Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript

Hi, everyone, and welcome to Q3 -- Wärtsilä Q3 Pre-silent call. My name is Hanna-Maria Heikkinen, and I'm in charge of Investor Relations. We announced today the closing of the transaction of our joint venture for our global energy storage business. Our CFO, Arjen Berends, will show a couple of slides and discuss the financial impact of the transaction on a more detailed level. Slides have already been published on our IR website, and my colleague, Nora, will share the slides on the chart. After Arjen's key messages, there is a possibility to ask questions. Arjen, please?

Yes. If somebody can bring up the slides. Like Hanna-Maria said, it was good to get the closing, let's say, of the joint venture now finally done. A little bit delayed than what we originally thought, but anyhow, let's say, still good. Not in Q3, as we originally were planning for, but let's say, just in Q4. It is, as you know, let's say, 50-50 joint venture between us and RCT solutions. We earlier stated that to get an impact of Wärtsilä 2026 operating result would be approximately EUR 40 million to EUR 50 million. With the knowledge of today, of course, balance sheet, et cetera, needs still to be concluded and completely finalized. But it will be less than that. And that is actually shown in the bottom of this page. Also good to highlight that, the joint venture or the energy storage result lands in different places throughout the year. So let's say, when we announced, this joint venture to be set up basically at that moment of time, the whole result, you could say, move to discontinued operations in the P&L. So out of the operating result as such. Now, when the joint venture goes live, actually, it comes back. So share of results in associated companies is part of operating results as also our Chinese joint ventures are. So in Q4, we will see, still a result, call it, operating result from the joint venture in our books. As you can see in the bottom of this page on the right side, that is estimated to be EUR 10 million to EUR 15 million. And the part, before that, which is all discontinued operations, that includes the result of the transaction itself, the estimated -- latest best estimate is basically EUR 10 million to EUR 20 million negative. That's what we are looking at today. I don't expect, that the numbers will materially change outside this range. So in your modeling, I hope this is helpful as well. Good to also mention, if we go to the next page, next year, again, the joint venture will move out of, operating result again because IFRS 18 will, come into force, which basically means that joint venture result is not part of operating result but a result from investing activities. In addition, let's say, also IFRS 18 has an impact to, hedging cost. That will actually move from financial items to operating results in the future. So there are different changes. I would say those are the two main ones, cost of hedging as well as share of results in associated companies. But good to remind that actually also next year, coming back to this joint venture, the result will not be part of operating results. So keep that in mind. Looking at all other developments now in Q3, I would say, business is developing nicely. You saw some announcement already. So Australia, largest-ever engine power plant that I think was yesterday, if I remember right, it was the day before. Time flies. Also good announcement working with Tokyo Gas on developing data centers in Japan. No concrete orders yet, but this is just a good sign of also activity starting in Japan as well on data centers and we are working with most influential partner, I would almost say. Looking at Marine. Clarkson did an update of their forecast compared to the March forecast. They typically do that twice a year, September and March. In general, I would say the forecast is up from previous forecast. Newbuild Mark at says actually Clarks and onwards is exceptionally busy and a good potential for container ships, tankers, bulkers, car carriers, gas carriers by other segments that are key for us like cruise and very -- stay rather stable on a good level. So I would say, all in all positive news actually from the Clarkson update as well. What else to highlight from that update, I would say, order book of shipbuilding is actually 22% of the fleet capacity. So pretty much is now in the pipeline for new build. Also Clarkson updated their scenarios. And their base case scenario is anticipating, which they believe is most realistic, is anticipating 2,500 vessel contracts per year actually, which is a quite higher level than what we have seen over the past decade, I would say, on average. So very good development as well. On the regulatory framework, the fragmentation as we discussed earlier, continuous instead of having a global carbon pricing mechanism, vote positively last year autumn. Customers need to deal with petwork of regulation. EU ETS is already applicable. U.K. also ETS has an own ETS, which entered into force now in July. Turkey, the ETS pilot is expected to launch also still within this year. And also China has launched an own scheme as well. So it's not so easy for customers and that also requires more and more, let's say, that they come to us actually for advice, what to do now and what to do next. As Robert Holme, our Head of Marine many times said that if you go too fast and decarbonization is not good for you. If you go to slow, it's not good for you either. So you need to find the right pace and you need to work with partners like Wärtsilä that can advise you on what to do now and later, while still moving forward in fuel efficiency and decarbonization. So from a market perspective, I would say, all good and looking positive. That's where I want to stop and open up for questions.

Thanks, Arjen. And it seems that Hanna-Maria dropped out of the call due to network issues. So I'll lead the Q&A.

And it seems that we have like a number of questions already, and the first one will come from Daniela Costa.

Just I'll ask two things. First, just wanted to see what -- how is your thinking around from order banning potentially power system or bolter system imports into the U.S. Could -- would that impact you in any sense? Do you have a way to circumvent that? Added clarity on that. I think we like a lot of details on our side. And then the second one, just interested on like the big Google announcements in Finland, how is your exposure potentially over there? What's the landscape of opportunity perhaps for orders for you from that? And those are my questions.

On the first one, let's say, Trump, you never know, what it will exactly look like. I think nobody really knows. So far, we don't see any break on queries coming from the U.S. But of course, anything can happen, you never know. The rules of engagement as we put it -- yes, they can change rapidly. But so far, we are not concerned. And I think it will also be a very big challenge. So if import would be stopped for whatever reason, because I think a lot of developments, which are positive to the U.S. cannot continue. So I think that is also internal -- or I would assume there is internal pressure also to -- keep going because there is a shortage of power equipment. Then on your second question, Google and Finland. I think the Finland network and also supply of energy is quite good. I don't think, they will immediately go for off-site. Power generation, I think there's good level of many power sources being at renewable but also nuclear. They recently installed a new nuclear plant not so long ago. So I don't see that being a huge opportunity. But yes, you never know. It depends also a bit where they want to put it in the future development.

Just a follow-up on the first part. If that order comes to fruition, would you have a way to -- would you consider like moving maybe your capacity expansion to the U.S., would you even have the possibility to do so? Or how much time would it take you to adapt if that order wouldn't become implemented?

I think there are too many question marks around this, Daniela. I don't know. I don't think we will put up production in the U.S., simply because it won't help us. Our supply chain is outside the U.S. You still need to import a lot of stuff. Can it be done? Yes, I think we can if we want. Can it be done fast? I think that's a challenge. And so we are at the same time ramping up capacity, and we have sold already pretty much the capacity, okay, we are approaching end of 2029 already. And debt is not stopped. I don't think they can stop those contracts already that will not happen or at least that's our estimate of it. But again, with Trump, you never know. Yes, strange can happen, but we have seen it before, and we have also seen many times that things are reversed in later on and very quickly later on when they realize, okay, this is an adverse effect.

Next question...

I have three questions, if I may, maybe I'll go one at a time if that's all right. The first is following up on your announcement this morning around the collaborator with Schneider Electric and Stanley consultants. I noted the comments around a faster approach to power. Could you maybe elaborate how much adoption you expect on this particular solution of approach? And how much the rental reduction in time lines can this offer?

I think it's a bit too early to be honest. If we just announced a joint effort to start it basically. What can we do together, one plus one is actually more than three. That's actually the idea behind it. How can we combine knowledge of process optimization, system optimization, et cetera, together in order to accelerate. In detail that still needs to be worked out. We now have launched this. Now the knowledgeable people need to sit together and work it out. So it's a bit too early to answer to that.

Understood. My second question is on the quarter and after the second half in general. You've had quite a ups and downs when it comes to the working capital in the first half. You had some outflows in the first quarter and a very strong second quarter. Are there any things to bear in mind about the phasing of cash flow and working capital as we go into the second half?

No, no, at least not to me. Of course, the biggest wings actually come with the advances received in the payments from customers. Okay, the payments on fixed terms and delivery terms, et cetera, that's pretty well known. But what you don't know is will you get an order now or next week or the next month or the next quarter and the advance payments that relate to it. I think that's typically the swing. I'm not concerned about cash flow at all, frankly speaking. I think it will also be strong cash flow in the second half. I'm pretty convinced about it. And of course, it links very much to order intake.

Understood. And my final question is around the Capital Markets Day. As we think about the potential new targets or revisions to targets. More of a theoretical question that last time you gave us the margin target which was just general midterm margin. Now you have a lot more visibility with the growth in the backlog. Should we expect that you'll be guiding for margins, for example, by a given year, given that you have more visibility over the next few years? Or would it be still a more sort of general approach?

I will not comment on that. I believe that -- you need to be patient for a little bit more at Capital Markets Day, we will come back to this.

The next questions come from Sven Weier.

First question is regarding data center orders. You announced one for the third quarter, but was pretty upbeat about demand from data centers in general. So should we assume that this was the only one? Or did you have other ones that you just were not allowed to announce it? That's the first one.

Good question. But let me answer by saying that I'm convinced we will get more orders. So we will be able to book it because we only book it when the down payment is in the bank. That's for us order intake moment that I'm not sure. But pipeline is good and signing also most well forward.

Yes, we'll see then, I guess. And the second question is just on Marine Services. I was just wondering if you could add anything what for in the strategy call that there's been some slowliness on the back of higher fuel prices and container ships running at full steam. Is there anything you want to add from your side on this?

No, I think that's pretty much the story. There are many different reasons for a bit of a challenge on our end. First of all, rates are very good. So do you go in for maintenance, while the rates are higher, do you wait until the rates are lower and then going from interlace, so there is postponement being applied by many. Of course, you cannot forever postpone or certain critical things need to be done. Otherwise, you destroy the equipment. But there is also for certain customers, it depends a bit by segment, some rates are high and some rates are not so high that they need the money actually for the high price of the fuel. The fuel is extremely high also for shipping companies. And you can spend the euro or the dollar only one. So you need to make choices. Again, here, I would say it's a temporary blip because at some point of time, you need to go in for maintenance. You cannot postpone this too long. But at the moment, we face that a bit, yes, that's correct.

And would you say the dynamic is the same as we had it in Q2, so no worsening of this or any change?

No, I would not say it's worsening. I think it's pretty much similar.

And it's just affecting the spare part bit of the service revenues, so also the entire service overall.

No, I would say mainly the spare parts. But of course, you have also, a piece of overshoot to the field service, for example, spare parts when they need to be mounted or used. It often also requires field service engineers. So also somewhat to the field service, but field service, in general, is quite busy actually because these resources are also used in agreements, for example, and also retrofits.

Next up, we have Uma Samlin.

First is a follow-up that you mentioned that your orders are now approaching the end of 2029. The recent order you have announced was, if I remember correctly, early 2029. Can we assume then that there has been more orders after that? Or is there any reason that...

No, let's say, it's filling up, I would say, towards the end of '29. If you take -- if I look at '29, either is booked, so the slot is gone, or it is commitments in outstanding codes. And then, of course, it's back to what we have also been communicating earlier if customers don't decide within a certain period of time, their slot is gone, and it will go to somebody else, but it's pretty much committed for the whole of '29 already. Then it can still be that -- if somebody doesn't take it, then there is room for somebody else. But if you're a totally new customer than you would like to have engines today, you end up in 2030 pretty much already.

Yes. That's super clear. My next one is would you be able to give us a bit more insight on orders you booked that you announced both in Australia and Japan this quarter. After we think about that, if you compare the contract terms versus the normal or the previous data center orders. Is there any reason that -- is there any sort of shift in your thinking to sort of more shifting towards other geographies or other customers? Or is -- how should we think about like the profitabilities of these orders versus the U.S. data center ones?

In general, all margins go up because oil prices go up, there is more demand than supply. And that's, of course, what everybody is doing, and we should be stupid if we won't do that. So it's not just for data centers, that price is up. I think it's across the board, basically. I'm very happy, actually, frankly speaking, with there's diversification geographically, but also diversification between balancing power in data centers and call it -- call traditional baseload power. We don't want to put all our eggs in one basket being data centers. That's might be a warm feeling shortly. But over time, I think it's not the best for Wärtsilä. And we think long term here.

Next up, we have Akash Gupta.

Maybe first one is on energy storage joint venture. I think you're now guiding for EUR 20 million to EUR 35 million total impact from EUR 40 million to EUR 50 million. Maybe if you can talk about what has changed in that calculation, fundamentally? Or was it just like you were cautious in the initial guidance? So that's first one...

I think it has a lot to do with -- the fixed -- I will not open it up to detail, but the fixed transaction price versus the change in the balance sheet. I think that's the main driver.

Okay. And then maybe secondly, when you talk about capacity, I think you talked about 2019 when you look at slots that are either booked or in outstanding commitment. But when we look at '27-'28, are there still any slots that is still in outstanding commitments or all of the slots in '27-'28 are booked?

I would say, to be very honest with you, we hardly talk about Slots '28 anymore. So out of my head, I would say, yes, they are booked. If they are all firm in the order book already, I'm not sure. There might be still some pending down payment. As I said, we only book it when down payment is received. But when we also in the Board of management talk about slots, we hardly talk about '28 anymore. It's all about '29 and beyond. So I would say pretty much, let's say, booked and committed.

Yes. And then maybe if I ask another follow-up. I think a lot of people looked into average selling prices of your Korean competitor in force to medium speed engine that got some couple of orders -- data center orders in the U.S. with your ASP, and it looks like there's a quite sizable difference. Maybe just from a technical standpoint, when we compare your product offering and scope of your portfolio compared to theirs, is there anything that worth highlighting? And so maybe when we look at this number, we are not comparing apples to oranges...

I'm 100% convinced that this is apples and bananas. Even within our own orders, let's say, it's apples and bananas to compare. If you just deliver the engines and the whole, let's say, generator fuel handling equipment, filter equipment, cooling equipment, whatever is done by somebody else compared to also doing that. We deliver equipment, so we are not doing EPC. But the equipment size can be so different. It can be, we have -- I cannot talk about the specific contracts because customers don't allow us to talk about it, but I can -- we have two exactly the same megawatt orders in our order book. But the price difference is almost double. And the only reason is nothing else. And I'm pretty sure that when you compare on average to what now has taken I don't think you can compare it. That's also why we have said earlier this euro per kilowatt is not a good KPI. I understand it's the best you have and yes, that's what it is. That's also why in Q2, we said, okay, our order book is 500 basis points up basically, just to help you. But scope is a big impact item on euro per kilowatt.

I think the bigger question is more the competitiveness, like because you are doing everything in Europe with European supply chain, and they are doing it in Korea. So do they have any advantage when it comes to unit cost because when we look at their expansion that announced last month, it is way more significant than what you are doing.

I don't know. I don't know their supply chain in detail, but I'm pretty sure they have quite similar suppliers, at least for critical components that we have because there are not so many players in the world that can do it. Will they get better prices? I doubt it. Yes, it's difficult to say. It's -- you probably should ask them. But yes, I can only say that I think we are absolutely much more experienced in power equipment and delivering power plants. I don't think has any experience. Now let's say, what we see happening in the market is that because of the shortage of power equipment, many customers go with players that have never done this before. Somehow, I have a of the scrubber times that when scrubbers boosted some years ago, we were there, were there. We had two or three big players among us being one of them. And then you had a whole slew up in parties that also deliver scrubbers, lifting on the momentum because there was a shortage. Now what we have seen afterwards with scrubbers is that, let's say, customers come to us and say, "Okay, I bought a scrubber from this company. Can you help us because it doesn't work." Yes. I don't want to say this is a one-to-one translation, but there are now many customers going with parties that have never done this before on very critical equipment, which needs a higher time. Yes. Let's see what happens in the future. But I think many were disappointed also because one thing is to sell it. The other thing is to, let's say, execute and deliver. And there you can go really, really wrong. I'm not saying that it will happen to them, but the experience that we have versus what others have, especially, the ones that have never done deliveries to power plant is way different. And I can tell you that also we in the past made mistakes. I mean, you learn from your mistakes. But we are very mature. We are doing this for decades already. I don't think has delivered many power plants, actually. They are very good in Marine, in particular, auxiliary engines.

And if I may ask a final one. I think -- when you look at your Marine business, I think historically, Marine has a bit higher lead times than energy. But now things are turning other way around because you have good visibility for 2029 already in energy, but I don't think you will have same in Marine. So do you see any pressure among your customers to bring forward their orders because otherwise, there may be a risk that you might allocate that capacity to more profitable energy orders? And then maybe if you can also comment on the pricing that you're seeing on the Marine side compared to energy side.

I would say, in marine, we see also lengthening order books. If you follow our order book statistics a bit over time, you can see that the order books also in marine get longer and longer, actually. Yard order books are on a record long. So it's 4.3 years now, the latest number I hear. And also for years, they also more and more one tool, lock their cost. If you want to lock the cost with even if the ship is only, let's say, due for delivery 4 years from now, you need to place the order with Macula and put a down payment in. So -- but we see more happening is also earlier orders, which also means, lengthening order books in Marine. Are we sacrificing marine slots over energy slots? No. We have, of course, -- we can, let's say, our factory is very flexible. But you need to plan it well in advance. And we also want to maintain our reliable reputation in Marine. Then on your question on prices going up in Marine as well. Yes, I think they are also going up. But it's a very, very different dynamic and it's by far not -- similar to energy. In energy, basically the product that you sell goes to the same party that typically operates the plant. So the benefits or the intrinsic benefits of your solution fuel efficiency, water consumption, what have you come straight to the party. You can also then link the life cycle agreement, better to it. We can even operate the whole plant for you if you want to. By marine you deal with operators and ship owners that need to convince yards to say, okay, I want vessel equipment in because that's the best total cost of ownership for me. So the dynamic is very different. And the shipyards are typically very cost conscious. So they want to have the biggest margin in between. So they are tempted to squeeze you more on price because they don't care about all this fuel consumption. For them, it's just the price. So we want to make the owners say to the yard that this is the equipment I want. The rest of the ship, you can do whatever you want, but the mission-critical propulsion equipment, engine and whatever, let's say pushes the ship forward, that needs to be Wärtsilä. And that is a bit more challenging to raise prices. But overall, I would say also in Marine, we see improved pricing.

Next up, we have Antti Kansanen.

I have three, so I'll check them one by one, and I'll start with the shortest one, which is on the storage joint venture. Do you want to say anything on the impact to net cash position from this transaction?

No. That's a quick one indeed.