Wartsila Corp Unsp/Adr

Good morning, everybody, and welcome to this news conference for Wärtsilä's half-year report 2022. My name is Hanna-Maria Heikkinen. I'm in charge of investor relations. Today, our CEO, Håkan Agnemal, will start with the group highlights, followed by the business area development, and then our CFO, Arjen Berends, will continue with the key financials. After the presentation, there is a possibility to ask questions. Time to start. Please, Håkan.

Thank you, Hanna-Maria, and thank you everybody for joining us. Let's jump into the second quarter for Wärtsilä. Some really good news on the service order intake side. Service order increased by 36% throughout the business. Also, on the overall order intake, we had a positive development. Order intake increased by 25%. So strong order intake in still a market with a lot of uncertainty, but we are making good progress. Net sales increased by 24%. And also on the services, we see that service net sales is developing in a positive way with increased service net sales of 18%. A comparable operating result also increased by 20%. But cost inflations, supply chain bottlenecks, COVID-related lockdowns in China, and sanctions in Russia have put and continues to put the global economy under pressure and cause challenges also for us. But still, we managed to grow our order intake. And starting point also two very important announcement from Wärtsilä. And if we start with the most recent one this morning is we This morning, we confirmed that our exit from the Russian market has now been completed. All adjustments and closures were completed in accordance with local regulations. The financial impact is in line with the provisions that we took already in the first quarter, and no material impact on our financials in the second quarter. Then earlier, we have also announced the plan to further optimize our European engine manufacturing footprint. Ramping down our factory interest Italy and centralizing our four stroke engine manufacturer to Vasa in Finland. This means taking the next step in strengthening our competitiveness and creating a structure enabled for future growth. Italy and Trieste will continue to be very important for Wärtsilä in many areas. And now we are highly committed, working very closely together with unions and institutions to identify different support solutions for the impacted employees. This has not been an easy decision for Wärtsilä to take. Coming back to the overview of the figures and we will talk through them. I highlight a couple of the first half year. I mean, we had a good second quarter, but also a good first half year with order intake up overall 18 percent. We have an order book that is up 13 percent. And our comparable operating result also from the first half year, up 35%. If we then look at the highlights of the second quarter, we see that net sales came in at 1.4 billion euro. 18% increase in service sales, a strong contributor. The comparable operating results landed at 85 million euros, growing 20% and strongly supported by higher sales volumes. You also see that our operating margin kind of stabilized. at 6.1%, and one could expect the operating margin to continue to develop in a positive way given our increased sales. But here we are also facing headwinds in terms of cost inflation, which is impacting our existing order backlog. We are also facing challenges with underabsorption in our industrial system. And we also said earlier that 2022 is a new build year. So the mix between new build and services weighs over a little bit more than normal to the new build side. And we know that the profit margins on the service side is higher. So these are a bit of the headwinds, so to say. But we are moving in the right direction. On the marine market, activities are at a good level. Investments in new vessels eased off a bit due to increased prices and also fewer available slots at key shipyards. And there is also some uncertainties related to future demand for tonnage. The number of vessels orders in Q2 decreased to 701 compared to 829 in Q2 last year. Vessels contracting has been driven by container ship and a record level LNG carrier ordering. And LNG carrier market activities has improved significantly during the Q2, as many countries in Europe are looking at replacing Russian pipeline gas with LNG from other sources. And on the cruise side, at the end of June, 90% of the cruise capacity was active, up from 70% end of March. And when I talk to our key customers on the crude side, I think they have a very optimistic view on the demand side here in the month and the year to come. On the energy market, markets are affected by global cost inflation and price volatility. But we also see the continued trend of increasing demand of balancing solutions. Cost inflation and continued COVID-19 pandemic have contributed to higher quotation prices. Increase of cost of supply and higher prices have also caused slower customer decision making. We see that. The market transforms as Europe is moving away from dependency on Russian imports. And more liquified LNG projects are moving forward globally. We see an increasing level of intermittent renewable energy that is expected. And we do see an acceleration in the need for balancing solutions. Storage growth is picking up after a slow first quarter. You've seen that in Q2. It's really taking pace again after, I would say, a digestion of the new cost and price level in the market. Service growth continues at a good level, and customers really show interest in our long-term agreements. Our market share, the Wärtsilä market share in the gas and liquid fuel power plants also increased a notch now to 9%. Oil intake was up by 25%. Equipment order intake increased by 13%, service by 36%. And what is really encouraging on the services side, we do see that the major drive of the growth in the second quarter was around agreements. And you know, we have been talking about moving up the service value ladder, and we see it happening gradually as we go forward. We have a strong order book, and this is despite that we have now, in the second quarter, removed 240 million Euro of Russian-related projects. You also see that if you look of the share of delivery of the current year, this year, this share has increased compared to previous years. Net sales increased by 24%. Equipment net sales increased by 31. And service net sales increased by 18. So positive development in both areas and throughout the business. Now, technology and partnership highlights. moving on our way to shaping the decarbonization of marine and energy. So what is happening? I think on the hydrogen side, we have some really interesting partnerships here. Two very concrete examples where the blending of hydrogen starts to be tried on the energy side. We have a collaboration with Capwat in Portugal, and we test up to 10% green hydrogen blends in our 34 ST engines. In the US, we blend up even up to 25% of hydrogen, and that will be tested in cooperation with WEC Energy, where they have a current plant running on three of our 50 ST engines. We also launched a new large-bore engine, our 46TS dual fuel engine. It has a modular design, it's part of our modular platform, and with a focus on efficiency. And we are really taking fuel efficiency and therefore reducing emissions to the next level. And we keep the fuel flexibility, which will be needed as we talk about the gradual shift to different type of fuels. And in gas fuel mode, this engine has the highest efficiency in the industry so far achieved in the medium speed engine market. And we also really celebrated our opening of our sustainable technology hub in Vasa in Finland. This is a new technology center where we invite customers, partners, and companies, academia, to come together to incubate, test, and validate ideas. Evolving a lot around the new fuels and the new sustainable solutions, we need to increase the pace of innovation. It also features a modern fuel laboratory, flexible technology and engine testing facilities, as well as a highly automated production system. And it's on land, but it's also at sea, because we have a great cooperation around the Aurora Botnia ROPAX ferry in Vasa, which actually is a floating test lab for us, which is an integrated part of the whole ecosystem. Now, if we look at the businesses, let's see how the businesses have evolved. For Marine Power, order intake and net sales increased. Service order intake is up here, also 36%. Overall, the order intake, you can see it's up 21%. Net sales with 8%. Our comparable operating results is going from 44 million to 45. On the positive side, strong services sales. What is holding it back is the factory capacity, the under-absorption, also the cost inflation, both on materials and logistics on the existing order backlog. We do a lot of testing on fuels and the fuel costs are going up, which is affecting the profitability. And then we also carry cost to ramp up the Sustainable Technology Hub, STH, this year. And if we look at the service agreements, they are really growing and the net sales from the installations under agreement is clearly increasing. And here I think is a great example, Marangas has extended their optimized maintenance agreements for an additional five years. These agreements ensure that operations can run safely in a controlled way, but also with predictable cost for the fleet of 21 LNG carriers. And in addition to the maintenance service, this agreement includes remote operational support, dynamic maintenance planning, and also our digital predictive maintenance solution based on our expert insight platform. And already today, Marine Power is supporting globally more than 700 vessels with our lifecycle agreements. And one interesting metric, we sold 90% of the cases remotely. And for me, a very strong proof point of the whole logic and the whole concept is that we have a very high renewal rate with our customers. Customers that have signed up for agreements, they come back and they want to prolong. Marangas is one great example. Looking at marine systems, net sales increased. Order intake and comparable operating result decreased. Order intake went down with 24%. I think on the new build one year ago, we had a spike in our gas solutions order intakes. It's a bit of a periodization. And on the services side, there is also this year a bit of a periodization. But order intake is down. And net sales is up. Then, in spite of the higher sales, you still see that the comparable operating results is going from 13 to 11. So on the positive side, we have higher sales volume. But on the negative side, we do have an unfavorable mix between equipment and services. And we also see the pressure from cost deflation in our existing order backlog. Voyage, Voyage order intake increased, but the Russia exit impacted clearly the sales and profitability negatively. However, I would really like to recognize the significant efforts and commitment from the Voyage team in rebuilding the business in new locations outside of Russia, keeping 100% focus on the customer and really delivering. So that has been a monumental effort. And now we have taken a significant step. So order intake up 8%, net sales down 15%. You can see operating results, minus 11, minus 12. On the positive side, we had a favorable sales mix between services and equipment, but we had a lower sales volumes. I mean, we also had, I mean, the cost related to ramp down of R&D capabilities and building up outside of Russia again, so to say. If we see how our cloud solutions are evolving, we continue to see the increase now, 23% increase in connected vessels. We also closed the acquisition of port link. And I will say this acquisition as one example of the type of acquisitions we want to do going forward. It's bolt-on acquisitions where we acquire maybe small or mid-sized companies with certain critical edge in technology or service capabilities. And Portlink is a leading provider of port efficiency solutions. It was founded in 2007, and it is headquartered in Vancouver, Canada. It has a global partnership with more than 3,500 users and a customer network in more than 20 countries. And the workforce is 20 professionals. It's not a big team, but it's a really good team. And they will be integrated now in the Wärtsilä Voyage business. And this acquisition, it will speed up Voyage journey towards creating an end to end connected maritime ecosystem with intelligent port logistics solutions. Then energy. And you can see the lady was smiling. Energy significant improvement in all key figures. Service order intake up by 56%. If you look at the order intake overall, it's up 51%. If we just zoom in on our battery storage business, it was up 91%. But also the thermal side was up with 34%. Net sales up with 52%. And we can see that the comparable operating result going from 24 up to 41. Major driver is the service volume growth, but also energy is working with cost inflation. It's a headwind in existing order backlog. And there's also a less favorable sales mix between equipment and services. And also within the services, there is a less favorable mix between the different disciplines of services. But an energy that is definitely going in the right direction. And Q1 was tough on our energy storage business. Q2, we see order intake really picking up again. One example from the UK, we are delivering 100 megawatt hour storage for our partners there, the SSE. The project also includes our GEMS software platform, and this is very normal for us when we deliver to our equipment, that we deliver our software solutions. And you know our approach to the storage arena, it's power system optimization. It is how you connect the battery to the power system in combination with different generating assets. This is where you can really create value uptime reliability and also lowest overall energy cost. This battery system is connected directly to the transmission network and supports access to clean and reliable energy by balancing the intermittency of renewables. The energy storage system will support UK's national grid with reliable services, and we will also support the wholesale market trading. That is crucial for establishing the market mechanism for balancing power. And we are actually in, we have received earlier orders in the UK, and we are installing similar sized energy storage system across the UK, helping, supporting UK to meet its ambitious renewable energy targets. On the service agreements, we also see that the installed base is increasing. The service coverage of the installed base is increasing. And this is one example from Brazil, where we have a performance agreement that will enable our Brazilian customer to meet its power purchase agreement obligations. It's the full operation and maintenance agreement for Temu Cabo. It covers a 48 megawatt power plant, and it operates on three of our 46 engines. And this agreement includes performance guarantees on availability and on fuel consumption. Now, other key financials. Arjen, please.

Thank you, Håkan. Other key financials, probably the main thing to highlight on this slide is the operating cash flow minus 90 million euro negative. The other key financial parameters quite much link to that number. We have been, during the first half of this year, we saw it in Q1 and we saw it also now in Q2, we have been building up working capital to facilitate higher volume deliveries going forward. And that was also actually shown by the order book graph that Håkon showed earlier. Let's say if we look at the order book for the remainder of this year, it's much higher than the year-to-date net sales. That on this slide, if you look a little bit deeper into the working capital, and you can see it from the right side slide here, the main increase comes from, let's say, trade receivables. We have been invoicing a lot of milestones recently in quarter two, which we anticipate to get paid for in the coming months. So if you ask me the question, are you more positive about the future cash flow? Yes, I am. With these words, I give back to you on the prospect, Sorkhan.