Wärtsilä published its Financial Statement Bulletin 2023 on Wednesday 31 January 2024 at 8:30 am EET. Here are the key messages and Q&A on the report.
General/market environment
In 2023, Wärtsilä continued to develop positively in many ways. Our financial performance improved steadily throughout the year, and we achieved all-time highs in order intake, net sales, and cash flow from operating activities. We improved our profitability through growing services, improving the quality of revenues, and progressing in turning around Energy Storage & Optimisation and former Voyage operations. We mitigated the headwinds from cost inflation, geopolitical concerns, and a slowdown of global economic growth. The market sentiment for our businesses remained fairly positive in both marine and energy, and we maintained our focus on executing our strategy and supporting our customers in their decarbonisation journeys.
In the energy market, climate policy reached new milestones in 2023. At COP28, the United Nations Climate Change Conference, more than 120 countries pledged to triple global renewable energy capacity by 2030. The COP28 final declaration also called for transitioning away from fossil fuels, in line with Wärtsilä’s vision of a 100% renewable energy future and our readiness to enable engines to run on future fuels. During the year, the macroeconomy caused uncertainty in the overall investment environment, delaying decision-making especially in the engine power plants business. After a slow first three quarters of the year, our engine power plants business significantly picked up and achieved good order intake during the fourth quarter.
In the marine market, the investment appetite for new ships remained healthy in 2023, despite capacity limitations at the main shipyards in South Korea and China and further increases in newbuild prices. In July, the International Maritime Organisation (IMO) updated its strategy on cutting greenhouse gas emissions from ships, with a more stringent goal of reaching net zero emissions by or around 2050. As a result, stakeholders are now more aligned globally on the requirements and investments needed to decarbonise the industry. This will accelerate the decarbonisation transition in marine where Wärtsilä solutions can make a real difference. Decarbonisation provides notable opportunities, not only for newbuilds, but also for retrofits and conversions as shipowners and operators seek to keep their existing fleets compliant and competitive.
Order intake, net sales, operating result and cash flow
In 2023, order intake grew organically at 22%, and net sales organically at 7%. Equipment net sales decreased in Marine Systems and engine power plants. The comparable operating result increased by 53% to EUR 497 million with a comparable operating margin of 8.3%. This was mostly driven by continued growth in services and improved quality of revenues. Services accounted for 52% of our net sales, and we see additional growth opportunities by continuing to move up the service value ladder.
Cash flow from our operating activities significantly improved to EUR 822 million, driven by a better operating result, good level of received customer payments, and our continued working capital optimisation.
Board of Directors’ dividend proposal
The Board of Directors proposes that a dividend of EUR 0.32 per share shall be paid for the financial year 2023.
Outlook
Marine
Wärtsilä expects the demand environment for the next 12 months (Q1/2024-Q4/2024) to be better than that of the comparison period.
Energy
Wärtsilä expects the demand environment for the next 12 months (Q1/2024-Q4/2024) to be better than that of the comparison period.
Q&A
You have upgraded your outlook for Marine demand environment to be “better” for the next 12 months (Q1/2024–Q4/2024). What are the main drivers for this?
- We expect the passenger and offshore segments to recover from current low levels, and these are both markets where we have a very strong presence.
- The earnings of cruise and ferry operators are recovering, and the limited orderbook, aging fleets and pressure to reduce emissions are expected to drive new builds and retrofit activities.
- Demand outlook is also positive for offshore, as supportive energy prices are resulting in further fleet reactivations and interest in newbuild units.
- Transition to sustainable future fuels is already under way. Our position becomes even stronger as alternative fuels as well as hybrid applications get adopted.
- We also see good possibilities to grow our service business as well as retrofits.
You expect the demand environment to be “better” for the next 12 months (Q1/2024–Q4/2024) for Energy. What are the main drivers for this?
- In Energy, EPP and especially ES&O continue to have a favourable demand environment outlook. Constraints in global and energy-related supply chains have eased, which has had a positive effect, especially on the ES&O business.
- In the EPP business, there is a good pipeline, and we anticipate the 2024 order intake to be good. Market activity is on a good level especially in Americas region.
- The outlook for services is stable, with the present situation in the energy markets driving a stable utilisation of our installed base.
What were the drivers for higher profitability in Energy in Q4? What are the key drivers for profitability in Energy going forward?
- Good services performance contributed positively to the Q4/23 result. Also, the comparison period in Q4/2022 was burdened by a provision of EUR 40 million related to the Olkiluoto 1 and 2 nuclear project, as well as cost inflation. The agreement for the Olkiluoto nuclear project was signed already in 2013. Wärtsilä stopped offering nuclear-related projects several years ago.
- Profitability can vary quarterly depending on the sales mix between equipment and services sales, and especially storage volumes.
- Profitability in 2024 will be supported by better factory utilisation, improved operational leverage, and continued good service performance.
How does the transition from EPC to EEQ impact revenues and profitability? Did it already impact revenues in 2023?
- In 2023, the revenue impact was limited, but the change of strategy to focus more on EEQ projects has improved the quality of the orderbook. Currently the EPP orderbook is 80% EEQ, compared to 40% going into 2022. The overall risk level in the portfolio has decreased due to the change in strategy.
- The key difference in EEQ vs EPC projects is the general contractor role, which is primarily civil works. This portion comprises of roughly around 30% of the overall project scope. In shifting from EPC to EEQ, the project revenues drop by the civil scope, but the risk also decreases as most of the execution risk comes from the civil portion of the scope.
- Overall, revenue recognition in EPC projects is more evenly distributed during the project (through Percentage of Completion), while EEQ project revenues tend to be high around delivery (Completed Contract Method).
You are heading for a net cash position. What are your capital allocation priorities going forward?
- Our financial targets include the target of distributing a dividend of at least 50% of earnings.
- We will also continue to invest significant R&D funds to support decarbonisation technology development. In 2022 and 2023, we raised our R&D investments from the historical level of ~3% of net sales to ~4%.
- Capex in fixed assets is expected to be around the same level as depreciation.
- In addition, we continue to assess M&A opportunities as per normal practice in all business areas. With regards M&A opportunities, we concentrate on synergistic bolt-on acquisitions. Our main focus is to continue on growing organically and improving our profitability.
What’s the outlook for cash flow? Is the current level of “working capital to net sales” sustainable?
- We do not give guidance for our cash flow or net working capital.
- That said, year 2023 was good in terms of all time high operating cash flow that benefited from improved profitability and a material reduction in working capital (= 350M€).
- Our current working capital level is negative which is extra-ordinary, and we do expect it to normalise in 2024. However, our working capital to sales ratio has since 2020 been on a much lower level than the long-term historical average.
- We have continued our working capital optimization program and were successful in collection throughout the year (while sales went up our trade receivables declined by 120M€ versus 2022 Q4).
How is the ES&O strategic review progressing?
- In October, we announced a strategic review of ES&O to accelerate its profitable growth in a way that benefits its customers, employees, and the value creation for Wärtsilä shareholders.
- This review is still ongoing, during which all potential alternatives will be considered.
- Such alternatives could include different ownership options of the ES&O business from continued full ownership to potential full or partial divestment of the business or other possible strategic alternatives.
How is the Voyage turnaround progressing?
- The turnaround of the former Voyage, meaning Voyage Services (in Marine Power) and ANCS (in Portfolio Business) is moving well forward, and profitability is improving gradually.
- In 2023, the loss of the former Voyage was about halved versus 2022, so we are making progress.
What’s the outlook for future fuel pickup? Have shipowners been resistant in new investments?
- The outlook for future fuel pickup is positive as the pickup continues to increase across vessel segments. Containerships is one of the frontrunner segments in alternative fuel pickup with ~85% of containership tonnage ordered in 2023 being enabled either for methanol- or LNG-power.
- Pickup has increased also in vessel segments that are still today primarily ordering tonnage using conventional fuels.
- Interest in alternative fuels among shipowners and operators is increasing but still a large percentage of newbuild orders placed in 2023 were with conventional fuel. This indicates there is still a large potential for further pickup but also confirms a wait and see mentality remains, as owners might place bets on Carbon Capture or rely on “drop-in” biofuels which are today about 3-4 times more expensive than conventional low-sulphur fuel.
What is your understanding regarding the coal switch-off and what does it mean for balancing power demand?
- The overall trend for coal is clear: The global pipeline for new coal power outside of China is shrinking heavily, now being less than 100 GW compared to 600 GW in 2015, according to data from Global Energy Monitor. In the first nine months of 2023, only four countries started the construction of new coal power plants.
- As power demand is only increasing, the diminishing role of coal needs to be replaced with other technologies. Coal is a source of baseload power, which can be replaced with for example renewables and balancing power or baseload gas power, leading to reductions in emissions and most often, costs.
Why are you ranked as top 3 energy storage system integrator with S&P Global, but lower in others?
- The energy storage system integrator market remains an emerging market and there are several differences between analyst reports. Wärtsilä is among the top players, but the specific place depends on the source quoted.
- Differences between market share analyses vary by at least two factors: the project universe and considered projects within that universe. In battery energy storage, no provider has a perfect coverage, as the number of projects is enormous and constantly growing. All incumbents also have confidential projects not covered in the databases.
- Market share varies depending on the considered region, status, and technology of projects, if one is interested in MW or MWh, and if the project pipeline, installed base, or order intake is the considered value.
