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Good morning, everyone and welcome to Wärtsilä Corporation's Q1 Report Session. Here everyone welcome - here in the Helsinki, Wärtsilä Helsinki Campus, and of course everybody on the lines.
I will make a short presentation then we have time for questions and answers. And with me here - that actually in the front I have the Heads of the Businesses and our CFO. And almost the - actually the whole Board of Management is helping me this morning.
I will start by talking a little bit about the market and the market environment, and I start with marine. The marine recovery is actually quite slow and there you can definitely see the demand outlook on merchant and offshore, which is cautious and that has been there for many quarters if you go back in history. On the other hand, again, you see good development and anticipated growth to continue in the LNG, Cruise and Ferry segment.
Energy, our story and the fundamental drivers were - on the energy demand, when you look at the emerging markets and at the same time the increased need for flexibility through the renewable transition remains in place. However, you all know that geopolitical risks, global uncertainty and the redefining of investment strategies, to meet all these ambitious renewable targets is slowing down the decision making temporarily.
I would also highlight this moment that this is the first time we've now come out with two divisions and the report is also reflected to that one. And this organizational change we initiated last year is actually paying off. You can definitely see a better understanding about the market, a better focus, bringing value to our customers and at the same time, you can it see here in Wärtsilä how people are working and delivering the results.
Then moving on, some of the key figures. Order intake went down a bit. And that's mainly driven by the newbuilding energy orders. And as we know all these years, the energy goes up and down during quarters. Order book, highest ever, made up 15%. And it's always interesting to add to that number the orders we don't book in services, which is 1.4 billion, and so we have a fantastic order book.
Net sales up, mainly marine, newbuilding deliveries and the services growth both in marine and energy, book-to-bill at the healthy level. Comparable operating result, the absolute number went up 16% and also we saw a better number on percentages. EPS at the same level and now cash flow also on the Q1 going to the right and healthier numbers.
Now in our presentation we also wanted to show the rolling numbers of order intakes and sales and profitability. And you can see here how stable - a little bit going up the trend, but how stable the quarters actually are. If you look at marine and energy; marine was 60% and energy 40%, what comes to the equipment side during this quarter. And that slow decision making has affected the energy orders this quarter.
Net sales growing and I'm happy to see that the sales in services, which we also wanted to show going forward is around 50% of the net sales, and again, the stability slowly going up if you look at the rolling numbers. Book-to-bill, I mean this trend going up and the book-to-bill at the healthy levels. Order book distribution, this is of course good to look at the year-end and then the years to come.
At this moment, I would like to highlight that reaching our targets and the growth for this year, we still need energy orders going forward. This has always been the case and no drama there, but those orders have to come and energy is actually turning around a bit faster. We still have a lot of orders in - and getting orders in the marine sector where the deliveries are a bit longer than compared to energy.
Now finally, also looking at the result numbers, it was a good quarter, but quarter is a quarter. And always you need to be looking at that the trends. But I want to highlight that when you look at the mix when services is growing and the - when the focus is on the value deliveries and the value bringing to our customers, the profitability will also grow.
Cash flow positive as compared to the last year. And working capital - okay, bit down from last year, but increasing from the end of last year, and of course, lot of good support also when you look at our advances and inventories going forward, gearing 0.29.
And moving on onto the businesses, slow recovery in the Marine segments, and if you - I mean, here you have on the left side the total order contracts. I think it was over 200 vessels. It's a bit more than last year, but I think everybody anticipated the market to pick up a bit faster. As everybody knows Clarkson has also downgraded a bit their longer-term forecast. And at the same time, on the right side on this slide, you see the specialized tonnage, which is supporting, of course, Wärtsilä's solutions more favorably.
Order intake development; here you can see the rolling numbers. Overall, order intake in marine went up. New equipment a bit more than services and the division - different segments is pretty much what it has been during the last quarters.
Good to see the installed base coverage, we have been talking about that a lot. And the long-term services are important for us. And there is a good example of one customer, LNG tankers are good examples because they have dual fuel engines and complicate - sophisticate, I would rather say, equipment and solutions were Wärtsilä can provide value to our customers.
Net sales development, up compared to the last year and also the rolling number again here is visible. Services 50% compared to new equipment, which is a good number. And of course, you can see also the division between spare parts and agreements and field service and projects, so healthy development on that side.
And one example of what has been going on during the first quarter, Wärtsilä is providing a solution, the new Wasaline ferry, which is going to - I would rather call it as a lab ferry, which has a lot of new installations, new innovations, hybrid dual fuel solutions, enabling the reduction of CO2. Wärtsilä will be there on the service side providing, again, maintenance and services, improving the reliability. As I call it a lab, because it has a possibility to develop and test and research different kind of new elements what you have in the Marine segments today.
Moving on energy. And I start by showing the slide, which clearly shows where Wärtsilä plays a role going forward. We all know coal and fossil fuels are targeted today. And it's not new that coal will or should be disappearing first then you look at different fossil fuels and the cleaner the fuel there no more possibilities it has. At the same time, renewable is playing a stronger role. The importance of this graph is that on the fossil fuel and the gas side, you need more solutions which are flexible, decentralized and that's why engine technology plays an important role.
Our orders on energy services, there was a growth, but new equipment, it was down and I have highlighted already couple of times the reasons there. And you can also see here how the orders go up and down. Again, the long-term story has not disappeared anywhere. And that's why we strongly believe that we have a very strong role to play when you look at the renewables coming more into the picture.
And examples of our services contract again. Now there was a pick up on the percentages, which is good, supporting our strategy. This is a five-year deal in Myanmar where Wärtsilä will operate and maintain a power plant for their developing infrastructure going forward.
If you look at the global numbers, highlights are there that Africa and Middle East have been growing up and you have a very healthy division between Asia, Africa, Middle East and Americas. Europe is a bit slow during this quarter.
Net sales development, and you always compare the net sales, of course, how orders have been coming in during the last 12 months, but here is also good to see services growth and services forming over 50% of the energy sales. Market share, okay, a bit old data. But in a shrinking market, Wärtsilä is gaining a bit market share.
And then one example where the market is going and we have been talking about different fuel and fuel strategies and our flexibility, what comes to different fuels. The new very interesting - not a new innovation, but the way how to fuel different equipment are the cases of Power-to-X. And there is a small Finnish startup called Soletair Power who is developing the technology to produce from CO2 and hydrogen a synthetic, renewable fuel.
Soletair is so fantastic examples of a company which is also looking at the healthy working environment, because their technology is actually taking the CO2 for example office environment and we would have a healthier air here to breathe and have our meetings and then converting that CO2 back to renewable fuel. And that fuel can be burned in Wärtsilä engines and we can basically call our energies to be renewable products.
This is not the only company in the world, and as you remember last year, we also announced our cooperation with Lappeenranta University and Nebraska, the biggest utility in Nebraska, where we are testing in a larger scale Power-to-X story. And I think this is the way how you can look at the different possibilities, again, based on our strategy to work on different fuel flexibilities.
And the final slide, our prospects are unchanged, solid for marine and services. At the same time, as I highlighted at the beginning, marine slow recovery, and energy is slowness in the decision making. Long-term story is there, but also for us, we need energy orders more than this quarter to go forward. And I stop here and let everybody to start asking questions.
So do we have any questions here in Helsinki Campus from the audience? No questions yet. And then we could turn to the lines, please. And may I remind, one question and then one repeat question, and then please go back to the line. I think we can roll it up quickly and you have possibility to ask many questions, please.
[Operator Instructions] And your first question from the line of Max Yates from Credit Suisse. Please go ahead.
Hi, thank you. My first question was just on the energy division, and I wanted to understand specifically which regions were giving you confidence and where you saw the healthy pipeline that was going to result in orders picking up as we go through the year?
Thank you. Very good question, and I could answer that one, but I'll let Marco because it's his specialty, Marco Wirén, the Head of Energy to answer to that one. Please Marco.
Thank you and thank you for the question as well. And of course, Middle East and Asia is a big important area for us and we definitely see a good pipeline there. We have lot of countries that still are growing and they need energy to be able to grow. But also if we look into southern America, Latin America, we see that Brazil will get back to the auctions. We will have one auction in May.
Then in the fall there will be more auctions and next year we will see more specific peaker auctions as well. And we see also that there are other places like United States - still and Australia, where the backup power for renewables is very important. But of course, just like Jaakko mentioned earlier today, that there's a lot of replanning to be made in many states in the United States where politicians have been demanding the increased share of renewables. And of course, when they have to go back to the drawing tables, it takes some time, and then they have to get the decisions made again. So that's why we see a little bit slowness in the decision making.
Central America also?
Yes, definitely Central America as well. The whole Latin America.
Is there anything we should read into - I mean, I noticed, kind of recent orders in Nigeria, Iraq was sort of 28 million to 48 million megawatts. Is there anything we should read into those orders in the Middle East and Africa just being fundamentally smaller than what we had seen in Bangladesh?
Yes, I would say that, we've been talking about that Africa will come. And I would say that, finally we see a movement in Africa. And we definitely believe the next coming five years we will receive more orders from Africa than we have received in the past five years. Middle East is also an area where we see opportunities, and Iraq is one of those, and there's a lot of need for them to transform their whole energy sector from dependency of other countries into becoming more domestic player.
Okay, Marco.
Maybe just what one follow-up on SOx scrubbers. Could you help us understand in marine how much SOx scrubbers accounted for in terms of orders? And maybe a comment on how you think the market will evolve in the coming quarters relative to that number, because obviously it's quite a sizeable amount of your 2018 order intake.
Yes, Roger Holm, Head of a Marine, he knows the scrubber market.
Yes, thank you for the question. And if we first start by looking at the Q1 order intake, it was on a good level, slightly less than comparable quarter last year, but still on a good level. We see still a lot of interests in the markets that has not reduced as we see it now.
The key question that we have is, how will now the fact change the market that if you want to have a scrubber 1 of January, you should have ordered one already. And now we need to follow how will the owners then decide based on this one, so I think this is the key a question point. But good activities, ongoing still and the pipeline also looks positive.
Thank you, Roger.
Could you just give us a sense of how much the orders were down sequentially, just, at least in magnitude even though.
I will just comment that it's a slight decrease compared to Q1 last year, but still on a good level.
Okay. That's great. Thank you very much.
Thank you.
Your question from the line of Andreas Willi of JPMorgan. Please go ahead.
Yes, sorry for the delay. It's Andreas from JPMorgan here. Could you just elaborate on the uncertainty in the energy market in terms of the customers that you mentioned, because they don't seem to have uncertainty when it comes to pulling the trigger on the actual investments for renewable?
However, solar, wind volumes continue to grow very strongly enterprise on the upside. What specifically do they need to pull the trigger on kind of the peakers to backup for the renewables given that that market hasn't grown in the last three, four years despite the extraordinary growth in renewables? What are they waiting for specifically that should then come in the next 12 months - 18 months?
Please Marco.
Yes. Thank you, very good question. And usually it depends how much renewables you have and we usually talk about the tipping point of 20%. And when they decrease, for example, coal and other resources that they have for generation, then when the tipping point is closing to 20% then they usually realize that they need a very good balancing power and peaking power as well.
But the slowness that we see now is basically because of the redoing of the plants, so it's not because of - that they're not reaching the 20%. And that's the case in all markets and it always depends how big the market is, so how much they have interaction with other utilities as well in the area.
Thank you.
But what should change in the next 12 months to 18 months for that to basically catch up and deliver the growth you expect?
Of course, we see that the share of renewables of their generation capacity is increasing and they're closing to this tipping point. And the other reason is that when they are redoing their plants, we see a slowness now, but they have to continue to invest, because they need the electricity and that's why they will continue to increase the renewables' share and that's where peaking power is coming in.
Thank you.
Thank you.
Your next question is from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead.
It's Johan. It's a terrible echo, but I hope you can hear me.
Yes.
So sorry for coming back to scrubbers again. Your Swedish competitor claim that the margins for the deliveries that they had for the scrubbers was clearly above 15%. Is that something you are seeing as well? And if not, why?
Thank you for the question Johan. I don't want to comment on anything what all of us have told and we don't comment on our scrubber margins. The only part what we have been commenting earlier during last year were that some of the initial scrubbers early on were lower, but then they have been getting on a healthier level. But we have no other comments on the margin side.
Then on the other ballast water, any actions there from your side?
Yes, Roger, please.
Thank you for that question. Yes, more activities in the pipeline. And we expect that still to - as a general comment, the market will probably increase towards end of next year 2021. Still, if we look at the volumes in relation to the rest of our business, we are still on low levels.
Okay. Thank you.
Thank you, Johan.
Your next question is from the line of Sven Weier from UBS. Please go ahead.
Yes. Good morning from my side. So two questions, please. The first one is on the service business, and obviously you know it had an encouraging development in the second quarter in a row and I was just wondering how you look at the sustainability of that, especially as far as the spare parts business is concerned? That would be the first question. Thank you.
Thank you, Sven. And as I started by talking about the new organization, and that's the, I think, the reasons why we can see. I mean, hopefully, of course, one quarter is always one quarter. But we should start seeing more healthier development on services. I have always been talking about the focus on how we deliver value to our customers.
And on the spare part side, of course, I mean, on that side, we have a dedicated actions going on already some months and you can start seeing the benefits of those. I mean, customers want to see some value and then they make decisions, and that's of course, one reason for the healthy development. And I shouldn't expect anything else to happen going forward with both divisions.
Okay, good. And the follow-up question I had was just also was regarding to IMO 2020, obviously the other option is to use low sulfur fuel. Is there anything you see in the new builds that is changing in the engine design if - as ship owners just using low sulfur fuel. Is the design any different, less equipment, less service intensive compared to heavy fuel oil?
Roger, please comment on that one.
Yes, thank you for the question. I think we are on the path as we have discussed very much before. We see more and more interest into LNG as a fuel and that goes to all segments. And then you have so much scrubbers that you will be able to install in the fleet and the rest then will have to comply by - on the fuel side. But direction wise, I don't see any change compared to what we have said before.
Some of the players will go for low sulfur fuel for years.
Absolutely. Yes.
And will never change.
But there is also listening to the ship owners, there is quite a lot of debate what to do on the scrubber, so low sulfur fuel and future will then tell what is right. And probably you need to look at where you operate? How you operate and so on and make a decision based on that.
I was also just wondering technically if the design of the engine is to be any different or the pretreatment given that if you burn low sulfur against high sulfur, is there much of a difference?
For our engines no, that's not a major issue. Of course, then when you go to LNG, then we talk about dual fuel engine, so that's then the major difference, but for...
And I would rather go to gas, I mean nothing else. Thank you, Sven.
Okay. Thank you, guys.
Thank you, Sven.
Your next question is from the line of Manu Rimpelä of Nordea. Please go ahead.
Good morning. Could you please comment on the divisional margins? I would like better understand that what was behind the reason for marine margins coming down in the first quarter compared to the last year?
Thank you, Manu. The basic reason for different margins is the mix. And basically, there is - I mean, the things smaller things here and there, but the mix is very important. And what - I mean and not only the mix between services and newbuilding, but also what you actually deliver during that quarter.
We might have projects going out where margins - original margin have been a bit lower and vice versa. So there is - and probably you will start seeing this comment going forward also, when the profitability is very during the quarters.
Okay. And are you able to comment in terms of the scrubbers? So, I mean obviously you mentioned that the early scrubber orders had lower margins. So what is the impact on the scrubber deliveries? And if you're not give - providing us the sales number, it's really hard for us to kind of assess the ramp up of the scrubber deliveries.
I think we can provide the sales number. And Roger, please comment.
Yes. On the sales side, I can comment. Q1 we were in the range of 50 million sales and then for the rest of the year, we have still an order book about 400 million. But there - and that's the - but biggest part of that are retrofit deliveries and there are many factors outside our control that might impact this one. So we at least expect to see some movements on that, but that's how we look at it.
But the retrofit numbers will be in newbuilding numbers.
Correct, correct.
Not in services.
Yes. But in this case, we talk about scrubbers going to existing vessels.
Yes.
If I may, finally on the scrubber still, so you are making positive margins for scrubbers even though the lower margins in the initial deliveries?
I will not comment more on the scrubber margins, that's what we said. That the - comparing to the regional deliveries, which were more challenging, we are on a good level as we speak.
And our aim is to be on a good level.
Correct.
That's definitely the strategy.
Thank you. Next question is from Robert Davies of Morgan Stanley. Please go ahead.
Yes. Thank you for taking my question. My question is just around the energy business, whether you can give us some color on the split of how much of those orders in the first quarter went to kind of backup renewables rather than - providing power towards renewables rather than just sort of base for backup power in emerging markets. If you could give us any color, please?
Yes. We have very good question as well, and about 30% were backup power for renewables in Q1.
And then just in terms of the sort of customer behavior on the service side. Can you just give us a little bit more color in terms of what's going on regionally in terms of service trends? Are you seeing any particular differences between the regions on service - on energy specifically?
Yes, please.
Yes. I would say that, it depends quite a lot what type of customers we have. If its utilities, they usually have their own service people and they don't always sign a contract with us. Where we have IPPs and industrials, they are more keen on signing a contract with us, because they don't have their own resources.
So this is, I would say, the main - I would say the factor that determines if we have a signed contract or not. But even if utilities don't have a signed contract with us, they usually keep the assets in a good shape. So they still buy spares and additional services when they need more high tech competencies.
And Roger can you comment on services in marine, that's a bit different than what's going on in energy.
Yes, thank you. And I would comment then more from a segment point of view. I think we have seen good development on cruise side and on merchant side. And also, some - if I call it small signs on increase on the offshore side, on the services side. Not on the newer build yet, but some small signs of bigger activities on the offshore side. So I would lift up those three segments.
Thank you.
That's great. Thank you.
Your next question is from the line of Edward Maravanyika. Please go ahead.
Hello, good morning. It's Ed Maravanyika from Citi. Just a question on your savings program, I know you will statement for that be, the fruits of that will come through maybe towards the latter end of the year. But is there any sort of progress or any detail you can give as to how that program is going as of now?
You're now talking about the realignment program, and the program - yes, the program as such as we initiated it has started as planned. And of course, it has all kinds of actions. One was to look at the capacity cost, and then we were looking at the sales and supply, and the spare parts, and then so on.
And as we comment in the earlier, the plan was to save €100 million, the cost being €75 million. And really the savings will start during the latter part of the year, and then finally 2020. And that's probably also how actually the costs are going on. But as I said, it's working as planned and we expect to get those savings as promised.
Okay, understood. And then follow up question on spare parts, particularly with say marine. How would you describe that qualitatively versus last year? Are you seeing lots more confident compared to last year or are your customers still reluctant?
In marine?
Yes. On spare parts in particular.
Spare parts, yes.
And on spare part in particular, so we had a 4% growth on the service side, and this very much also goes to the spare part activity. So I say good development. Market is still cautious so we need to follow-up how this will continue then in the coming quarters. But I'm happy with the development so far in Q1.
Okay. Thank you very much.
Thank you, Ed.
And your next question is from the line of Sean McLoughlin, HSBC. Please go ahead.
Can I just come back to this idea of the tipping points driving peaker demand? If I understand it correctly, we have greater share of renewables already in developed markets, particularly in Europe, which is also the region where you actually have the lowest order intake.
And this business has historically been focused on emerging markets, should we therefore think more about in the longer-term as other markets - in emerging markets come up to this tipping point, that is when peaker demand will boom? In other words, we could be several years away for a peaker growth story.
Thank you, very good point. As I said earlier, each market are quite different. In Europe, there's an overcapacity of electricity. Even if the share of renewables is quite high, but there's a lot of overcapacity in Europe and - which is actually taking all the balancing power.
But of course, when we see that more and more countries will take down the nuclear and coal facilities in Europe that means that the balance will be different. And that's why we also said that we've been quite careful about the future sales in Europe and this is the reason.
But for example, UK has decided that they will take down the coal by 2025 and Germany will take down the nuclear by end of 2021, and decrease the coal. And finally 2038, they will take down the coal totally. So these different developments will affect the balance of the market.
But if you go to United States, which is a different case where they actually are closing down coal power plants before the end of the lifecycle just due to the monetary reasons, it is more beneficial to invest in renewables and having a peaking power or balancing power for that renewable asset. And that's why we're seeing more development in the United States. The same in Australia, they're taking down their coal power plants and putting up lot of renewables, and that's why they have ordered balancing power or backup power as well.
If I could just follow-up as well, I noticed that you no longer include the quotation activity slide. If you could just comment on how the volume, the mix in quotation activity develops in the previous quarter?
I would say that it's being quite stable. The reason we don't have that, because quite often when you have auctions, for example, and then they might pull back the auction or they don't actually order anything from the auction, and then the auction comes up again a little bit later. So that's why it was a bit shaky up and down the figures as well.
But as we said earlier, the pipeline is healthy and the drivers are there. But also if you look to Page 19 in the presentation, you see the Bloomberg New Energy Finance, their predictions of peaking power. And you can see that 2020 their prediction is that that will go down. And it's a quite tiny, little part of that bar, but if you enlarge that you can see that and that we see as well. And that's pretty much of all reason that we also already mentioned that redoing the plants and that's the major reason there.
Thank you.
Thank you.
Thank you, Marco.
There are no further questions at this time. Please continue.
And do we have any further questions here in the audience? No. Then we will close here. And thank you all participating, wonderful questions, and let's meet again in July. Thank you.
That concludes presentation today. Thank you for participating.