Full Year 2024 Wartsila Oyj Abp Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Akash Gupta - JP Morgan - Analyst : Yes. My one question is a follow-up to your tariff answer. Can you provide some color on how much of your energy backlog is coming from the US? And how much of your current service business in energy is coming from there? So at least we have some idea of how much impact we should expect from potential tariffs.

Question: Antti Kansanen Kansanen - SEB Equities - Analyst : Antti from SEB. My question, and that would be on profitability and the backlog mix or '24 deliveries and maybe especially on the Marine business. I mean, we saw quite modest earnings leverage and margin improvement now on Q4, and you flagged a little bit of a less favorable project mix. So I just wanted to understand better how should we think about margin expansion, especially on the Marine business in '25, I mean, when you start to deliver the backlog out?

Question: Antti Kansanen Kansanen - SEB Equities - Analyst : Yes. Just wanted to understand like on Q4, was the mix especially weak now on '24? Or was the comparison period very strong? Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management I think it was a little bit weaker, you could say, than normal. In Q4, this '24.

Question: Sean McLoughlin McLoughlin - HSBC - Analyst : Just one. Understanding -- just coming back to your offering in Energy. I mean, how does this fit with the baseload opportunity in the US from data centers? I always understood that your offering was about peaking power. So just anything you can tell us on how the economics stack up versus heavy-duty, medium-duty gas turbines or other baseload power? And again, thinking again around the tariffs, how we can quantify the economics may be impacted.

Question: Panu Laitinmaki Laitinmaki - Danske Markets - Analyst : I just wanted to ask about the EBIT margins at the 12% target. So do you think that could be within reach in '25? And directionally, how do you see this improvement kind of coming divisionally? So Marine is already almost at 12%, energy is a bit below, our portfolio business a lot below. So I mean, directionally what -- which one will be the biggest driver towards 12%? Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management It's a good question. We are not guiding on time, but I would say it's near. And as you can see from our trajectory we are improving strongly. So yes, I think it's not far away.

Question: Panu Laitinmaki Laitinmaki - Danske Markets - Analyst : Can I just have a quick follow-up? If you conclude the review of energy storage, will you kind of revise the targets when do you do that?

Question: Panu Laitinmaki Laitinmaki - Danske Markets - Analyst : The question was really like when you do that, do you kind of touch the margin targets? Or would that happen later?

Question: Tomi Railo Railo - DNB Markets - Analyst : It's Tomi from DNB. Also on a question on the profitability. Did you improve the profitability in both service and equipment last year? And are you profitable in the equipment side? Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management We will not break down our profitability as we have not done that earlier as well. Yes, we are growing profitability on both equipment side as well as on the service side. But it depends very much on the mix as well. And if you take service, as I've been saying before, the highest is spare parts REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 05, 2025 / 8:00AM, WRT1V.HE - Full Year 2024 Wartsila Oyj Abp Earnings Call and then the other ones are on a lower level. And of course, the mix between those makes the overall service mix margin percentage go up or down a little bit. But overall, I would say we are continuously optimizing our processes, enabling also smoother operations, smoother execution of orders. And that, of course, comes to the good of the margin.

Question: Mikael Doepel Doepel - Nordea Marktets - Analyst : Just coming back to the tariffs. I understand that it's very difficult to predict and what's going to happen there. I'm just wondering, you previously said that the technologies that you provide are basically not available in the US. And I was wondering if this could lead to some sort of redemptions if there were any tariffs coming into place. We have seen this or heard about this in some other equipment businesses, where you don't have similar technologies offered by local producers in the US. Do you have any thoughts around this?

Question: Mikael Doepel Doepel - Nordea Marktets - Analyst : Okay. And then secondly --

Question: Mikael Doepel Doepel - Nordea Marktets - Analyst : Right. Okay. No, that makes sense. Then a question on capital allocation. So you've had very strong cash flow now in 2024. You have a net cash position. How do you think about that going forward? Do you -- could you consider some buybacks or extra payout? I mean, it doesn't it look like the balance sheet is becoming overcapitalized to this. Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management No, I would say our capital allocation principles don't change. For sure, we want to meet and we also have that in the proposal to meet 50% EPS payout as dividends. So that's definitely one. I think our R&D spend will remain on a higher level than what we have if we take long-term historical levels of 3% of sales. Last year, we ended 4.6% of sales. I think it will be in the 4-point-something percent also this year. Clearly, we need capital for that. Then of course, we are not blind for acquisition either. We need to monitor the market and look at investments potentially that could make our position even stronger, I mean, acquisitions that could make our position even stronger. Today, there are not many big items on the horizon. I think we have said before also that, okay, (inaudible) is an interesting option. If that is there, okay, we will certainly look at it. But otherwise, I think it's more like smaller bolt-ons. Yes, I would say those are the key principles that we have been communicating, and I don't think they have really changed.

Question: Akash Gupta - JP Morgan - Analyst : My follow-up, I have one on Marine services. So last year saw some benefit from Red Sea disruption. And I'm just wondering if you see any headwind this year if we get some peace in the Middle East and flow of vessel again through Red Sea and Suez Canal that can reduce the requirement to travel far away. And on the same topic, is there any way you can quantify the positive impact that you may have seen last year, so we know how much of this can potentially reverse when the situation normalizes?

Question: Antti Kansanen Kansanen - SEB Equities - Analyst : I had a follow-up question on the energy storage side. And when we look at last year's full year orders, I mean, on the megawatt hour terms, there's a big jump up from the previous year, the level that you have been. So does this impact the delivery times and backlog rotation from orders to sales, I mean, how much you expect to book in '25? Or is it just the same number of projects but they are just, in scale, larger ones?

Question: Antti Kansanen Kansanen - SEB Equities - Analyst : Yes, I understand the pricing dynamic. But my question was that on volume terms, you are taking more deals or bigger deals. Will that lengthen the delivery times? I mean, how much of of those orders that you took last year will be revenues this year, longer project or just bigger ones?

Question: Antti Kansanen Kansanen - SEB Equities - Analyst : And then thinking of the profitability. I mean, the business in volume terms is much bigger. And if I understand correctly, lower prices are largely a function of pass-through items. So is this margin accretive, that the volume of a single project or the order intake has grown? Is this a big driver for your margins going forward?

Question: Panu Laitinmaki Laitinmaki - Danske Markets - Analyst : Thanks for taking my follow-ups. I have two. First, on the net working capital. So you have been flagging that it's probably an unsustainable level. But it's been going up. So could you kind of be more concrete? Do you think this will happen in '25 yet and to what magnitude? And is there like a number as a percentage of sales that we should assume it to kind of reach at midterm? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 05, 2025 / 8:00AM, WRT1V.HE - Full Year 2024 Wartsila Oyj Abp Earnings Call Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management I will not -- we are not guiding on working capital. Besides that, to guide on working capital is really, really difficult, because there are so many moving parts in the working capital. Like I explained, there are many good actions that I mentioned earlier that are sustainable. But not everything is sustainable. If you take the EPC-EEQ mix, it might be different this year than compared to what we saw last year. If it moves more back again to 10% or 20% more on EPC, yes, that has an impact to working capital. The same goes with your negotiations with customers. If your solutions are unique, you can differentiate, you can have a better price, you can have a better payment terms. Negotiation with customers is not only one thing about price, it's also about payment terms, warranty terms, all kind of other terms and conditions. So that we have been able to get very good payment terms today or you could say improved payment terms today is no guarantee that it will happen in the future also. So I think there is a -- there are many dynamical parts that are not given as a sustainable item. The one stock location that I referred to, that's, of course, sustainable. But there are also moving parts. So what we see at this point of time or what we believe that will happen at this point of time, that we are probably at -- if you take a ratio of working capital to sales, we are probably at a lower point. And from here on, it's likely to go up. I don't think, as I mentioned, that 2025, we will end up in a positive ratio, but it will be less negative.

Question: Panu Laitinmaki Laitinmaki - Danske Markets - Analyst : Okay. Then just a question on order book and the deliveries, if there is any more color that you can give, what to expect in '25. I'm assuming it's more like normal seasonality this year as you haven't commented on it like last year. Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management No, I'd say we have made a comment about equipment sales in the second half of last year. That's why it was a one-time that we wanted to flag to you as an audience that, okay, this is what we see on the horizon. Eventually, it turned out to be not so bad from a mix point of view because of very good service performance in the later part of the year. So actually, you can also see in our EBIT percentage of Q4. I do believe, and that we have also seen in the past years that it's more stabilized, the hockey stick that we have been talking about also in 2024, yes, there might be something. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 05, 2025 / 8:00AM, WRT1V.HE - Full Year 2024 Wartsila Oyj Abp Earnings Call But it's not any more what the vessel used to have five or 10 years ago. Then it was always a hockey stick in Q4. We had typically very low EBIT margins in the first part of the year or the first half of the year in the first quarters, and then it came up again in the second half of the year. I think the future will be more stable. And that is also due to the fact that we are growing our service business very well. So the book-to-bill ratios, we have been talking about a lot. And the puts a very stable foundation under our profitability as well. If you look at last year, 53% of our net sales was service. The year before, it was 52%. And I believe that gives a very solid fundamental, also profitability stability. And also during the year, the service is much more stable, where the equipment sales is much more fluctuating through the year. So it depends very much on delivery schedules of equipment sales. But also here, I feel that the trend is more to -- stable then to these big fluctuations. We will always have fluctuations, in particular, for big orders in storage, what Hakan was referring to earlier as well. But it gets more stable and the direction.