Pre-silent call for the third quarter was held on 5 October with the CFO Arjen Berends. In this blog post, we summarise the main messages and questions from the call. The recording of the call is available here.
Before the Q&A session, Arjen discussed the recent development of the businesses, market sentiment, and opportunities.
Market sentiment has remained at a positive level, even though segment-specific situations differ. Service business continues on a good level, clearly supported by the strategy of moving up the service value ladder.
Decarbonisation and fuel efficiency remain topical in discussions with customers, similar to the first half of the year. The topics remain relevant because of the upcoming regulatory requirements, and carbon taxes. Customers understand that fuel efficiency is increasingly important in the future, which brings good opportunities for Wärtsilä.
The 1.2 billion order book, which was hit by cost inflation coming from the beginning of last year when the war started, will be mostly out of the books at the end of Q3 as previously estimated.
The overall view of the markets is stabilized. The pipelines are good in both Energy and Marine businesses. Engine power plant order intake was estimated to improve towards the second half of the year, but the timing of auctions related to those might affect the amount of how much higher the order intake will be on H2 compared to H1. Headwinds have been seen on the marine side with slot capacity at yards. The pipeline for equipment orders at yards is at a good level but new ship orders are hampered by slot availability and prices that are trending up.
You stated that the engine power plant orders are taking longer than estimated, are those still in line with H2 order estimates, or taking even longer? And are these explicitly on the thermal engine business, not affecting the storage business side?
We believe that power plant order intake in H2 will be higher than in H1. Now there have been shifts from Q3 to Q4 for some orders because of the auctions, but we cannot estimate if the shifts can move even from Q4 to Q1. Our storage business is very active, and we don’t see any problems there.
Can you give an update on the margin drivers, Voyage business turnaround and Trieste-Vaasa factory consolidations, what is the situation with those?
The Voyage business was separated into two parts. One part is now called Voyage Services, which we integrated into Marine Power and another part is called Automation Control Navigation Systems (ANCS), and it was integrated into Portfolio Business for divestments. If these two parts are viewed as a unit, the result is significantly better than last year.
Regarding the factory cost and margin, we are in the so-called relocation mode, by moving products from Trieste to Vaasa, and from the old Vaasa factory to the new Sustainable Technology Hub in Vaasa. Processes are ongoing in Trieste, and we estimate these to last until next year. However, the activities in Vaasa between the old factory and STH are mostly done.
Do you think the competitive picture in energy storage system (ESS) markets is changing?
The markets are still growing. The new entrants, such as the Chinese Sungrow, are quite aggressive in pricing and their goal is to take a big share of the market. However, there is a lot of demand for energy storage and hereby it is not mandatory for us to grow as fast as the market. We are more selective in the approach and the projects we take, as we prefer to have the right risk reward balance and a reputation that allows us to be competitive in the markets without competing with the price. We estimate to be the first storage business in the world with black numbers.
Why is Wärtsilä growing much faster on services compared to almost all other engineering companies at the moment?
We have a good strategy for moving up the service value ladder. I believe that our strategy is paying off. We can see that offshore is very active, and has been growing throughout the year, but at the same time merchant business is decreasing, which makes it a mix of both. Our strategy of getting more agreement coverage and increasing the share of wallets is working, but everything depends on the markets.
Regarding the change in the competitive landscape on energy storage systems, have you been able to retain your pricing on previous levels?
We have always had quite a good pricing level. The issues were related to having an order book when the price escalations hit. Since that, we implemented the indexation which has been beneficial. Also because of the new entrants in the markets with price-aggressive strategies, the good chances of increasing the prices are limited.
On the ESS, do you see the pricing pressure being in specific types of projects, for example, on lower spectrum projects, or are high aspect projects also having price competition?
It varies, but probably in both. We have not seen a pattern on projects where specific competitors only appear, these vary.
Are you fully compliant with the Inflation Reduction Act (IRA) in the US, given that your engine manufacturing is in Europe?
We are not benefitting directly from the IRA on the engine side, but more indirectly by it driving engines towards renewable energy sources, balancing and storage.
Looking into revenues and fixed cost absorption in the second half of the year on the power plant side, is there a substantial drop in revenues out of backlog because of the weak order intake?
We have been rather low on the thermal business ordering. There is a lot of uncertainty and other influences on the market playing a role. However, we believe the orders will return, and we will play a big role in the business of balancing power of the world. Timing is difficult to estimate precisely. The decision to close the Trieste manufacturing site was a good decision at the right time when looking at how the market has developed.
Where the order book for Energy products, especially thermal balancing and energy storage is growing fastest from the geographical perspective?
On both the storage business and thermal balancing power, the geographical activity is similar. We see most activity in the North America, Europe, Australia, and Asia.