Good morning, everyone, and welcome to Wärtsilä Interim Report January-September 2018 presentation. We have a very familiar concept. I will give a short presentation, then you have the possibility for questions. With me here this morning, I have the whole board of management and Natalia Valtasaari, head of Investor Relations. I would like to welcome also Arjen Berends, his first time here, our new CFO, to the meeting. First of all, we had a good development in net sales in the third quarter. That was thanks to very strong sales development in Marine and Energy Solutions. If you look at the markets today, we are having a very steady development in the service markets. It's supported by the development in services in cruise and ferries, and that supports, of course, going forward. The anticipated growth in merchant and offshore has not been there.
That's a negative development so far. If you look at Marine and Energy, the fundamentals are there. Marine is supported by the efficient and clean and safe marine today. Energy, of course, supported very much by renewable story, and at the same time, developing world needing energy. Some highlights. Order intake stable in the third quarter. Order book growth 16%, very good. Net sales has developed well, 13% growth from last year. We also had the result growth of 8%, which represents a little bit less in a percentage-wise than last year, and cash flow a bit lower than last year. If you look at the divisions today, of course, very good development in Marine, supported by cruise and ferries, LNG carriers, gas carriers overall, and of course, the exhaust gas cleaning systems.
Services is also developing well based on service agreements, and again retrofitting exhaust gas cleaning systems. A quite disappointing development in Energy Solutions this quarter. I come back to that one. Is it a timing issue or is there something else? Net sales boosted by the new build deliveries asset. Because of the new building development, well development in Marine and Energy, Services is now 46% of the group. That has, of course, affected a bit to our profitability. In the long term, of course, it's great to have Marine and Energy developing well because that will finally support the great development in Services. Book-to-bill, 1.22. If you look at the order book distribution, we still have a higher bar on the rest of the year and good development going forward.
Operating result as set for the first nine months, we are at the same level as last year. One of the highlights in third quarter was the announcement of our Smart Technology Hub here in Vaasa, in Finland. It's going to be a new way of working together with our customers, suppliers, academia, and the society. It will go forward thinking about the testing and the new technologies, new research in the area of Energy and Marine. Moving on to Services. As said, steady development in Services sales. A bit lower than anticipated. I said some of the segments in Marine not developing as expected. Of course, if you take the FX impact into account, the first nine months, we grew 4%. That's good to remember. Product areas, good to see the development in agreements. There is growth, which we have been anticipating and really focusing.
Spare parts, 48% of the total, which again partly affects that mix to the profitability. Here you can see the install base, which is covered by service agreements. Now finally, growth also in Energy. Moving on to Energy quotation level, a bit lower than previously. Of course, this is measured in megawatts, so it might be also because of dealing a lot with renewable energy today and storage and so on. Also, as said, that in some areas of the world, people are still at the wait and see mode. When you look at the development of order intake, clearly, the story has to be remembered. Developing world needs energy infrastructure. In certain countries, the currency changes have affected the timing. That's why we didn't book some of the expected orders in Q3.
We are definitely looking at them to be booked in Q4 or Q1 or Q2 next year, they are not disappearing anywhere. In developed world, of course, the story is really behind the renewable increase in the energy sector. Wärtsilä is needed for the flexibility, and that's not disappearing anywhere. People and countries and utilities are looking at the possibilities for the new development of the energy industry. Order activity in Q3 was highest in Asia, today our market share is 17%. It's a bit down, and here in market share, it's always good to remember if one of the big turbine players sell one turbine to the market, that changes the market share position quite a lot. Marine. The contracting recovery is going on. We have a bit more contracts so far, 2018.
As we all know, even Clarksons now finally downgraded the expectations for 2018 and 2019. It's still going to be more than last year. For us, it's good to see that the development of cruise and ferry and gas carriers and special vessels is going well. So far, it has been supported by exhaust cleaning systems and the continued activity well in the cruise and ferry segment. Couple of words about financials. Cash flow was a bit low. We are basically building the inventories for the very large Q4, as we have highlighted many times. Gearing is 0.28 at the moment. For the prospects, it's good to mention that we have lowered the services prospect from good to solid, a bit lower than previously, and maintain the good in Energy and good in Marine. Energy order intake, the pipeline looks good, promising.
Of course, Marine is doing extremely well what comes to the order intake. Finally, also in third quarter, we announced the redesign of the organization, where we definitely want to enhance the customer value. We want to be faster to look at the market and accelerate the growth, what we have in our Energy and Marine strategies. Our business is serving our customers, the service plays the most important role when we deal with our customers, that's why the new building has to be linked to the service element going forward. This new organization will be operational as 1st of January next year. Thank you all. At this moment, now we have the possibility for questions and answers.
If I would like to remind you as we had already the standard last time, one question for everybody and a follow-up question. Then please go back to the line or if you are here in this room, just wait for your turn. Let's start here in this audience, if anybody wants to ask questions here. No questions here. Then we go to the lines, please.
Thank you. For the participants over the phone lines, if you have any questions, you may press star and the number one on your telephone and wait for your name to be announced. To cancel your request, you may press the hash key. The first question, it's from the line of Sven Weier from UBS. You may ask your question.
Good morning, Jaakko. Two questions from my side. The first one would be, when you look at the scrubber order intake, I think it was a little bit lower sequentially. The activity on the other hand in the scrubber market was extremely high. Was it that you already received a couple of contracts, but you have not included those in the Q3 order intake yet? That would be my first question.
Thank you, Sven. Exactly. We had 29 scrubber orders in services and 46 in Marine. In services we have won quite many scrubber orders which have not been included in the order intake. You are right, the market is at the moment very hot. More than 50, says Pierpaolo Barbone, additional in one deal.
As one deal.
It's not in order intake.
Is that because you haven't received the advance payment yet? What's the technical factor not booking it yet?
We don't book it before we see money.
Okay, good. The follow-up question would be just on your service outlook. Is that mostly a backward-looking adjustment on the outlook because the first nine months didn't really come in as you expected? Or are you also more bearish on the fourth quarter? Are you seeing any green shoots there on service or is it just also negative for Q4?
It's more to look at the development of the net sales this year and Q4. Basically, if we don't see that growth what we expected and we see a little bit lower growth, that's why we downgraded it. It's for this year.
It's still improving somewhat in Q4, but simply not enough to make it.
That's the expectation, yes.
Is that also improving in your view on the transactional side, or just because you're starting to install scrubbers?
We don't start installing scrubbers yet. Almost all scrubbers I think in both marine and services will start next year.
Okay.
It's improving. We have order book, and we have the transactional business, and that's why we base this solid development statement.
Okay. Understood, Jaakko. Thank you.
Thank you, Sven.
Thank you. The next question, it is from the line of Antti Suttelin from Danske. You may ask your question.
Thank you. An EBIT question. Very weak EBIT in the quarter, if I look at your report, you are blaming transactional services. When I go and look at your Services sales split, I cannot really see that there is a big difference compared to last year. Can you explain what happened in Services and how important really is this weak transactional services for the group EBIT margin?
Antti, thank you for the question. First of all, the more sales we have in Marine and Energy, where the margins are of course as high as in Services, will affect to the group profitability. In Services, the lower the spare parts, it will affect to the Services profitability. Adding those two elements, you end up with this number. Our absolute profitability grew 8%, we are developing also the whole group in what comes to the profit.
Okay. Then a second question on energy. I can understand the logic that your traditional energy business is being hit by emerging market currency weakness, but what is hitting the new business, the backup power for renewables? Why didn't that succeed in Q3?
It's a timing issue, Antti, but Marco now is the new head of Energy. Marco Wirén, the new head of Energy Solutions. Marco, would you like to open it up a bit?
Yes, of course. Thank you for the question, Antti. I would say that we will see more renewables coming in, many of the utilities in many countries actually have to redesign their plants now. If you take many of the Western countries, when they see that renewables actually are an alternative to base load, they had been thinking of having perhaps a coal or turbines, now they see that wind and solar are good alternatives, that might delay a little bit their decision making as well. It's a timing issue, I would say, in many places.
Okay. Can I just ask then, basically back to Jaakko, just to clarify. Basically what you say is that the drop in group EBIT margin year-over-year, 1.5 percentage point, was caused by the group sales mix services accounting for a smaller proportion than year ago. As I said, in the services mix, I cannot see any big change year-over-year. I can agree with you that there is a smaller proportion of services overall in the group sales mix. Is this what you mean? This is what caused the 1.5 percentage point weakness in group EBIT margin year-over-year?
If you simply ask it in that way, yes.
Okay. All right. That's all. Thank you.
Thank you. The next question, it's from Jonathan Hunt from Goldman Sachs. You can ask your questions.
Hi, Jaakko. Thank you for taking my question. I just wanted to ask on the order deferrals in power, how many projects did you see that deferred? If you could give a little bit more color on the reasons they were deferred, that'd be great. Was it all just about currency volatility, or was there also some kind of project-specific factors at play?
Thank you, Jonathan, and Marco Wirén again. He will be answering a lot of questions this morning. Please, Marco.
Thank you. I would say that it is varying a lot. I would say that all the delays that we see are due to currencies. In some countries where the currency has depreciated a lot, of course, these countries we usually see that they will defer their decision-making to see what is the new level. In the power business, you also see delays due to a lot of different reasons. It could be permit issues, it could be just some other issues. We actually had also due to the nickel prices went down, that affected one customer. I would say that you see so many different reasons in the power business.
Okay, thanks. Thank you very much. I suppose just following on from that, is there a risk that customers see the new currency level and then change their minds and therefore don't proceed with the order? Or do you see that as a limited risk?
Marco, continue.
Yeah, I would say that when there's a permit issues or other issues, just they might be not getting all the decisions made by politicians or the board of directors in different companies. These are usually the projects that will proceed in the next quarter or quarter after that. When there's more macroeconomic issues, if these are severe and longer term, of course, they have to, if it's governmental power plant, they have to go back to their approval bodies and get a higher funding, and that might take a little bit longer term, a long time.
Okay, thank you very much.
Thank you.
The next question, it's from Max Yates from Credit Suisse. You may ask your question.
Thank you. Just my first question is on the profitability this quarter. I think you sort of quite helpfully laid out in the last couple of quarters some of the cost inflation that you had been seeing, so the higher R&D costs in Q1, the digital investment, I think at Q2, you talked about some additional investment in people. Could you give us a little bit of color around any increases in costs that you saw year-over-year in Q3? Was all of the sort of margin effect down to this mix issue?
Thanks, Max. There are certain increase in cost in Energy Solutions. We are building the organization for the higher deliveries. The division has been growing quite well. They have been needing more people.
How much that finally affected, I don't have a number. We have a bit higher R&D cost so far. As we said earlier, it should be similar at the end of the year than last year. We have higher digital costs. At the end of the year, it will be some EUR 6 million-EUR 7 million, probably higher than last year, which is affecting then finally to the profitability. At the same time, we are building the organization and the competencies by acquisitions and Transas and Greensmith and so on. Definitely digital also increases the numbers.
Okay. Maybe just to sort of follow up is on thinking about sort of margins for next year. Obviously, if we look at the sales development this year, you've grown 5%, but we've not seen any margin expansion on that. Obviously, the Marine business is going to be growing nicely next year. Potentially, services may have some negative mix because scrubbers may be lower margin than the traditional business. I just wanted to maybe understand a little bit better about how you think about the drop through in the business on any growth you get next year, and what kind of levels that could get to, because I think the consensus looks fairly pegged towards you moving quite quickly towards your 14% margin targets.
I just wanted to hear in your view whether we should think about sort of slower development into 2019 and maybe drop-throughs more around the 10% level that we've been more used to this year than maybe sort of 20% plus that looks to be in consensus numbers.
Thanks for the comments. First of all, our 14% is still a target, and we definitely look at achieving that one, not probably next year, but let's see when we do it. Let us come back to guiding and telling more about 2019 in January. It is also going to be a little bit easier because then we have the final organization set up in place, and we can start commenting more about how Energy is doing and how Marine is doing, and then of course, what are the service elements there. Both divisions, both businesses are actually doing quite well if you combine the services also in there, and that would probably tell you more about going forward. I don't want to start guiding now exactly, or trying to help you with.
Okay
exact number for next year.
Maybe if you could just help, because looking at the business, you've grown your top line, and we're just not seeing margin expansion coming through. If you could maybe, even from a high level, just explain very simply what has gone wrong and what will be different next year to give us confidence that margins won't be stranded at this 12% level where we've been for a while. What could be different next year to really change that?
Let us come back to more details. I would rather say today that our services, as it is, will be growing. I mean, the retrofitting business in the exhaust gas cleaning systems is growing. Our agreements are growing. That will definitely help to the overall profitability. As I said, I would rather come back in January for more detailed analysis.
Okay. Thank you.
Thank you.
Thank you. The next question is from Manu Rimpelä from Nordea. You may ask your question.
Thank you. I would have a question on the energy business. You maintain the outlook at good, despite that you have a big shortfall in the Q3 orders, then you commented in your remarks that you expect the energy orders that were postponed to be closed in Q4 or potentially in the first half of 2019. Since that is in 2018 outlook and you're commenting that they could come over the next nine months or so, and we know that the currencies, EM currencies are down and commodity prices are down, which is not going to ease probably the situation for your customers. Why did you not downgrade that to a good outlook?
Thanks, Manu.
Oh, sorry. Solid outlook.
Yeah, the pipeline is strong. Marco, do you want to still once again highlight where do you see the next orders coming from?
Yeah, thank you, Manu. I would say that reason why we didn't downgrade the outlook is that we still believe that in Q4, we have a lot of potential orders we could sign, and the orders are coming mainly from Asia and Emirates. There's a lot of customers that are needing more energy, and they want to have that quite fast, and we believe that we can sign. Of course, we see also that El Salvador project is proceeding as planned, and we believe that will come, if everything goes right, in Q4 as well. Thank you.
Can you remind us of the EUR size of El Salvador? If that comes in Q4, what would it be?
250.
Okay. Just a follow-up question on the way you think about the guidance wording, good. Should we interpret that means that the order intake should be growing in 2018 compared to 2017?
Good means order intake will be growing in the equipment business and the services guidance is guiding the sales.
Okay. I'm sorry to get stuck on this point, you basically, in your remarks, you said that you expect to get the postponed orders in Q4 or Q1 or Q2. It doesn't sound that you have a lot of confidence in signing those in Q4. I'm just feeling a bit perplexed that you still feel so confident in signing them in Q4, in your remarks, not necessarily indicating that confidence.
Yeah.
Marco. Yeah. Thank you. What happens usually when there's a delay is that they will postpone, but it's very difficult to say exactly when. What we are now guiding is Q4 for your order intake, and we believe that the pipeline is so solid, so we believe that we actually will sign enough orders in Q4, unless something very big macroeconomically or geopolitical issues will happen.
Okay. Thank you.
Thank you.
Thank you. The next question, it's from the line of Sean McLoughlin from HSBC. You may ask your question.
Thank you for taking my question. I think just to follow up on the previous discussion, Marco, you've obviously taken a fresh view of the Energy Solutions, it looks like you're coming in at a slightly difficult time. Is there anything that you think strategically you need to change or areas that you need to drive in order to help this turnaround?
Yeah, of course, I believe that we have a very good, solid business and know-how and skills in our Energy Solutions business. Of course, now when we combine from 1st of January with Services, we will definitely secure that we are offering even better solutions to our customers from the day one when they start planning in a power plant until or during the lifetime of that asset. Securing that we can add value not only when we do a service or when we build a power plant, but also during how they run the power plant. We can definitely, with our knowledge, run that power plant and give advices so they can actually earn more money. We're definitely going to look into those opportunities in much more detail going forward.
Okay, thank you. Just a quick general follow-up. In restructuring the business into two areas, would you be looking at giving earnings by division?
That's our plan.
Very good. Thank you.
Thank you. The next one, it's from Peter O'Leary from Jefferies. Thank you. You may ask your question.
Good morning. Can I please come back on this issue of the transactional service business? I'm just interested in some more color on what's going on. If I understand it correctly, this is spare parts for the merchant segment, which I would assume would be the sort of thing you could predict fairly easily, because it must be just a function of how much the ships are being used. What do you think is driving the weakness, and is it in any way part of the whole IMO 2020 issue, with potentially some of the older ships being scrapped prematurely, and therefore, owners being reluctant to spend on service if they're reaching the end of their lives? Maybe you can help us understand what's going on there, and what you think it tells us about the future.
Thank you for the question. Pierpaolo Barbone, Head of Services, to you.
Thank you. Thank you for the question. First of all, I would like to remind you that two-thirds of our order book is related to our long-term agreement. We have also to underline that today, we have a record in the number of installation ever, and especially, the number of installation ever in power plants. This is the big picture. Two-thirds of order book related to long-term agreement, but two-thirds of the net sales every month are related to transactional business. Orders that are flowing in, invoices that we are, let's say, issuing on assets, on parts, on activities that we do not have in our order book. They are transparent. They are coming, and they are going during the month. We are capturing this business every month.
To, let's say, giving more color to the transactional, in particular, we have seen that in merchant, especially, let's say, the pace of recovery of merchant and oil and gas is lower than what we have expected. Not for all sub-segments, in particular, for container ship, the volumes and freight rates have increased. Let's say, there is an improvement. In dry bulk, especially in tanker market, they are still depressed, let's say. On the long-term agreement, you know that we have certain long-term agreement related to spare parts and related to field service activities. These activities, to be invoiced, they have to be called off.
When you have a change in the operational profile of a power plant from base load to peak shaving, for example, and you have a long-term agreement for parts, for example, in order to materialize net sales, you have to invoice them. If the peak load is sweet, the base load approach or profile is changed to peak load, you don't need that moment the part, it is postponed. I don't know if I have given some more colors or if you would like to know something more.
You've given some more color, that's appreciated. Dry bulk and tanker, is it that they're being used less and therefore you see less transactional spares, or are people deferring doing servicing because they're under financial pressure? I just want to understand whether it's just a sort of blip or whether.
Yeah. Both, also, sometimes when there are orders on the market, the customer, they prefer to avoid to stop the ships, then to continue to work until, let's say, they can. Of course, the risk is that then they will face some breakdowns later on, they prefer to harvest when it is possible.
Okay. If I can ask a follow-up on the scrubber business. You're obviously going to be very busy in 2019. What do you think happens in 2020? I know it's some way away, are you now booking any orders to retrofit in 2020, or is it still all about just 2019?
There are some orders that will, let's say, expand into 2020 as well.
There will be also a new building.
Also a new build.
I think it might go to 2021 even more.
Yeah.
It's going to be.
Yeah
Quite an interesting. Even might be further.
Presumably the key variable there being the difference in the fuel prices between high sulfur and low sulfur fuel.
Exactly. Of course, how IMO succeeds to implement the fines or how they will follow the development.
Yeah. Okay. Thank you very much.
Thank you.
Thank you.
Thank you. The next question is from Robert Davies from Morgan Stanley. You may ask your question.
Morning, Jaakko. Main question from me is just around the risks you see to delays in the IMO implementation.
Robert, somehow we missed your question. Could you repeat it, please? We lost Robert.
Hello?
Jaakko, can you hear me?
Now we can hear you.
Okay, great. My question was around the implementation of the IMO legislation. I've seen some recent news flow that there could be delays. Is that impacting your customer conversations at all? How is that evolving in terms of the outlook for activity? Is there any risk that once that is cleared, you get a catch-up, or has there been any obvious impact on your business? Just the other one, the follow-up I'll put in ahead of time, was just around the outlook for LNG. I've seen quite a few new projects on the LNG side starting to filter through. How are you thinking about the balance in terms of the LNG carrier outlook and the LNG infrastructure market in general as we go through 2019 and 2020? Thanks.
Thank you for a good question. First of all, the scrubber one is that's a very good one to try to analyze and what's going to happen in 2020. First of all, we have been seeing a very strange market for the last five years. Now finally, this year, beginning next year, this year, or previous year, we started this order activity. Nobody knows what's going to happen 1st of January. IMO will be, at least today, they say that they will be sticking to that one. Next week is the IMO meeting, in London, we will hear more. Some countries are already planning for different structures to twine, and implement a follow-up, like they did in, ECA legislation 2016. There will definitely be cases where the governments probably need to allow ship owners to do something going forward.
Roger Holm, the head of marine, you see it also. You talk daily to the ship owners and could you comment the scrubbers and then also the LNG question, please, Roger?
Yeah. Thank you, Jaakko. If I start with the scrubbers. So far, we haven't seen any impacts on the dialogue we have with our customers and the ongoing discussions. As we have said before, we firmly believe that the critical point now is that when IMO are making decisions, they stick to the decisions. It's a bad thing both for our customers and us and our competitors if we cannot trust the schedule. I think that's the good starting point. So far, no impacts on the discussions we have seen with our partners so far. Then to the LNG carriers, we have had 44 LNG carrier vessel orders so far this year. The outlook is positive. If we look how the forecast is going forward for next year as well, it's also looking fairly positive.
I think the only downside for us is that the FSRU market is extremely slow at the moment. We don't see much activities on that part, which last year was a good business for us. LNG carrier is positive. FSRUs are slow at the moment.
That's great. Thank you.
Thank you. The next one, it's from Alexander Virgo from, Bank of America. You can ask your question.
Thanks very much. Good morning, everyone. It's just a quick one, asking Peter's question a slightly different way. I think historically, you've always said that the transactional business is a good barometer of health for your customers. I was just wondering whether we should read the commentary that you've made so far into a broader comment on the health of those customers, particularly on the merchant side, whether or not we should think about how we should think about that as we progress through Q4, and into next year, particularly given the transactional business requirement, to Pierpaolo's point. Any comment you can make on the momentum there, given I think we've got about what, 4% or so underlying service growth? Thank you.
Yes. In merchant business, as Pierpaolo said, of course, it depends on their capability and the money, whether they can do the services. Isn't it so, Pierpaolo, that if you postpone the service for a certain period, you finally have to do it, you can't postpone it forever.
Absolutely.
We are reaching some of our customers, also because of all the digital ways we can follow the engines that they need to do the service. We are not so much worried about.
The classification societies will, in a way, stop you or will suggest you strongly that you have to do certain maintenance. Second, there is a risk of breakdown or possibility that there are breakdowns. In that sense, let's say for us, there are good opportunities in both ways.
Going forward, we have been selling solutions to cruise and ferries and LNG and so on. Those are engines you don't want to let go, and you definitely need service agreements. You need the service.
Absolutely. The fact that we have the peak, the highest number of installation ever under long-term agreement, this grants, let's say, a very solid development. Of course, the operational profile, as I have said, especially in terms of ferries or on the other side, in terms of power plants, is then making the business, let's say, fly or not.
Yep.
Okay, thank you. Then I was intrigued by your comment here, Pierpaolo, on the change in usage of the power plants and how much that affects the call loss under the LTSAs. Is that something that is a quarter or a six-month change, or is that something that you would see as a structural shift if someone changes the way they're using the power plant, can that change back? Thank you.
It depends by regions, of course, by geographical regions. In regions where you have a huge base of hydropower, for example, you are subject to, let's say, integrating the hydropower plants, and so it is episodic, let's say. In other region, it could be a philosophical, a business model that is changing, let's say, but we don't see huge modification in that.
It's not quarter by quarter. It's more like how they use finally.
It is how they use concretely the power and how much more convenient is to utilize alternative sources, with different type of prices of energy.
Right. Okay. We should be thinking about that for the next year, I guess, was where I was going with this.
We are optimist because our long-term agreement are in place. We have, as I said, the highest amount of installation covered by agreements, so let's say we are optimist and we are growing. We have been growing also in terms of installed base, number of megawatts, not only number of installation. Because the business is developing in smaller installation, less power intensive. We have seen now that we have been growing in number of installation, in megawatt installed, and also in percentages of installation covered by agreement in terms of megawatt.
Thanks very much.
Thank you.
The next one, it's from Johan Eliason from Kepler. You may ask your question. Once again, Johan, your line is now open.
Yeah. Sorry. Good morning. This is Johan.
Good morning.
Just a question on the energy. We saw obviously weak orders, as you have explained, but revenues were actually pretty good. Have we now seen these legacy power plants with low margins that you have talked about historically being delivered now in the quarter? Or is those to some degree linked to this El Salvador order, and we should still expect some impact on the margins from those going forward?
Thank you, Johan. Good question, Marco is happy to answer with that one, how does it look going forward?
Yeah. As you remember, we took some low-margin orders a couple of years back, but those being delivered now. Now it's more normalized orders that we have in our order book as well. El Salvador is just another order in our normal business.
With good margins.
With decent margins.
Decent margins.
Not good, but decent.
Better. Better than previously.
Yeah.
Thanks, Johan.
Good. On your outlook statement, you take down services from good to solid, referring to these transactional business in the short term, and you say this is related to how you see the sales development. If you look into next year, obviously talk about very solid scrubber orders that will turn into revenues primarily in 2019. If in a normal circumstance, assuming there's not a big drop of the transactional revenues in 2019, that would obviously then imply that you should have upped your guidance or will up your guidance then for services to good again. Is there also worried for these transactional service businesses also going into 2019, potentially turning even negative on the top line from that part?
Thank you, Johan. Yes, we are very much looking forward how that develops, in January, we will give you the next one. This is only in relation to this year. Let's get back to that one. You are right, we shouldn't be worried at all.
Okay. Just finally on the scrubber thing, it seems like you have taken around 400 scrubbers this year or somewhere above 300. Do you have a feeling for how many ships in total will actually be fitted with a scrubber come January 2020 or at least early parts of 2020? Are we talking about a total of 2,000 or 3,000 or 4,000? What's your feeling with what you have seen in the order intake out there, not only for you, but for the orders that have been around?
I think the latest DNV report said that this boom was 1,600 vessels, where our market share was the highest, very good, you need to remember what has been ordered before. Could it be 2,000 at the moment? You have 39,000 vessels, or whatever is the number, which need to be
Retrofit it, that's going to be interesting. They will switch fuels. They will still order from us, as we heard, this will go forward. Around 2,000 might see today.
Mm-hmm. That's, as you mentioned, a very slow number. Do you think the installations will increase come 2020, 2021, and 2022? Will 2019 be sort of the peak year?
We still expect this to continue. There is no way, looking at the difference on fuel prices, there is no way that the fuel switch is going to be more economical. I will be expecting countries to allow some of the ship owners to install later, and that's what we see already from our order intake today.
Yeah. How are you doing with your capacity management? I talked to a small competitor to you, and he sort of said that he's been promising the board to be on a production level of 100 scrubbers by the end of this year, and then 200 by the end of 2019. What's your number and how you're planning your delivery capacity going forward?
We have been talking about a capacity of 500 scrubbers per year.
Yeah.
That's the capacity today. We are, of course, looking at ways to increase it. We are almost sold out in 2019. Of course, for us it's more the testing, the engineering, and the automation side, which is a bottleneck. We don't manufacture scrubbers. We get it from sub-suppliers, and then we install it on board of the ship.
Good. Thank you very much.
Thank you.
Thank you. The next one from Ed Moravin at Jega. You may ask your question.
Good morning. Actually, my question was around what your capacity for scrubbers was. That was answered. I guess I could also just add as a question, are you starting to receive scrubber orders that would only be delivered beyond 2020 or beyond 2019?
Yes, we are. We are having already today scrubber orders which are beyond 2020, already 2021, probably 2022, and what I have heard. The first question I somehow missed. Was it about the competition or?
No. It was about your own capacity. My question would be.
Oh, capacity. It's around 500 today.
Yeah.
Per year.
Yeah. Would you take that up by 5%, 10% in anticipation of demand extending beyond the deadline dates or are you more cautious?
That's difficult to say. Roger, do you want to add anything to that?
No, I think we will not comment on any exact figure. Of course, we are constantly working on how we can optimize this. The main bottleneck for us is around engineering, and it very much, because this is not, especially on the retrofit side, this is not a standardized product going out. It depends very much of what kind of scrubber, how standardized they are. The more standardized they are, the more volumes we can do. It's not an exact science that we can comment on.
Just to be clear, because you do installation of scrubbers on the retrofit side, it's possible that a vessel owner could buy a scrubber from a competitor of yours, but come to you for the installation?
We could buy from competitor and install it, so far we haven't started that kind of a business. It wouldn't probably make any sense.
Okay. All right. Thank you very much.
Thank you.
Thank you. The next one, it's from Glen Liddy from JP Morgan. You may ask your question.
Good morning. For Q4, are you expecting this to be a record quarter, not only in terms of absolute profit, but also in margin terms?
Glenn, thank you for the question, and the answer is yes.
To both?
Yes.
On your service agreement, it's nice to see that the energy part is growing again. Do the customers behave differently if they're using the power systems for renewable energy compared with primary energy in developing countries?
If the power plant, I can try to answer that one. You can correct me if I'm not right. Glenn, of course, if we sell to as a backup or as a flexibility power plant for a renewable storage for developed world, they use it here and there. The service agreement is probably then supporting that deal itself. Pierpaolo?
Hi, Glenn. Thank you. It is not often in general for the contracts that we have already in place. What it is important, let's say we have a relationship with the customers, because they have, for example, a gas power plant or whatever. They want to add on maybe a module that is renewables, let's say, or batteries storage or whatever. We integrate with the logic, Greensmith Energy as a typical integrator, that is covering, let's say, the entire power plant, giving flexibility to the installation. This is the model that we have experienced a lot.
In normal power plant, it's running base load and it's a normal agreement. We can even run it.
Yeah, absolutely. Operate the plant, yeah.
Going forward, though, I'd assume that you're expecting to get a greater proportion of your OE sales coming from customers that are using these as renewable backups. Is that correct?
That's a growing area today. Everybody asks. You are right.
Yeah. If we think about that, do the customers that are taking the equipment for renewable-related applications, are they more or less likely to enter into Long-Term Service Agreements than your traditional customers in the past?
Depends on the customer. Again, if it's a utility, a well-known big utility, they would probably do it by themselves.
Okay.
If it's a smaller player who also needs our energy management system, then it will be probably ours, I'll guess.
Okay. You can still continue to grow the penetration of your install base in the longer term?
Yeah.
Final question. You're clear about margins and absolute profit for Q4. Will you also see a big release in working capital, so your cash from operations will be at least matching last year?
Glenn, I'm not guiding the number. You are-
No, not the number, but- -relative to last year, can you-
We are releasing quite a substantial amount of working capital.
Okay, then. That's great. Thank you very much.
Thank you.
Thank you. The next one, it's from the line of Manu Rimpelä.
Okay, thank you. I would have a follow-up question. If I may question you a bit on the services mixed impact that you talked about. If I look at the numbers that you provide, it seems to me at least that the share of merchant and offshore is actually up compared to last year, which doesn't necessarily support what you're saying, is that if you see these segments being under pressure, and that is putting pressure on the margins in services. I think year-to-date, the share of spare parts is 48% compared to 49% last year, and that is roughly like a EUR 20 million impact on sales. Is there something that I'm missing, or is it that the pricing in this segment has come down significantly, which is then the big impact on margins?
Pierpaolo, do you want to start?
On the first part, we have said that we have been disappointed by the lack of growth in merchant and oil and gas. That was my statement. I wanted to grow 5%, bloody hell, this year, and it was not possible because we couldn't catch the, let's say, there is no growth, let's say, the growth that we were forecasting and the evidences we had on merchant and oil and gas. Especially on oil and gas, I must underline the offshore and also the supply vessels that have been growing, as you said, but let's say, very limitedly. We believe that it could have been better.
The other part was what, Manu, was it on?
It was a question about the impact on margins from the spare parts sales, as they were 48% of sales in the first nine months of 2018, compared to 49% in the 2017 comparable period. That translates to roughly EUR 20 million in absolute sales terms. It doesn't feel that that would be a big enough impact to actually kind of explain the fall in EBIT we've seen year-to-date. I'm kind of just wondering that whether there is also something related to prices.
No, it is not related to prices, but you have also to, let's say, to analyze the fact that we got from the Marine Solutions division, we had, let's say, after-sale services, and that part had and has parts with a lower margin. That is what has happened. A spare part Just to, in the mix of spare part, a spare part, a piston, let's say you have a higher margin than selling, let's say, a spare part for a water purification plant.
Is this something we should think about just kind of cyclical, or is this a structural fact because you kind of increased the share of long-term contracts?
It's cyclical.
It's cyclical. It's not structural.
Thank you.
Thank you.
Thank you.
There are no further questions at this time. Please continue.
Thank you. Thank you all. Let's see you back here in January. Thank you.
Thank you. That concludes our call for today. You may all disconnect. Thank you all for participating.