Summary of the Q2 2022 Pre-silent call

To improve the quality and equality of our IR communications, we have started to organise open quarterly pre-silent calls with our CFO Arjen Berends. This quarter’s call was held on 20 June. In this blog post we summarise the main messages and questions from the call.

To improve the quality and equality of our IR communications, we have started to organise open quarterly pre-silent calls with our CFO Arjen Berends. This quarter’s call was held on 20 June. 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. The presentation slides can be found here.

A great milestone in Q2 was the opening of the Sustainable Technology Hub (STH) in Vaasa, Finland. The facility will help us in the journey towards decarbonisation of marine and energy. Now all our R&D will be in one location in STH, which will help in the development work. We expect to have an engine concept for ammonia ready in 2023, and for hydrogen in 2025. Our first methanol engine (W32) delivery will happen in 2023. We are #1 in marine hybrid power systems.

Our service business is very important for us, and in 2021, services net sales were approximately 2.5 billion euros. Service business is a key driver of our growth and profitability. We often talk about moving up the service value ladder, which means that we move from transactional services, meaning spare parts and field services, to optimised maintenance, and to retrofits and upgrades. There is huge potential to convert the existing fleet from HFO to LNG or to green fuels. On top of that, there is the performance-based agreement space both in the marine and energy industries. Currently we have 700+ vessels globally supported with lifecycle agreements and 90% of the cases can be solved remotely without sending anyone over to the location. Comparing to transactional services, the customer spending ratio EUR/kW is projected to increase by a factor of 2 to 5 when moving to performance-based agreements. However, we can also see great opportunities in transactional services. We are increasingly using digital solutions to reach out to customers that do not buy big quantities.

The energy market is still quite volatile and there is still a lot of uncertainty in the customers’ decision making. However, we see that the level of cost inflation is somewhat stabilising. There is a lot of activity in thermal power plants and the pipeline is good. However, it is a lumpy business and the timing of single orders can significantly impact quarterly orders. Energy storage was sluggish in Q1, and we had an order intake of 70 MEUR, mostly due to the rising price levels. Now the situation is stabilising, and customers are accepting the current price levels. Service business in Energy is doing well and going according to plan.

Also in Marine, service business is doing well. The newbuild market is impacted by cost inflation and limited yard capacity. The yards are quite full, and the delivery times for some vessels are extending to 2025 and beyond. 90% of the cruise fleet capacity was active at the end of May, and the port calls reached pre-covid levels. Offshore oil and gas market is improving in the services point of view, as the fleet has been reactivated. Offshore wind continues as before, there is a lot of demand for offshore wind installations in different parts of the world. Contracting for LNG carriers is still going  strong, as Europe wants to be less dependent on Russia.

We are confident about our guidance for Q2/22, which guided similar demand environment as in Q2/21.

What should we expect in terms of cash flow development?

Our poor cash flow in Q1 was somewhat related to the very strong cash flow in Q4 last year, which was strongly supported by supply chain financing solutions that we have in place, as well as some large advance payments received. We are still expecting a bit of a struggle in Q2, but the situation should improve during the second half of the year.

Are you renegotiating the prices on the existing energy storage orders as well?

Most of the order intake from last year has been secured for cost from a pricing point of view. But not all, because of the lag in getting the order in and purchase order out. Breaking up existing contracts and getting a higher price is not likely to work. All the new orders have been raised to the new price level and we are not accepting any orders below that.

What is the impact of the lockdowns in China to your service sales in Q2? 

The lockdowns in China are still impacting our servicing, although the impact is not massive. The good thing is that we have a lot of local service resources in China that can execute work there instead of flying people over from abroad. Most of the yards are also opening again.

Can you quantify the costs caused by the relocation of the Russian R&D center? When do you expect Voyage’s turnaround to happen given the situation?

We are now ramping up resources in other locations outside of Russia and moving some people from Russia to other locations. We are focusing on securing business continuity. It is too early to say how much the turnaround will be delayed but if I have to indicate some timeframe, I would say 6-12 months.

How is the cost inflation developing?

We saw an acceleration of cost inflation in Q1, which has now flattened. We have implemented indexation in almost all of our new contracts to safeguard our margins.

Is wage inflation accelerating? Is it covered by the indexation?

The pressure is up, varying by country. Contrary to the material cost inflation, wage inflation is probably here to stay. In certain cases, wage inflation is covered in the indexation such as in agreements.

Are you hedging raw materials?

We are not hedging any raw materials. We buy components.

Do you already see increased tender activity in the navy segment? What content do you provide for this segment?

Yes, the activity has increased. The content varies by ship type, but there are certainly many solutions that we can provide to the navy segment.

Have your factories been closed China?

Yes, but now they are open again. They were closed for about 6-7 weeks in Q1-Q2. Our most critical supply chain is not in China.

Are there new cruise vessel orders in the pipeline? How do you see the cruise service opportunities developing?

There are talks about new cruise vessels. Our service business correlates with running hours, so as the running hours increase, our service opportunity increases.

Is the recent gas price increase affecting the demand of your gas engines, especially in Energy?

No, we have not seen that much impact. Baseload plants are usually dual fuel anyway, so they can run also with liquid fuels.

You have a timeline to launch ammonia engine concept in 2023, and hydrogen concept in 2025. Can you start selling the engines already during these timeframes?

Yes, during those same years we can start selling the products.

We have not seen many published orders during this quarter. Why is that?

Customer approval is needed to publish the orders, and in many cases, customers are reluctant to give the approval for various reasons.

Are you able to give any indication of the energy storage order intake in Q2?

I can say that Q2 will be better than Q1.