Earnings Call: Q1 2019

Apr 25, 2019

Wartsila Corporation's Q1 Report Session. Here, everyone, welcome here in the Helsinki Palsirasgi 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, Actually, in the front, I have the heads of the businesses and our CFO and almost Actually, the whole, 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, therefore, many, 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 segments. Energy on the energy demand, when you look at the emerging markets and at the same time, the increased need for flexibility to the renewables. 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 now come out with 2 divisions and the report is also reflected to that one. And this organizational change we initiated last year is that definitely see a better understanding about the marketing and delivering the results. Then moving on, some of the key figures. Order inly, mainly driven by at the newbuildingenergyorders. And as we know, all these years, energy goes up and down during highest ever, went up 15%. And it's always interesting To add to that number, the orders we don't book in service have a fantastic order book. Net sales up, mainly marine newbuildingdeliveries and the So number went up 16%, and also we saw hedges. EPS at the same level. And now cash flow also on the Q1 going to the right and healthier numbers. To show the rolling numbers of order intakes and sales and profitability, and you can see here How stable a little bit actually are. If you look at marine and energy, marine was 60% and energy, 40%, what comes inside in during this quarter. And the Slow decision making has affected the energy orders this quarter. The sales in services, which we also wanted to show going forward, is around 50% of the net sales. 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 at the year end and then the years to come. At this moment, I would like to highlight that reaching our target 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 I'm 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. But when you look at the mix, When services is growing and 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 last year. And working capital, okay, A bit down from last year, but increasing from and of course, a lot of Good support also when you look at our advances and inventories going forward. Gearing, 0.29. And moving on to the businesses. Slow recovery In the Marine segments, and if you I mean, here you have on the left side the total order contracted more than last year. But I think everybody anticipated the market to pick up a bit faster. As everybody knows Clarkson has Also the 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, Wartsila's Surbry. Order intake development. Here you see also you can see the rolling numbers, 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 1 customer and complicated sophisticated, I would rather say, equipment and solutions where Wartsila can provide value to our customers. Net sales development, up compared to last year. And also the rolling number again here is visible. Services, 50% good number. And of course, you can see also the division between spare parts and agreements and field service and projects. So healthy, what has been going on during the Q1, Wartsila is providing a solution to the new Wassa Line ferry, which is going to I would rather call it as installations, new innovations, hybrid dual fuel solutions, enabling the reduction of CO2, providing Again, maintenance and services improving the reliability. And It's as I call it a lab because it has in the marine segments today. Moving on. Eni clearly shows where Wartsila plays a role going forward. We all know coal and fossil fuels are targeted today, and It's not new that coal will build or should be disappearing first. Then you look at different fossil Self fuels and the cleaner the fuel there, no more possibilities it has. At the same time, renewables playing a stronger role. The importance of this graph is that on the fossil fuel and the gas side, unit is an important role. Up there and then you can also see here how the orders go up and down anywhere. And that's why we strongly believe that We have a very strong role to play when you look at the renewable. An example of our services contract again, now there was a pickup on the percentages, which is good, supporting our strategy. This is a deal, 5 year deal in Myanmar, where Wartsila will operate and maintain a power plant for their developing infrastructure. 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. I mean, you always compare to net sales, of course, how orders have been coming in during the last 12 months. And but here it's also good to see services growth and services forming over 50% of the energy. Old data, But in a shrinking market, Wartsila is gaining a bit market share. I've 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 A small Finnish startup called Solater Power, who is developing the technology to produce from CO2 and hydrogen, a synthetic renewable fuel. Soliteri is a fantastic example of a company which is also looking at the healthy working environment because their technology is actually taking the CO2 from, for example, office environment And then we would have a healthier air here to Pret and have our meetings and then converting that CO2 can be burned in Wartsila's engines. And we can basically call our engines 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 story. And I think this is the way how you can look at different possibilities, again, based on our strategy to work on different fuel Solid for marine and services. At the same time, I saw slowness in the decision making. Long term story is there, but we'll talk 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 up quickly, and you have possibility to ask many questions. Please. And your first question is from the line of Marc Spietz from Credit Suisse. 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 have energy to answer to that one. Please, Marco. Thank you, and thank you for the question as well. Of course, Middle East and Asia is a big And but also if you look into Southern America, Latin America, then in the fall, there will be More auctions and next year, we will see more specific bigger 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. States in United States where politicians have been demanding the increase the 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. 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 28,000,000 to 48,000,000 megawatts. Is there anything smaller than what we had seen in Bangladesh? Yes. I would say that We've been talking about the Africa will come. And I would say that finally, we see movement in Africa. And we definitely believe that next coming 5 years, we will receive more orders from Africa than we have received the past 5 years. The Middle East is also an area where we see a form there whole energy sector from dependency of other countries into becoming more domestic player. Okay. Maybe just one follow-up on SOX scrubbers. Could you help us understand Tamba? Because obviously, it's quite a sizable amount of your 2018 order intake. Thank you. Yes, Roger. Thank you for the question. And if we first We see still a lot of interest in the market that has not reduced as we see it now. The key question that we have It's how will now the fact change the market that if we need to follow how will the owners then Decide based on this one. So I think this is the key question point. But good activity is ongoing still and the pipeline also looks Positive. Thank you, Roger. Okay. Could you just give us a sense of how much the orders were down Sequentially, just either just at least in magnitude. At least level. Your next question is from the line of Andreas Willi of JPMorgan. Please go ahead. Andreas, your line is open. 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 power, solar, wind Volumes continue to grow very strongly and trigger on Canada the peak is the backup for the renewables Given that, that market hasn't grown in the last 3, 4 years despite the extraordinary growth in renewables, what are they waiting for specifically that should then come in the next 12 months, 18 months? Ruiz Markku. 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 or generation, then when the tipping point is closing to 20% now is basically because of the redoing of the plans. So not because of that they are 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. What should change in the next 12, 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 that's where they're closing to this tipping point. And the other reason is that when they are redoing their plans, we see a slowness now, but 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. Thank you. Your next question is from the line of Yes. Hi, it's Johan. Terrible echo, but I hope you can hear me. So sorry for coming back to scrubbers or the deliveries 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 Alfa has there told. And I We don't comment on our scrubber margins. The only part in 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 lever. But We have no other comments on the margin side. Okay. Then on the other ballast Yes, more activities in the pipeline. And we expect that still to as a general comment to 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 from the line of Sven Weier from UBS. Please go ahead. Yes. Good morning from my side. So two questions, please. The first and the second quarter in a row. And I was just wondering how you look at the I started by talking about the new organization. And that's the I think that hopefully, of course, 1 quarter is always 1 quarter. But we should start seeing more healthier development of services. I have always been talking about we I mean, on that side, we have a dedicated actions. Consumers 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 is regarding to IMO 2020. Obviously, the other option is To use low sulfur fuel, is there anything you see in the new sulfur fuel? Is the design any different, less equipment, less Service intensive compared to heavy fuel on? Roger, please comment on that. Yes. Thank you for the question. I think we are on the part, 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 payers will go for low sulfur fuel for 4 years and Absolutely. There is Quite a lot of debate what to do on the scrubbers or 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. Different or the pretreatment given if you burn low sulfur against Hi, Salve. Talk about dual fuel engine. So that's then the major difference. But I would rather go to gas. I mean, nothing else. Okay. Thank you, guys. Thank you, Sven. Your next question is from the line of Manu Rimp of Nordea. Please go ahead. Good morning. Could you please comment on the divisional margins? Would like to better understand what was behind the reason for marine margins coming down in the Q1 compared to last year. Thank you, Manu. The basic reason for different margins is the mix, smaller things here and there. But the is very important. 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 margins have been a bit lower and vice versa. So there is and probably you will start this very during the quarters. Okay. And are you able to comment in terms of the Scrubbers, I mean, obviously, you mentioned that the early scrubber orders have lower margins. So what is the impact on the scrubber deliveries? And if you're not 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 sales number, and Roger, please comment. Yes. On the sales side, I can comment. Q1, we were in the range of €50,000,000 sales. And then For the rest of the year, we have still an order book about €400,000,000 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 moments on that, but that's how we look at it. But the retrofit numbers will be in newbuilding numbers, No color services. So you are making positive margins in scrubbers even though lower margins in the initial deliveries? The comparing to the original deliveries, which were more challenging, we are on a good level as we speak. And our aim is to be on a good level. That's definitely the strategy. Next question from Robert Davies of Morgan Stanley. Around the Energy business, whether you could give us some color on the split of how much of those orders in the Q1 went to kind of backup renewables rather than to providing power towards renewables rather than just sort of base load backup power in emerging markets, if you could give us any color, please? Yes. Very good question as well. And about 30% were backup power for renewables in Q1. Okay. And then just in terms of This 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 it's 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 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 newbuild yet, but some small signs of bigger activities on the offshore side. So I would lift up those three segments. Thank you. Your next question is from the line of Edward Marais. It's Ed Maravanyika from Citi. Just a question on your savings program. I know your statement was that The fruits of that will come through maybe towards the latter end of the year. But is there any sort of The program yes, the program as such As we initiated it, it has started as planned. And of course, It has all kinds of actions. 1 was to look at the capacity cost And then we were looking at the sales and supply and the spare parts and so on. And as we commented earlier, the plan was to save €100,000,000 the cost being SEK 75,000,000. And really, the savings will start during the latter 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 just a follow-up question, correct that qualitatively Virtually versus last year, are you seeing a lot more confidence on spare parts into the Spare parts, yes. And spare part in particular, you saw we had a 4% growth on the service side and this very much also goes to the spare part activities. So I would say Good development. Market is still cautious, so we need to follow-up how this will continue then in the coming quarters. But So I'm happy with the development so far in Q1. Okay. Thank you, Gunnar. Ron McLaughlin of HSBC. Please go ahead. Can I just come back to this idea of the tipping point 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 more about in the longer term as other markets in emerging markets come up several years away from a peak Growth? As I said earlier, each market are quite different. In Europe, there's an overcapacity of the electricity. Even if the share of renewables is quite high, but there's we see that more and more countries will take down the nuclear and coal facilities in Europe. That means that the balance will be that we've been quite careful about the future sales in Europe And this is the reason. But for example, U. K. Has decided that they will take down the coal by 2025 And Germany will take down the nuclear by end of 2,030 8. They will take down the coal totally. So these different developments would be the United States, which is a different case, where they actually are closing down Coal power plants before the end of the life cycle, just due to the monetary reasons and having a Peaking power or balancing power for that renewable asset. And that's why we see more development in the United States. The same in Australia, they're taking down their coal power plants and putting up a lot of renewables. And that's why they have ordered balancing power or backup Power as well. Understood. 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 Steff, the reason we don't have that because quite often when you have auctions, for example, and then they might pull back the auction Earlier, the pipeline is halogens 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 all reason to reason for that. Thanks. Thank you. 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