Main messages from the Q4 2022 mid-quarter call

We hosted the Q4 2022 mid-quarter call on 14 November with our CFO Arjen Berends. In this blog post we summarise the main messages and questions from the call.

We hosted the Q4 2022 mid-quarter call on 14 November with our CFO Arjen Berends. 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.

Service business continues to do well, and we see good progress there. The pipeline of new equipment orders is also developing as expected. It is still good to remember that Q4 last year was a record high quarter for us in terms of order intake.

Our installed base has good utilisation rates, which have a clear correlation with our service business. We saw growth in the service agreements already during the previous quarters and the development has continued in line with our expectations during this quarter. It is also worth pointing out that the renewal rates for both our Energy and Marine service agreements is over 90%.

Our work in marine decarbonisation also includes hybrid installations. We have equipped more than 80 vessels with our hybrid installations and our market share there is about 25% (measured in MWh battery capacity). In energy, we announced an order to a Japanese power plant, where our engines replace combined cycle gas turbines.

Continuous improvement is a daily way of working at Wärtsilä. The propulsion joint venture in Zhenjiang, China is now closed, and you have probably also seen the announcement regarding our Trieste factory closure.

Are you fully booked for LNG carrier related equipment orders?
There are still some contracts from yards to equipment suppliers pending but in the short term, the yards are pretty much booked up. By short term I mean about 1-1.5 years forward, after that changes are possible.

Has the reopening of China had implications to your business?
It has helped us for sure. It has been quite cumbersome for our engineers to go to China and stay in quarantines. So yes, we are very happy about China reopening.

How should we think about the dividend for this year?
We will stick to our policy, which is to distribute at least 50% of our EPS as dividend. The Board of Directors will make the proposal for AGM so I will not further comment on this.

How do you see your cash flow developing towards the end of the year?
We had a record high cash flow in Q4 last year, and I can already say for sure that this year’s cash flow will not be on the same record high level. We are of course aiming for positive cash flow in Q4, and big milestone payments can make a big difference there.  

Are your service prices in line with the current cost levels?

You mentioned that you have a good equipment order pipeline and last year in Q4 you had some very big orders. Are there more of these big orders in the pipeline now?
There are always some bigger ones in the pipeline, but they do not happen that often. Actually I think the volume is quite good and there is a good pipeline also with sizable orders, but the EUR 400 million kind of orders are quite rare.

Are your prices in energy storage remaining firm after you raised them earlier this year?
Yes, I would say so. There is a new price level which has also been accepted by the market.

Are you still one of the top players in the energy storage market, amongst Fluence and Tesla?
Yes, I would say that has not changed and we are still in the top 3 players.

Now that the shipyards are full, how do orders translate into an order for Wärtsilä? Are there some ships that were maybe ordered 12 months ago that have not yet had the equipment orders come through?
This depends very much on the ship type. If you think about gas carrier orders, in Korea you would probably get the vessel in 2027, but now some yards in China are being reactivated as well. If a gas carrier is ordered for delivery in early 2027, the equipment order will probably not come to us before 2025 because customers want the latest technology. So, the longer the order book is, the longer this track will be.

What is the financial impact of the hybrid orders you are getting? Will there be more service contracts?
I would say that we make good margins on the hybrid installations and service volumes depend on the running hours.

Are you able to transfer the wage inflation to your prices on the equipment side of the business?
Renegotiating the prices of the existing contracts on the equipment side is challenging. However, we are making sure that there is a very tight link between our supply management and the HR department so that we can react as soon as possible. And for example, when we know that in a certain country the collective labor agreement says that the increase will be plus x%, we can already consider that in our quotes. The validity times of our quotes are also very short, I would say max a month at the moment.

What has been driving the major uptick in your service business?
Our service business is correlated with the ship utilisation. During this year, we saw the return of cruise and increase in container vessel running hours. Also gas carrier utilisation has been going up. Our strategy of moving from transactional services to service agreements, what we call moving up the service value ladder, is also paying off and supporting the stickiness of our customers. And like I mentioned before, the renewal rate of our agreements is very high.

Which one of your product areas is the key for your service growth going forward?
The majority comes from engines but of course propulsion is also one key area. In thrusters for example, there is a lot of rotating parts that cause wear and tear. Seals and bearings are also important.