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Edited Transcript of WRT1V.HE earnings conference call or presentation 23-Oct-20 12:00pm GMT

·44 min read

Q3 2020 Wartsila Oyj Abp Earnings Presentation Helsinki Jan 6, 2021 (Thomson StreetEvents) -- Edited Transcript of Wartsila Oyj Abp earnings conference call or presentation Friday, October 23, 2020 at 12:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Arjen Berends Wärtsilä Oyj Abp - CFO, Executive VP & Member of the Board of Management * Jaakko Eskola Wärtsilä Oyj Abp - CEO, President & Member of Board of Management * Natalia Valtasaari Wärtsilä Oyj Abp - VP of IR * Roger Holm Wärtsilä Oyj Abp - President of Marine Power, Executive VP & Member of the Board of Management * Sean P. Fernback Wärtsilä Oyj Abp - President of Wartsila Voyage, Executive VP & Member of Board of Management * Sushil Purohit Wärtsilä Oyj Abp - President of Energy, Executive VP & Member of Board of Management ================================================================================ Conference Call Participants ================================================================================ * Alexander Stuart Virgo BofA Merrill Lynch, Research Division - Director * Andreas P. Willi JPMorgan Chase & Co, Research Division - Head of the European Capital Goods * Antti Kansanen SEB, Research Division - Analyst * Antti Suttelin Danske Bank A/S, Research Division - Head of Research of Finland * Erkki Vesola Inderes Oy - Analyst * Johan Eliason Kepler Cheuvreux, Research Division - Analyst * Max Yates Crédit Suisse AG, Research Division - Research Analyst * Sebastian Kuenne RBC Capital Markets, Research Division - Analyst * Sven Weier UBS Investment Bank, Research Division - Executive Director and Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [1] -------------------------------------------------------------------------------- A warm welcome to Wärtsilä's Q3 results presentation. My name is Natalia Valtasaari, and I'm Head of Investor Relations here at Wärtsilä. Before I let Jaakko take over the show and go through the presentation itself, I thought I'd say a few words around the practicalities surrounding the Q&A session, given that this is a bit of a new setup for us. So first of all, good to note that only the people who have registered via the go-to webinar link can actually participate in the Q&A session. So please do so now if you haven't yet. (Operator Instructions) And that was about it. If you do experience audio issues, which I hope you don't, there is a chat function. So questions can be sent in via there. And I will try to ask them here online. If we don't have time for that, then I will get back to you later on. With that, I'll let Jaakko take over. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [2] -------------------------------------------------------------------------------- Thank you, Natalia, and good afternoon, everybody, and welcome to the interim report presentation. I'll start with a short story about the market and the situation where we are today. First of all, the conditions in the marine and energy markets remain difficult with escalating COVID-19 infection rates and concerns over the pandemic's long-term economic implications, delaying decision-making. I mean you have definitely seen that also in our order intake development. Customers are adjusting their CapEx and OpEx plans to the prevailing market conditions. This is visible in low vessel contracting, postponements of new power plant capacity investments as well as reduced spare parts consumption and maintenance activities. The low level of orders received in the third quarter reflected the uncertainty in our market environment. You have seen definitely the demand decline in cruise segment. That has been continued to represent the main challenge, what we have in power -- marine power and voyage, affecting both equipment and service orders. Marine services. Marine Systems' order intake developed quite well, thanks to good progress in our Gas Solutions business line, which was offset the continued lack of scrubber orders. And in Energy, we experienced delays in finalizing negotiations for certain orders. While Services' order intake declined due to the postponement, maintenances, overhauls and agreement renewals. One, on a more positive note, orders for storage projects developed well, thanks to an increased need for short-term flexibility. And I state at this moment, probably it will be said many times during the call that we did not experience any major cancellations beyond normal patterns. One of the highlight was cash flow development on the third quarter, and this is mainly thanks to inventory management and our efforts to decrease credit risk by intensifying receivables collection. A couple of key figures. Here, you see order intake, no change actually from last year. But what is definitely seen here is also the services order intake, which is lower than last year. Order book. This, at this moment, 12% down from last year. Net sales, 11% less than the comparable number. And again, Services, minus 14%. Book-to-bill getting closer to 1, which is always a good situation. And then comparable result, operating result, EUR 61 million, it's 55% compared to last year. And last year, we all remember, we had some difficulties with the projects. So this is probably also one reason why the percentage is so high. And again, highlights the cash flow from operating activities, plus EUR 174 million. If you look at the markets a bit through a couple of slides, first of all, vessel contracting. September vessel contracts, a bit less than 30 vessels. So this year, we are a bit over EUR 500 million, which is very low number. If you look at it in tonnages, it's extremely low compared to the previous year. And then for us in Wärtsilä's specialized tonnage, I mean, very, very low numbers. Of the September '20, 29 or 28 or so vessels, quite many of those were also tankers. And so not so much supporting the special tonnage, which always has been very important for Wärtsilä. Energy markets saw some decline. Now it's good to remember that this figure here is 1 quarter behind Wärtsilä's market share a bit higher, but also the energy markets have seen some decline. And order intake, as already discussed, flat development, but then again, more equipment and less services. Going forward, of course, we could -- we should and we always try to aim to get more services than equipment. Order book. First of all, on the left side, book-to-bill. Now the trend is a bit to the right direction. Delivery schedule on the right-hand side, you can here see delivery at this moment for current year around EUR 1.2 billion. Next year is the same level as we were last year, and then delivery after next year, it has been dropping now down. Net sales, small decrease. Again, if you look at, very importantly, the one of the pie chart here. Services, again, less than the development than in the equipment side. And comparable operating result, now when you start comparing one quarter to another, you need to remember also the distressed projects we have been having in our operations. Overall, if you take the rolling number, now the trend is a bit more positive. Cash flow, very good compared to the -- I mean comparable number and has been developing extremely well this year. Moving on to the businesses. First, Marine Power. Order intake decreased idling cruise vessels and customers adjusting capital and operating expenditures. Net sales decreased by 11%, and the comparable operating result amounted to 8.3%. So a bit less than last year, COVID-19 heavily affecting to the numbers. At the same time, weaker absorption of fixed cost. This slide, first of all, talks about the net sales from installations under agreement when quite major customers not having ships which are not moving definitely affects the net sales level. At the same time, a good example of Wärtsilä providing a 5-year maintenance agreement to the world's largest NGO hospital ship. These kind of ships are important also for our services operations. Marine Systems. Order intake increased by 16%, good development in Gas Solutions. The reduced fuel spread, which hasn't been developing so much is lessening the demand for scrubber investments. And this is one area where the visibility is also quite bad. I mean it totally depends on the fuel spread. Net sales decreased. Last year, we had much more scrubber deliveries than this year. And the result, very good development. But then again, last year, we had some of the cost overruns in certain Gas Solutions projects. Voyage. Voyage is also very much hit by COVID and the situation with cruise and ferry segments and really quite a drop on the order intake. Net sales didn't decrease so much. There has been COVID-19 related postponements. And at the same time, lower transactional service business. Comparable result amounted a bit better than the comparable number. And there, the reason is mainly coming from cost savings. We have been talking about the voyage and the future. And one important element here is the -- how we can get vessels connected. And here is a good example of the number of vessels connected. And a good example of a profit-sharing contract with Brittany Ferries, where we basically help them, the customer, to reduce the exhaust emissions. And this is an important number to look and follow so that we get these connected vessels into Wärtsilä's portfolio. Energy order intake increased, still affected by postponed decision-making and traveling site access is not so easy. Net sales also increased 6%, and operating profit amounted to EUR 14 million. Again, you have to compare last year where we had certain cost overrun in our equipment projects. And then one chart about Energy installed base, which is now flat. Of course, there are good examples of great deals. We have signed a 5-year maintenance agreement in Cambodia for a 200-megawatt power plant, which supports, of course, the whole Energy going forward. Today, we also reinstated our prospects for 2020. And it's -- when I started my presentation, it's now following the same story, near-term demand is expected to improve from current levels. However, visibility remains limited and the prevailing market conditions make the outlook uncertain. If you look at the order book I showed you earlier, based on that one, net sales for 2020 is expected to decline around approximately 10%. Last year, it was EUR 5.17 billion. Profitability is expected to continue to be burdened by the effects of COVID-19. And while service demand is anticipated to improve, the seasonal pickup is unlikely to be as strong as in previous years. So we normally have a quite a hockey stick in Q4. Now these days that it's not going to be as strong as earlier. I will stop here and let everybody to start asking questions and, as Natalia said, 2 questions in a row, and then you get the next one. And once again, I have the whole Board of management here. So we can get also the good -- more -- I mean, important elements of the markets from the business leaders. Please. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- The first question on the line, Andreas Willi. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [2] -------------------------------------------------------------------------------- We can't hear anything, unfortunately. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [3] -------------------------------------------------------------------------------- (Operator Instructions) -------------------------------------------------------------------------------- Andreas P. Willi, JPMorgan Chase & Co, Research Division - Head of the European Capital Goods [4] -------------------------------------------------------------------------------- Can you hear me? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [5] -------------------------------------------------------------------------------- Yes, Andreas. Now we can. -------------------------------------------------------------------------------- Andreas P. Willi, JPMorgan Chase & Co, Research Division - Head of the European Capital Goods [6] -------------------------------------------------------------------------------- Yes, finally, sorry for being late. Two questions, please. First one, on your order book. You have removed a few more this quarter. What's the quality of the order book on the stricter criteria you now use? Is this process coming to an end where we kind of slowly chip away on some of the orders because of your stricter criteria in terms of what could materialize and what could not? And the second question on your balance sheet, you said you focused on a sound financial position. Maybe you could clarify what kind of metrics you looked at to judge what is a sound financial balance sheet? And also, what should we read from that for your dividend for this financial year? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [7] -------------------------------------------------------------------------------- Thank you, Andreas. And first of all, the order book, and if I understood it right, you asked about the quality of the order book. We have taken out around EUR 310 million during the 9 months out of it, mainly because we felt -- I mean, customers didn't perform as they should have and mostly -- I mean, those kind of cases, not cancellations. I would say the order book is a quality order book, whether they will finally be delivered, all the products at exactly when they should have been, there might be postponements. But we are quite strict at the moment also. If customer performance isn't as the agreements say, we will take it out from the order book. But at the moment, it has been scrutinized quite thoroughly, and I'm not worried about it. Regarding balance sheet, I would actually like to give the possibility for Arjen Berends. Arjen, are you -- our CFO -- I mean, if you would open up a bit about the balance sheet question. -------------------------------------------------------------------------------- Arjen Berends, Wärtsilä Oyj Abp - CFO, Executive VP & Member of the Board of Management [8] -------------------------------------------------------------------------------- Yes. Thank you, Andreas, for the question. Of course, now in this period of COVID-19, there's so much uncertainty in the world, let's say, the main focus has been on keeping a strong balance sheet and also, let's say, an extremely good cash flow. And as you can see from the numbers, I think that has been quite successful. If we then, let's say, talk about what will we eventually do with this good cash flow, if it also holds going forward, which, of course, really try to make happen, I think that's for a later decision. Then, we will, first of all, I think, need to close this year in good financial matters. The outlook is good, but we only know it when the year is over, and then we will make the decision about the dividends. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [9] -------------------------------------------------------------------------------- Next question on the line, Johan Eliason. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [10] -------------------------------------------------------------------------------- Johan, we cannot hear you. -------------------------------------------------------------------------------- Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [11] -------------------------------------------------------------------------------- Okay. Can you hear me now? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [12] -------------------------------------------------------------------------------- Now we can. Yes. -------------------------------------------------------------------------------- Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [13] -------------------------------------------------------------------------------- New technology. Okay. So on the guidance, you talked about where the revenues will end up at and then also that the normal bounce will hopefully stick in the fourth quarter will be lower than normalized. Suppose you still expect the margin in the Q4 to be the best of the year, but would you say that it's a dramatic difference from last year in terms of how the margin will progress? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [14] -------------------------------------------------------------------------------- Johan, thank you for the question. I don't want to go more deeply and to try to translate the wording here. It's -- the reason really, Johan, is that we have an order book, and you can add the order book to the net sales we have had so far. And then we always have services. Now transactional business. Now it depends totally about the mix of the transactional business and that visibility is not good. So I mean, you can hear it and read it from here, but I cannot open -- or, I mean, I really don't know what to say anything more. -------------------------------------------------------------------------------- Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [15] -------------------------------------------------------------------------------- Okay. Fine. Then just on the cruise. So we obviously see that it's the most impacted segment. And I was just wondering how it works with your long-term contracts. We see some operators selling their ships and maybe not running some of them, et cetera. How does it impact, for example, I think you have a 12-year service agreement with one big client in the cruise segment? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [16] -------------------------------------------------------------------------------- Thank you, Johan, and very good question. And Roger Holm, Head of our Marine Power, I mean, Roger is in constant -- having constantly, these discussions with our cruise customers. Roger, if you are on the line, please, could you elaborate the situation? -------------------------------------------------------------------------------- Roger Holm, Wärtsilä Oyj Abp - President of Marine Power, Executive VP & Member of the Board of Management [17] -------------------------------------------------------------------------------- Yes, absolutely, and hello from my side as well. It's a bit of a mix impact. Of course, if we look at the agreements and the old vessels are scrapped, it will have an impact on our business because in the normal situation, we would have less vessels operating. But that's minor, the key for us on cruise is really to get the vessels back in operation. And depending a bit on the contractual structure, as you can see, the major impact for our agreement business is really coming from less cruise vessels operating. So there, you clearly see the impact. And for us, the key is that we need to get the cruise vessels back in operation. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [18] -------------------------------------------------------------------------------- Next question on the line, Antti Suttelin, Danske Bank. -------------------------------------------------------------------------------- Antti Suttelin, Danske Bank A/S, Research Division - Head of Research of Finland [19] -------------------------------------------------------------------------------- I assume you can hear me, or I hope so. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [20] -------------------------------------------------------------------------------- Yes. Yes, Antti. -------------------------------------------------------------------------------- Antti Suttelin, Danske Bank A/S, Research Division - Head of Research of Finland [21] -------------------------------------------------------------------------------- Good, good. It's still on the cancellation. And I'm puzzled because you say that you have not seen cancellations, but then you take orders away from your order book. To me, it's the same as a cancellation. Or am I misunderstanding this? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [22] -------------------------------------------------------------------------------- Antti, actually -- I mean, there is a cancellation, which is, I mean, normally coming from the customer saying that they canceled, for example, the ship. That's what we, I mean, normally have seen and then the shipyard cancels the engine order. But some of these projects we have taken out from the order book is a customer who might have been there and is finally not able to get a financing or an arrangement together, which clarifies our requirements and where we see that the risks are too high. So we take it out of our order book. We might still continue the discussions with the customers, but it's our decision to take it out. -------------------------------------------------------------------------------- Antti Suttelin, Danske Bank A/S, Research Division - Head of Research of Finland [23] -------------------------------------------------------------------------------- Okay. Is it mainly Energy? Or is it mainly Marine? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [24] -------------------------------------------------------------------------------- I mean, don't -- I don't want to start opening it where it is, and some of them might be even quite old transactions. -------------------------------------------------------------------------------- Antti Suttelin, Danske Bank A/S, Research Division - Head of Research of Finland [25] -------------------------------------------------------------------------------- Okay. Finally, what do you think is the problem in the low ship contracting? If we will leave aside cruise because we all understand the problem in cruise. But leaving that aside, do you think it's overcapacity? Or is it because there are so many technological changes happening and that makes simply customers from ordering? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [26] -------------------------------------------------------------------------------- Good question. And I can start by, first of all, saying that, I mean, seeing what's going on always in the marine market, it's not easy to say what might be the real reason. Definitely, there are a lot of new technologies. People are wondering about the IMO requirements going forward. But Roger, could you, Roger Holm, open up about -- I mean, what is now IMO planning and why customers are waiting? -------------------------------------------------------------------------------- Roger Holm, Wärtsilä Oyj Abp - President of Marine Power, Executive VP & Member of the Board of Management [27] -------------------------------------------------------------------------------- Yes. Thanks, Antti, for the question. And as you said, the cruise is a bit a known story as well as ferry goes a bit in the same direction as well, depending on the needs for the vessel. But I would -- I will say that the key issue overall is the overall economical uncertainty. That's number one. Number two, which starts to definitely come more and more in the discussion as well is that, is what is the future fuel of the shipping community. And now we talk about 10, 20 years ahead, but we need to remember that the investments our customers are making are for really long-term investments. And here, I see that Wärtsilä has a strong role to play, both to provide the needed fuel flexibility, whatever the fuel will be, but also to make sure that the conversion opportunity is there when that is coming. So yes, for sure, to some extent, I think the technology and the fuel plays a certain role, but I would still claim that the global uncertainty, economical development plays a clearly bigger role at this stage. And it's our role then to make sure we support our customers on the long, long-term conversion opportunity for whatever fuel comes. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [28] -------------------------------------------------------------------------------- Next question on the line, Sven Weier from UBS. -------------------------------------------------------------------------------- Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [29] -------------------------------------------------------------------------------- Yes. It's Sven here. Two questions from my side, please. The first one is on the outlook statement you've given on the short term. First of all, I was wondering, I mean, the Marine order intake in the quarter was not so bad. I was just wondering, is there a common denominator in these orders, why they have been okay-ish despite the weak shipyard orders? And then also relating to that, given your slightly more positive short-term outlook, is that just because of Q4 seasonality because Q4 is always better? Or does that also slightly go beyond? That's the first one. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [30] -------------------------------------------------------------------------------- First of all, Q4, it's in a one way, it's easy to talk about Q4 because we see the order book. At the same time, at this moment, is not so easy because you don't really know about the services. Roger, I'm disturbing you all the time. About the marine order book, what would you say? -------------------------------------------------------------------------------- Roger Holm, Wärtsilä Oyj Abp - President of Marine Power, Executive VP & Member of the Board of Management [31] -------------------------------------------------------------------------------- I would say, if I start from the order intake, I think since these are fairly big fluctuation in projects, I think that can fluctuate from quarter-to-quarter on the new build side, I mean, now and especially when we talk about solo vessel contracting, as we have now, some deals might make a big difference, actually. But as you said, I think we had a fairly decent order intake despite COVID. Then on the service side, we see fairly big fluctuations, and that's our main challenge. And this goes between months. Actually today, it comes from 2 main items. One is that we see that customers, of course, are much more careful in spending money for obvious reasons. And to some extent, also, we have still challenges in moving field service resources. It was -- it has lately become a bit better to move field service resources. But of course, while the COVID infection rates are going up, this is something we need to very, very carefully monitor. And that's also why we see the fluctuations in service sales. -------------------------------------------------------------------------------- Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [32] -------------------------------------------------------------------------------- Okay. And if I then may follow-up. When I just look at your marine power equipment order intake in the first 9 months and look at the breakdown by entry market, it seems to me that your absolute order intake on the cruise and ferry side has gone up compared to the first 9 months last year. Is that because of the ferry side then? -------------------------------------------------------------------------------- Roger Holm, Wärtsilä Oyj Abp - President of Marine Power, Executive VP & Member of the Board of Management [33] -------------------------------------------------------------------------------- No. No, it's not ferries. Ferries have been also fairly okay, but we need to remember here that these orders comes with a delay. There might be still cruise orders. For sure, we know that there will not be any major cruise ships orders for some times, but there are still vessels ordered by the yard that have not ordered equipment. So this is what you also see in our order intake. And we haven't seen cancellations coming from the yards, but we have seen movements in the order book, so they're moving their vessels forward. But that means still that we have received orders for cruise vessels that will then be delivered based on existing orders at the yard. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [34] -------------------------------------------------------------------------------- Next question on the line, Alexander Virgo from Bank of America. -------------------------------------------------------------------------------- Alexander Stuart Virgo, BofA Merrill Lynch, Research Division - Director [35] -------------------------------------------------------------------------------- I wonder, can you just do one thing for me? Just on this order cancellation thing, I just want to understand why it was considered an order in the first place. I hope -- were -- presumably, money had changed hands or money hasn't changed hands? I'm just trying to understand why you would consider an order in the first place and now no longer consider it an order, although I appreciate the latter point a little bit more easily given what you already said. I'm just trying to understand quite how much of this backlog we need to be thinking about in the context of potentially in the future, if things continue, how long -- how much are we likely to see further reviews and further revisions, whether you call them cancellations or not? And then the second question is your comment in guidance in the mix. If we continue to see limited development of the service business, clearly, that has a margin headwind. I'm just thinking about the context of margin progression over the next 12 to 18 months. Strictly in the context of your cost actions that you've taken to date, you had originally expected, I suppose, to be getting up towards double digit. That's obviously not going to happen. But I'm just wondering what sort of headwinds you would anticipate we need to think about. Can you give any kind of quantification for that? That would be really helpful. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [36] -------------------------------------------------------------------------------- Thank you, Alexander. And first of all, if you -- it depends on the customer and when we take an order, I mean, there has to be a down payment or there has to be a security and also security for the further payments. If the customer somehow -- I mean customer situation changes during the time when the order has been taken finally in and whatever we then do, what comes to the contract, there might be situations where we feel the customers' credibility is not anymore there. So I mean, basically, you shouldn't be worried about our order book whether they are. Of course, some customers might get in a very difficult position, and they would probably like to have the order, but we feel that it's not anymore there. I'm more worried about customers who, they, by themselves, start canceling. But again, we have securities for that one. And I only remember the years when there was a huge amount of cancellations after the financial crisis. And those -- I mean, based on our contracts and what we do based to the contracts, ourselves, those years actually were quite -- I mean, developed quite well. Regarding the -- again, the guidance, the prospects, I mean, what are the headwinds and so on? I mean, I think you have heard already many times here where the market is and what might be there, Roger was referring to the marine sector. And now cruise ships have been taking up many times. We all expect the American cruise liners, some of the major ones to start operations in November. If everything goes like planned, CDC has agreed with them, they will start in November. Are they really going to start them and with how many ships? Nobody knows. And how quickly can they actually get those ships in the condition so that they can be sailing with all the elements, what you have to take into account with this pandemic situation. So again, outlook is uncertain because of the COVID-19, making everything so difficult. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [37] -------------------------------------------------------------------------------- Next question on the line, Max Yates from Crédit Suisse. -------------------------------------------------------------------------------- Max Yates, Crédit Suisse AG, Research Division - Research Analyst [38] -------------------------------------------------------------------------------- Can you hear me? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [39] -------------------------------------------------------------------------------- Yes, Max. -------------------------------------------------------------------------------- Max Yates, Crédit Suisse AG, Research Division - Research Analyst [40] -------------------------------------------------------------------------------- So just my first question, I wanted to get an update on the projects that you had problems on last year. And obviously, we know there was a kind of EUR 65 million provision that was in last year's numbers. So I just wanted to understand how much or an update on those projects and actually whether kind of to what extent the zero margin revenues from those projects were still weighing on your EBIT this quarter? That's my first question. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [41] -------------------------------------------------------------------------------- First of all, all the actions we have done are actually being implemented, and I'm happy to see how the organization, first of all, runs those projects and then how we take new projects in. In Q3 of these projects which were delivered, it was EUR 20 million around with 0 margin. So probably your next question is I can already answer that one, in Q4, it's EUR 30 million to EUR 40 million with 0 margin. -------------------------------------------------------------------------------- Max Yates, Crédit Suisse AG, Research Division - Research Analyst [42] -------------------------------------------------------------------------------- Okay. Okay. And just my second question is maybe a sort of bigger picture question. If you think about the time that you've been in charge of Wärtsilä, do you think that looking back, there's been a structural change in the market where in Marine, the environment has become more competitive, and it's an issue where essentially people are now prepared to give away the equipment and you're having to follow the pricing on the OE down just to get the same service revenues. So structurally, we're going to see lower margins than the sort of 12% historically going forward. Or do you see kind of some structural changes in the service business, so more service taken in-house that's actually putting pressure on the service profitability because some of the high-margin areas like selling sort of simple products like seals, weapons and perhaps in the past, you were able to charge kind of very high margins, there's cheaper alternatives out there from smaller competitors. I'd just love to know kind of in the sort of -- in your time, kind of in charge of Wärtsilä, are there any structural observations you'd make for the marine business? And are either of those right in your view? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [43] -------------------------------------------------------------------------------- Max, extremely good question. And I remember 5 years back, we were -- I mean, after the financial crisis, we have been saying many times that the marine market has been getting extremely competitive. And you really need to fight for your margins. Basically, quite a lot because of overcapacity in certain segments. Offshore used to be extremely strong for us, an important element has disappeared totally of the market. So everybody, even if you look at the easiest product to think about, engine players, they -- I mean, we all are fighting for the same ships now and the amount of vessel contracting has been going down for several years. And so of course, yes, the margins are extremely depressed. I don't want to use a word that we give something away. It has always been extremely important for us also to look at the total solution. So Wärtsilä wants work with our customers, and now we talk about the end customers, want to work with our customers so that we can provide something else than only the engine. So there is a bit more possibility to negotiate for the margin because Wärtsilä is going to be there and can provide something more than one engine to customer. But market has been and has been developing extremely -- to be extremely, extremely competitive. It can definitely ease if vessel contracting comes back. And -- but for us, I think the more important element is to look at the future, like Roger was telling earlier, that where -- what are the customers actually? What do they need going forward? Decarbonization, efficiency and safety. And with that one, it's -- I mean, when you can develop something which fulfills then the requirements from the markets and the customers, I'm not so worried about where we are today. I'm sure that with all these developments, even the equipment margins can be defended. And then the services is important. For us, Services has developed quite well, and it's not only sending somebody there, but also looking at the digital development where we can remotely monitor, we can remotely control, we can provide something more to our customers and then link all that huge portfolio of engines we have on board of the thousands of vessels. And through the sensors, the information back to our voyage business and combine really the thinking of the most efficient and safe journey. So yes, today, we are in a quite challenging position, more challenging than ever. But I look at the future more. I mean it has a bright future when all these requirements are getting actually tougher and tougher. -------------------------------------------------------------------------------- Max Yates, Crédit Suisse AG, Research Division - Research Analyst [44] -------------------------------------------------------------------------------- Okay. I mean, I guess just an observation is that it's, particularly in the merchant segments, we've had kind of service continually pushed out. And I think we've seen kind of that happening for the 2 or 3 years now. And I guess, is there a point at which maybe this isn't kind of service being pushed out, and it's actually an issue where they're finding alternatives to service the engines in different ways, taking it in-house and finding cheaper alternatives? Do you have a view on whether you have seen any of that change in behavior? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [45] -------------------------------------------------------------------------------- Yes. Max, that's a good point and -- I mean, I rather have an opinion that the customers would let us actually do more. But Roger, why don't you jump in and -- I mean, help me also. I mean how do you see the future now going on? -------------------------------------------------------------------------------- Roger Holm, Wärtsilä Oyj Abp - President of Marine Power, Executive VP & Member of the Board of Management [46] -------------------------------------------------------------------------------- Yes. I think this is a very good question, but I also see positively on this one, and for a few reasons. One is that technology gets more complex. So there, we can help both with our capabilities as well as the data. It's also getting more complex due to what I referred to before due to decarbonization, where we see our technology being really something that can help our customers to decarbonize. So being there to make sure that we can also do retrofitting overtime. So from that angle, I'd rather see this from something that supports our development also in the service side, that we definitely have opportunity to look at more things together with the customer. And then I'm not looking at it only from a performance agreement point of view, but even further from a retrofitting and decarbonization point of view. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [47] -------------------------------------------------------------------------------- Next question on the line, Sebastian Kuenne from RBC. -------------------------------------------------------------------------------- Sebastian Kuenne, RBC Capital Markets, Research Division - Analyst [48] -------------------------------------------------------------------------------- Two questions here. First of all, on the feedthrough of the lower ship contracting into your order book. So we -- as you mentioned today, you have a 26% growth in the global ship contracting. That's what you observed. And then we hear companies like Carnival Cruises pushing out 30% of their ship deliveries beyond 2024. So there are virtually no cruise ships being delivered in 2023 and '24. When will this be through to your equipment orders in Marine Power? It was mentioned earlier that Marine Power is still quite strong in the orders, but the numbers from the shipment tracking look very dire. When will this go through your books? That would be my first question. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [49] -------------------------------------------------------------------------------- Thank you, Sebastian. And Roger, again, a lot of marine orders and situations. Please, Roger. -------------------------------------------------------------------------------- Roger Holm, Wärtsilä Oyj Abp - President of Marine Power, Executive VP & Member of the Board of Management [50] -------------------------------------------------------------------------------- Yes. Thank you for the question. And we need to remember here when the order book at the cruise yards are moving, they are doing it because no one assumes that there will be new vessels ordered for the next 2 to 3 years. And what they are doing is that they are flattening out the existing order book. So they have evened the amount of work until they expect to get new orders that will then be for deliveries after 2025, most probably. And this means also that for us, we will still have deliveries to the cruise yards during the coming years, but it will be more flattened out than we thought pre-COVID. There are still some orders of existing vessel contracts that have not been placed to equipment manufacturer yet. So there might still be cruise orders still coming, but those are not for any new vessels. So it will gradually change. And that means that for the coming year, we need to focus on new orders for something else than from cruise. It will be only existing vessels, vessel contracts that will be in the pipeline for next year. -------------------------------------------------------------------------------- Sebastian Kuenne, RBC Capital Markets, Research Division - Analyst [51] -------------------------------------------------------------------------------- Okay. And in that context then, regarding cost control, I was a little bit surprised that you still rely fully on temporary cost savings, whereas Alfa Laval, for example, for their marine, they announced something late January, early February next year. Then MAN had a 30% staff cut recently. You now seem to be the only one who is currently still relying on temporary savings. Is that kind of linked to still a strong order book for next year? Or -- yes, what is there behind? Or do you come up with proper capacity cuts then later next year? I mean what's your view there? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [52] -------------------------------------------------------------------------------- Thank you. And first of all, our setup is already today extremely flexible. It's basically we are assembling the engine. So we rely heavily with -- on our sub-suppliers. And please, remember, if you go back a couple of years compared to any of these names you mentioned, we have done huge amount of restructurings. We only -- and now if we, I mean, really talk about the bigger facilities we have, we only have one in Finland and one in Italy. And then basically 1.5 in China. And the Chinese market is really supported only by, I mean those, and that's a totally different story. So flexible model, we have done a huge amount of restructuring, and you need to remember that we make the same engines for energy market in these 2 facilities in Europe. So you have to be extremely careful if and when -- or when you start any restructuring. We have -- as you see, we are getting energy orders in. Basically, the same line produces the energy engine than the marine engine. And that's why we haven't yet been in that situation where the calculations show that we need to do something more drastical. But we are -- I mean, be sure that we have a plan B and C and D when the right moment comes. But now these markets are moving a little bit in different cycles. So we are getting good energy orders. There is a good pipeline also in the energy. And we need to see, do they -- are we getting them through in Q4? And if not, of course, we need to get back to the drawing table. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [53] -------------------------------------------------------------------------------- Next question on the line, Andreas Willi from JPMorgan. -------------------------------------------------------------------------------- Andreas P. Willi, JPMorgan Chase & Co, Research Division - Head of the European Capital Goods [54] -------------------------------------------------------------------------------- Yes. Just had a follow-up question, if you have time for the -- if you look at your outlook where you said you're more positive or you expect the market to improve, on the marine side, obviously, in service, given that cruise is so low, that makes sense that it will improve going forward. But on the equipment side, you're normally [large ship] contracting. So would you also expect your orders on the marine side to improve in the next few quarters on the just the equipment side? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [55] -------------------------------------------------------------------------------- We say near-term demand is expected to improve from the current levels. That's what we say. And so -- but at the same time, there is a concern about the market conditions, if they move in one or another direction. -------------------------------------------------------------------------------- Andreas P. Willi, JPMorgan Chase & Co, Research Division - Head of the European Capital Goods [56] -------------------------------------------------------------------------------- But maybe another question on the power side. The share of storage projects is increasing as that market continues to grow. How does that impact your margins compared to the kind of engine business longer term? So the storage projects you're getting relative to the engine project you get on the power side? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [57] -------------------------------------------------------------------------------- That's a valid question. And of course, in storage, you don't have the same elements of services as you have with engines. So there is no parts which you need to change. And of course, that's a totally different one. We will have, and we normally have our software included in those. And the concept has to be a little bit different, I mean, with the storage side. I don't know. I would like to give the possibility for Sushil Purohit now who is first time in our call, head of our energy. He is now based in Houston, and I hope -- are you, Sushil, on the line and could comment a bit about the energy? -------------------------------------------------------------------------------- Sushil Purohit, Wärtsilä Oyj Abp - President of Energy, Executive VP & Member of Board of Management [58] -------------------------------------------------------------------------------- Thanks a lot, Jaakko. I'm here. I think it's a good question. We are seeing increased activities, of course, in the energy storage market. So you can see that in our order pipeline already. Currently, I think our margin levels are -- I mean, we don't see any difference between the new build engine and energy storage, but it's a competitive market, and it is going to be slightly lower than what we have seen on the engine side. Again, the services part will not be there as much. But what we are right now looking at, of course, is trying to see what other values we can bring towards our customer because every customer is also, right now, trying to understand how they can yield and what kind of revenue streams that they can actually derive from use of energy storage, and we are going to play a part in that one going forward as well. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [59] -------------------------------------------------------------------------------- Next question on the line, Johan Eliason, Kepler Cheuvreux. -------------------------------------------------------------------------------- Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [60] -------------------------------------------------------------------------------- It's Johan here again. Just -- while on the subject on energy, we see low energy prices out there, and there are people thinking they will stay now lower for a longer time as well. Do you think that could overall imply better demand for your power business as the fuels they're using are cheaper or maybe even delay some of its renewable backup power? Or how do you think these lower energy prices will play out for your energy business? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [61] -------------------------------------------------------------------------------- Sushil, can I get you back? -------------------------------------------------------------------------------- Sushil Purohit, Wärtsilä Oyj Abp - President of Energy, Executive VP & Member of Board of Management [62] -------------------------------------------------------------------------------- Yes. I think that's a very good question. We, of course, see in every places, solar and wind are becoming cheaper and cheaper, and I think a lot of countries are -- and power systems, are investing in these. We see that this is really going to increase the demand for flexibility going forward. If you see how Bloomberg estimates the flexibility with gas technology is going to grow from 5-gigawatt a year to 20-gigawatt a year in next 5 years' time. So we would definitely see increased demand going forward with our technology. -------------------------------------------------------------------------------- Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [63] -------------------------------------------------------------------------------- But do you think the energy prices, as such, has a positive or a negative impact for you? -------------------------------------------------------------------------------- Sushil Purohit, Wärtsilä Oyj Abp - President of Energy, Executive VP & Member of Board of Management [64] -------------------------------------------------------------------------------- Well, the negative or the reduction in energy prices are just going to help us because people are going to invest in renewable and solar and that should increase the demand for flexible generation going forward. So on the contrary, we would see an increase in demand going forward. We have seen during the COVID period, if you look at where the share of renewables were much higher. And especially in Europe, for example, we have seen negative prices on energy, and that is because of inflexible capacity. So if this cost increases, then people will invest more in flexible generation with gas-based technology as well as on storage. And then we already see the orders on the storage side from that point of view. -------------------------------------------------------------------------------- Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [65] -------------------------------------------------------------------------------- Okay. And switching to Marine. We discussed your service opportunity business risk, if there's an acceleration of scrapping in cruise, for example. I think the future is very different in most of the other shipping segments. Or is there any other segment you see a little bit at risk for an accelerated scrapping that could impact your service opportunity later on? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [66] -------------------------------------------------------------------------------- Thank you, Johan. Roger, any other segments where scrubbing is going on? -------------------------------------------------------------------------------- Roger Holm, Wärtsilä Oyj Abp - President of Marine Power, Executive VP & Member of the Board of Management [67] -------------------------------------------------------------------------------- Yes, of course, normal levels. But I think cruise is maybe the one that was not expected pre-COVID. So I would say that's the main worry for us from a scrapping perspective. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [68] -------------------------------------------------------------------------------- Next question on the line, Erkki Vesola from Inderes. -------------------------------------------------------------------------------- Erkki Vesola, Inderes Oy - Analyst [69] -------------------------------------------------------------------------------- Can you hear me? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [70] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Erkki Vesola, Inderes Oy - Analyst [71] -------------------------------------------------------------------------------- I guess you guys seem to be pretty cautious regarding LNG vessel contracting going forward. I mean aren't Qatar and Russia, they're placing LNG vessel orders mostly in South Korea. I'd like to ask where did you stand currently in terms of, say, auxiliary engine, gas solutions, navigation system orders, et cetera? Are you seeing any of that? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [72] -------------------------------------------------------------------------------- Yes, we are. And Roger, do you want to open up the LNG carrier ordering? -------------------------------------------------------------------------------- Roger Holm, Wärtsilä Oyj Abp - President of Marine Power, Executive VP & Member of the Board of Management [73] -------------------------------------------------------------------------------- Yes. And of course, all of those are on the table and preliminary bookings have been made for yard slots as well, both in China and in Korea, for example, for the Qatar. I don't think we will see movements on order intake on those before some time into next year. Let's see where it ends. And yes, of course, we are in discussions for auxiliary engines and gas systems, et cetera. So it's definitely something that we follow closely. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [74] -------------------------------------------------------------------------------- Erkki, the engines for those ships will be 2-stroke engines and -- the main engine, sorry, and Wärtsilä is not in... -------------------------------------------------------------------------------- Erkki Vesola, Inderes Oy - Analyst [75] -------------------------------------------------------------------------------- Yes, I'm aware of that. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [76] -------------------------------------------------------------------------------- Next question on the line Antti Kansanen from SEB. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [77] -------------------------------------------------------------------------------- Antti, we cannot hear you yet. -------------------------------------------------------------------------------- Natalia Valtasaari, Wärtsilä Oyj Abp - VP of IR [78] -------------------------------------------------------------------------------- (Operator Instructions) -------------------------------------------------------------------------------- Antti Kansanen, SEB, Research Division - Analyst [79] -------------------------------------------------------------------------------- Can you hear me now? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [80] -------------------------------------------------------------------------------- Yes, now we can. -------------------------------------------------------------------------------- Antti Kansanen, SEB, Research Division - Analyst [81] -------------------------------------------------------------------------------- So my question would be on the cruise service side. And if we think about kind of the revenue and earnings prospects when the COVID situation someday fades away and the ship return to sea, do you expect any kind of structural changes? Are customers talking about pricing or scope? Or are we looking at business as usual and eventual return to same profitability and volumes as pre-COVID? I mean scrapping was mentioned, let's say, a minor headwind, but anything else? -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [82] -------------------------------------------------------------------------------- Thank you, Antti. And Roger, could you start, and then Sean Fernback, we have, Head of our Voyage, could actually add to -- I mean, if Roger starts and then Sean follows. -------------------------------------------------------------------------------- Roger Holm, Wärtsilä Oyj Abp - President of Marine Power, Executive VP & Member of the Board of Management [83] -------------------------------------------------------------------------------- Yes. I can start. Then, from a Marine Power, and I think the key point to look at is to get the engines back into operation. That's for us, the key point. And when they do that, the business will start coming back. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [84] -------------------------------------------------------------------------------- And Sean, could you open up what we do in Voyage to provide services to our customers? -------------------------------------------------------------------------------- Sean P. Fernback, Wärtsilä Oyj Abp - President of Wartsila Voyage, Executive VP & Member of Board of Management [85] -------------------------------------------------------------------------------- Thank you. Thanks for the question. So yes, a couple of things, really, is on our services side, where you saw most of the drop in Q2 and a pickup towards the end of Q3. And certainly, this quarter, we're seeing more activity. A lot of that is, of course, related to COVID and the ability to access the vessels. So -- and on the pricing side, it looks like it's returning to normal pricing, which is, of course, very encouraging. And I think the second thing to add is that, which I think is a result of a number of cruise ships being not sailing, docked is -- we're starting to see a positive pickup in retrofits, so -- certainly in this quarter. -------------------------------------------------------------------------------- Jaakko Eskola, Wärtsilä Oyj Abp - CEO, President & Member of Board of Management [86] -------------------------------------------------------------------------------- Thank you. All right. So thank you for excellent questions, and thank you also for my colleagues for the answers. See you then next time in January. Thank you. Bye-bye.