Wärtsilä published its Interim Report for January–March 2024 on Friday 26 April 2024 at 8:30 am EEST. Here are the key messages and Q&A on the report.
General & market environment
Wärtsilä continued to make good progress during the first quarter of 2024. Our profitability improved, cash flow from operations increased and our order book ended up at a new all-time high driven by a continued strong order intake. We also made good progress in services, with service net sales growing by double-digits in both Marine and Energy.
In the energy market, the current macroeconomic situation caused uncertainty and delayed decision-making. On the positive side, the global energy transition advances steadily, which has resulted in a need for more flexibility in energy systems around the world. This creates ample growth opportunities for Wärtsilä in the mid to long term.
In the marine market, trade flows around the world have been impacted by the conflicts in the Middle East, the attacks on ships in the Red Sea, and the drought affecting the Panama Canal, which have led to longer average shipping distances, increased transportation costs, and delays to global supply chains. Driven by the increasing demand for ship capacity and decarbonisation-related ship renewal, investments in new ships were clearly higher than in the first quarter of 2023. The market sentiment continued to develop favourably for Wärtsilä’s key segments, especially on the passenger side.
Order intake, net sales, comparable operating result and cash flow
In the first quarter, Wärtsilä’s order intake grew organically at 17% supported by good equipment order intake in Marine and engine power plants, as well as continued growth in service. Net sales decreased organically by 6%. While we saw growth in service net sales, equipment net sales decreased in both Energy and Marine, with the largest decrease in Energy Storage & Optimisation (ES&O).
As we have communicated before, the Energy equipment business is lumpy by nature, which means that order intake, but also revenue recognition, can vary significantly from one quarter to another. In 2024, equipment deliveries and revenue recognition in Energy will be tilted towards the second half of the year, both in engine power plants and ES&O. In Marine, the lead times from equipment order intake to net sales are currently slightly longer, due to remaining constraints in shipyard capacity.
The comparable operating result increased by 50% to EUR 132 million with a comparable operating margin of 10.0%. The improved margin was supported by a more favourable mix between equipment and services, but negatively impacted by lower operating leverage during the quarter. Cash flow from operating activities significantly improved to EUR 258 million. The improvement was driven by a better operating result, but also by the very good level of received customer payments related to the strong order intake, and strong service sales generating a good inflow of cash.
Marine
Wärtsilä expects the demand environment for the next 12 months (Q2/2024-Q1/2025) to be better than that of the comparison period.
Energy
Wärtsilä expects the demand environment for the next 12 months (Q2/2024-Q1/2025) to be better than that of the comparison period.
Q&A
You expect the demand environment to be “better” for the next 12 months (Q2/2024–Q1/2025) for Marine. What are the main drivers for this?
- We see good momentum and opportunities in the passenger and offshore segments, both markets where we have a very strong presence.
- The earnings of cruise and ferry operators are recovering, and the limited orderbook, aging fleets as well as the pressure to reduce emissions are expected to drive new builds and retrofit activities. In Q1/2024 cruise operators (Carnival, Royal Caribbean) placed new order at yards (Meyer, Chantiers d’Atlantique). In the beginning of April, Norwegian Cruise Line announced a strategic long term fleet expansion plan of eight vessels, scheduled for delivery over a ten-year period between 2026 and 2036.
- Demand outlook is positive for offshore, as supportive energy prices are resulting in further fleet reactivations and increasing interest in new equipment.
- The transition to sustainable future fuels is already underway. The adoption of alternative fuels and hybrid applications is accelerating, further strengthening our position.
- We see good possibilities to further grow our service business as well as retrofits.
You expect the demand environment to be “better” for the next 12 months (Q2/2024–Q1/2025) for Energy. What are the main drivers for this?
- In Energy, Engine Power Plants and especially Energy Storage and Optimisation continue to have a favourable demand environment outlook. Constraints in global and energy-related supply chains have eased, which is driving demand, especially in the Energy Storage and Optimisation business.
- In the Energy Power Plants business, there is a good pipeline, and we anticipate the 2024 order intake to be good, especially in the Americas region.
- The utilisation of our Energy installed base is stable, providing good opportunities for services going forward.
What were the biggest drivers for your service order intake growth?
- Service order intake increased by 7% with good development in Marine, mainly supported by the cruise, ferry and navy segments. Service order intake decreased in Energy mainly due to the fact that the comparison period included a sizeable upgrade project and renewals of several agreements.
The price of lithium has come down. What is the impact on your order book in Energy Storage and Optimisation?
- We do utilize indexation as a part of our pricing which means that Wärtsilä’s gross margin (%) in the project stays fixed. The relevant index for us is a battery Raw Material Index (RMI).
- In our current orderbook, projects are valued based on the value at the time of booking the deals in order intake. As the price of the battery is typically locked in connection with the contract signing, typically no adjustments are needed.
Your Group net sales decreased by 10%. Could you elaborate on this?
- Service net sales increased by 13% while equipment net sales decreased by 33%
- The decrease was mainly related to the periodisation of equipment deliveries between quarters.
- In Energy, equipment net sales decreased by 58%, with the largest decrease in Energy Storage and Optimisation. It is also good to note, that order intake in Energy Power Plants was on a low level during the first three quarters of 2023. The share of EPC (Engineering, Procurement and Construction) deliveries was lower, which has a negative impact on sales as well. The periodisation for EEQ (Engineered Equipment) deliveries was unfavourable for Q1. In Energy, the deliveries are tilted towards the end of the year.
- In Marine, equipment net sales decreased by 12%. The decrease was mainly related to the periodisation of deliveries.
Energy equipment net sales decreased by over 30%. Why?
- Main decrease is due to Energy Storage and Optimisation where the net sales decreased by 75%. Equipment net sales decreased in Energy Power Plants as well.
- Due to periodisation of orders, the deliveries are tilted towards the end of the year. In project business, revenue recognition will fluctuate quarter by quarter depending on the delivery schedule of the projects.
- It is good to note, that revenue recognition in Energy Storage and Optimisation is based on percentage of completion (POC). Major part of the revenue recognition is tied to the battery delivery from supplier.
- Regarding Energy Power Plants, it is good to note, that order intake was on a low level during the first three quarters of 2023. The share of EPC (Engineering, Procurement and Construction) deliveries was lower, which has a negative impact on sales. The periodisation for EEQ (Engineered Equipment) deliveries was unfavourable for Q1.
Are your lead times in Marine longer than before and why?
- In Marine, the time between ordering and sales recognition is increasing on average, from earlier 12-18 months towards 18-24 months, although there are large variations between ship types.
- This is due to remaining constraints in shipyard capacity.
What were the biggest drivers behind improved profitability in Marine?
- The comparable operating result was supported by good performance in services, but negatively impacted by increased R&D costs to support the development of decarbonisation technology, as well as increased depreciation and amortisation.
- The comparable operating margin was supported by a more favourable business mix between equipment and services (service net sales increased by 15% while equipment net sales decreased by 12%)
What were the drivers of Energy Storage and Optimisation’s profitability in Q1/2024? How do you see the profitability development in Energy Storage and Optimisation going forward?
- Comparable operating result in Energy Storage and Optimisation was low in Q1/2024 due to low volumes.
- Going forward, we expect the profitability to improve on the mid- to a long term driven by good volumes, better operating leverage and improved execution capability.
- We may still see some quarterly fluctuations in revenues and profitability due to the lumpy nature of project business and especially as some orders are very sizable.
What supported your operating cash flow? What’s the outlook for 2024? Your working capital continued to decrease, how should we think about that going forward?
- Cash flow from operating activities in Q1/2024 was again strong after a very strong Q4/2023 and full year 2023 and ended at EUR 258 million. The improvement was driven by the better operating result, but also by the good level of received customer payments related to the strong order intake, and strong service sales generating a good inflow of cash.
- We do not give guidance for our cash flow or net working capital.
- Our current working capital level is negative which is extra-ordinary. We expect it to normalise during 2024.
- Since 2020 our working capital-to-sales ratio has been on a much lower level than the long-term historical average. Actions on all elements of working capital (receivables, payables, inventories, etc.) have well supported us to keep the working capital on a low level.
How is the strategic review of Energy Storage and Optimisation progressing?
- In October, we announced a strategic review of Energy Storage and Optimisation to accelerate its profitable growth in a way that benefits customers, employees, and the value creation for Wärtsilä shareholders.
- No update on the schedule: This review is still ongoing, during which all potential alternatives will be considered.
- Such alternatives could include different ownership options of the Energy Storage and Optimisation business from continued full ownership to potential full or partial divestment of the business or other possible strategic alternatives.
