Wartsila Oyj Abp Q1 2025 Earnings Call Transcript

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

Question: Akash Gupta - JPMorgan Chase & Co - Analyst : Hi, good morning. Thanks fopr time. My one question is on risk of uncertainty that you flagged in your outlook. And clearly, things have changed since you closed the quarter with a lot of tariffs came in from April 2, onwards. So maybe if you can comment on have you seen anything already on ground in April in terms of your discussions with customers? And -- or this is more your anticipation that you have not seen much change, but based on how things have changed since early April, this is something that you may expect. So any color on what sort of discussions you are having with customers since the close of the quarter would be appreciated.

Question: Akash Gupta - JPMorgan Chase & Co - Analyst : Thank you. And maybe just a follow-up, like, if you look at the tariffs that are in place so far, how should we think about impact on your backlog margins? Do you have ability to pass it on to customers or you may need to absorb some of the extra costs?

Question: Sebastian Kuenne - RBC Capital Markets - Analyst : Yeah, hi. Thank you for taking my question. I was wondering if you could give some indication on the Marine side. You mentioned that contracting is also down for offshore and specialty vessels to the lesser degree than compared to commercial vessels. What do you expect going forward given that oil prices are coming down, so maybe there's less demand than for meters supporting offshore oil and gas. And also in the US, you will see the risk that offshore wind farms are being stopped. So how do you assess the risk that even in your core markets for Marine that demand is slowing down further.

Question: Sebastian Kuenne - RBC Capital Markets - Analyst : And cancellation risk, you say, is not increasing much.

Question: Vivek Midha - Citigroup Inc - Analyst : Thank you very much, everyone. If I may, another question on the Marine outlook, just looking at the container segment, as you highlighted, if the line is still continue with their fleet renewal plan? And the similar thing to the other question, how much concern do you have about that continuing and the line advancing out that renewal needs versus the uncertainty around trade? Thank you.

Question: Antti Kansanen - SEB - Analyst : Yeah, hi guys. Thnaks for taking my question. It is also on the Marine outlook. And I mean the charts are -- that you're referring to from the Clarkson, I mean, it appears that the newbuild side is fairly flattish. And I mean it has been for some quarters now, still guiding for growth given all of the uncertainty. So how much is this driven by aftermarket versus something that you kind of -- has been already contracted, but maybe the engines haven't been yet awarded or something like that. But mainly kind of should we expect then a positive mix in terms of orders going forward with the aftermarket clearly outpacing the new build?

Question: Sean McLoughlin - HSBC - Analyst : Thank you. Good morning. A question on portfolio. This is another quarter where the results have surprised. Where are we on sale on separation process? And is this now an increased focus of yours following the end of the strategic review of energy storage?

Question: Panu Laitinmaki - Danske Bank A/S - Analyst : Hi. Thank you. I have a question on the power plant orders, which were quite strong in Q1 and have been in for a while. So can you talk about how much was balancing in Q1? How much -- did you have any data center orders already? And how do you expect this to develop in the balancing and data center segments going forward?

Question: Sven Weier - UBS Investment Bank - Analyst : Yeah. Good morning. Thanks for taking my question. Just a follow-up on the energy outlook that you've confirmed today. I mean obviously, Q1 was super soft as we all know in storage. And I guess we could have understood if you lowered the outlook one notch not. So obviously, now a few more hedge classes associated to that. But is it keeping the guidance basically to say that you do expect the thermal part to be maybe stronger than you originally thought and that could compensate some of the more lasting weakness on the storage side? Or is it also on storage, the potential that you basically see outside the US? Thank you.

Question: Sven Weier - UBS Investment Bank - Analyst : And can I just have one follow-up on storage? Because do you also source like 100% of the cells from China and nothing from Korea? What's the exposure there? And also your latest thinking on the assembly in the US actually?

Question: Sven Weier - UBS Investment Bank - Analyst : Hakan, how does it work? I mean, if you import the cells from China to, say, Finland and then you pass it on to the US I mean how does the tariff work? Are you then tariff with the European tariff on the overall price? Or are you all having to pay a tariff on the bit that is sourced from China?

Question: Sven Weier - UBS Investment Bank - Analyst : Because I thought you have some assembly in Finland and before you pass it then on to the US. So it goes directly. Okay.

Question: Vladimir Sergievskiy - Barclays Bank - Analyst : Good morning and thank you very much. I again wanted to follow up on storage and just to understand how it works. I understand that there is limited new ordering activity given uncertainty, but what about the existing backlog in the US. If you have like the delivery obligation within the existing backlog, how does it work with, as you mentioned, tariff is 175%, because it's hard to mention that anyone in the value chain, you or your clients will actually be need to pay.

Question: Mikael Doepel - Nordea Markets - Analyst : Thnak you. Good morning, everyone. I have a question also on the Marine outlook here, just to be clear. So basically, you are guiding for a better outlook. As I understand it, it is driven by continued growth in the aftermarket business. I also think it's driven by for ship contracting in core segments or engines are likely to be ordered, but do you also expect ship contracting to increase this year compared to '24 for your core segments, is really the question. I mean you said that you have a fairly optimistic view and so on. But you also expect contracting to actually improve also this year compared to last year for your core segments, which also will drive your I guess, orders towards the end of the year?

Question: Mikael Doepel - Nordea Markets - Analyst : Could I just have one clarification before as market? I mean, you've kind of talked about energy storage in the US, it's not your biggest market. Could you just clarify kind of how much of your orders in energy storage the US was last year, by what percentage?

Question: Mikael Doepel - Nordea Markets - Analyst : Okay. And just my question is just actually on your service business and I guess more for Marine than energy, but I guess also for energy. When we think about sort of spare parts into the US, I mean, we all understand kind of a lot of the production of the new engines in energy happens in Wartsila. But on the spare parts, how does that actually work in practice? If the US customer or docks his ship at a port or you've got a an installed engine in the US, a thermal power plant. When they buy spare parts, where are those spare parts actually being produced? And are those much more local for local? Or will those also be produced in some of your major production hubs in China, in Finland? Just to understand the sort of flows of spare parts, in particular in the service business.

Question: Mikael Doepel - Nordea Markets - Analyst : So -- but just not to labor this point because I know some of your competition historically in Marine has been the sort of mom-and-pop service shops that sit in the ports and they can sell some of the lower-end products. So if you're having to put up prices on your your energy aftermarket and on some of your Marine spare parts by 10% as a result of tariffs. I assume those local service competitors are just sourcing locally. How are you not going to become more uncompetitive in your service business versus some of those sort of local service providers on some of those more basic spare parts for those customers not in service contracts?

Question: Akash Gupta - JPMorgan Chase & Co - Analyst : Yes, hi. Thanks for the follow-up. The follow-up is on margins in thermal power plant side. So we have seen from some conventional turbine manufacturers that they have reported improvement in prices this year on top of what was the level last year. And maybe if you can comment on what are you seeing on the pricing side of these power plants? And are you also seeing any incremental pricing this year versus what it was last year?

Question: Sebastian Kuenne - RBC Capital Markets - Analyst : Yeah. Thank you for taking my follow-up question. Again, on the US storage business. You say you have contract termination clause that compensate you for the cost incurred, but how does it look on the other side? You are sourcing the batteries in China. You get an order from the US. from US customer, you order the battery simultaneously in China. How do you design those contracts? If the US customer pulls out, you have to pull out from the battery purchase as well. What does that mean for your costs?

Question: Sebastian Kuenne - RBC Capital Markets - Analyst : Okay. So you don't incur major cost because you are withdrawing from contracts with your Chinese battery provider, is that correct?

Question: Tom Skogman - Carnegie - Analyst : Yeah. Hello. This is Tom. I have two questions. First, you have fixed prices in your service contracts. I wonder if this is a risk now with tariffs that when you have to import the spares to the US. And if you have agreed on fixed prices or do you have clauses for this? Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management We have sources for everything, including that -- and that's the short answer. The commercial setup is such that we can compensate for changes of laws and tariffs, et cetera.

Question: Tom Skogman - Carnegie - Analyst : Okay. Good to hear that. Then I wonder about this new margin target of 14%. And as you said, you had 12.9% last year. Usually, when companies come out with margin targets, they at least initially seen very ambitious, but this is like improving by 1 percentage point. So I would like to hear a bit more the reasoning behind this, I guess, you have a high return on capital employed, but you also have great market shares in what you do and the great service business. But is it simply so that you expect that the sales mix change will be quite negative in the coming years with equipment growing faster, which will hold back the margin progression.

Question: Panu Laitinmaki - Danske Bank A/S - Analyst : I just wanted to ask about the newbuild margins that you said were better in both Energy and Marine year-on-year. So was this due to pricing? Or what was driving that? And then going forward, like are the orders that you are now taking at higher margin than the ones that you are delivering at the moment?

Question: Panu Laitinmaki - Danske Bank A/S - Analyst : Okay. And then if we think about the order book kind of margin, is it better going forward than what you have delivered Q1? Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management We are not guiding on margins, sorry.

Question: Mikael Doepel - Nordea Markets - Analyst : Thank you. Just a quick follow-up on storage and also talking about profitability here based on my calculations, it's interested if the business was loss-making in the quarter. And I'm wondering is this -- how should we think about this going forward? Is this just a function of the revenues being REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 25, 2025 / 7:00AM, WRT1V.HE - Q1 2025 Wartsila Oyj Abp Earnings Call fairly low? Or is there something else also burdening profitability that we should take into consideration going ahead? How do you think about profitability?

Question: Vladimir Sergievskiy - Barclays Bank - Analyst : Yeah. Thank you very much. Stepping away from energy storage this time. Working capital contributed positively to free cash flow in Q1 once again. Would you be able to disclose what part of working capital actually plays favorably for you? Is it the asset side? Is it the liability side? Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management Yeah, I can open up that a little bit. Let's say, as I said already earlier when presenting the numbers, our negative working capital stayed more or less on the same level, let's say, EUR787 million at the end of last year, EUR770 million now. I would say the main positive contributor in Q1 was actually advances received. And sizes of orders get, let's say, more lumpy and bigger. Also, of course, down payments get bigger. And that in combination with an order book that gets longer, we can introduce, let's say, the new graph that we have now for order book extra year. That, of course, helps very much the cash flow, and in particular, now we saw that in Q1 that the down payment comes now when the cash out, you could say, on those same projects is coming more and more into the future. So advances received was the main highlight, I would say.