Wärtsilä published its Interim Report January–September 2021 on Tuesday 26 October 2021 at 8:30 am EEST. Here are the key messages and Q&A on the report.
In the third quarter, order intake grew by 21% from a low level in the corresponding period in 2020, supported by all our core businesses. The demand for services remained solid across customer segments, resulting in a 14% growth in service order intake.
Net sales and operating result
Net sales increased by 11%, driven by a 20% growth in service sales. Profitability continued to improve. The comparable operating result increased by 43%, driven by higher sales volumes and a more favourable sales mix between equipment and services. We saw good progress especially in the Energy and Marine Power businesses. Marine Systems’ result continued to be burdened by low scrubber volumes.
Cash flow and financial position
Wärtsilä's cash flow from operating activities in Q3 was at a good level, taking into consideration that working capital increased to support near-term deliveries. Wärtsilä’s asset-light business model, strong cash generation ability, and high service volumes deliver overall operational stability.
While market conditions remain uncertain, we expect the demand environment for our offering in the fourth quarter to be considerably better than that of the corresponding period in the previous year.
Q: What was driving the increase in service orders and sales?
A: Improved economic activity in general drove the demand for services, especially in the marine markets. The growth was broad and driven by several customer segments. Only Energy service order intake decreased, which is somewhat related to some large conversion projects booked in Q3 last year. Service activities are strongly correlated with the running hours and age of equipment.
Q: What was the impact of rising logistics costs, and how do you anticipate the situation to develop?
A: Logistics costs have clearly increased during this year. Both sea and air freight rates have gone up. Logistics service providers have cancelled their price lists and are now giving prices day by day. In addition, port congestion puts pressure on delivery times and sometimes forces using air transport. The situation does not seem to be getting easier in the near term. We monitor costs and search for alternative routes and other logistics options on a daily basis.
Q: You expect the Q4 demand environment to be “considerably better” y-o-y – what kind of an increase in order intake in % would that translate into, and what are the drivers behind the improvement?
A: There are clearly more positive signs in the market today (vaccination programmes, cruise industry restarting, energy storage demand booming, etc.) compared to one year ago. However, it is still difficult to put a number on it. In many of the energy core markets (emerging markets in particular) the pandemic is not yet turning to a favourable direction, nor are the vaccination programmes picking up speed in those regions. New virus variants may also slow the process.
Q: What is included in items affecting comparability?
A: Items affecting comparability amounted to EUR 12 million (18) in Q3, related to both divestments in Portfolio Business and some smaller restructuring programs in various parts of the world.
Q: What is the current outlook for vessel contracting on the market?
A: Shipping markets have recovered from the covid-19 pandemic to a large extent, with firm demand combined with widespread logistical disruptions driving significant upside, and average earnings in 2021 so far having reached their highest level since the financial crisis. As a consequence, the shipbuilding market has significantly improved, driven primarily by the containership sector. In the short-term, activity in the newbuild market appears to be slowing, with owners in most sectors showing limited interest at current elevated price levels. In the mid- to longer term, older vessels are expected to be replaced (or retrofitted depending on the vessel age) at a faster rate, driven by significant regulatory pressure.
Q: What is the impact of high gas prices on your business?
A: The current abnormal situation with gas and LNG bunker fuel prices seems more like a temporary blip ahead and over the peak season than a new normal. We do not see the high prices or volatility reducing the appetite for LNG as a marine fuel in the long run. If high gas prices persist, carriers may switch to low-sulphur fuel, which most modern vessels can use in dual-fuel engines.
Q: How much of the uptick in service business came from one-time services needed to restart cruise operations? What kind of service order and sales levels can we expect, once the cruise business is fully back to normal?
A: We do not expect to see any one-time effect as a result of the cruise ramp-back. Cruise vessel operations ramping up during Q3 and Q4 this year and continuing during the first half of 2022 is stabilising the service business to a normal level. In major overhaul services, the uptick is not driven by the need to restart vessels, but more by the need to upgrade to meet decarbonisation requirements.
Q: What drove the increase in Marine Systems’ order intake in Q3, and what is your outlook going forward?
A: The main increase came from Gas Solutions, driven by the increasing LNG demand, with a lot of gas carriers being ordered in H1/2021. It is realistic to expect that this particular market will slow down somewhat in the forthcoming quarters. For the other main markets where Marine Systems operates, the short-term growth potential lies mainly in specific niche opportunities.
Q: What are the reasons behind the negative EBIT margin in Voyage?
A: Profitability is weak due to low absolute sales volumes, driven by residual covid-19 effects, and investments in digital competences to further accelerate our strategy.
Q: What were the primary drivers behind the strong growth in Energy order intake, and what is your outlook for the coming quarter?
A: There was good ordering activity for energy storage, compensating the lower activity in liquid and gas power plant orders. The good momentum in energy storage is expected to continue in the coming quarters. There is activity also in the power plant side, but with higher uncertainty and lower visibility.
Q: What was behind the clear improvement in Energy profitability?
A: Profitability improved mainly due to volume growth in both services and equipment, supported by robust execution.
Q: Fluence disclosed clearly negative profitability figures for their storage business. What is the profitability of your energy storage business?
A: Energy storage is a growth business entering a very rapid expansion phase associated with upfront investments. From a full end-to-end perspective, it needs to be noted that the margins on storage solutions are lower than the margins on engines, so when the share of storage solutions in the mix increases, there will be a margin impact driven not by deteriorating margins but by the mix.