Wärtsilä published its Interim report January–March 2022 on Thursday 28 April 2022 at 8:30 am EET. Here are the key messages and Q&A on the report.
The continued impact from Covid-19 and the Russian attack into Ukraine in the first quarter of 2022 intensified overall uncertainty in the global business environment and amplified concerns related to cost inflation and global economic development. While the Covid-19 situation stabilised or improved in certain parts of the world, the recent lockdowns in China show that the impact is far from over. Overall, we saw uncertainty increase on the demand and supply side in both our end markets.
In the energy markets, the sanctions and an unforeseen price volatility had a negative impact on global supply chains. For example, the price of lithium nearly doubled during the first quarter. This type of development has led to higher prices in our offering, and customer decision making slowing, especially in the energy storage business. The need for power system flexibility to support renewable energy sources remains and resulted in for example an order to supply 110 MW of flexible thermal balancing power to Italy. The energy transition in Europe may even accelerate as Europe strives to become less dependent on Russian oil and gas. We continue to see long-term opportunities in balancing power globally.
In the marine markets, newbuild investments eased as a result of higher prices and limited shipyard capacity. Bunker fuel has widely become more expensive than ever, and activity levels in our key vessel segments continued to vary. The cruise industry faced temporary headwinds, as surging Covid-19 infections slowed down vessel reactivations. At the end of March, around 70% of the cruise fleet capacity was active, which was flat compared to the situation at the end of December. Activity in the offshore oil and gas segment, however, has seen a notable increase, as higher crude oil prices have supported demand. The need for Europe to be less dependent on Russian gas might lead to opportunities in maritime LNG transportation.
Total order intake grew by 11%, supported by a good level of equipment orders in the Marine Power, Marine Systems, and Energy businesses. The demand for services also improved.
Net sales and operating result
Net sales increased by 30%, driven mainly by growth in energy equipment deliveries. Comparable profitability improved. We foresee cost inflation to remain high during the rest of 2022. Growth in equipment deliveries, and the large installed base support our long-term opportunities in the service business. Our comparable operating result increased by 61%, thanks to higher sales volumes, especially in the Energy business. Unfortunately, the operating result ended up being heavily negative, due to a write-down of approximately EUR 200 million made as a result of a decision to downscale operations in Russia. The situation in Russia will impact our sales volumes during the remainder of 2022.
Cash flow and financial position
The negative cash flow development was mainly driven by working capital build-up to support near-term deliveries and by outgoing payments related to energy storage project deliveries. Wärtsilä’s asset-light business model, strong cash generation ability, and high service volumes deliver overall operational stability.
Wärtsilä expects the demand environment in the second quarter to be similar to that of the corresponding period in the previous year. However, the prevailing market conditions make the outlook uncertain.
Strategy and long-term opportunities
In the longer term, we expect the use of renewable energy to accelerate, which sets the scene for more balancing power, while rising fuel costs emphasise the need for fuel efficient solutions.
What kind of indirect impacts did the sanctions against Russia have on Wärtsilä’s performance in Q1?
The sanctions accelerated the already existing cost inflation as well as logistics and availability challenges throughout the supply chain (steel prices more than doubling, lithium prices more than doubling, challenges especially in automation-related parts, prices for logistic rising, etc.). Increasing number of suppliers are trying to break open existing agreements to increase prices.
How did you conclude the EUR 200 million write-down?
We have considered different scenarios for our Russian related business and how the sanctions impact those. The EUR 200 million write-down includes approximately EUR 75 million of impairment of Voyage related goodwill and intangible assets, approximately EUR 50 million of impairment related to assets in Russia and approximately EUR 75 million write-down related to trade-sanctioned projects and receivables. The write-down will be included in items affecting comparability and therefore, does not impact comparable operating profit. The outcome represents our view of the most likely scenario.
Why did you have to impair Voyage goodwill?
Voyage has a sizable and critical operational and R&D footprint in Russia, coming from the Transas acquisition in 2018, which was valued at MEUR 210 (enterprise value). While we are planning to downscale operations in Russia, we have business continuity plans in place to ensure there is no disruption to our customer commitments. We anticipate that this will have a slowdown effect on the Voyage turnaround and business case realisation.
Is it fair to assume that comparable operating profit margin will increase in 2022?
As stated before, 2022 is expected to be a year of equipment as a result of strong growth in equipment orders in 2021. Higher equipment growth dilutes margins, as margins in equipment projects are lower than in the service business. We foresee cost inflation to remain high during the rest of 2022.
What are the biggest opportunities and headwinds in terms of orders and EBIT this year?
The main drivers for order intake are the expected good activity in the Energy market, but also the continued positive development in both the energy and marine service business activities in general. However, market uncertainty is high, and we need to be prepared for volatility also going forward. EBIT should be supported by the cruise business ramp-up and a good sales volume development, while being burdened by continued Covid-19 challenges, sanctions on Russia, high cost inflation, supply chain bottlenecks, and a less favourable sales mix due to the strong growth in equipment deliveries.
What is the outlook for LNG carrier ordering going forward, considering increasing gas prices and many countries striving to limit their dependency on Russian gas?
The outlook for LNG carrier orders remains positive, as in 2022 the order volumes are expected to grow compared to the strong 2021 volumes. The planned growth in LNG liquefaction capacity is expected to further support the future contracting of LNG carriers. The future demand for LNG is elevated, as many countries are planning to shift away from Russian pipeline gas to LNG, requiring more LNG carriers. However, this is a multi-year initiative to ramp-up the required infrastructure and build the LNG carriers, as the specialist shipyards capable of building LNG carriers have few to no slots available in the short term.
What kind of an impact did the Covid-related lockdowns in China have on Marine Power operations and performance?
We see lockdowns causing delays and disruptions to the supply chain, similar to those seen in the early days of the pandemic. The impact is also noticeable in spare part availability and on-time delivery. Further, limitations of movement in China are foreseen to affect our ability to perform service jobs at shipyards in China and therefore impacting the utilisation of resources in China. Our engine production joint ventures in China are currently in full lockdown.
For Marine Power, you mentioned customers stocking up spare parts – was this a temporary peak only, or do you expect the trend to prevail?
By default, customers increase safety stocks when they hedge against possible risks. While the act of stocking up safety stocks is a temporary event, we can expect customers to keep higher stock levels until the global supply chain is more stable and predictable.
With the HFO/LSFO fuel price spread spiking, have you received new scrubber orders? How is the outlook going forward?
The fuel price spread is one of the key determining factors for increased business activity in the scrubber retrofit market. We have seen the sentiment in the retrofit market improving, but at the same time high shipping rates, the current supply chain problems with critical component availability, as well as the Covid-19 situation in China impacting dry-docking slots and length very heavily, are postponing customer decision-making. For the scrubber newbuild business, the number of opportunities decreased slightly in the last quarter after growth in the previous 6 months.
How much did energy storage contribute to orders, net sales, and EBIT?
Energy storage represented around 30% of total energy equipment orders in Q1 (MEUR ~70 vs. MEUR ~10 in Q1/21), while it represented around 40% (MEUR ~130 vs. MEUR ~10 in Q1/21) of total energy equipment sales. The profitability of energy storage business is currently negative. However, the gross margins are positive.
What was behind the low energy storage order intake in Q1? What is the outlook going forward?
The slow order intake in Q1 was due to the price increases in the storage value chain. The battery industry has been suffering from price increases, and the price of lithium has increased by more than 300% during the past 12 months, and has more than doubled since November. The pipeline remains good, but the timing of projects is pushed forward.