Interim report Q3 2011
GOOD GROWTH IN ORDER INTAKE
THIRD QUARTER HIGHLIGHTS
- Order intake increased by 11% to EUR 1,118 million (1,004)
- Order intake in joint venture companies grew significantly, EUR 182 million (68)
- Net sales decreased 18% to EUR 851 million (1,039)
- Operating result EUR 94 million, or 11.0% of net sales (EUR 117 million and 11.2%)
- Earnings per share amounted to EUR 0.28 (0.41)
- Book-to-bill increased to 1.31 (0.97)
- Wärtsilä acquired Cedervall, a manufacturer of shaft seal and bearing systems for the marine industry
HIGHLIGHTS OF THE REVIEW PERIOD JANUARY-SEPTEMBER 2011
- Order intake increased by 9% to EUR 3,267 million (3,002)
- Order intake in joint venture companies grew significantly, EUR 216 million (73)
- Net sales decreased to EUR 2,970 million (3,091), -4%
- Operating result EUR 324 million (328), 10.9% of net sales (10.6)
- At the end of the period the order book totalled EUR 4,042 million (4,243), -5%
- Earnings per share amounted to EUR 1.05 (1.18)
- Cash flow from operating activities EUR 303 million (491)
The operating result and earnings per share are shown excluding nonrecurring items. Wärtsilä recognised EUR 6 million (2) of nonrecurring items related to restructuring measures during the third quarter and EUR 17 million (59) of nonrecurring items during the review period January-September 2011.
BJÖRN ROSENGREN, PRESIDENT AND CEO:
“This is my first time presenting Wärtsilä’s result and I am pleased as it was strong in many ways. Wärtsilä’s resilience in terms of solid profitability and increasing order intake in all three businesses gives us good possibilities for the future. In addition to the active Offshore segment, order intake grew significantly in our Korean joint venture, which focuses on dual-fuel engines for LNG carriers. This emphasises our strong position in the gas engine markets. Power Plants received some landmark orders, in addition to good ordering activity globally. Mining sector customers, utilities and Independent Power Producers actively placed orders. The third quarter developed as expected in terms of net sales, which was on a lower level compared to the previous year. This development was mainly related to the timing of deliveries. While certain marine service markets are suffering from uncertainties in the global economy, the power plant service market is more stable. In the slightly longer term, we see good prospects arising for environmental services. Despite the increased uncertainties in the global economy during this quarter, our prospects for net sales and profitability for the year 2011 remain the same.”
WÄRTSILÄ’S PROSPECTS FOR 2011 REITERATED
Wärtsilä expects its net sales for 2011 to decline by 0-5% compared to last year and operational profitability (EBIT% before nonrecurring items) to be around 11%.
ANALYST AND PRESS CONFERENCE
An analyst and press conference will be held on Wednesday 19 October 2011, at 10.45 a.m. Finnish time (8.45 a.m. UK time), at the Wärtsilä headquarters in Helsinki, Finland. The combined web- and teleconference will be held in English and can be viewed on the internet at the following address: http://storm.zoomvisionmamato.com/player/wartsila/objects/cfrvmw0h/.
To participate in the teleconference please register at the following address:
You will receive dial-in details by e-mail once you have registered. If you want to ask questions during the teleconference, press the *-button followed by the 1-button on your phone to register for a question and the # -key to withdraw a question. The event name is: Wärtsilä Interim Report Q3 2011. Please be ready to state your details and the name of the conference to the operator. If problems occur, please press the *-button followed by the 0-button.
An on-demand version of the webcast will be available on the company website later the same day.
For further information, please contact:
Executive Vice President & CFO
Tel: +358 10 709 5640
Director, Investor Relations
Tel: +358 40 570 5530
For press information, please contact:
Group Vice President, Communications & Branding
Tel: +358 40 547 6390
Wärtsilä in brief
Wärtsilä is a global leader in complete lifecycle power solutions for the marine and energy markets. By emphasising technological innovation and total efficiency, Wärtsilä maximises the environmental and economic performance of the vessels and power plants of its customers. In 2010, Wärtsilä’s net sales totalled EUR 4.6 billion with approximately 17,500 employees. The company has operations in 160 locations in 70 countries around the world. Wärtsilä is listed on the NASDAQ OMX Helsinki, Finland.
INTERIM REPORT JANUARY-SEPTEMBER 2011
This interim report is unaudited.
Contracting for specialised tonnage continued to be strong
Overall vessel contracting activity slowed down in the third quarter. 916 contracts have been registered in 2011, which is in line with expectations of lower contracting compared to 2010. The slowdown continues to be linked with certain merchant segments, such as bulk carriers and tankers.
Meanwhile, activity continued to be on a good level in the special vessel markets. During 2011, 44 LNG carriers have been contracted, compared to 10 vessels contracted during 2008-2010. Offshore vessels, notably drillships, have also seen a significant rise in contracting activity during 2011. The shift in contracting activity towards specialised tonnage means that the amount of capital invested in new buildings during 2011 is at the same level as investments in 2010, despite lower overall vessel contracting numbers. Korea and China continue to dominate contracting activity, securing 40% and 35% of contracts placed in 2011 (in number of vessels).
Ship Power market shares
Wärtsilä’s share of the medium speed main engine market increased from 44% (at the end of the previous quarter) to 46%. The market share in low speed engines increased to 18% (17). In the auxiliary engine market Wärtsilä’s share remained at 3% (3).
Natural gas based power plant market continued to be active
Activity in the natural gas based power plant market continued at a high level despite the global economic slowdown. The liquid fuel based power plant markets were less active during the third quarter. The financial crisis led to the postponement of investments for power generation in 2009 and 2010, and this is now creating demand in several markets.
Power Plants market position
During the period July 2010 – June 2011, the overall market for gas and liquid fuel based power plants grew to approximately 70.1 GW (51.1). This includes all prime mover units of over 5 MW. Wärtsilä’s share represents 4.5% of the market (4.8).
Power plant service market stable
The European markets, which are dominated by marine customers, continued to be slow in the third quarter. In the Americas, the Middle East and Asia where there are a mix of marine and power customers, development of the service market was more stable. Service activities in these areas are also supported by higher economic growth. In the Merchant segment especially, customers are holding back on maintenance spending. However, the Offshore and Container vessel segments continued to be active. The interest in various service agreements also continued to increase.
Good order intake in all three businesses and joint ventures
Wärtsilä’s order intake for the third quarter totalled EUR 1,118 million (1,004), an increase of 11%. In relation to the previous quarter, Wärtsilä’s order intake decreased by 4% (EUR 1,170 million in the second quarter of 2011). The book-to-bill ratio for the third quarter was 1.31 (0.97).
Ship Power’s order intake for the third quarter totalled EUR 196 million (176), an increase of 11%. Compared to the previous quarter, order intake decreased by 36% (EUR 306 million in the second quarter of 2011). During the third quarter, Offshore and Special Vessels segment orders continued to be active. Important orders were booked for drillships, as well as for cruise and navy applications. The Merchant segment represented 30% of the total order intake. It was followed by the Offshore segment with a 25% share, and Cruise & Ferry with a 20% share. The Special Vessels and Navy segments both represented 11% of the order intake, and Ship Design accounted for 2%.
The order intake for Power Plants in the third quarter was on a high level and totalled EUR 466 million (393). This was 19% higher than for the corresponding period last year, and 11% higher than in the previous quarter (EUR 419 million in the second quarter of 2011). During the third quarter, Wärtsilä received a large turnkey project order from the Dominican Republic, several midsize projects from Africa, Australia and the United Arab Emirates, as well as a large gas power plant order from Turkey.
Order intake for the Services business totalled EUR 455 million (433) in the third quarter, an increase of 5% from the corresponding period 2010. Compared to the previous quarter, order intake increased by 2% (EUR 444 million in the second quarter of 2011).
The total order intake for the review period January-September 2011 was EUR 3,267 million (3,002), which represents an increase of 9% compared to the corresponding period 2010. The book-to-bill ratio for the review period was 1.10 (0.97). Ship Power’s order intake was EUR 675 million (479), an increase of 41% from the corresponding period last year. Power Plants’ order intake was EUR 1,138 million (1,097), which is 4% higher than in 2010. Services’ order intake for the review period totalled EUR 1,450 million (1,421), an increase of 2% over the corresponding period in 2010.
Order intake in joint ventures
During the review period, the joint venture company in Korea, Wärtsilä Hyundai Engine Company Ltd (WHEC), received orders for dual-fuel engines for 16 LNG carriers. Total order intake in WHEC and in the joint venture company Wärtsilä Qiyao Diesel Company Ltd in China producing auxiliary engines, totalled EUR 182 million (68) in the third quarter. Order intake for the review period January-September grew significantly to EUR 216 million (73). Wärtsilä’s share of ownership in these companies is 50% and the profits will be reported as a share of result of associates and joint ventures.
The total order book at the end of the review period stood at EUR 4,042 million (4,243), a decrease of 5%. In relation to the previous quarter, Wärtsilä’s order book increased by 7% (EUR 3,779 million in the second quarter of 2011). The Ship Power order book stood at EUR 1,740 million (2,038), which is 15% lower than at the same date last year. At the end of the review period, the Power Plants order book amounted to EUR 1,478 million (1,517), a decrease of 3%. The Services order book totalled EUR 825 million (689) at the end of the review period, representing an increase of 20%.
Wärtsilä’s net sales for the third quarter decreased by 18% to EUR 851 million (1,039) compared to the corresponding period last year. Net sales for Ship Power totalled EUR 197 million (277), a decrease of 29%. Power Plants’ net sales for the third quarter totalled EUR 243 million (321), which is 24% lower than in the corresponding quarter last year. The third quarter net sales for Services amounted to EUR 412 million (435), a decrease of 5%. The reason for the decline is mainly related to the timing of deliveries. Another factor is a further decline in global economic sentiment, which has an impact on Services customers’ maintenance and investment spending.
Wärtsilä’s net sales for January-September 2011 decreased by 4% and totalled EUR 2,970 million (3,091). Ship Power’s net sales decreased by 14% and totalled EUR 713 million (831). Net sales for Power Plants totalled EUR 952 million (948). Net sales from the Services business were stable and amounted to EUR 1,303 million (1,307). Ship Power accounted for 24%, Power Plants for 32% and Services for 44% of the total net sales.
Of Wärtsilä’s net sales for January-September 2011, approximately 69% was EUR denominated, 13% USD denominated, with the remainder being split between several currencies.
The third quarter operating result before nonrecurring expenses totalled EUR 94 million (117), which is 11.0% of net sales (11.2). For the review period January-September 2011, the operating result before nonrecurring expenses was EUR 324 million (328), which is 10.9% of net sales (10.6). Including nonrecurring expenses, the operating result was EUR 307 million or 10.3% of net sales. Wärtsilä recognised EUR 17 million (59) of nonrecurring expenses related to the restructuring measures during the review period January-September 2011.
Financial items amounted to EUR -9 million (-3). Net interest totalled EUR -3 million (-8). Dividends received totalled EUR 3 million (6). The deviation in other financial items is mainly due to losses from exchange rates, which were positive during the corresponding period of 2010. Profit before taxes amounted to EUR 298 million (298). Taxes in the reporting period amounted to EUR 96 million (80). Earnings per share after nonrecurring expenses were 0.99 euro (1.07) and equity per share was 7.84 euro (7.89).
BALANCE SHEET, FINANCING AND CASH FLOW
Cash flow from operating activities for January-September 2011 totalled EUR 303 million (491). Net working capital at the end of the period totalled EUR 122 million (229). Advances received at the end of the period totalled EUR 632 million (EUR 603 million at the end of the previous quarter). Cash and cash equivalents at the end of the period amounted to EUR 658 million (578). Net interest-bearing loan capital totalled EUR -57 million (91).
Wärtsilä had interest bearing debt totalling EUR 604 million (688) at the end of September 2011. The existing funding programmes include long-term loans of EUR 507 million, unutilised Committed Revolving Credit Facilities totalling EUR 548 million and Finnish Commercial Paper programmes totalling EUR 700 million. The total amount of short-term debt maturing within the next 12 months is EUR 97 million.
The solvency ratio was 41.3% (40.5) and gearing was -0.03 (0.07).
Gross capital expenditure in the review period totalled EUR 140 million (54), which comprised EUR 97 million (5) in acquisitions and investments in securities, and EUR 43 million (49) in intangible assets and property, plant and equipment. Depreciation amounted to EUR 84 million (87).
Maintenance capital expenditure for 2011 will be below depreciation. Possible acquisition opportunities may affect capital expenditure for the year.
STRATEGIC STEPS, ACQUISITIONS AND EXPANSION OF NETWORK
The set up of a joint venture between Wärtsilä and Jiangsu CuiXing Marine Offshore Engineering Co. Ltd. for the manufacturing of Wärtsilä 26 and Wärtsilä 32 medium-speed marine engines in China, announced in June, is proceeding according to plan.
In July, Wärtsilä acquired Cedervall, one of the leading manufacturers of shaft seal and bearing systems for the marine industry. This acquisition strengthens Wärtsilä’s leading position in the global service market, in line with its strategy. The combination of Wärtsilä’s and Cedervall’s businesses will create the market leader for oil and water lubricated seals and bearings, as well as for sterntubes. The total preliminary consideration of the transaction is EUR 81 million.
During the review period Wärtsilä continued expanding its Services network. A new workshop was inaugurated in Gdansk, Poland during the second quarter. During the third quarter a new workshop facility was opened in Helsinki, Finland. This workshop is strategically located near the main shipping routes.
In 2009, Wärtsilä began the process of adapting its activities to lower demand through various restructuring measures with the aim of reducing approximately 1,800 persons. This target has nearly been reached.
When fully implemented, it is estimated that the reductions will decrease costs by approximately EUR 130 million. Of these cost savings, about EUR 60 million had materialised by the end of 2010. The remainder of the savings will gradually materialise during 2011. Wärtsilä anticipates that the majority of these cost savings will be permanent. The total nonrecurring costs related to the restructuring will be approximately EUR 150 million, out of which EUR 115 million has been recognised by the end of 2010. In the review period January-September 2011, Wärtsilä recognised EUR 17 million (59) of nonrecurring items related to the restructuring measures. The remainder of the costs will be recognised during 2011.
Wärtsilä had 17,875 (17,704) employees at the end of September 2011. The average number of personnel for January-September 2011 totalled 17,838 (18,116). Ship Power employed 989 (974) people. Power Plants employed 830 (845) people, Services 11,200 (11,157) and Wärtsilä Industrial Operations 4,062 (4,347) people.
Of Wärtsilä’s total employees, 19% (19) were located in Finland, 6% (7) in the Netherlands and 30% (31) in the rest of Europe. Personnel employed in Asia represented 33% (31), out of which 7% (7) were in China, in India 7% (6), in Singapore 4% (5), and in the rest of Asia 14% (13).
In July, CSSC Guangzhou Marine Diesel Co. Ltd., a member of the state-owned China State Shipbuilding Corporation and Wärtsilä jointly signed a license agreement for the manufacturing and sale of Wärtsilä 2-stroke engines in China. It covers the entire engine portfolio with a power range from 4,300 to 80,000 kW per engine. With the shipbuilding industry increasingly concentrated in Asia, the local manufacture of Wärtsilä’s marine engines is a key element in the company’s growth strategy.
Activities in Wärtsilä’s joint venture with Transmashholding in Russia are proceeding according to plan. The joint venture is preparing to manufacture modern and multipurpose diesel engines, including a new and technically advanced version of the Wärtsilä 20 engine, to be used in shunter locomotives and for various marine and power applications.
Workload in the factories is continuously evaluated against the current order book and market development, and adjustments are made where necessary.
RESEARCH & DEVELOPMENT
During the third quarter, Wärtsilä’s dual-fuel engines exceeded three million running hours in both land-based and marine applications. This milestone represents a dual-fuel track record that cannot be matched by any other engine manufacturer. Today, the total number of Wärtsilä dual-fuel engines delivered to both marine and land-based applications is 470. The fuel flexibility of these engines offers numerous tangible benefits, both economic and environmental.
Wärtsilä has successfully tested its new low-speed gas engine technology in trials conducted at the company’s facilities in Trieste, Italy. The tests have demonstrated that the engine performance fully complies with the upcoming IMO Tier III nitrogen oxide limits, thereby setting a new benchmark for low-speed engines running on gas. The new 2-stroke test engine is part of Wärtsilä’s 2-stroke dual-fuel gas engine technology development programme.
Wärtsilä is well positioned to reduce the use of natural resources and emissions, thanks to its various technologies and specialised services. Wärtsilä’s R&D efforts continue to focus on the development of advanced environmental technologies and solutions. The company is committed to supporting the UN Global Compact and its principles with respect to human rights, labour, the environment and anti-corruption. Wärtsilä’s share is included in several sustainability indexes.
CHANGES IN MANAGEMENT
Mr Björn Rosengren M.Sc. (Tech.), born 1959, started as the new President and CEO of Wärtsilä Corporation on 1 September 2011. Mr Rosengren succeeded Mr Ole Johansson, who retired at that time.
SHARES AND SHAREHOLDERS
The figures in the table below have been adjusted to reflect the increased number of shares resulting from the free share issue approved by Wärtsilä Corporation’s Annual General Meeting on 3 March 2011.
During the review period January-September 2011, Wärtsilä was informed of the following changes in ownership:
On 5 January 2011, BlackRock, Inc. increased its holding in Wärtsilä Corporation. Following the transaction BlackRock, Inc owned 4,941,593 shares (the number of shares as before the free share issue) or 5.01% of Wärtsilä’s share capital and total votes.
On 9 August 2011, BlackRock, Inc. decreased its holding in Wärtsilä Corporation. Following the transaction BlackRock, Inc. owned 9,838,853 shares or 4.99% of Wärtsilä’s share capital and total votes.
DECISIONS TAKEN BY THE ANNUAL GENERAL MEETING
Wärtsilä’s Annual General Meeting held on 3 March 2011 approved the financial statements and discharged the members of the Board of Directors and the company’s President & CEO from liability for the financial year 2010. The Meeting approved the Board of Directors' proposal to pay a dividend of EUR 1.75 per share and an extra dividend of EUR 1.00 per share, totalling EUR 2.75 per share. The dividend was paid on 15 March 2011.
The Annual General Meeting decided that the Board of Directors shall have nine members. The following were elected to the Board: Ms Maarit Aarni-Sirviö, Mr Kaj-Gustaf Bergh, Mr Alexander Ehrnrooth, Mr Paul Ehrnrooth, Mr Lars Josefsson, Mr Bertel Langenskiöld, Mr Mikael Lilius, Mr Markus Rauramo and Mr Matti Vuoria.
Authorized public accountants KPMG Oy Ab were appointed as the company’s auditors for the year 2011.
Free share issue
The Annual General Meeting decided to approve the free share issue in accordance with the proposal of the Board of Directors. The free share issue was implemented by applying the pre-emptive right of the shareholders so that for each old share one new share was issued. Thereby a total of 98,620,565 new shares were issued. The new shares were registered in the trade register on 8 March 2011.
Organisation of the Board of Directors
The Board of Directors of Wärtsilä Corporation elected Mikael Lilius as its chairman and Matti Vuoria as the deputy chairman. The Board decided to establish an Audit Committee, a Nomination Committee and a Remuneration Committee. The Board appointed from among its members the following members to the Committees:
Chairman Markus Rauramo, Maarit Aarni-Sirviö, Alexander Ehrnrooth, Bertel Langenskiöld
Chairman Mikael Lilius, Kaj-Gustaf Bergh, Lars Josefsson, Matti Vuoria
Chairman Mikael Lilius, Paul Ehrnrooth, Matti Vuoria
RISKS AND BUSINESS UNCERTAINTIES
Shipping and ship building are sensitive to the global economic outlook and uncertainty is increasing over the strength of the global economy. At present the main risk for Ship Power is still the slippage of ship yard delivery schedules.
In the Power Plants business, uncertainty in the financial markets may impact the timing of bigger projects.
Increasing risks in the financial markets may have a negative impact on Services’ order intake, especially for larger upgrades and conversion projects.
The annual report for 2010 contains a thorough description of Wärtsilä’s risks and risk management.
Overall vessel contracting activity is expected to be at a lower level than during 2010, but the mix of vessels to be contracted should continue to favour specialised tonnage. In the short term, uncertainty over the outlook of the global economy, coupled with low earnings for shipowners, will affect contracting activity for the main merchant vessel types, such as bulk carriers, tankers and container vessels. Contracting activity is expected to remain strong for offshore vessels, especially production and support vessels, as well as for LNG carriers and other specialised vessels. In newbuilding of ships, interest in natural gas as a fuel, environmentally sound designs and fuel efficiency is expected to remain strong. A significant number of additional dual-fuel engine orders for LNG carriers are expected to materialise. Dual-fuel engine orders for LNG carriers are booked in the order intake of the joint venture Wärtsilä Hyundai Engine Company Ltd. Intense competition and price pressure prevails in the market. Wärtsilä expects Ship Power’s order intake in 2011 to be significantly better than in the previous year.
Recovery in the power generation market is expected to continue in 2011. The growing emerging markets will continue to invest in new power generation capacity, which will increase demand, especially in the flexible baseload segment. The ramp down of older coal based generation, as well as the increasing amount of renewable generation, will increase the demand for gas based generation in the medium to long term. We expect to see an increasing demand for a new type of generation based on fuel and operational flexibility. These developments are supported by the production of shale gas in the US, and the expectation that natural gas prices will remain competitive. Wärtsilä Power Plants estimates its order intake in 2011 to be better than in 2010.
Despite the economic uncertainty, the overall service market outlook remains rather stable. Economic growth prospects in BRIC countries are still considered to be good, and the service market outlook continues strongest in these countries. Economic development and the service markets are expected to remain challenging in Europe. The marine service market is still suffering from overcapacity in certain segments and this is likely to continue. The active installed base growth is slowing down due to increased scrapping and idling of vessels. The power plant service market is expected to increase steadily.
WÄRTSILÄ’S PROSPECTS FOR 2011 REITERATED
Wärtsilä expects its net sales for 2011 to decline by 0-5% compared to last year and operational profitability (EBIT% before nonrecurring items) to be around 11%.
WÄRTSILÄ INTERIM REPORT JANUARY-SEPTEMBER 2011
This interim financial report is prepared in accordance with IAS 34 (Interim Financial Reporting) using the same accounting policies and methods of computation as in the annual financial statements for 2010. All figures in the accounts have been rounded and consequently the sum of individual figures can deviate from the presented sum figure.
Use of estimates
The preparation of the financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the valuation of the reported assets and liabilities and other information, such as contingent liabilities and the recognition of income and expenses in the income statement. Although the estimates are based on the management’s best knowledge of current events and actions, actual results may differ from the estimates.
Of the amended International Financial Reporting Standards (IFRS) and interpretations mandatory as of 1 January 2011 the following are applicable on the Group reporting:
- Amendment to IAS 32 Financial instruments: Presentation - Classification of Rights Issues
- Revised IAS 24 Related Party Disclosures
The adaption of the revised standards and interpretations does not have any material effect on the interim report.
This interim report is unaudited.
18 October 2011
Board of Directors