Interim Report Q3 2005 PDF, 125Kb »
WÄRTSILÄ’S GROWTH CONTINUED, ORDER BOOK AT NEW RECORD LEVEL
- Demand for ship power and power plant solutions was strong
- Accelerating growth in service business
- Order intake grew 45.5% to EUR 870.8 million (598.4)
- Net sales grew 20.3% to EUR 607.8 million (505.1)
- Profitability (EBITA) 7.2%
HIGHLIGHTS OF THE REPORTING PERIOD 1-9/2005
- Profitability (EBITA) 6.7%
- Order book at new record level EUR 2,544.7 million (1,870.3)
- Profitability (EBITA) for the full year around 8%
ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
Wärtsilä adopted IFRS reporting standards on 1 January 2005. The comparison figures in this interim report have been adjusted accordingly. The impacts of IFRS on the balance sheet and income statement are described in Wärtsilä’s stock exchange release dated 18 March 2005, which is available on the company’s website, www.wartsila.com. IAS 39 (Financial Instruments) has been applied since 1 January 2005. Its impact at 1 January 2005 on shareholders’ equity was EUR 42.7 million from derivative financial instruments and EUR 141.5 million from assets available for sale. The impact at 30 September 2005 was EUR -5.2 million from derivative financial instruments and EUR 134.8 million from assets available for sale.
DEVELOPMENT OF GROUP STRUCTURE
Imatra Steel became part of a new steel company, Oy Ovako Ab, at the beginning of May. Ovako has been consolidated as an associated company since 1 May 2005. Wärtsilä’s holding in Oy Ovako Ab is 26.5%.
TARGETS AND STRATEGY – ACTIONS TO SUPPORT GROWTH
Wärtsilä provides lifecycle power solutions to enhance the business of its customers, whilst creating better technologies that benefit both the customer and the environment. Wärtsilä´s vision is to be the most valued business partner of all its customers.
Wärtsilä’s strategic goal is to strengthen the leading positions of its Ship Power and Service businesses globally. This will be done by broadening the product range and developing alliances. In addition to organic growth Wärtsilä´s strong balance sheet also enables the company to grow through acquisitions within the bounds set by the solvency targets.
In its Power Plants business Wärtsilä’s strategic goal is to focus on the decentralized energy market and to strengthen its position in the growth sectors of this market, i.e. gas power plants.
Wärtsilä took several steps during the reporting period which support these strategic objectives:
The start-up of manufacturing in China and India underpin the growth target of the Ship Power business. Production at the new thruster manufacturing company in China, Wärtsilä Propulsion (WUXI) Co Ltd, began in June and the first deliveries were made in September. The project to manufacture marine reduction gears in India is making planned progress. Construction of a new factory for Wärtsilä Qiyao Diesel Company Ltd (Shanghai), a 50/50-owned joint venture set up with China Shipbuilding Industry Corporation (CSIC), started in September. This company will start production of Wärtsilä diesel generating sets, used as auxiliary engines in marine vessels, for the growing Chinese marine market. Production is expected to begin in early summer 2006.
In September Wärtsilä signed an agreement with Mitsubishi Heavy Industries Ltd (MHI) for a strategic alliance in the field of two-stroke diesel engines.
At the start of the year Wärtsilä took a 12.5% stake in Aker Arctic Technology Inc., which offers ship designs for shipyards, shipowners and offshore operators interested in operations in ice-infested cold waters.
The transfer of the DEUTZ marine engine service business from the German company DEUTZ AG to Wärtsilä was completed in March and Wärtsilä began to provide service and OEM parts for these engines globally from 1 April 2005.
To expand the Service business Wärtsilä set up a Ciserv marine service company in Estonia with the Estonian BLRT Grupp to serve the Baltic market early in the year. Wärtsilä owns 51% of this company. Wärtsilä now has 11 Ciserv companies in important ports worldwide.
GROUP NET SALES AND RESULT
Third quarter: July-September 2005 Wärtsilä’s consolidated net sales for the third quarter of the year totalled EUR 607.8 million (559.0). Operating income improved to EUR 43.5 million having been EUR 38.3 million one year earlier.
Full reporting period: January-September 2005
Net sales totalled EUR 1,865.3 million (1,662.0). Earnings per share improved to EUR 1.05 (0.74). Operating income rose to EUR 138.2 million, compared with EUR 8.0 million one year earlier. The result in the comparison period was burdened by a restructuring provision of EUR 63.8 million which, under IFRS, was entered in the first quarter of 2004 rather than in 2003.
Financial items for the reporting period were EUR -19.4 million (-1.3). Financial expenses increased mainly because the derivative instruments, for which hedge accounting according to IAS 39 is not applied, are recorded in the profit and loss account. Their impact is approx. EUR -10 million. Income before taxes was EUR 129.4 million (114.7).
Wärtsilä’s cash flow from operating activities was EUR 14.0 million (93.3). Working capital was tied up at the beginning of the year due to an increase in business volumes and also to the growing DEUTZ business. Furthermore cash payments have been made during the period against the restructuring provision made in 2003.
During the third quarter working capital was released and the cash flow from operating activities for the third quarter was EUR +106 million.
Liquid reserves at the end of the period amounted to EUR 133.2 million (145.5). Net interest-bearing loan capital totalled EUR 317.5 million (194.8). The solvency ratio was 43.2% (41.1) and gearing was 0.33 (0.23).
Gross capital expenditure for the reporting period totalled EUR 196.1 million (47.4), which comprised EUR 142.3 million (7.4) in acquisitions and investments in securities and EUR 53.8 million (40.0) in production and information technology investments. EUR 23.2 million was related to the Ovako transaction. Depreciation amounted to EUR 52.1 million (54.5).
The largest single investment was the acquisition on 31 March 2005 of the marine engine service business from DEUTZ AG. The investment value of this acquisition, including costs, was EUR 116.0 million which included inventories amounting to EUR 8 million. The remainder was allocated to intangible assets. The business was consolidated in the balance sheet on 31 March 2005.
Wärtsila’s holding in Assa Abloy AB (publ) is 4.7% of the company’s shares. The holding has been booked in the balance sheet at its market value at the end of the reporting period, EUR 202.8 million.
The new steel company Oy Ovako Ab was formed on 1 May 2005 and Wärtsilä´s holding is 26.5%. The balance sheet value of this holding at the close of the period was EUR 103.9 million. Furthermore Wärtsilä has granted a shareholder’s loan of EUR 21.2 million to Ovako. Wärtsilä has recorded EUR 9.6 million as its share of this associated company’s result for the period 5-9/2005.
Wärtsilä Group had 11 914 (12 303) employees on average during the reporting period and 11 589 (12 380) at the end of September. The largest personnel increases took place in the Service business. The DEUTZ AG agreement added 170 service employees. Due to the termination of production, the number of employees in Turku, Finland, decreased by 359 during the first quarter. The number of employees in Vaasa, Finland has increased by 80 persons during the current year. Imatra Steel´s transfer to Ovako reduced the number of employees in the Group by 1 279 persons.
ANNUAL GENERAL MEETING AND BOARD OF DIRECTORS
The annual general meeting on 21 March 2005 approved the Board of Directors’ proposal to distribute a dividend of EUR 0.45 per share and an extra dividend of EUR 0.45 per share, i.e. a total dividend of EUR 0.90 per share.
The AGM confirmed the number of Board members to be seven and elected the following to the Board: Heikki Allonen, Göran J. Ehrnrooth, Risto Hautamäki, Jaakko Iloniemi, Antti Lagerroos, Bertel Langenskiöld and Matti Vuoria.
The AGM appointed the firm of authorized public accountants KPMG Oy Ab as the company’s auditors.
The AGM authorized the Board for one year to repurchase and dispose of the company’s own Series A and B shares in proportion to the total number of shares in each series provided that the total nominal value of the shares so purchased, and the votes carried by these shares, shall not exceed five per cent (5%) of the company's total share capital and voting rights. This authorization has not been exercised during the reporting period.
The Board elected Antti Lagerroos as its chairman and Göran J. Ehrnrooth as the deputy chairman. The Board has an Audit Committee and a Nomination and Compensation Committee. The chairman of the Audit Committee is Antti Lagerroos and its other members are Heikki Allonen, Risto Hautamäki and Matti Vuoria. The chairman of the Nomination and Compensation Committee is Antti Lagerroos and its other members are Göran J. Ehrnrooth and Jaakko Iloniemi.
CHANGES IN SHARE CAPITAL AND OWNERSHIP
A total of 824,100 Wärtsilä B shares were subscribed during the period under Wärtsilä Corporation’s 2001 and 2002 option schemes. This increased the share capital by EUR 2,884,350, following which the share capital amounts to EUR 326,811,509.50.
At the end of the reporting period Fiskars Corporation held 7,764,654 Wärtsilä A shares and 7,165,800 B shares, which represents 16.0% of all Wärtsilä shares and 27.7% of the voting power.
On 3 February 2005 Wärtsilä’s Board of Directors decided to include the 2001 options in the book-entry securities system. These options were admitted for trading on the Main List of the Helsinki Exchanges on 7 March 2005.
The decision of the annual general meeting to pay an extra dividend of 0.45 euros per share reduced the subscription price of the B share under Wärtsilä’s 2001 and 2002 stock option schemes by the amount of extra dividend, as stipulated in the terms and conditions of these schemes. Hence the subscription price of shares based on the 2001 options is 16.70 euros per share and based on the 2002 options 9.50 euros per share.
The good demand is expected to continue both in Ship Power and Power Plants. Capacity utilization at the Vaasa and Trieste factories will be high into 2007.
The number of new vessel orders this year is almost as high as in the record years 2003 and 2004. In terms of tonnage order volumes have decreased, returning to their normal average levels, meaning that orders are focused on smaller vessels.
Demand is still higher than supply in the shipping industry. New-building prices are still high. Charter earnings from freight transport have declined in certain sectors. Some signs of a reduction of the prices are evident. The longer-term outlook is expectant.
As shipyards are essentially fully booked until 2008, shipowners are unwilling to commit themselves to investments with paybacks starting only 3-4 years from now.
The decline in orders for large vessels has not affected Wärtsilä’s order intake. The cyclical differences between customer segments have balanced the variations in demand effectively. It is, however, probable that the demand for new vessels this year will be the top of this business cycle, and a return to normal level could happen in 2006.
In most segments of the power plant market the situation has remained good and Wärtsilä´s order intake grew 56% during the third quarter. Some larger orders are expected for both gas and heavy fuel oil power plants by the year end.
Demand for electricity continues to grow and programmes have been started in many countries to install additional capacity. Some of this additional capacity will be for baseload power, some for load control and some for local, mainly industrial, consumption. The high cost of fuel is driving investments in higher efficiency, which favors Wärtsilä´s technical solutions.
WÄRTSILÄ’S PROSPECTS IN 2005 AND 2006
The net sales of the Wärtsilä Power Businesses for the current year are estimated to grow approximately 15%. The full-year profitability (EBITA) of the Power Businesses is expected to be around 8%. Net sales in 2006 are estimated to increase by about 10% based on the current strong order book and lively market activity, and profitability (EBITA) in 2006 is estimated to improve slightly.
Third quarter: July-September 2005 Net sales of the Power Businesses rose 20.3% to EUR 607.8 million (505.1) in the third quarter. The strong growth of order intake continued, up 45.5% on the comparison period based on the strong demand in ship power and power plant solutions. Operating income improved to EUR 43.5 million (35.8). Profitability in the third quarter was 7.2% (7.1).
Full reporting period: January-September 2005
Net sales rose 17.6% to EUR 1,746.8 million (1,485.4), 25% of which was contributed by the Ship Power business, 45% by Service and 30% by Power Plants. The order intake of the Power Businesses during the period amounted to EUR 2,390.6 million (2,075.4) representing growth of 15.2%. The Power Businesses’ already strong order book continued rising to a new record high of EUR 2,544.7 million (1,870.3), or 36.1% higher than at the same time last year; about 73% of the total is scheduled for delivery during or after 2006.
Operating income of the Power Businesses rose to EUR 116.4 million (-3.2) and profitability improved to 6.7% (-0.2).
SHIP POWER BUSINESS: STRONG ORDER INTAKE
Third quarter: July-September 2005 Order activity continued to be very lively during the third quarter. The order intake of the Ship Power business more than doubled compared to one year earlier while net sales grew by one-fifth.
Full reporting period: January-September 2005
The order intake of the Ship Power Business grew 91% compared to the same period last year and the order book at the close of the period stood at a record EUR 1,444.5 million (736.0). Net sales rose 3.7% to EUR 444.8 million (429.1).
During the third quarter the market segments showed varying development. Many segments such as container feeders and the offshore sector were extremely active and continued to grow. Wärtsilä won several orders for its newest engine, the Wärtsilä 46F.
Lively demand in the offshore drilling segment, evident already at the end of the second quarter, focused in particular on the larger deepwater fleet. All in all, the offshore drilling segment represented almost a third of Wärtsilä’s Ship Power order intake for medium-speed engines in the third quarter.
The cruise vessel segment was relatively quiet during the third quarter, but it is estimated to recover before the year end. Orders for large container vessels and tankers decreased after the end of June owing to a decline in charter earnings, the number of vessels under construction and long delivery times.
The first two-stroke RT-flex50 engines were delivered to shipyards in South Korea and China. This new engine type has been very well received in the market and the order book already contains 40 such engines. The RT-flex50 has been developed jointly by Wärtsilä and Mitsubishi Heavy Industries (MHI).
Continuing their successful joint development of the RT-flex50 engine, Wärtsilä and MHI signed an agreement in September for a broad strategic alliance in the field of two-stroke diesel engines. The purpose of the alliance is to explore various possibilities for research and development, efficiency in production, and the distribution of jointly developed two-stroke diesel engines.
Market shares increased Wärtsilä’s product and solution portfolio correspond well with recent market trends and the company’s market shares have continued to grow. In the medium-speed main engine segment Wärtsilä’s market share rose to 41% (25) in the 12 months to 30 September 2005, and in auxiliary engines Wärtsilä’s share stood at 11% (9). The company’s market share also improved in low-speed main engines to 23% (19).
SERVICE BUSINESS: STRONG GROWTH CONTINUED
Third quarter: July-September 2005 Growth in the Service business continued to be strong. Net sales rose in the third quarter by 19.8% to EUR 273.4 million (228.3).
Full reporting period: January-September 2005 Net sales for the whole period were EUR 778.1 million (683.5), an increase of 13.8%.
Operations and maintenance (O&M) agreements for power plants worldwide cover 2,659 MW (2,596). Long-term service and O&M agreements cover approximately 12,200 MW, or 8% of Wärtsilä’s active engine base (150 GW).
POWER PLANTS BUSINESS: SIGNIFICANT GROWTH IN GAS POWER PLANT ORDERS
Third quarter: July-September 2005 The Power Plant order intake grew by 56% compared to the third quarter last year. The largest third-quarter orders were received from Azerbaijan, Brazil, Bangladesh and the Caribbean. The gas power plant market will grow and orders for gas power plants increased significantly. Net sales of the Power Plants business increased 22.5% to EUR 176.4 million (144.0).
Full reporting period: January-September 2005 Gas power plants represented 40% of the January-September order intake, compared with 20% in the same period last year. The order intake for the full period was lower than last year due to the Iraq orders in the comparison period. Net sales rose 40% to EUR 516.6 million (368.9).
Market shares According to the statistics compiled by Diesel and Gas Turbine magazine Wärtsilä’s market share in the heavy fuel oil engine power plant market between June 2004 and May 2005 was 53.0% (74). During the comparable period Wärtsilä received large orders from Iraq. The gas engine power plant market has grown from approximately 2,000 MW to 3,000 MW. Wärtsilä´s share of this market was 19.8% (19.3).
IMATRA STEEL BUSINESS SEGMENT
Imatra Steel became part of a new steel company, Oy Ovako Ab, which started up on 10 May 2005. Wärtsilä´s holding in the new company is 26.5% and it was accounted for as an associated company from 1 May 2005. The figures in the table show Imatra Steel consolidated as a subsidiary for four months in the reporting period.
27 October 2005
Wärtsilä Corporation Board of Directors
The figures in this interim report are unaudited.
The interim report has been prepared in accordance with the recognition and measurement principles under International Financial Reporting Standards (IFRS). The accounting principles applied are the same as in the stock exchange release dated 18 March 2005, which described the impacts of the transfer to IFRS.
A MEDIA AND ANALYSTS’ CONFERENCE AND TELECONFERENCE lasting approximately one hour will be held in English at Wärtsilä’s corporate head office, John Stenbergin ranta 2 on 28 October 2005, starting at 10.45. The opportunity will be given to put questions to President and CEO Mr Ole Johansson and to Executive Vice President, Mr Raimo Lind.
To participate in the teleconference, please call +44 87000 13140, "Wärtsilä Q3 results".