Wartsila Oyj Abp Q3 2024 Earnings Call Transcript

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

Question: Daniela Costa - Goldman Sachs Group, Inc. - Analyst : So the topic I wanted to ask about is if you could give us a little bit more detail on storage. Just like looking at the orders to sales chart, look like you have a big gap this quarter. I guess, how much of the backlog have you used now? And how much you have left? And was it one-off, just one order that maybe got slightly delayed that you expect to receive in Q4? Is that what is behind it or more broad based?

Question: Vivek Midha - Citigroup Inc. - Analyst : Thank you very much for taking question. Good Morning. My question is, again, on the storage business. It looks like the implied ASP in storage

Question: Vivek Midha - Citigroup Inc. - Analyst : Thank you

Question: Max Yates - Morgan Stanley - Analyst : Thank you. Good Morning. Just my first one, my only question is just on the Marine margins. So if I look at the margins, that's come down by about 100 basis points quarter-on-quarter. But if I look at the mix of the business, equipment and service, it hasn't really changed that much since the second quarter. And obviously, part of what you've talked about, implied weaker margins in the second half, has been driven by mix. So I guess my question is, should we expect as mix gets worse from here that we see another kind of sizable or meaningful 100 bps sequential margin step-down in the fourth quarter? And could you maybe talk about if it wasn't obviously a big change in mix, what really drove the sequential margin weakness in Marine? So yes, the sequential trends in the Marine margins and then also how to think about the fourth quarter because I assume that should get materially worse with worst mix. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2024 / 8:00AM, WRT1V.HE - Q3 2024 Wartsila Oyj Abp Earnings Call Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management Of course, there is more than just mix between equipment and services. Let's say, also within equipment, you have a mix in projects. Let's say, not all projects are the same margins, depends on what segments are you operating as well as in the service, let's say, business itself, you have basically different margin levels between spare parts, field service agreements and projects. So there is mix and mix, and I think this has a quite significant impact in the numbers as we see them today. And as we have guided also before, we see similar trend happening also in Q4. So this all-time high EBIT margins that we have always seen in Q4, we don't anticipate that to see this year to the same level at least.

Question: Max Yates - Morgan Stanley - Analyst : Could I just clarify what you're really trying to say with this guidance? I mean, if we really simplify, are you saying there is a reasonable probability that margins will be below the third quarter in the fourth quarter? Or should we compare it to the first 9 months? I'm just really trying to -- like I realize you don't want to guide, but just in plain English, what is it you're trying to actually guide to? Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management I will not guide you on that question. Let's say, we have said and we said it already at the end of Q2 that the second half of the year from an EBIT percentage point of view will not see the same, let's say, hockey stick effect as we have used to see in Wartsila in Q4. And the second half is, therefore, let's say, EBIT margin-wise expected to be on a lower level than what we saw in the first half, which was 10.7%. And that still holds.

Question: Max Yates - Morgan Stanley - Analyst : Okay. Understood. Thank you

Question: Sebastian Kuenne - RBC Capital Markets - Analyst : Thank you for taking my question. My question relates to storage. You mentioned that in the US because of regulation, there is a big focus on local content. Maybe you can elaborate a little bit how this affects you, whether you're getting squeezed out of tenders there and what your strategy is for the North American market, especially given that data centers is such a big or important business currently for the US So I just want to get a bit of an idea of what your strategy is for North America and whether you're really impacted by that local content regulation.

Question: Vladimir Sergievskiy - Barclays Bank - Analyst : Thank you very much for taking my question. Yes. I will also ask on storage. Today, it's a year since you have started the strategic review. Now 12 months later, would you be able to share with us at least findings of this year? The business, as you show on Slide 16, started to decline at least tactically here. But operating margins, on my calculations, are in high single digits over the past 2 quarters despite relatively limited operating leverage compared to history. Do you think those high single-digit margins in storage are sustainable over the medium term with volumes, what you have today? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2024 / 8:00AM, WRT1V.HE - Q3 2024 Wartsila Oyj Abp Earnings Call

Question: Antti Kansanen - SEB - Analyst : I wanted to follow up on the previous question on the Marine segment's profitability, and to be fair, I had expected a bit more in terms of earnings

Question: Antti Kansanen - SEB - Analyst : Thank you

Question: Sven Weier - UBS Investment Bank - Analyst : Good Monring. Just want to have the follow-up on what you said. What has been delaying the customer decisions in terms of the order intake. Is it ahead of the US elections that makes them wait? Or have you received some of the orders in the meantime in Q4 and corresponding to that because of the review you do for the storage business? I mean, one side of the equation could be to find a buyer for this. And is this US election uncertainty may be also delaying the whole process.

Question: Sven Weier - UBS Investment Bank - Analyst : And that's also true for the strategic review that this is not an impact.

Question: Sven Weier - UBS Investment Bank - Analyst : And could you confirm, you sounded very confident on getting the orders in Q4. Does it mean you have already received some by now? Or that's still pending?

Question: Sven Weier - UBS Investment Bank - Analyst : Okay. Thank you. I will get back in for another one later. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2024 / 8:00AM, WRT1V.HE - Q3 2024 Wartsila Oyj Abp Earnings Call

Question: John-B Kim - Deutsche Bank AG - Analyst : Hi Good Morning. I'm wondering if we could go back to Marine for a second. When we think about the backlog, particularly what you're going to deliver in, call it, the next 12 months, are there noticeable mix effects on the equipment and/or the service side that we should think about when we think about margins on a go-forward basis? Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management There is always mix effect when you compare, let's say, quarters to quarters or year to years, it's never the same. So in that respect, I can say that the answer is yes. I will, of course, not open up, let's say, what the mix effect is going to be.

Question: John-B Kim - Deutsche Bank AG - Analyst : So operating leverage should offset potentially any negative mix. Is that a fair read-through?

Question: Panu Laitinmaki - Danske Bank A/S - Analyst : I just wanted to ask about storage margins. So can you confirm our calculations that it was high single digits or around 8% in Q3? And what has driven the improvement in the margins in that business?

Question: Panu Laitinmaki - Danske Bank A/S - Analyst : Okay. If I just may, like do you see Q3 run rate as a sustainable level? Or was there something exceptional in Q3 that everything went very well?

Question: Panu Laitinmaki - Danske Bank A/S - Analyst : Okay, thanks

Question: Erkki Vesola - Inderes Oyj - Analyst : Regarding the lead times in Marine engines and lack of shipyard capacity, if a customer orders an engine now, when will it actually be delivered? Adding to that, as a reminder, on average, how much before the ship is delivered from the shipyard to a customer do you usually get the engine in order, just timing dynamics. Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management I think, if you order an engine now and how fast you can get it, I think you can get it pretty fast. I think the, let's say, the production capacity and our supply chain is not a bottleneck. But of course, let's say, the vessels that are in the shipyard order books, as Hakan mentioned and showed on REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2024 / 8:00AM, WRT1V.HE - Q3 2024 Wartsila Oyj Abp Earnings Call the slide as well, let's say, the shipyard capacity is limited and that also creates it. Engine orders are typically, let's say, longer, how do you get, say, contracted to us basically than what we used to see. Earlier, we saw typically, let's say, 12 months in advance. Now we see more like, let's say, 12, 18 months in advance. So it's moving a little bit longer forward.

Question: Erkki Vesola - Inderes Oyj - Analyst : And would you say anything about how large a chunk of your marine engine backlog or will be delivered in 2016 and after that? Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management No, we are not opening up.

Question: Erkki Vesola - Inderes Oyj - Analyst : Thanks

Question: Tomi Railo - DNB Markets - Analyst : Hi. I am Tomi here from DNB. Question on the thermal orders, which were pretty solid, around EUR 200 million in the quarter. Would you have a similar confidence to say that you would expect also those orders to improve in the fourth quarter compared to third quarter? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2024 / 8:00AM, WRT1V.HE - Q3 2024 Wartsila Oyj Abp Earnings Call

Question: Tomi Railo - DNB Markets - Analyst : Thank you

Question: Akash Gupta - JPMorgan Chase & Co - Analyst : Hi Good Morning Everyone,. I have a question regarding your order book delivery schedules. So when I look at your deliveries in current years, we have only slight uptick in the backlog you have for this year. But then when I look at the consensus revenue expectations, we have like 20% increase in revenue expectations. So maybe if you can help us reconcile is there anything that consensus is missing on the revenue side or has there been any difference from this year to next year in delivery schedule because when we look at your next year delivery schedule, you have quite a large gap there versus what backlog you had last year. So any commentary on your Q4 order book. Arjen Berends - Wartsila Oyj Abp - Chief Financial Officer, Executive Vice President, Member of the Board of Management No, we are not commenting on consensus. Let's say, we are providing, let's say, guidance on order intake. And order intake with, of course, let's say, the assumptions that analysts make converts to, let's say, sales in a certain year. Of course, the order book is a fixed one. That's a given. That part we have. But how much will come in addition, let's say, that converts into deliveries next year, I think that I leave to your, let's say, assumptions to identify that. We guide positively. Let's say we have an outlook for better in both end markets. We see a growing trend in book-to-bill ratio all the time. So we are very confident that, let's say, we see growth also in the future.

Question: Akash Gupta - JPMorgan Chase & Co - Analyst : Thank you. I will go back in the queue now

Question: Sean McLoughlin - HSBC - Analyst : Good Morning. A question on your portfolio business. You seems to have the demand on margins, So firstly, is it sustainable? You talk about gas solutions and marine electrical. What are you seeing across other segments, automation, navigation, voyage so forth? And I guess, how is better demand and profitability changing your thinking on how you structure and whether you keep these businesses going forward?

Question: Sean McLoughlin - HSBC - Analyst : Great, thanks

Question: Tomas Skogman - Carnegie Investment Bank AB - Analyst : Yes. This is Tom from Carnegie. I would like to understand your margins a bit better, not just for this quarter. So for instance, is the order book

Question: Tomas Skogman - Carnegie Investment Bank AB - Analyst : Perhaps rephrasing a bit. I mean the other companies now report their service margins. Basically all of them, seeing them close to 20% or so. And, is there something that kind of means that you could not have a 20% or 20-plus margin in services. Is it so competitive with parts so many modernization projects where the competition is tougher or is it just kind of a thing that you can fix basically then.

Question: Tomas Skogman - Carnegie Investment Bank AB - Analyst : But then on the modernization side, would you say that your type of modernization projects are more complex with lower margins than in many other engineering companies or is that broad understanding?

Question: Tomas Skogman - Carnegie Investment Bank AB - Analyst : Okay, Thank you,