Key messages and Q&A on Financial Statements Bulletin 2022

Wärtsilä published its Financial Statements Bulletin January–December 2022 on Tuesday 31 January 2023 at 8:30 am EET. Here are the key messages and Q&A on the report.

General/market environment

The year 2022 was characterised by geopolitical tensions and uncertainty in the global business environment. The war in Ukraine has had a strong direct and indirect impact on the markets we operate in, especially the energy markets. Following Russia’s attack on Ukraine, we exited from the Russian market. However, despite the continuing challenging market conditions, demand has remained at a good level both for equipment and services. 

In the energy markets, the market situation remained volatile during the year. The war in Ukraine, the consequent sanctions on Russia and the Covid-19 pandemic contributed to global cost inflation as well as price volatility in the energy markets. At the same time, climate policies around the world continue to evolve towards more ambitious decarbonisation targets. We have seen that the demand for balancing power has been growing and we have signed important orders for both thermal balancing power and energy storage solutions throughout the year. In the fourth quarter, for example, we signed a contract to deliver a new grid-scale energy storage facility in the UK, and dual-fuel balancing engines for two new power plants in the USA, among others.

In the marine market, the market sentiment continued to improve throughout 2022. Ordering activity was supported by record-high orders for LNG carriers, especially in terms of order value. Increasing demand for tonnage, improved volumes in the passenger travel segment and continued fleet reactivations developed favourably. This also supported our service business. The active cruise fleet has been 94% at the end of 2022 compared to around 70% at the end of 2021. Decarbonisation continues to be an increasingly important topic for our customers. One proof point of our ability to support our customers’ environmental targets is the announced order for hybrid propulsion systems for four new heavy lift vessels. This innovative hybrid system will minimise the ships’ CO2 emissions, thus supporting the marine sector’s decarbonisation ambitions.

Order intake

We were able to grow our order intake by 6% during the year. We were especially successful in the service business, where our order intake grew by 17% exceeding the equipment order intake in absolute terms.

Net sales and operating result

Net sales increased by 22% in 2022. Service net sales grew by 12%, with growth in all businesses. Interest in long-term agreements has been high, and our service agreement renewal rates in both the Marine and Energy businesses were more than 90%. Equipment net sales increased by 33% and was strongly supported by growth in Energy equipment deliveries. The comparable operating result decreased by 9%, supported by higher sales volumes and burdened by cost inflation, a less favourable sales mix between equipment and services, and a cost provision related to the Olkiluoto 1 and 2 nuclear project. Particularly the profitability of projects taken before the acceleration of cost inflation in the beginning of 2022 has suffered. 

Outlook (near-term)

Wärtsilä expects the demand environment for the next 12 months in the Marine business (including Marine Power and Marine Systems) to be similar to that of last year. For the Energy business, Wärtsilä expects the demand environment to be better than last year.

Whereas global economic and political uncertainty is set to continue, our strong order book in both equipment and services will support our ambitions for 2023. At the same time, the share of equipment orders taken before the acceleration of cost inflation in the beginning of 2022 will be significantly smaller. We aim to improve profitability by climbing the service value ladder, and by turning around the Energy Storage and Voyage business units.

You expect the demand environment to be “similar” y-o-y for Marine and “better” for Energy – what kind of a development in order intake in % would that translate into, and what are the drivers behind it?

In Energy, both storage and thermal markets have a good pipeline. In Marine, yards are full at the moment and high ship prices and long lead times may postpone customers’ decision making. Demand for decarbonization solutions is expected to remain good. The same goes for overall service demand. It remains difficult to put a number on it, due to many uncertainties in the market. The global economic development is also difficult to predict.

What are the biggest opportunities and headwinds in terms of orders and EBIT for 2023?

We are not providing guidance for the margins, but if we look at positive and negative drivers we can say the following:

  • EBIT should be supported by growth in service, continued decarbonization push in both the energy and marine markets, profitability improvements in Energy Storage and Voyage Business, and continued footprint and cost optimization. We have a strong order book both in new equipment and services and the orderbook includes an overall lower value of new equipment orders sold before the acceleration of cost inflation in the beginning of 2022.
  • On negative side, we have wage inflation and the risk of higher costs of energy, for example fuel costs for testing, and higher gas price. Even though energy costs in general level would come down, impact on us come in delay: higher costs are expected for 2023 deliveries which were booked before the acceleration of cost inflation in the beginning of 2022.
  • It is also fair to say that there are lots of uncertainties: geopolitical tensions, potential trade restrictions / trade wars, Covid disruptions deriving from China’s release of restrictions and recession risk (although the messaging around this is changing frequently). 

Why did the cost inflation have a more negative impact in Energy business than in Marine Q4/22?

In Energy we deliver a lot more equipment around the engines than in marine, definitely in turnkey EPC contracts (out of our Energy new equipment net sales 2022 51% was EPC). In Energy we also have the Storage business which with the batteries has been highly sensitive to inflation considering the development of lithium prices).

There are recession fears in the market. What is your plan B, if the world lands in a recession in 2023?

We have a good order backlog, which gives certain visibility. In addition, our service business is a fairly stable business. Naturally, in the case demand and order intake severely weakens, we need to adjust our cost base accordingly.

What are your assumptions for cost inflation going forward? Have we reached the peak and are costs already coming down?

This is very difficult to estimate and varies between cost items, geographies, and businesses. The increased energy price is impacting the prices of certain components, while salary inflation pressure is very different in different geographies depending on cost of living, governmental support, and labour market conditions.

What should we expect for ETR for the full year 2023?

ETR (effective tax rate) has been unusually high in recent years (2022 being special due to a loss making situation and extra-ordinary high non-deductible items) largely driven by losses in units which were not possible to offset against profits in other entities. Actions have been taken to improve the situation in the loss making units.

What actions are you taking to improve Voyage profitability?  

The continuous review of cost structures and product costs, as well as changes to the product mix with increased focus on end-to-end digital solutions, are expected to translate into improved profitability in 2023. The integration with Marine Power is moving forward and is also expected to generate efficiencies and cost savings during the year. The strategy work is progressing and will be concluded in Q1.

What were the key drivers for positive Voyage result in Q4? Is it fair to assume, that profitability will be on the same level in 2023 as in Q4? 

The strong result Q4 was largely the outcome of improved delivery volumes and lowering costs. Profitability correlates strongly with business volumes. We expect that 2023 full year result will be better than the full year result of 2022, however numbers will be part of Marine Power.

Energy comparable operating margin in Q4/22 declined clearly compared to Q4/21, even though net sales increased by 46%, why?

Main driver for the declined operating margin % was the EUR 40 million provision made for Olkiluoto nuclear project. Cost inflation in projects as well as sales mix with less Services and more Equipment sales contributed negatively to the operating margin in Q4. Cost inflation realized in last quarters is not expected to impact with equal magnitude in coming quarters as the share of equipment orders booked before the acceleration of cost inflation in the beginning of 2022 will be significantly smaller.

How much did energy storage contribute to orders, net sales, and EBIT?

Energy storage represented around 40% of total energy equipment orders in Q4 (168 MEUR versus 146 MEUR in Q4/21), while it represented around 54% of total energy equipment sales (328 MEUR vs. 170 MEUR in Q4/21). The full year comparable operating margin of the energy storage business was approximately -4% in 2022. We have seen an improving profitability trend throughout the year.

How do you see the European energy crisis on your demand? Does it clearly increase your demand in Energy? 

The European energy crisis affects the market landscape in a couple of ways. On the short-term, price and availability of gas causes some uncertainty and likely postponements in finalizing investment decisions. However, our customers base their decisions on an outlook over decades, while the energy crisis should ease in a matter of a few years. As renewable energy helps in solving the energy crisis, the outlook for battery energy storage and thermal balancing power has clearly improved.

How are you proceeding with the Energy storage turnaround plan?

The turnaround plan is proceeding well. The plan is to a great extent based on higher volumes, better cost leverage as well as improved product costs. We also progress well to scale power system optimisation based on GEMS software and AI. The order intake in 2022 as well as the order pipeline supports our turnaround plan.

How much of your Energy thermal order intake was balancing power in 2022?