Wartsila Corp Unsp/Adr

Hi, everybody, and welcome to this news conference for Wärtsilä Q1 results. My name is Hanna-Maria Heikkinen, and I'm in charge of investor relations. Today, our CEO, Håkan Agnival, will start with the group highlights, followed by business area development, and after that, our CFO, Arjen Behrens, will go through the key financials. After the presentation, there is a possibility to ask questions. Time to start. Please, Håkan.

Thank you, Johanna-Maria, and a warm welcome to everybody. So, the interim report for the first quarter. What are the highlights? I mean, order intake increased, but of course, the major topic for the first quarter is the write-down of €200 million that is burdening the operating result. But looking at order intake, it increased by 11%. On the equipment side with 17% and on the service side with 6%. Net sales increased by 30% following a strong order intake last year. Service net sales increased by 17%. Now, the Russian-Ukrainian war has intensified the overall uncertainty and amplified the concerns related both to cost inflation and to the global economic environment. And I will also say that the pandemic situation, especially in China, also triggers additional challenges on logistics and cost inflation. And the war between Russia and Ukraine certainly has an impact on Wärtsilä. I mean, first of all, we condemn the war in Ukraine. We have suspended all deliveries, sales orders, bidding to Russia, and we comply with all the sanctions applicable for our operation. In the current environment, it's not viable for Wärtsilä to maintain activities in Russia. And therefore, we have decided to further downscale our Russian operations. So, we have now included in the first quarter a write-down of approximately 200 million euro. And these 200 million euro includes approximately 75 million related to impairment of voyage, goodwill, and intangible assets. Approximately 50 million euro of impairment related to assets in Russia and then approximately 75 million euro related to write downs in in trade sanctions, projects and receivables. And also to give the magnitude, Russia related activities accounted for about 5 percent of our net sales in 2021. And out of that, about 40 million euro was with services. The key figures in a short summary, and we will go through the details. So let's jump into the details. If we look at the net sales, up 17% on the services sale, or up 11% sorry, up the net sales, up 30% in general, 17% in services sales. the comparable operating results, we reached 65 million euro, 5.3%. That's a 61% growth quarter on quarter. But we should acknowledge that first quarter 2021, we also had some net provision related to distressed projects. But we are moving in the right direction. And basically, overall, you can say that we are supported by higher sales volumes. The marine market activity varies by segment. New bill investments soften, mostly due to the increased prices and also challenges with slot availability at key shipyards. And if we look at the number of vessels ordered, they decreased compared to previous quarter, 274 compared to 376. The contracting was largely driven by container ships. Cruise new build activity remained limited. The transitions to cleaner fuels has already started. And we had 107 orders in the market placed globally for alternative fuel capable vessels in the first quarter. And at the end of March, around 70% of the cruise fleet capacity was active, and that was flat compared to the end of December. However, I would say when I talk to some of our customers, they have an optimistic view of the way forward here to the summer. On the energy market situation, the whole Russia-Ukraine creates turbulence and price volatility. It has created an unforeseen turbulence and it has a negative impact on global supply chains, increasing prices and also delaying customer decision making overall. The pandemic has somewhat stabilized, but full recovery will most likely take time. And as we have additional uncertainty within the investment environment and especially in China, we all know the impact of COVID there and its impact on supply chains. Increasing amount of intermittent renewable energy is definitely a theme going forward. And it will require flexible power, where we have some of the key technologies for the balancing power. We see that as a mid- to long-term trend that probably will be even accelerated by the current challenges in the energy market. And then the market share in gas and liquid-fueled power plants increased to 8% from 5%. Order intake increased by 11%. On the equipment side, it increased by 17%. And on services, it increased by 6%. We look at the order book. We see it's increasing. Book to build decreased a bit, but that's because we are ramping up sales and delivering. We also see that the order book develops in a positive way, both for this year and for the two coming years. Net sales increased by 30%. Equipment by 48%. services went up with 17%. And also reiterating one of the key messages that we will have a sales mix with a relatively high share of equipment sales compared to services sales for the full year. And we know that services has somewhat higher profitability than equipment sales. Now, technology and partnership highlights. So a lot of interesting things going on in Wärtsilä and in the world to enable decarbonization. So a couple of proof points from our side. We had in the quarter, we had our first order for new-build methanol-fueled engines. It's the next generation of methanol-fueled engines. Van Oord placed the order. It's for offshore wind installation vessel. And now we have also included the methanol pack, which is a fuel supply system to the engine itself. So, methanol, one of the green fuels going forward. On Solstad, we are cooperating with Solstad on decarbonizing the entire fleet, about 90 vessels. And the target is to achieve a 50% reduction in CO2 until 2030. And in this agreement, we are working together with the customer to identify and evaluate and implement solutions that will increase fuel efficiency and also reduce the greenhouse emissions from Solstads offshore vessel. On another area, on the energy side, we have just opened our expertise center in Houston, Texas. And this center will deliver support to our U.S. and Canadian energy customers, enhancing our ability to grow our service business. And what we do in the expertise center, we collect and we use all the data analytics to improve customers' uptime reliability, to improve the performance. And this is really part of moving up the service value ladder strategy that we have. Now, if we go business by business, and we start with marine power. Marine power increased in all figures. Service order intake increased by 15%. You see the order intake overall, 34% up. Net sales, 7% up. When we look at the comparable operating result, up from 40 million euro to 44. Key drivers, service sales, very strong. On the challenging side, we see increasing cost for fuel testing, increasing transportation costs, also overall increasing cost in our supply chain. And also when it comes to some of our service business, COVID and lockdowns in China has a significant impact also on some of our JVs in China. We also have a cost this year for ramping up our new facilities in Vasa, the smart technology hub. And if we look at the service side and the service agreement on marine power, it's the installed base. Net sales from installations is increasing. And we have one interesting example here from Japan for MMS gas carriers. It's an optimized maintenance agreement covering two LNG carrier vessels and operated for MMS. The agreement are designed to deliver maximized engine uptime and long-term cost predictability, optimizing maintenance for highest efficiency and low boost carbon footprint. And central to the OMAs is our predictive maintenance solutions, expert insight, where we use artificial intelligence and advanced diagnostics to monitor onboard equipment and systems in real time. If we then move to marine systems, Also, an increase in old figures. Service order intake increased by 41%. Overall order intake up 29%. Net sales up 15%. And if we look at the comparable operating results, going from 8 to 12. And here, the key driver is the favorable mix between equipment and services. The services has a strong contribution. On the scrubber side, we still see lower deliveries. Although the fuel spread is very high and from that healthy for the business, our customers has a very active business now and therefore waits with some of the scrubber retrofits. If we look at Voyage, Here, we have more of a challenge. Order intake and comparable operating results decreased. And profitability has been burdened by delays and the sanctions of Russia. If we look at the order intake, it's down 23%. Net sales is up, too. And you can also see here the comparable operating result. We have a decrease from minus 12 to minus 14. On the positive side, services is contributing positively, but we have challenges in delays in projects, higher material and transportation costs, FX, ruble, and also we have a cost now when we rebuild our capabilities outside of Russia related to Voyage. So we are downscaling in a staggered way and building up competence, making sure we have business continuity and serving our customers. But of course, we are incurring cost of this. And you could say this whole Russia challenge will delay the turnaround of Voyage. If we look at how our cloud solutions are developing, we have a 28% increase in connected vessels. You see a little bit of a downturn in the first quarter. There is more of a prioritization. Certain crews not renewing in the quarter, but coming later, etc. I think the trend is still very positive for connected solutions. A very interesting example from Voyage. We are investing in Marindos to support the shipping decarbonization in Japan. This is a consortium in Japan, and where Marindos links edge computing on board ships with cloud services and shop-based applications to provide a range of maritime-specific services to seafarers and to vessel operators. And the collaboration, which will include the area of vessel optimization and autonomy, will create significant value for the Japanese market. And by reinforcing synergies and leveraging a digital ecosystem of applications that can run onboard and ashore, companies will bring to market safer, greener, and more efficient operations. Switching to energy, we had a significant increase in net sales and profitability. Service order intake decreased by 7%. The overall order intake is up 3%. Net sales is up 86%. And you can also see comparable operating result from 4 to 24 million euro. Service volume growth has been a key enabler for the increased operating result. Our challenge here clearly cost inflation and less favorable sales mix. We talked about that before between equipment and services. A key example here, the flexible thermal balancing journey continues. And here we have yet another order in Italy for balancers, where our fast-starting internal combustion and the technology will be used to balance the power system in Italy and ensure it is stable when the share of renewable is increasing. And this order was placed by A2A. It will be delivered as a full engineering, full EPC contract in partnership with the Italian engineering group, SELFIA. The new plant will operate with six of our 50SG gas engines and will come in operation in 2023. And when we have completed this, this will be the largest power plant in Italy using internal combustion engines. If we look on the services side and our service agreements, the install-based of long-term service agreements is also increasing. And here we have one interesting example, our guaranteed asset performance agreement, where we are working with our customers in Senegal for a power plant. It's a 10-year contract. It covers 130 megawatt of power plant in Malikunda, Malik, which is scheduled to be commissioned in 2022. And the power plant of FlexiCycle power plant will operate seven 50 engines. And it combines the advantage of flexible, simple cycle operation with the outstanding efficiency of a combined cycle plant. And this agreement, the service agreement, will provide operational reliability with scheduled maintenance and spare parts, as well as heat rate and power output guarantees after major overhauls. Now, Arjan, some comments on other key financials.

Yes, thank you, Håkan. If we start with cash flow from operating activities, minus 122 million euro negative, and the main negative contributor, you could say, is the working capital. We had to increase our working capital in Q1 in order to, let's say, facilitate the higher delivery volumes in the coming months. And that you can also see on the working capital line, it's still negative, minus 18, coming from, what was it, about minus 100 at the end of last year. Net interest bearing debt, 276, coming from close to zero at the end of last year. This includes, let's say, about 50 million repayment of debt, as well as, let's say, about 60, 70 million euro increasing of lease commitments, and mainly coming from the STH facility ramping up in Vasa. Looking at gearing, 0.14 solvency, 35.3, and basic earnings per share, negative 24. If we would exclude the provisioning of the 200 million, also addressed earlier by Håkan, gearing would be 0.13 solvency, 2% higher at 37.3, and basic earnings per share, 6 cents positive. Looking at the bridge from profitability to operating cash, starting with 142 on the left side, on the right side graph here, adding back, let's say, the depreciation amortization, which is not, let's say, cash. This includes about 85 million euro of the write-downs related to the 200 million provisioning, assets in particular. Then we have a few blocks on the working capital, 169 million euro down for the reasons I mentioned earlier to facilitate deliveries in the coming months, higher deliveries. And then the other part is also related to the 200 million write-down because the major part here is the write-downs of WIP in projects as well as receivables on Russia-related matters. If we move on to the prospects then, Håkan.