Wärtsilä published its Financial Statements Bulletin January–December 2021 on Friday 28 January 2022 at 8:30 am EET. Here are the key messages and Q&A on the report.
In 2021, the Covid-19 pandemic continued to affect our end markets, our operations, and our financial performance. However, we saw signs of stabilisation and recovery in both the marine and energy markets towards the end of the year. The need for various flexible balancing solutions was illustrated by strong demand for energy storage solutions, as well as by some important thermal power plant orders.
In the marine markets, we saw mixed activity levels across different vessel segments. Vessel ordering activity overall improved, largely driven by containerships. At the same time, activity in our key vessel segments remained relatively low, particularly in the important cruise segment. The active cruise fleet capacity increased from around 20% at the end of June to around 70% at the end of December, which supports our service business going forward.
Full year order intake grew by 32% versus previous year, supported by all our core businesses, albeit from earlier low levels. The increase in order intake was mainly related to equipment, with an impact on sales mix in 2022. Demand for services was solid, resulting in a 17% growth in service order intake. Energy storage order intake reached a level of MEUR 720 in 2021.
Net sales and operating result
Net sales increased by 4%, driven by a 11% growth in service sales. Energy storage net sales reached a level of MEUR 325 in 2021. We saw a clear improvement in profitability. The operating result increased by 34%, largely driven by a more favourable sales mix between equipment and services, as well as improved service capacity utilisation. The Marine Power and Energy businesses in particular improved their results. Voyage also performed better towards year-end, driven by strong seasonal effects in Q4. Marine Systems’ result continued to be burdened by low scrubber volumes.
Cash flow and financial position
Our firm focus on working capital resulted in another record high year in operating cash flow. 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 first quarter to be better than that of the corresponding period in the previous year. However, the prevailing market conditions make the outlook uncertain.
Strategy and long-term opportunities
One key milestone during 2021 was the launch of a new strategic framework, the Wärtsilä Way, combined with the introduction of new financial and decarbonisation targets. Going forward, the Wärtsilä strategy is focused on shaping the decarbonisation of marine and energy industries. We emphasise customer success, innovation in technology and services, diverse teams making a difference, as well as continuous improvement. This strategy enables us to accelerate the marine decarbonisation and the shift to a 100% renewable energy future. We also launched revised financial targets and the “Set for 30” decarbonisation commitments. Financially, we aim for 5% organic growth annually and to reach a 12% operating margin. We see the biggest growth opportunities in energy storage, thermal balancing power, and services.
What was driving such a big increase in orders in Q4?
We received some major orders for thermal power plants in Mexico and Brazil. Marine Power and Marine Systems got some sizable important orders as well. Please remember that the nature of the thermal energy business is lumpy, meaning that we may not get similar orders every quarter.
How did you manage to reduce your working capital to below zero?
We have had a strong focus on improving working capital for the past two years, and it has really had an impact. In Q4, we benefitted from the improvement initiatives already implemented, but also received several sizable milestone payments from customers for orders received.
R&D expenditure as a % of sales increased – why?
The total sales volume has not yet fully returned to the pre-Covid level. At the same time, we have continued investments in R&D to deliver on our decarbonisation targets and to maintain our technological leadership.
You expect the Q1 demand environment to be “better” y-o-y – what kind of an increase in order intake in % would that translate into, and what are the drivers behind the improvement?
There are more positive signs in the market today (vaccinations, cruise industry restarting, energy storage demand booming, an increased need for thermal balancing power, etc.) compared to one year ago. However, it is still difficult to put a number on it. In many of the energy core markets (emerging markets in particular) the pandemic is not yet turning to a favourable direction, nor are the vaccination programmes picking up speed in those regions. New virus variants may also slow the process.
What are the main drivers for Wärtsilä’s orders and EBIT in 2022? Where do you see the biggest opportunities?
The main drivers for order intake in 2022 are the expected good activity in the Energy market (both thermal and storage), but also the continued positive development in the energy and marine service business activities in general. However, market uncertainty is still high, and we need to be prepared for volatility also going forward. Volume development and equipment/service mix will be important factors for profitability also in 2022. It is expected to be a growth year for the equipment business which impacts the sales mix. One important single item is the cruise business ramp-up after the Covid slowdown.
What is the current outlook for vessel contracting in the market?
In the short term, activity in the newbuild market appears to be slowing down slightly, with owners in most sectors expected to show less interest in newbuilds at current elevated price levels and long lead times. In the mid- to longer term, older vessels are expected to be replaced (or retrofitted, depending on the vessel age) at a faster rate, driven by significant regulatory pressure.
What type of efficiency improvement actions were behind the increase in Marine Power profitability?
It is mainly related to capacity adjustments initiated last year within field services, with increased flexibility, as well as footprint adjustments in the propulsion business. In addition, we have been optimising the ways of working in several other areas (all part of continuous improvement). Also an increased top line improves profitability through better utilisation of assets.
You mentioned lower newbuild scrubber margins – what is behind the decline? Is the scrubber business now diluting Wärtsilä or Marine Systems’ margins?
The order margins that can be achieved currently and also going forward in the scrubber business are lower than during the legislation-driven demand peak. This is not only driven by the decline in the demand level but also by an increased level of competition. Having said this, the margin levels of the scrubber business has never been dilutive to Wärtsilä or Marine Systems’ margins.
Voyage reached a positive comparable operating result in Q4 – what was behind the improvement, and will you be able to maintain the good development going forward?
The positive comparable operating result in Q4 was driven by good sales volumes (partly seasonality driven), especially by a good level of service activities. In addition, as part of Wärtsilä’s continuous improvement culture, Voyage started to realise positive financial impacts in Q4 as a result of various activities streamlining functions and increasing efficiency. Q1 is typically a clearly weaker quarter than Q4 due to normal business seasonality. Full year 2021 would be a better starting point for evaluating future margin potential than stand-alone Q4.
Why was Energy profitability % lower in Q4/21 than in Q4/20?
There was significantly more storage sales in Q4/2021 versus Q4/2020, and this storage volume comes with negative profitability (also driven by the ramp-up of the storage organisation). The unfavourable sales mix between equipment and services contributed to lower profitability %.
How much did energy storage contribute to orders, net sales, and EBIT?
Energy storage represented around 20% of the total energy equipment orders in Q4 (MEUR ~150), and close to 50% during the year (MEUR 720), while it represented around 45% (MEUR 170) of the total energy equipment sales in Q4, and around 33% during the year (MEUR 325). The profitability of energy storage business is currently negative.