singaporean Total Automation Ltd was closed.
- In July Wärtsilä acquired the German service company INTEC
Injectortechnic GmbH.
- Acquisition of the business of the Swedish company Stockholms
Fartygsreparationer AB in October.
- In December Wärtsilä acquired the German ship design company
group SCHIFFKO.
– The new factory for Wärtsilä Auxpac marine generating sets in
China was inaugurated at the end of June.
- In September Wärtsilä, China Shipbuilding Industry Corporation
and Mitsubishi Heavy Industries announced the establishment of a
joint venture to manufacture large, low-speed marine engines in
China.
- In China Wärtsilä is investing in additional capacity to meet
increased demand for propellers.
- The agreement signed in July by Wärtsilä, SKF and Rautaruukki to
sell the operating companies owned by Oy Ovako Ab was closed
during the fourth quarter of 2006.

Financial targets
The Group’s average annual growth target for net sales is 6–7%.
The annual growth target for the Ship Power and Power Plants
businesses is 4% and for the Services business 10–15%. Wärtsilä’s
operating income (EBIT) target is 8% of net sales over the cycle.
The solvency target is 35-40%.

THE YEAR 2006

Operating environment and markets

Ship Power
In terms of vessels orders 2006 exceeded all expectations and the
year turned out to be the best of all during the current
shipbuilding boom and probably the best in the history of modern
shipbuilding. Orders for 2,677 vessels were registered in 2006,
which exceeds the earlier record in 2005 by 10%. Also in terms of
deadweight tons the year exceeded the previous record from 2003 by
22%.

All energy-related segments have been the main drivers behind the
highly active shipbuilding market. In very large tankers, VLCCs
and Suezmax class vessels, for example, the order volumes were
more than three times higher than in the previous year. In
chemical and gas tankers the level remained the same. Demand for
containerships slowed down, indicating the challenges faced by
liners with increased costs and stagnating freight rates. In the
big cruise vessel segment the number of vessels remained more or
less the same, while in passenger vessels and ferries ordering
volumes halved.

China continued to grow in the shipbuilding market. In terms of
deadweight tons Korea maintained its dominating country position
with a share of 38% although China approached closer than ever
with 35%. In numbers of vessels China was clearly the biggest with
34% followed by Korea 25% and Europe 17%. Korea is strongest in
the tanker and container sectors and almost entirely serves export
customers, whereas Japanese yards predominantly serve domestic
customers, the main sectors being dry cargo and gas vessels. China
is active in all segments, except for the most sophisticated
vessel types, and its customer base in mainly abroad. There has
been relatively little competition between the countries for the
same customers due to the strong demand for new ships and new-
build prices have remained strong.

Power Plants
All power plant segments relevant to Wärtsilä – baseload
production, industrial self generation and grid stability – were
active in 2006. Demand was evenly spread globally, which reduced
the risks associated with single markets and geographical
concentration.

The high prices of oil, gas and metals had a positive impact on
demand for power plants in certain markets. Countries in Africa
and the Middle East, as well as other oil-producing countries are
investing heavily in new infrastructure. Demand has also been high
for gas power plants, notably in Japan. Liquid-biofuelled power
plants are continuously offering new opportunities for Wärtsilä in
both Europe and the developing world.

Order book again at all-time high
A record number of new orders were received during the year. The
order intake totalled EUR 4,621.1 million (3,491.1) representing
growth of 32.4%. Most new orders were registered in the Ship Power
business, where the order intake was EUR 2,270,5 million
(1,545.3), 46.9% higher than one year earlier. The full-year order
intake for the Power Plants business grew by 18.7% and was EUR
1,027.3 million (865.2).

Wärtsilä’s total order book at the end of 2006 once again reached
an all-time high, EUR 4,438.9 million (2,905.7), up 52.8% on the
previous year. Approx. 50% of the order book is due for delivery
in 2007.

Strong growth in net sales
Wärtsilä’s comparable consolidated net sales rose to EUR 3,189.6
million (2,520.3), an increase of 26.6% compared to 2005. Ship
Power’s net sales accounted for roughly 30% of total net sales,
Services sales represented 40% and Power Plants’ share of total
net sales was around 30%.

Result improved, profitability developed according to plan
The comparable operating income improved to EUR 261.6 million
(202.5). The profitability (EBIT) was 8.2% (8.0).

Financial items amounted to EUR -7.1 million (-23.4). Net interest
totalled EUR -12.8 million (-11.9). Other financial expenses were
EUR -2.7 million (-18.7). Other financial items decreased
primarily due to changes in market value of derivatives and
currency differences. Financial items include dividends totalling
EUR 8.5 million (7.2), the largest of which were dividends paid by
Assa Abloy AB (publ)and Sampo Oyj.

Income before taxes was EUR 446.8 million (212.4). The result
includes a capital gain of EUR 123.9 million from the sale of 10
million Assa Abloy B shares and Wärtsilä’s share of Ovako’s profit
after taxes, EUR 18.1 million. The result also includes a capital
gain of EUR 49,3 million from the sale of Ovako. The figure in the
comparison period includes Imatra Steel’s pretax profit of EUR
21.4 million and Wärtsilä’s share Ovako’s profit after taxes EUR
10.4 million.

Taxes amounted to EUR -93.9 million (-44.0), of which EUR -32.2
million related to the sale of Assa Abloy shares. Taxes include
deferred tax assets totalling EUR +25.5 million related to
previously recognized restructuring expenses.

Net income was EUR 352.9 million (168.4).

Earnings per share improved to EUR 3.72 (1.80) out of which 1.49
euros refers to capital gains. Return on investment (ROI) was
31.8% (18.0) and return on shareholders’ equity (ROE) was 29.5%
(16.3).

Financial position strong
Wärtsilä’s cash flow from operating activities was EUR 302.4
million (76.0). The financial position was strong. In addition to
good cash flow from operating activities advanced payments
increased during the review period. Due to the increase in
business volumes both receivables and inventories have increased.

Cash and cash equivalents at the end of the year amounted to EUR
179.4 million (119.6). Net interest-bearing loan capital was EUR
54.7 million (255.9). The solvency ratio was 47.0% (46.6) and
gearing was 0.07 (0.24).

Capital Expenditure
Gross capital expenditure for the reporting period totalled EUR
193.2 million (231.1), which comprised EUR 86.4 million (152.2) in
investments in acquisitions and EUR 106.8 million (79.0) in
production and information technology investments. Depreciation
amounted to EUR -71.6 million (-71.6).

The largest single investment was the acquisition of the
businesses of Total Automation Ltd. The acquisition price was EUR
59.4 million.

During 2006 investments in the Trieste and Vaasa factories
amounted to EUR 12.5 million and Wärtsilä had commitments related
to the investment programmes amounting to EUR 14.3 million.

Holdings
Wärtsilä owns 7,270,350 B shares in Assa Abloy, or 2.0% (4.7) of
the total. This holding was booked in the balance sheet at its
market value at the end of the reporting period, EUR 119,8
million.

During the reporting period Oy Ovako Ab sold its operating
companies of which Wärtsilä’s share was 26.5%. The total price of
the business was approximately EUR 660 million, comprising a cash
payment at closing of approximately EUR 535 million, a deferred
cash payment of EUR 15 million to be paid in July 2008 and an
interest-bearing vendor note of EUR 110 million to be paid within
3-6 years from closing. As a result of the transaction and the
subsequent liquidation of Oy Ovako Ab, Wärtsilä has recorded a tax-
free capital gain of EUR 49,3 million.

Personnel
Wärtsilä Group had 13,264 (12,049) employees on average during the
year and 14,346 (12,008) at the year end. The personnel increased
both through recruitments and by acquisitions by over 2,300
people. The largest personnel increases took place in the Services
business. The largest increases were in Europe and Asia. The
number of employees in Finland increased by 332 persons during the
year.

The largest personnel increases through acquisitions related to
Total Automation Ltd with a personnel increase of 571 people,
AKPAS in Norway 135 people and Diesel Technology Solutions BV
(DTS) with 75 people.

The auxiliary engine factory jointly owned by Wärtsilä and
Shanghai Marine Diesel Engine Research Institute employed 52
people at the year end. The service company Wärtsilä BLRT Services
Klaipeda established in Lithuania by the joint venture between
Wärtsilä and BLRT Grupp employed 71 people at the end of the year.

Sustainable Development
The Sustainability Report, which is part of the annual report, is
prepared to meet the 2002 GRI Guidelines. It represents a balanced
and reasonable presentation of our organization’s economic,
environmental and social performance. The Sustainability Report is
assured.

Changes in management
Jaakko Eskola (48) MSc (Eng.) was appointed Group Vice President,
Ship Power and a member of the Board of Management with effect
from 1 April 2006.

Mikael Mäkinen, Executive Vice President and head of the Ship
Power Business, left Wärtsilä to join another company on 1 April
2006.
Christoph Vitzthum (37) MSc (Econ.) was appointed Group Vice
President, Power Plants and a member of the Board of Management
with effect from 1 April 2006.
The former head of the Power Plants business, Pekka Ahlqvist MSc
(Eng.) MBA, reached 60 years of age in spring 2006 and was then
entitled to retire under the terms of his employment contract. He
will continue to be employed by the company with responsibility
for strategic management of Wärtsilä’s automation activities.
Matti Kleimola, Prof. CTO, Group Vice President, Technology and
Environment, retired on 1 May 2006 having reached the retirement
age stipulated in his employment contract. Professor Kleimola will
continue to act as an advisor to the Board of Management in
matters related to Wärtsilä’s field of technology.
Option schemes
Wärtsilä’s option schemes covering key employees of the Group were
launched in 2001 and 2002. The 2001 option rights have been listed
on the Helsinki Exchange since 2005 and the 2002 option rights
since 2004.

The decisions of Wärtsilä’s annual general meeting and the
extraordinary general meetings to pay an extra dividend of EUR
0.60 per share and EUR 1.50 per share reduced the subscription
price of the B share under Wärtsilä’s 2001 and 2002 stock option
schemes by the amount of extra dividends, as stipulated in the
terms and conditions of these schemes. Hence the subscription
price of shares based on the 2001 options is EUR 14.60 euros per
share and based on the 2002 options EUR 7.40 per share.

Annual General Meeting
The annual general meeting on 15 March 2006 approved the Board of
Directors’ proposal to distribute a dividend of EUR 0.90 and an
extra dividend of EUR 0.60 per share, i.e. a total of EUR 1.50 per
share.

The AGM confirmed the number of Board members to be seven. The
following were elected to the Board: Heikki Allonen, Göran J.
Ehrnrooth, Risto Hautamäki, Jaakko Iloniemi, Antti Lagerroos,
Bertel Langenskiöld and Matti Vuoria.

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

The Meeting authorized the Board for one year to repurchase and
dispose of the company’s own Series A and B shares in proportion
to the total number of shares in each series provided that the
total nominal value of the shares so purchased, and the votes
carried by these shares, shall not exceed ten per cent (10%) of
the company's total share capital and voting rights. This
authorization was not exercised during the reporting period.

Board of Directors
The Board of Directors 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, Risto Hautamäki
and Matti Vuoria.

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

Compensation Committee
Chairman, Antti Lagerroos; Members Heikki Allonen and Jaakko
Iloniemi.

Extraordinary general meeting
The extraordinary general meeting on 24 November 2006 approved the
Board of Directors’ proposal to pay an extra dividend of 1.50
euros on each Series A and B share for the financial period ended
31 December 2005.

Share capital and shares
A total of 1,447,236 Wärtsilä B shares were subscribed during the
period under the 2001 and 2002 option schemes. This increased the
share capital by EUR 5,065, 326.00 following which the share
capital amounts to EUR 334,440,232.00.

New record in received orders
In 2006 Wärtsilä set a new record in orders received for Ship
Power equipment and systems. The total order intake for 2006 was
EUR 2,270.5 (1,545.3) million, which is 46.9% more than in the
previous year. The order intake during the year was dominated by
offshore vessels and LNG tankers, together standing for
approximately half of the total order intake. The cruise and
passenger segments, other tankers and various service vessels were
also active.

The final order book at the end of the year was at an all-time
high, EUR 3,019.7 (1,658.5) million, representing growth of 82.1%.

Net sales of the Ship Power business rose to EUR 984.7 million
(710.3), corresponding to growth of 38.6% on the previous year.
Growth accelerated towards the end of the year and the fourth
quarter represented over 40% of the year’s net sales. In terms of
engine output Wärtsilä delivered medium-speed engines totalling
2,397 MW (1,760) to the marine market. Deliveries of licensee-
built Wätsilä low-speed engines amounted to 3,120 MW (3,577) in
2006.

A successful year for Ship Power in several areas
Wärtsilä gained further success with its dual-fuel concept in LNG
carriers in 2006 and the concept became a major solution for
powering these vessels. At the year end Wärtsilä had a total of
188 W50 dual-fuel engines on order for seven shipyards and for 47
LNG vessels. In the offshore segment Wärtsilä received an order
from MPF Corporation Ltd for a Multi Purpose Floater mobile
drilling unit whereby Wärtsilä will deliver an integrated onboard
power plant along with power distribution, automation and
propulsion systems. The order is a good example of the enhanced
capabilities Ship Power has gained by acquiring the automation and
power system company AKPAS in Norway in March 2006. The
acquisition on the one hand enlarged Wärtsilä´s product portfolio
and on the other increased the company’s system integration
capabilities in electric propulsion, power distribution and
automation, especially in the oil and gas and offshore sectors.

Cruise and passenger vessels remained one of Wärtsilä’s key
segments also during 2006. Wärtsilä recorded several sizeable
orders from shipyards in Finland, Italy, France and Germany.
Wärtsilä was awarded a contract to deliver the main engines and
transverse tunnel thrusters for the world’s biggest cruise vessel,
to be built at Aker Yards in Finland for Royal Caribbean Cruise
Ltd.

In its propeller business Wärtsilä booked a historic order for
altogether 50 fixed pitch propellers for two Chinese customers.
The propellers are to be manufactured in Zhenjiang, China.

Market share
The total market for medium-speed main engines in 2006 was 9,200
MW (9,600). Wärtsilä Ship Power increased its market share in this
sector to 51% (50% at the end of the previous quarter). The other
main players in this area recorded shares of 23% and 13%. The high
market share is a reflection of the market segments active during
the year and for which Wärtsilä’s product portfolio is well
suited. In low-speed engines the total market was 26,600 MW
(21,900) at the end of the previous quarter, out of which
Wärtsilä’s share was 16% (17%). Wärtsilä’s low-speed engines are
manufactured by licensees primarily in Asia close to the
customers. The establishment of a joint venture company for
manufacturing low-speed engines in China and the recent
acquisition of the ship company Schiffko are strategic measures
Wärtsilä has taken to improve its market share in the low-speed
business. The total market for auxiliary engines was 7,600 MW
(6,700) and Wärtsilä’s share fell slightly from 7% to 6% due to
capacity constraints.

In propulsor equipment Wärtsilä maintained its strong foothold.
Controllable pitch propellers remained the strongest segment for
Wärtsilä with a market share of 36% (35). In fixed pitch
propellers Wärtsilä has traditionally been stronger in big units
and, owing to the constraints in capacity, the company’s market
share has decreased to 11% (18). At the moment Wärtsilä is further
increasing its fixed pitch propeller capacity in China to meet
demand. In steerable thrusters likewise, demand has been very
high. In this segment Wärtsilä’s share has remained unchanged 11%
(11).

Wärtsilä Services

Strong growth continued
Net sales of the Services business rose to EUR 1,266.5 million
(1,093.1), up 15.9% on the previous year of which 9.3% was organic
growth.

The acquisition of Total Automation Ltd was part of the company’s
strategy to strengthen its position as a Total Service supplier.
It also complements earlier automation acquisitions. Total
Automation has a strong foothold in the offshore and LNG sectors.
The ship repair company set up in Lithuania jointly with the
Estonian BLRT Grupp serves the Baltic market. The acquisition in
July of INTEC Injectortechnic GmbH, provides installation and
service of injection components for marine diesel engines. The
acquisition of the Swedish company Stockholms Fartygsreparationer,
positions Wärtsilä to further expand its Services operations on
the eastern coast of Sweden.

With its recent acquisitions, the company has turned its “one-stop-
shop” vision into a reality: through Wärtsilä, customers now have
a unique opportunity to get the largest scope of services from a
single source all over the world. To help customers select
services more easily, Wärtsilä Services has re-structured its
offering into seven categories: Engine services, Automation
Services, Propulsion Services, Operation & Management Services,
Reconditioning Services, Training Service and Ship Services.

Wärtsilä’s training unit, the Wärtsilä Land & Sea Academy, opened
a new training centre in Turku, Finland, and a new maritime
training centre in Khopoli, India. The Academy also has training
centres in Italy, the Netherlands, Sweden, the USA, and the
Philippines. These centres provide training courses and personnel
development services for Wärtsilä’s marine and power plant
customers.


Wärtsilä Power Plants

High demand boosted net sales
The total power plant order intake for 2006 amounted to EUR
1,027.3 (865.2) million, representing growth of 18.7% on the
corresponding period in 2005. Markets remained active in all major
segments and in all fuel types. The share of gas-fired power
plants rose to 52% of the total order intake. Gas-fired power
plants were sold as flexible baseload installations, for grid
stability and as solutions for industrial self-generation
purposes. The largest single orders came from Azerbaijan, the
United States, Tanzania, Nigeria and Turkey, Many of these orders
are repeat orders, testament to the good experience Wärtsilä’s
customers have had with previous Wärtsilä installations. Wärtsilä
also sold more than 150MW of gas-fired plants to Japanese
customers in 2006, which makes the company the market leader in
large gas engines in Japan.

Oil-fired power plants continue to offer possibilities in the
areas of industrial self-generation and flexible baseload power
generation. The largest orders in 2006 came from Brazil, Saudi
Arabia, Italy, Cyprus and Uganda. Wärtsilä has a strong foothold
in the biofuel market and received orders totalling more than 160
MW for liquid-biofuel-fired power plants to be delivered to Italy,
which further demonstrates the versatility and fuel flexibility of
the Wärtsilä Power Plant products.

As a result of the good order intake during 2006 the order book
for the Power Plants business is EUR 1,061.4 (943.9) million,
which is 12.4% higher than at the end of the reporting period one
year earlier.

Net sales for Power Plants developed favourably during 2006 and
totalled EUR 934.2 (710.3) million, representing growth of 31.5%.
Geographically, sales were distributed evenly with the largest
growth coming from successful deliveries of power plants in Brazil
and Azerbaijan. 1,944 MW was delivered during 2006, which
comprised 746 MW for gas and 1,198 MW for oil.

Market size and market shares
In 2006 the total global market for oil and gas power plants in
Wärtsilä’s power range was roughly 14,750 MW (10,300). In these
markets Wärtsilä focuses on heavy fuel oil, gas and liquid biofuel
power plants.

According to statistics compiled by Diesel and Gas Turbine
magazine, Wärtsilä’s market share of heavy fuel oil plants between
June 2005 and May 2006 was 34% (44). During the review period a
large number of smaller heavy fuel oil power plants were ordered.
These power plants are not within Wärtsilä’s power range. In the
light fuel oil segment relevant to Wärtsilä, Wärtsilä’s market
share increased to 23% (9) thanks to high demand for Wärtsilä’s
power plants fuelled by liquid biofuels. The market for gas power
plants, including both reciprocating engines and gas turbines,
increased from 7,574 MW to 10,371 MW during the same period.
Wärtsilä’s share in this segment was 8.1% (7.8).

Manufacturing

Engines
In 2006 Wärtsilä announced investment programmes to increase
production capacity for four–stroke engines in Vaasa, Finland and
Trieste, Italy to meet the growing market demand. The investment
projects are proceeding according to plan; capacity increases will
start during the second quarter of 2007 and full capacity will be
reached in the fourth quarter of 2007. The planned production
model raises efficiency and ensures flexibility in terms of both
multi-engine delivery and volumes, throughout the supply chain.

Wärtsilä Qiyao Diesel Co Ltd (Shanghai), the joint venture company
between Wärtsilä Corporation and the Shanghai Marine Diesel Engine
Research Institute (SMDERI) for manufacturing Wärtsilä Auxpac
marine generating sets in China, was started in mid-2006. The new
assembly factory manufactures Wärtsilä Auxpac 20 and from the end
of 2007 also Auxpac 26 diesel generating sets for the growing
shipbuilding market in China. It also exports these products to
other countries through Wärtsilä’s global sales network.

Wärtsilä, China Shipbuilding Industry Corporation (CSIC) and
Mitsubishi Heavy Industries (MHI) have decided to establish a
joint venture factory to produce low-speed engines in China in
order to meet the increasing demand in Asia and the growing
shipbuilding market in China. The QMD factory will produce large
marine engines for Chinese shipyards. It will develop, manufacture
and sell a new generation of energy-saving and environmentally-
sound low-speed two-stroke marine engines under licence from
Wärtsilä and MHI. The factory will be built in the Qingdao area,
where CSIC is setting up a marine industry cluster. Production is
expected to start in 2008.

The acquisition of Diesel Technology Solutions BV (DTS) in 2006
has increased Wärtsilä’s component machining capacity.

Wärtsilä has continued to develop capacity for critical components
to be able to meet growing demand in the years ahead. Investments
have been implemented by many of the company’s suppliers and the
main part of the investment will be operational during 2007.
Wärtsilä is increasingly looking at broadening its supplier
network in Asia and India.

In output terms a total of 4,256 (3,445) MW of four-stroke engines
manufactured by Wärtsilä’s own factories was delivered to
customers during the year.

Other equipment
In propulsion equipment Wärtsilä launched investment programs to
enlarge the Chinese transverse thruster factory to cover also the
steerable thruster product range. At the same time the company is
increasing capacity for larger thrusters in the Drunen factory in
the Netherlands. Furthermore, Wärtsilä is adding capacity for
fixed pitch propellers in its joint-venture factory in Zhenjiang,
China.

To meet the increased demand in seals and bearings Wärtsilä is
building a new factory for seals, line shaft bearings and
sterntubes in Wuxi, China. The factory will further strengthen
Wärtsilä’s position in seal and bearing products on the Chinese
market.

The capacity enlargements of the investment projects will enter
operation by mid 2007.

Research and development
Wärtsilä’s research and development focuses on developing and
applying technology with the aim of reducing environmental
impacts, improving efficiency and reducing the fuel consumption of
the engines. In its propulsion business Wärtsilä is continuously
focusing on technologies for increasing propulsion efficiency and
on environmentally friendly sealing solutions for the containment
of oil.

In 2006 Wärtsilä and MAN Diesel agreed to propose a large-scale
Cooperative Research Project – HERCULES-B – in continuation of an
ongoing joint research project funded by the European Union. The
target is to improve the fuel efficiency of marine diesel
propulsion systems to more than 60%. An additional concurrent aim
is towards ultra-low exhaust emissions from marine engines by
2015. The HERCULES-B Project is planned to run over a four-year
period and is expected to be fully agreed in 2007. It will be
subsequently proposed for funding within the Framework Program 7
(FP7, Theme Transport) of the European Commission.

In the field of fuel cell development the European Union has
chosen a research consortium coordinated by Wärtsilä to develop
the use of methanol-consuming fuel cells to provide electrical
power to marine vessels. The main purpose of the METHAPU project
is to develop and validate renewable-fuel-based technology on
board a cargo vessel involved in international trade.
In 2006 the 14RT-flex96C engine, the most powerful diesel engine
ever built, was delivered to the customer. The engine has an
output of 108,920 bhp.

In 2006 Wärtsilä’s research and development expenses totalled EUR
84.8 million (71.0), or 2.7% (2.7) of net sales.

Events after the end of the period
Wärtsilä and Hyundai Heavy Industries Co. Ltd (HHI) signed an
agreement on 23 January 2007 to set up a 50/50-owned joint venture
in Korea to manufacture dual-fuel engines for LNG (liquefied
natural gas) carriers. The total investment in the company will be
EUR 58 million, Wärtsilä´s share being EUR 29 million. The name of
the company will be Wärtsilä Hyundai Engine Company Ltd.

Boards proposal to the AGM 2007
The Board of Directors proposes to the Annual General Meeting on
14 March 2007 that a dividend of 1.75 euros per share be paid for
the financial year 2006.

Risks and business uncertainties
The very high level of demand has led to short supply of some 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 the main
part of the investments will be operational during 2007.

Market outlook 2007
The shipping and shipbuilding industries continue to grow
extremely strongly. The pace of new orders accelerated towards the
end of the year. After the fourth consecutive boom year, shipyard
order books now represent roughly 30% of the existing vessel
fleet. The increase in deliveries will speed up the growth of the
sailing fleet over the next few years at an annual rate of 6-7%.
In the immediate years to come the world economy and sea trade are
expected to grow at an annual rate of 5%. Freight rates have
maintained their level and there have been no significant
decreases in any of the segments. Thanks to strong earnings
shipowners have been able to continue to invest in new ships.

High energy prices have accelerated investments in the energy-
related industries. Offshore investments for both vessels and
various production platforms are estimated to continue despite
somewhat reduced oil prices. In the offshore vessel segment
average earnings are clearly above the long-term trends.

In 2007 shipyards will increase their capacity at the same time
more new ships are entering the market. This is raising pressure
on both freight rates and new-build prices. At the macroeconomic
level the fundamentals have not changed and the above factors
suggest a decrease in activity levels in the long term. However,
at this stage no signs of deceleration exist and Wärtsilä foresees
strong demand continuing for at least the first part of 2007.

The main drivers for continued growth in the power plant market
remain world economic growth as well as the need to improve
efficiency and increase versatility in power generation due to
high fuel prices. Other drivers for the power plant market were
environmental concerns and fuel availability issues. Power Plants
sees growth potential in the grid stability services market in
North America as well as other developed countries. Russia offers
significant market potential in the oil and gas industry where
recent signs point to considerable growth in demand for energy
generation and the need to renew outdated power plant capacity.
Japan continues to remain an active gas power plant market.
Flexible baseload power as well as industrial self-generation are
forecast to remain active market segments throughout the Middle
East and Central and South America. A continued high order intake
is expected in all segments during the first part of 2007.

Services continues to grow through new products, acquisitions and
as a result of the high utilization of the engine base.

Wärtsilä stands well prepared for changes in the market having
restructured its business, penetrated new market segments and
achieved growth in its Services business.


WÄRTSILÄ’S PROSPECTS IN 2007
Demand in the ship power and energy markets looks likely to remain
active for Wärtsilä for at least the first half of 2007. Based on
the strong order book, Wärtsilä’s net sales are expected to grow
this year by around 15%. Profitability will exceed 9%. Wärtsilä
sees further possibilities for growth in 2008.

5 February 2007

Wärtsilä Corporation
Board of Directors