Interim report 1 January - 30 June 2003

Wärtsilä Corporation, Stock exchange release 31 July 2003 at 08:30 UTC+2

Strategic focus on Ship Power systems and service

- Focus on ship power systems and service.
- Power plant business to be re-examined. Focus on areas of strength in markets and products.
- Low order intake in 2002 reduced net sales and result.
- Power Divisions’ order intake up 29% in first half of year.

An exceptionally high number of ships were ordered at Asian shipyards in the first six months of the year as total investments in new ships in the first half of the year exceeded the entire figure for 2002. Business continues to be slow in Wärtsilä's traditional home market, Europe. The lower prices offered by Asian engine manufacturers intensified competition.

The power plant market showed no significant recovery during the spring months. Projects under negotiation made progress, although more slowly than expected. Demand does not correspond to supply in this field.


Wärtsilä is planning to concentrate its resources more strongly on ship power systems and service. Among other things this will mean starting manufacturing of marine engines and propellers in the growing Chinese market as well as acquisitions aimed at broadening the company’s range of products and services in this sector.

The structure and product portfolio of the Power Plants business will be re-examined and focused.

Revision of the corporate strategy is part of the Group’s development, the aim of which is significantly improve the company's profit generating ability. The Group's targeted operating margin is 7-8%.

That is why Wärtsilä will begin to prepare a plan for a new structure during the coming autumn. It is foreseen that this will also include measures that will further concentrate the Group’s manufacturing capacity.

The consolidated operating profit was EUR 21.1 (148.8) million. Last year’s figure includes a capital gain of EUR 111.1 million on the sale of Assa Abloy shares.

The operating profit of the Power Divisions was EUR 22.3 (32.1) million. The reason for the decrease was the lower manufacturing load. Imatra Steel’s result of operations, EUR -1.1 million, was burdened by a EUR 4.5 million writedown of fixed assets during the first quarter. Net financial items amounted to EUR -5.5 (-1.5) million. The Group’s profit before taxes was EUR 15.6 (147.3) million. Earnings per share (EPS) were EUR 0.13 (1.58). The order intake of the Power Divisions rose 28.9% to EUR 1,102.3 (855.0) million.

Capital expenditure during the period totalled EUR 24.9 (363.1) million and included the acquisition of the Dutch company Caltax Marine Diesel BV during the first quarter. Depreciation during the reporting period amounted to EUR 56.3 (49.9) million, and included EUR 13.4 (9.5) million in amortization of goodwill on consolidation. Cash reserves at the end of the period totalled EUR 136.5 (212.5) million. Net interest-bearing loan capital increased to EUR 521.5 (373.7) million, mainly because of growth in working capital.

The solvency ratio was 35.0% (35.1) and gearing was 0.67 (0.47).


The six-month operating profit margin of the Power Divisions was 2.4% (2.7). The second-quarter operating profit was an improvement on the first-quarter figure. The order intake of the Power Divisions grew. The order book was at the same level as one year earlier and clearly better than the order book at the end of 2002.

Restructuring measures were continued in the Power Divisions in line with market conditions. The closure of the factory in the Netherlands was completed in the first quarter and its production operations were transferred to Italy. The temporary layoffs started at the Turku factory in the autumn were continued. Negotiations were concluded in France on the reduction of approximately 130 employees during this year and 2004.


The Marine Division’s order intake between April and June showed a clear increase, being 25.6% higher than at the same time last year. These periods are comparable because Wärtsilä Propulsion was consolidated from the beginning of April 2002. The six-month order intake rose 59.5%. The order book was at a lower level than in the comparable period but at the same level as at the end of 2002.

Demand remained lively for large tankers, containerships and bulk carriers. The offshore, cruise ship and passenger ferry markets were slack.

Wärtsilä gained propulsion system orders for one cruise ship and five passenger ferries; in the market altogether, only one cruise ship and 10 passenger ferries were ordered during the period. Wärtsilä Propulsion continued to develop well and received several significant orders. Orders for Sulzer engines manufactured under licence rose likewise and Wärtsilä’s position strengthened further, especially in the containership market. Wärtsilä expects to see its dual-fuel engines achieve a breakthrough in the LNG carrier market this year.


Investment decisions continue to be postponed owing to general uncertainty in the global economy and energy sector, as well as unfavourable exchange rates. Forecasting of market trends is difficult although small projects are making progress. The most lively markets are in Central and Southern America, Africa, the Middle East and South Asia.

Wärtsilä won three times as many new power plant orders during the second quarter as in the same period last year. The six-month order intake rose 41.6% compared to the first six months of last year. The most important orders for oil-fired power plants came from Portugal, Saudi Arabia and Sudan. The largest gas power plant orders were placed by customers in Hungary, India and Japan. Wärtsilä sold its first biopower plant in Ireland.


Net sales of the Service Division continued to rise but fell short of the long-term growth target. The increase in the reporting period was 6.8%. Net sales rose more slowly during the second quarter principally because the exchange rate of the US dollar weakened.

The volume of long-term service and operation agreements covers more than 12,000 MW, or over 9%, of Wärtsilä's total active installed engine base (128,000 MW). The volume of long-term service agreements rose 5.9% to 9,867 MW. Operation and maintenance (O&M) agreements cover 2,182 MW, or more than 120 power plants around the world, an increase of 19.6%. The first O&M agreement for a biopower plant was signed in May, marking a significant strategic step for Wärtsilä’s service business.


The thrust of Wärtsilä's product development activities is on environmentally sound combustion and engine technology. The research project started by Wärtsilä and MAN B&W Diesel is making planned progress.

Engine manufacturing volumes were at a low level during the first half of the year. The streamlining measures started in autumn 2002 are being continued.


Imatra Steel’s net sales increased 5.5% between April and June due to growth in its forging business. Demand in the special engineering steels market overall remained unchanged.

Imatra Steel showed an operating profit of EUR 2.2 (2.9) million between April and June. The weaker result arose mainly from the fact that the company was unable to transfer the sharply increased raw material and energy prices to its product prices to a sufficient degree.

Under an agreement signed in June, Styria Group will acquire the assets and operations of the Billnäs Spring Works on 31 July 2003. The impact of this deal on Imatra Steel’s profits will be neutral after write-down of fixed assets. Imatra Steel will henceforth concentrate on manufacturing and marketing long special engineering steels and forged components for the heavy truck industry.


Wärtsilä holds 27.8 million shares in Assa Abloy, or 7.6% of the total. The market value of this holding at the close of the period was EUR 233.1 million and its book value in the consolidated balance sheet was EUR 67.4 million.


Wärtsilä's Annual General Meeting, held on 12 March 2003, decided to pay a normal dividend of EUR 0.25 per share and an extra dividend of EUR 1.50 per share. The terms of the convertible subordinated debentures and the bond with warrants were changed corresponding to the amount of the extra dividend. The meeting confirmed the number of members of the Board of Directors to be six. Göran J. Ehrnrooth, Risto Hautamäki, Jaakko Iloniemi, Antti Lagerroos, Bertel Langenskiöld and Paavo Pitkänen were elected to the Board. Authorized Public Accountant KPMG Wideri Oy Ab were appointed to be the company's auditors. The Meeting also renewed the Board's authorizations to purchase and dispose of the company's own shares.

The Board elected Antti Lagerroos as its Chairman and Göran J. Ehrnrooth as the Deputy Chairman. The Board also appointed the

members of the Audit Committee: Antti Lagerroos, Göran J. Ehrnrooth and Paavo Pitkänen.


Investments in new tankers are at a good level this year and the expected EU regulations on double hulls will be a further spur to investment activity. Demand for bulk carriers is expected to be high and the volume of containership orders should maintain its current momentum. A limiting factor could be the insufficiency of shipyard capacity in Asia. Wärtsilä’s traditional marine engine market in Europe will remain slack, which further emphasizes the need for restructuring.

Uncertainty will continue in the power plant market. A few largish orders can be expected this year. Wärtsilä estimates that its total power plant order intake for the year will be higher than in 2002. The postponement of decisions in this sector is likely to continue, however. The intake of biopower plant orders is forecast to develop favourably.

Acquisitions will focus on broadening and deepening the company’s service capabilities as this will offer Wärtsilä good opportunities to increase its share of the market for 2-stroke engine service. Business operations will focus on levering the synergies offered by the Ciserv group and increasing sales of service contracts and service products.

The Power Divisions’ order intake grew during the first half of the year. The order book at the end of June was at the same level as one year earlier and clearly better than the order book at the end of 2002. The Power Divisions’ net sales and operational profitability in 2003 are expected to be at last year’s levels. Streamlining measures will be continued and once the plans and evaluations are completed a restructuring provision will be made that will burden the Power Divisions’ result for 2003.

The market outlook in Imatra Steel’s business continues to be uncertain in the second half of the year. However, Imatra Steel’s net sales are expected to increase and its operational result to improve due to streamlining measures.