To improve the quality and equality of our IR communications, we have started to organise open quarterly pre-silent calls with our CFO Arjen Berends. This quarter’s call was held on 3 January. In this blog post we summarise the main messages and questions from the call. If you would like to listen to the entire call, the recording is available here.
Before the Q&A session, Arjen provided a summary of the recent development and discussed the profitability drivers for 2023.
Order intake in Q4 has developed pretty much in line with our expectations and with the guidance. Still, it is good to remember that Q4/2021 was Wärtsilä’s all-time high in terms of order intake. We have progressed well in services both in Energy and Marine. Renewal rates of our service agreements have been over 90% and we expect this trend to continue in Q4 as well. It also is good to keep in mind that last year our operating cash flow was record-high.
The integration process of Voyage business with Marine Power is proceeding well. We are currently looking at potential savings and having discussions with our customers. By combining the engine, propulsion and voyage efficiency we can create unique customer value and drive decarbonisation of marine.
Our efforts to promote decarbonisation are continuing at a good pace. This includes more than just development of multi-fuel solutions and our R&D efforts are progressing according to plan. One example is hybrid installations, where we have 25% market share based on installed MWh and where we see increasing demand.
In December, we announced that we book provisions of EUR 40 million related to the Olkiluoto 1 and 2 nuclear project in Finland. It is good to keep in mind that this cost provision is not treated as IAC and it will have an impact on Energy business’ comparable operating profit in Q4/2022.
Cost inflation has remained high. When the cost inflation accelerated last spring, we had EUR 2.2 billion of order book deliveries for 2022 at the end of March. The impact will still be visible in Q4. In 2023, one of the profitability drivers is growth in the service business. We had a good year in services, and we expect the good development to continue in 2023. Decarbonisation is more and more in focus, and the increase in demand seen in 2022 is expected to continue in 2023. We are also working hard to improve the profitability of energy storage and Voyage, which are currently negative. In cost optimization, the closure of Trieste factory is one example, but we also continue to execute smaller actions throughout the organization. We also have a higher order book for the year than we had a year ago. It is good to keep in mind that when cost inflation accelerated last spring, the order backlog deliveries for 2022 with “pre-war prices” was EUR 2.2 billion, and now the share of these orders for 2023 is EUR 1.2. billion.
Several uncertainties are affecting the operating environment related to geopolitical tensions, potential trade restrictions, risk of recession and Covid disruptions deriving from China’s release of restrictions. Wage inflation is one of the negative factors that is affecting us. Also rising energy costs have an impact, even though the development is hard to predict. Fuel costs are relevant to us especially in testing, supply chain and energy intensive production.
Are you seeing typical seasonality in your service business in Q4 that would make your margins better compared to other quarters?
Compared to other quarters, we typically see a “hockey stick” in the fourth quarter, which is also anticipated this year.
How do you see energy storage costs and lithium prices evolving in 2023 and 2024?
It is too early to comment on cost development. But it is good to note that we have indexation in our contracts covering lithium prices and other raw materials where possible, so changes in these prices should not have an impact on our margins.
How are the deliveries of the pre-war order backlog of EUR 1.2 billion divided for the quarters?
Majority is in the first half of the year, maybe some in Q3 but not that much in Q4.
What kind of impacts will wage inflation have in your businesses in 2023?
In general, salary pressure is quite global and has an impact on both hiring and retention. Of course there are regional differences. For example in the USA, where we have a lot of energy storage business, there is pressure. But there is pressure also in Europe. We have of course made some assumptions in our planning but it is hard to predict whether those assumptions meet the reality. Nevertheless, we are better prepared than a year ago.
You have announced only a couple of orders for Q4, even though you said that expectations for Q4 are good. Could you comment on that?
Order intake is pretty much in line with expectations. Of course there are always some timing questions, but in general the situation looks quite good. Unfortunately we cannot announce all the orders, as all customers do not want to publish the information. So there is no 1-to-1 correlation between announced orders and order intake.
Are delivery times similar in 2022 and 2023? Any differences in supply chain issues in 2022 and now?
I would say that the delivery times are similar. Logistics costs are still a challenge, but I think we are getting better at handling deviations.
If you want to listen the complete call, it is available here.