Wärtsilä Corporation FINANCIAL STATEMENTS BULLETIN 7 Feb. 2002
Wärtsilä Group’s net sales totalled EUR 2,358.7 (2,706.8) million for the financial year 2001. The profit before extraordinary items was EUR 508.7 (336.1) million. Earnings per share were EUR 5.53 (4.20). Power Divisions’ operating profit was EUR 87.8 million (86.2) or 4.0% (3.8) of the net sales. After restructuring provisions totalling EUR 122.4 million (0.0), the Power Divisions showed an operating loss of EUR -34.6 million (86.2).
The Board of Directors proposes to the AGM a dividend of EUR 0.50 per share and an extra dividend of EUR 3.50 per share, making a total dividend of EUR 4.00 per share.
Net sales and result
Wärtsilä Group’s net sales totalled EUR million 2,358.7 (2,706.8). Comparable net sales after eliminating the changes in the Group’s structure decreased 5.0%. Net sales of the Power Divisions decreased to EUR 2,174.3 million (2,287.8) and Imatra Steel’s net sales to EUR 186.4 million (194.1).
The Group’s operating profit was EUR 523.9 million (367.1). This included non-recurring capital gains from the sale of Assa Abloy and Sanitec shares, totalling EUR 550.4 million, as well as EUR 122.4 million in restructuring provisions related to the Power Divisions. The comparable operating profit included EUR 225.4 million non-recurring capital gains. The operational profitability of the Power Divisions was on the same level as last year. Imatra Steel’s profitability declined.
Net financial expenses decreased to EUR 15.2 million (31.0) and represented 0.6% (1.1) of consolidated net sales. Dividends from Sanitec, EUR 8.6 million (0.0), and from Assa Abloy, EUR 5.7 million (5.7), were recorded under financial items in Wärtsilä’s accounts. The result before extraordinary items was EUR 508.7 million (336.1).
Taxes totalled EUR 194.7 million (96.4) including EUR 219.5 million (93.3) in taxes for the financial year. The effect of non-recurring items in total taxation amounted to EUR 196,1 million (65.4). Deferred tax assets totalling EUR 31.7 million were recorded based on confirmed tax losses of foreign subsidiaries.
Wärtsilä Group recorded a net profit of EUR 305.7 million (213.2). Earnings per share were EUR 5.53 (4.20), which included non-recurring items of EUR 4.13 (2.95). Return on investment (ROI) was 43.0% (25.4) and return on shareholders’ equity (ROE) was 33.7% (27.6).
Financing and capital expenditure
Wärtsilä’s cash flow after investing activities was strong in the period, EUR 532,5 million (221.4), as a result of large share disposals. Cash flow from the Power Divisions was negative. Stock levels increased owing to the timing of large deliveries.
Imatra Steel’s cash flow, EUR 0.6 million (5.0), included an acquisition.
The Group’s financial position was good. Cash reserves at the close of the period totalled EUR 184.6 million (118.9). Net interest-bearing loan capital decreased to EUR -56.5 million (396.7). The solvency ratio improved to 47.3% (35.1) and gearing was 0.01 (0.60). Treating the convertible subordinated debentures as shareholders’ equity, the solvency ratio improved to 48.6% (40.2) and gearing was -0.02 (0.40).
Capital expenditure during the period amounted to EUR 97.1 million (207.7), which comprised EUR 29.6 million (151.7) on investments in shares and EUR 67.5 million (56.0) on production investments. Depreciation was EUR 126.0 million (103.1), which included a writedown of EUR 37.5 million related to non-recurring restructuring measures and EUR 11.3 million in amortisation of goodwill.
In June Wärtsilä acquired the Swedish marine service company Ciserv AB, which had net sales in 2001 of approx. EUR 9 million. In October Wärtsilä acquired the Finnish biofuel power plant manufacturer Sermet Oy, which had net sales in 2001 totalling approx. EUR 23 million. In November Imatra Steel acquired a forge in Scotland which was renamed Imatra Stampings Ltd; its net sales in 2001 totalled approx. EUR 22 million.
In January 2002 Wärtsilä concluded an agreement covering the acquisition of John Crane-Lips, a leading global supplier of marine propulsion systems. This company’s net sales in 2001 amounted to EUR 249.4 million with 1,200 employees. Its profitability is good. The acquisition price was approx. EUR 350 million.
Research and Development in the Power Divisions totalled EUR 79.8 million (79.6), or 3.7% (3.5) of their net sales. Imatra Steel’s R&D expenditure was EUR 1.7 million (1.9).
Changes in group structure
In June Wärtsilä sold its entire holding in Sanitec, 46.7% of Sanitec’s share capital. In Wärtsilä’s 2000 accounts Sanitec was consolidated as a subsidiary until the end of March and as an associated company from the beginning of April. Sanitec was no longer consolidated as an associated company in 2001.
Ciserv has been consolidated in the Service division’s accounts from 1 July 2001. Sermet has been consolidated in the Power Divisions accounts from 17 October 2001. Imatra Stampings has been consolidated from 6 November 2001.
The Power Divisions
The Power Divisions generated net sales of EUR 2,174.3 million (2,287.8), down 5.0% on the previous year mainly because of a fall in Marine’s net sales. Power plants and marine engines totalling
3,794 MW (4,505) were delivered to customers. New orders amounting to EUR 2,040.4 million (2,460.6) were received during the year. The year-end order book stood at EUR 1,516.5 million (1,624.2).
Power Divisions’ operating profit was EUR 87.8 million (86.2) or 4.0% (3.8) of the net sales. After restructuring provisions totalling EUR 122.4 million (0,0), the Power Divisions showed an operating loss of EUR -34.6 million (86.2).
Early in the year the company decided to close its factory in Mantes, France, and to centralize its project and service organizations. The cost impact of these measures was EUR 32 million and the pay-back period 2-3 years. The measures were fully implemented by the end of 2001.
In November Wärtsilä announced its intention to further streamline its manufacturing capacity in line with market volume. Under this plan the Dutch company will become a sales and service company and the intention is to close the Zwolle factory and move its manufacturing operations to Trieste in Italy. Consultations with personnel are in progress. Wärtsilä is looking for a new occupant for the Dutch factory who could also employ the local personnel. The EUR 90 million provision already made is calculated to be sufficient to cover the costs of the streamlining and capacity reduction measures, most of which will incur in the Netherlands.
The general slowdown in world economic growth was reflected in the shipbuilding industry. Weak growth combined with a fall in oil prices also delayed the predicted increase in investment activity in the offshore sector. Shipyards will still operate at full capacity through 2002, however, and Wärtsilä’s marine order book is at a good level.
The John Crane-Lips acquisition substantially strengthens Wärtsilä’s position as the world’s leading ship power supplier. The integration of the product portfolios of Wärtsilä and John Crane-Lips into complete systems is enhanced. The acquisition also makes Wärtsilä a leading supplier of marine seals and bearings in addition to significantly strengthening its position as a supplier to navy. The acquisition is estimated to increase Marine’s net sales by EUR 235 million.
The total marine engine market increased 18% to 28,036 MW between June 2000 and May 2001 according to statistics released by Diesel & Gas Turbine Worldwide. Growth was particularly significant in high-speed engines. The company’s brands, Wärtsilä and Sulzer, had a market share of 22% (28). According to Wärtsilä´s statistics Wärtsilä maintained its market share in main engines. The market share in medium-speed main engines was 37% (38) and in low-speed main engines 26% (25). Wärtsilä holds a strong position in the marine market especially in RoPax and RoRo vessels, cruise ships and large containerships.
Wärtsilä shipped Wärtsilä and Sulzer engines totalling 2,346 MW (2,768) during the year. Its licencees supplied a further 2,378 MW (2,990) of low-speed Sulzer engines.
The power market reflected major fluctuations in the prices of all forms of energy during 2001. The financial difficulties of a large electricity trading corporation added to uncertainty in the energy sector. Despite the dramatic world events oil prices were clearly lower at the end of the year than at the beginning.
The main markets for gas power plants were once again Continental Europe and especially the USA, where Wärtsilä supplied power plants totalling more than 300 MW. A gas power plant ordered for Colorado in June was the largest (110 MW) of this type in Wärtsilä’s history. The biggest orders for heavy fuel oil power plants came from Turkey, El Salvador, the Azores, Sudan, India, Sri Lanka, Taiwan and Japan. Wärtsilä received its largest power plant order ever (160 MW) from Guatemala at the end of the year, for delivery in 2002 and 2003.
Wärtsilä broadened its product portfolio to include biofuel-fired power plants, strengthening its position in decentralized power generation. In October Wärtsilä acquired the Finnish company Sermet, which specializes in small and medium-sized boilers fired with biofuels, oil and gas.
The Power Plants division’s focus on offering multi-fuel alternatives, modularized products and professional project management services has strengthened customer confidence in Wärtsilä’s products and concepts. A good example is the Wärtsilä Power Module, a modular power plant designed for turnkey delivery.
The total market for HFO engines and gas turbines was 2,226 MW between 1 June 2000 and 31 May 2001, up 3% on the previous one-year period, according to Diesel & Gas Turbine Worldwide’s statistics. Wärtsilä’s market share was 50% (58). The market for small gas turbines (unit size 1-60 MW) increased to 17,264 MW (+34%). Wärtsilä’s share of this market segment was 398 (281) MW (+42%).
The volume of power plants delivered by Wärtsilä in 2001 was 1,449 MW (1,737). The volume of HFO power plants decreased to 982 MW (1,574) whereas the volume of gas power plants increased to 467 MW (163).
Net sales of the Service division increased 12.6% in line with long-term targets. Net sales from low-speed engine service rose even faster, 15%, despite tough competition. The aggregate output of engines covered by Wärtsilä’s service agreements exceeded 10,000 MW, or 9% of Wärtsilä’s active engine base.
The volume of Operation and Maintenance (O&M) agreements increased 34.5% on the previous year. The most significant O&M agreement was made in the Dominican Republic, where Wärtsilä is responsible for operating the world’s largest floating power plant, Sultana del Este (149 MW).
The acquisition of Ciserv AB in Sweden was completed in June, strengthening Wärtsilä’s position as a supplier of comprehensive marine maintenance and repair services and broadening Wärtsilä’s portfolio of service products. The acquisition marks an important
step in Wärtsilä’s plans to extend the coverage of its service activities to engines and ship equipment supplied by other vendors.
During the year greater emphasis was placed on developing new service products and speeding up delivery. Examples include O&M services, product renewals and upgrades, as well as online services.
Research and development
The focus of Wärtsilä´s R&D programme is on environmentally sound combustion and engine technology. Wärtsilä, as a leading manufacturer is a pioneer in the application of new technology to heavy-duty medium-speed and low-speed diesel engines. Last year Wärtsilä shipped eight medium-speed engines equipped with Common Rail technology from its Turku factory. The first Common Rail low-speed engine has accumulated more than 1,000 operating hours.
In the spring Wärtsilä was granted a prestigious environmental award by Lloyd’s List in recognition of its smokeless EnviroEngine technology. Wärtsilä gained further recognition during the year when its first environmental report was judged the best in Finland.
Major achievements in gas engines included the successful testing of the 50DF engine and its release for sale, and the first marine order for a 32DF engine. Development of engines running on Orimulsion continued during the year and showed successful progress.
Wärtsilä’s portfolio of medium-speed engines is new and modern. Their further development is focusing, in addition to environmental issues, on raising efficiency and on optimizing their operating characteristics and cost structure. In low-speed engines, the first RT-flex 60C engine has been the subject of intense design and development at the Trieste factory.
Capacity load during 2001 varied unevenly among Wärtsilä´s factories. Volumes at Mulhouse in France were clearly higher than in the previous year. The order book for low-speed engines in Italy is record high.
Flexibility in production was improved and concentration on key expertise continued, when the manufacture of welded components at Trieste was outsourced.
The order intake slowed down during the latter half of the year, which contributed to the plan to close the Dutch factory. Under this plan manufacturing of the Wärtsilä 26 and Wärtsilä 38 engines will be moved to Trieste, raising Trieste’s critical mass and reducing unit costs. The move will have no impact on the company’s engine portfolio.
Demand for special engineering steels started well in early 2001 but began to decline during the spring. Steel consumption in Europe fell roughly 4% during the second half of the year compared to the same period in 2000.
Truck production in Europe declined and the decrease for the whole was approximately 8% compared to the year 2000. Car registrations remained unchanged but uncertainty clearly increased at the end of the year. Demand for special steels in the mechanical engineering industry and among wholesalers weakened distinctly towards the year end.
Imatra Steel’s net sales in 2001 totalled EUR 186.4 million (194.1), down 4.0% on the previous year. Measures to adjust capacity and production load were introduced in stages. Despite these, profitability weakened and the operating profit was EUR 6.4 million (17.4).
In January 2001 the decision was made to renew the base metallurgical process at the Imatra Steel Works between 2001 and 2003.
In November Imatra Steel acquired a forge in Scotland, strengthening its position as a leading world supplier of forged components to the heavy truck industry. The forge was renamed Imatra Stampings Ltd.
In June Wärtsilä sold its entire 46.7% holding in Sanitec to a new company founded by the private equity fund BC Partners for EUR 419 million. Wärtsilä recorded a capital gain of EUR 254 million on this deal, or a gain after taxes of EUR 2.56 per share.
In May Wärtsilä sold 20 million Assa Abloy shares, recording a capital gain or EUR 297 million or EUR 3.75 per share after taxes. Since this disposal Wärtsilä’s holding in Assa Abloy has been 10.7%. The market capitalization of this holding at the close of the period was EUR 614 million. Its book value in the consolidated balance sheet is EUR 92 million.
Wärtsilä Real Estate sold properties and shares in housing companies totalling EUR 10.8 million (29.5), which yielded a profit of EUR 6.3 million (10.1). The book value of the real estate portfolio, excluding the properties in use by the Group itself, totalled EUR 21.4 million (27.5) at the year end.
Corporate management and personnel
Pekka Ahlqvist was appointed Group Vice President, Power Plants, and a member of Wärtsilä’s Board of Management at the beginning March after his predecessor left the company.
The Group had 10,846 (12,800) employees on average during the year and 11,122 (10,564) at the year end. The Power Divisions had 9,738 (9,255) employees at the year end. The increase was mainly due to an increase in operation and maintenance personnel in the Service division and to the acquisitions of Ciserv and Sermet. Negotiations are currently in progress which could lead to a reduction of personnel, principally in Zwolle. Conversely, the John Crane-Lips acquisition will increase total personnel.
Debentures and option scheme
In March 1994 Wärtsilä floated two convertible capital notes issues, each of the same amount and together totalling EUR 117.7 million. One is convertible into Series A and Series B shares, and the other into Series B shares. On 14 June 2001 Wärtsilä announced that it would exercise its right to repay the convertible subordinated debentures based on the performance of the share price. However, the condition underlying repayment, a share price of EUR 24.03 on the trading day preceding repayment, 13 July 2001, was not fulfilled and the repayment did not therefore take place.
Following the decision of the AGM on 20 March 2001, a total of 1,500,000 warrants were issued to key persons in the Wärtsilä Group, entitling them to subscribe for the same number of Wärtsilä B shares. The share subscription period begins on 1 April 2003 and ends on 31 March 2007.
Purchase of own shares
The Annual General Meeting on 20 March 2001 authorized the Board for one year to repurchase the company’s own shares in public trading on the Helsinki Exchanges at the prevailing price, disapplying shareholders’ pre-emptive subscription rights. Following the Meeting the Board decided to repurchase the company’s shares but so far no shares have been purchased.
Board’s proposals to the annual general meeting 2002
The Board proposes to the Annual General Meeting on 12 March 2002 that a dividend of 0.50 euros per share and an extra dividend of 3.50 euros per share be distributed on the financial year ended 31 December 2001.
With respect to the extra dividend the Board proposes that the conversion ratio of the 1994 convertible subordinated debentures and the subscription price of the Wärtsilä shares subscribable under the warrants attached to the 1996 bond with warrants be changed corresponding to the amount of the extra dividend.
Furthermore, the Board proposes that the AGM authorize the Board for one year to repurchase the company’s own shares in public trading on the Helsinki Exchanges at the prevailing price, disapplying shareholders’ pre-emptive subscription rights. At most 770,721 A shares and at most 2,201,971 B shares may be repurchased, representing at most 5% of all the shares and votes. This authorization also includes the right to dispose of the company’s shares repurchased in this manner at a price at least equal to the share price prevailing on the Helsinki Exchanges at the time of surrender, disapplying shareholders’ rights. At the same time the Board proposes that the unexercised authorization granted by the AGM on 20 March 2001 to repurchase and dispose of the company’s own shares be revoked.
The Board also proposes that warrants be issued to key personnel in Wärtsilä Group. The Board proposes that altogether 800,000 warrants be issued allowing subscription of the same number of Wärtsilä Corporation B shares. The shares subscribable under these warrants will represent 1.3% of the share capital and 0.4% of the votes. Issuing of the warrants will be contingent upon the company
reaching the minimum profitability targets set by the Board for the financial year 2003.
The purpose of the share option programme is to encourage key employees to work on a long-term basis in order to raise shareholder value and to increase their commitment to the company.
Prospects for 2002
For Marine, the year 2002 is founded on a strong order book. The John Crane-Lips acquisition offers good potential for developing the company’s The Ship Power Supplier concept and expanding it to include the naval and offshore sectors. Demand will continue to be brisk for environmentally sound solutions. General market uncertainty makes it difficult to estimate the order intake.
Demand for power plants is expected to remain positive in Latin America during the year. In Europe there is continued potential for gas- and biofuel-fired power plants. Investment activity is low in Asia, Africa and the Middle East. Demand in individual markets could substantially affect development during the year. Wärtsilä will develop its biofuel solutions and will seek growth through, among other things, synergies with its conventional power plant business during the year.
The total order book for Wärtsilä’s Power Divisions is at a satisfactory level. The order book for Marine is good but for Power Plants only satisfactory. Organic growth in net sales is expected to increase. Power Divisions’ operational profitability is expected to remain at the same level as in 2001. The benefits of the restructuring measures completed in 2001 and under way this year will be seen in performance during 2003. John Crane-Lips will add roughly EUR 235 million to Marine’s annual net sales. The acquisition will increase the Group’s operating profit and it will be earnings neutral.
For Imatra Steel, the year 2002 has begun under the shadow of uncertain market prospects. The decline in truck production is expected to continue and car production in Europe is expected to begin shrinking. A reduction in consumption of special engineering steels is forecast. Imatra Steel is expected to report an increase in net sales, following growth in its forging operations, and unchanged profits in 2002.
The figures in this bulletin are unaudited.