WÄRTSILÄ'S PROFITABILITY IMPROVED DURING THE THIRD QUARTER
Highlights of third quarter 7-9/2004: The order intake grew 7.7% on the same period in 2003. Net sales decreased 8.2%. The operating margin reached 6.0% (4.3) for the Group, for Power Businesses 6.1% (4.7) and for Imatra Steel 4.7% (-2.1).
Highlights of the reporting period 1-9/2004: The order intake grew 25.2% to EUR 2,075.4 (1,658.1) million. Net sales rose 1.6% to EUR 1,662.0 (1,635.4) million. Operating income was EUR 162.0 (47.2) million, which included a one-time capital gain of EUR 107.7 million on the sale of Assa Abloy shares. The Power Businesses' operating income was EUR 43.3 (49.2) million and operating margin 2.9% (3.3). Imatra Steel's operating income was EUR 11.0 (-1.9) million and operating margin 6.2% (-1.3). The Group's earnings per share (EPS) were EUR 1.83 (0.40). The order book was on a good level.
Financial outlooks for the Power Businesses and Imatra Steel for the full year remains unchanged.
GROUP NET SALES AND RESULT
Wärtsilä Group's net sales for the reporting period 1-9/2004 rose 1.6% compared to the first nine months of 2003. The Group's operating income totalled EUR 162.0 (47.2) million, which included a one-time capital gain of EUR 107.7 million on the sale of Assa Abloy shares during the first quarter. The operating income of the Power Businesses amounted to EUR 43.3 (49.2) million. Imatra Steel's EBIT was EUR 11.0 (-1.9) million. Imatra Steel's result in 2003 was burdened by a EUR 4.5 million writedown on fixed assets.
Net financial items were EUR -0.8 (-12.3) million owing to low gearing, higher dividend income compared to last year and a strong cash flow. The Group's result before taxes was EUR 161.2 (34.9) million. Earnings per share (EPS) were EUR 1.83 (0.40).
CAPITAL EXPENDITURE AND CASH FLOW
Capital expenditure in the reporting period amounted to EUR 43.9 (41.7) million. Cash reserves at the close of the period totalled EUR 144.0 (109.1) million. Net interest-bearing loan capital was EUR 185.9 (464.6) million. Cash flow after operating activities increased to EUR 89.6 (62.6) million due to the of good performance and favourable development in working capital during the third quarter.
The solvency ratio stood at 41.6% (37.3) and gearing was 0.22 (0.58).
STRUCTURAL DEVELOPMENT OF THE GROUP
Personnel consultations on discontinuing manufacturing at Turku, Finland and Mulhouse, France were completed in March. In August Wärtsilä sold the product rights of the high-speed Wärtsilä 200 and 220 product family that was produced
in Mulhouse. Divestment of the French production unit is also under negotiations. The restructuring continued as planned.
In May Wärtsilä established Ciserv Korea Ltd, a Ciserv group company, in Korea. In June Wärtsilä acquired two Dutch marine electrotechnical repair and service companies, which were renamed Ciserv Europoort BV.
Wärtsilä-CME Zhenjiang Propeller Co Ltd, the joint venture company set up by Wärtsilä and China State Shipbuilding Corporation (CSSC) to manufacture propellers in China, started operating at the beginning of June. The cooperation and production has started well.
Wärtsilä has increased its holding in Japan Marine Technologies Co Ltd from 93.9% to 99.3%. The investment in the shares was altogether EUR 3.9 million.
In June Wärtsilä decided to outsource the global maintenance and support of its information technology applications. The decision underpins the company's aim to enhance operational efficiency.
The third-quarter profitability of the Power Businesses rose clearly due to the efficiency improvements and high activity level of the Group. The operating income of the Power Businesses was 6.1% (4.7) of net sales. The operating income for the whole nine-month period totalled EUR 43.3 million (49.2). The operating margin was 2.9% (3.3). The volume of new orders received during the nine-month period was 25.2% higher than in the comparable period, demand being good in all sectors.
Ship Power business
The order intake of the Ship Power Business grew significantly during the third quarter and was 29.4% higher than in the comparable period. The increase during the reporting period was 14.9%. The order book has improved during the whole year.
Activity was lively in the markets of importance to Wärtsilä.
Wärtsilä gained significant new orders in Poland and China. In Poland Wärtsilä was contracted to supply for four vessels, total packages consisting of medium-speed main and auxiliary engines, propellers including seal protection systems and efficiency rudders. The Chinese order also included a complete integrated propulsion system and auxiliary power based on main and auxiliary engines, reduction gears and controllable pitch propellers. In September Wärtsilä launched a range of Wärtsilä Auxpac generating sets. The launch resulted immediately in orderintake growth, with over 50 units ordered at Chinese shipyards during the third quarter.
In the low-speed sector Wärtsilä gained a large amount of RT-flex engine orders during September.
Service net sales grew 4.4% during the third quarter. The increase in net sales for the whole reporting period was 4.6% compared to the same period last year.
Wärtsilä has approximately 150 operations and maintenance (O&M) agreements for power plants worldwide covering now almost 2,600 MW, an increase of 17.2% compared to last year. Long-term service and O&M agreements cover more than 12,000 MW, or over 9% of Wärtsilä's active engine base (130 GW).
During 2004 Wärtsilä has signed 30 O&M agreements, of which a third are renewed agreements. Wärtsilä signed new O&M agreements for nine power plants during the third quarter. One O&M agreement was also signed for a marine offshore vessel. Sales of spareparts and service for 2-stroke engines continued to grow.
Wärtsilä now has nine Ciserv companies at strategic maritime locations around the world. The acquisitions of the Dutch service companies in June further strengthens Wärtsilä´s special competence in the repair and maintenance of marine electrotechnical equipment. The development of the Ciserv brand continues.
Power Plants business
Net sales of the Power Plants business weakened slightly during the third quarter but grew during the reporting period compared with the same periods last year. The order intake weakened during the third quarter compared with the same period last year. Success in the gas power plant market continued. The order book at the close of the period, EUR 808.7 million, was at a record high level and double that of the level at the end of 2003. The historically high order book was due considerably to the two power plants, with an aggregate value of EUR 361 million, ordered for Iraq in March. The most important orders received in the third quarter were placed in Africa and Asia. Wärtsilä also received a significant bioplant order from Central Europe.
Engine manufacture and technology
The new engine Wärtsilä 46F was launched in September. The target for the new engine is to further strengthen Wärtsilä´s leading position within this power range. Wärtsilä's research and development activities have continued to focus on common rail and gas engine technology. Feedback from the market has been good.
The agreed restructurings have continued according to plan. The current order book and order intake during the past months will secure high capacity utilization.
Imatra Steel's net sales for the reporting period rose 17.3% compared to the same period last year, during which the Billnäs Spring Works was still part of Imatra Steel. The comparable growth in net sales during the period was 21.6%. The growth was a result of improvement in demand and to the fact that it was possible to pass on increased raw material costs to prices.
Operating income between January and September improved to EUR 11.0 (-1.9) million. Last year's result was burdened by a one-time EUR 4.5 million writedown of fixed assets (the comparable result in 2003 was EUR 2.6 million). The third-quarter result was EUR 2.5 (-0.8) million. The improvement in performance was attributable to the company's streamlining measures, improved demand and price increases. During the summer a significant maintenance investment was undertaken at the Kilsta forge.
Demand for special engineering steels continued strong with respect to both forgings and steels. Especially deliveries to the Heavy truck industry have been continuously rising.
HOLDING IN ASSA ABLOY
During the first quarter Wärtsilä sold its entire holding of Assa Abloy AB (publ.) Series A shares, i.e. 10,546,425 shares, for SEK 116.50 per share, or SEK 1,228.7 million (EUR 133.3 million). Wärtsilä entered a capital gain of EUR 107.7 million on this sale.
Wärtsilä still owns 17,270,350 Assa Abloy B shares, or 4,7% of Assa Abloy's share capital. The market value of this holding at the end of June was EUR 174.3 million and its book value in the Group's balance sheet is EUR 41.8 million.
ANNUAL GENERAL MEETING
The Annual General Meeting, held on 15 March 2004, decided to pay a dividend of EUR 0.75 per share. The meeting decided that the company's Board of Directors would have seven members. The following were elected to the Board: Heikki Allonen, Göran J. Ehrnrooth, Risto Hautamäki, Jaakko Iloniemi, Antti Lagerroos, Bertel Langenskiöld and Paavo Pitkänen.
The firm of authorized public accountants KPMG Wideri Oy Ab was appointed as the company's auditors. The meeting also renewed the Board's authorizations to purchase and dispose of the company's own shares.
BOARD OF DIRECTORS
The Board elected Antti Lagerroos as its chairman and Göran J. Ehrnrooth as the deputy chairman. The Board decided to establish an Audit Committee and a Nomination and Compensation Committee. The Board appointed Antti Lagerroos chairman of the Audit Committee and its other members Heikki Allonen, Risto Hautamäki and Paavo Pitkänen. The Board appointed Antti Lagerroos chairman of the Nomination and Compensation Committee and its other members Göran J. Ehrnrooth and Jaakko Iloniemi.
Lars Hellberg, (45), BSc (Eng.) was appointed Group Vice President, Engine Division, and a member of the Board of Management on 1 June 2004. He follows Sven Bertlin, who continues as Executive Vice President of the Group until his retirement at the end of the year.
Wärtsilä floated two convertible subordinated debentures in 1994 which together totalled EUR 117.7 million. Of the outstanding loan, EUR 27.5 million at the end of 2003, EUR 1.0 million was converted into Series A and B shares between January and March and EUR 23.6 million between 1 and 19 April 2004. The non-converted balance, EUR 2.8 million, was repaid by the company on 3 May 2004. These conversions raised Wärtsilä's share capital by EUR 7,176,540. The share capital after the increase was EUR 215,951,442 and the total number of shares was 61,700,412 divided into 15,719,725 Series A shares and 45,980,687 Series B shares.
Varma Mutual Pension Insurance Company's holding of Wärtsilä votes decreased below 5%. The change was the result of the aforementioned share capital increase recorded in the Trade Register on 24 May 2004.
In April Fiskars Corporation raised its holding in Wärtsilä Corporation to 20.5% of the shares and 28.1% of the votes.
Wärtsilä will adopt IFRS reporting standards from the beginning of 2005. Preparations have proceeded as planned.
Wärtsilä Corporation´s Board of Directors has decided to convene
an Extraordinary General Meeting for 1 December 2004 during wich the Board will propose payment of an extra dividend of 1 euro per share. The Board will also propose a bonus issue in which one new A share and one new B share will be issued for two existing A shares and two existing B shares respectively.
A record number of orders for new ships have been placed during this year. The capacity of large shipyards to handle big vessels is full, especially in Asia. The bulk of shipbuilding capacity has been sold to the end of 2007 and many yards are refraining from marketing berths for 2008. The lack of capacity, the
sharp increase in the price of steel and the resulting rise in shipbuilding costs, and the action taken by China to curtail its economic growth will slow the rate of orders for large new vessels. Owing to the lack of capacity in Asia, European shipyards able to build smaller containerships, for example, with short delivery times increased their order books during the first half of the year. As a result, delivery times at the European yards could become longer.
Project activity has increased in the sectors of importance to Wärtsilä's own manufacturing - cruise ships, RoPax and RoRo vessels, LNG carriers and offshore applications. During September five cruise vessels were ordered bringing the total number of orders to eight. Comparable figure for last year is four.
The situation with fully booked yards in Asia and the filling up of yards in Europe is likely to cause a dip in order intake within the next 12 months.
The shift to contract based service continues although spare parts and components still contribute significantly to Wärtsilä's service sales. Sales of spare parts and service products for 2-stroke engines continue to grow, which gives Wärtsilä strong potential to increase its share of the 2-stroke engine service market.
A large part of the net sales of the Power Plants business is concentrated towards the end of the year. Regardless of the high price of oil the order intake and the demand for gas power plants is expected to stay at a good level.
Demand in Imatra Steel's market is expected to continue to remain favourable into next year.
GROUP PROSPECTS 2004
Net sales of the Power Businesses are expected to grow slightly. Wärtsilä's forecast for its full-year result remains unchanged, i.e. profitability is expected to improve slightly compared to 2003. A risk factor that could affect this estimate is the uncertain political situation in Iraq. The EUR 130 million restructuring provision made during the fourth quarter of 2003 to cover the programme is confirmed as sufficient.
Imatra Steel's net sales are expected to increase and its result to improve due to streamlining measures and the improvement in demand.
27 October 2004
Board of Directors
A teleconference on Q3 results will be held today Thursday 28 October starting at 10.45 am Finnish time (8.45 am WET) when the opportunity will be given to put questions to President and CEO Ole Johansson and to CFO Raimo Lind.
To participate in the teleconference, please call +1 415 537 1941, "Wärtsilä Q3 Results" slightly before the starting time.