Wartsila presents 2008 full year results

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Jan 2009

Ole johansson, President and CEO commented: “The year 2008 will go down in history as a year of contrasts for Wartsila. On one hand it was another record year; net sales grew by more than 23% and the profitability also improved clearly. The order intake was brisk in the beginning of the year and by the end of June the order book reached a level of 7.5 billion euros. On the other hand, the global financial and economic crisis created uncertainty in Wartsila’s main markets. As a result order intake, particularly in our Ship Power sector, slowed down markedly during the second half of the year and there was an increase in order cancellations. During the review period cancellations of EUR 333 million materialised and we see an additional EUR 800 million at risk. The power plants markets continued to be active throughout the year and orders were signed even at the very end of the year. While it is difficult to foresee the extent and duration of the downturn, the effect on our activities should, at least during the current year, be limited. We look at 2009 with confidence. The substantial order book at the end of the year should support net sales growing 10-20% in 2009 even with the risk of cancellations, which would maintain the profitability at last year’s good level.”
WaRTSILa’S PROSPECTS FOR 2009
Despite the risk of cancellations, the substantial order book at the end of the year should support a 10-20 percent growth in net sales for 2009, which would maintain the profitability at last year’s good level.
OPERATING ENVIRONMENT AND MARKETS 2008
SHIP POWER MARKETS UNDER TURMOIL
The year 2008 started with very high activity in all the main marine vessel segments. Due to the financial crisis uncertainty increased during the autumn. As a consequence the shipping market came to a complete standstill in the last quarter of 2008 and only a handful of new orders were placed. In total, ordering volumes for the year 2008 represented roughly half of the very high volumes of 2007. Despite the gloomy ending to the year, ordering for the full year was still at the same level, or even above, that of the years preceding the booming markets of 2006-2007. Although signs of declining demand have been seen for quite some time, the markets were taken by surprise by the speed at which the slowdown has occurred.
Cancellations and rescheduling of existing orders occurred during the last 6 months of the year. Tightened lending policies together with the low asset values in combination with heavily decreased freight rates totally froze shipbuilding financing. In the bigger vessel segments, such as tankers and bulkers, some 300-400 vessels were cancelled in 2008. It is quite clear that more cancellations will occur. The cancellation risk is still biggest for various merchant vessels and some offshore vessels due to the developments in oil pricing. Furthermore slippage of shipyard delivery schedules will most probably occur in the future. Many yards are scaling back from their original timetables, which in turn inevitably impacts the schedules of the whole supply chain.
Measured by number of vessels, China still holds the number one position with a 38% market share while Korean yards have signed 29% of the new vessels ordered in 2008. Japan’s share has grown to 14%, whereas Europe and other areas total 9% and 10% of the total market. Measured by tonnage, Korea still represents the biggest share with 44%, China following with 38%, Japan with 12% and Europe with just 2% of the market.
Ship Power market shares
At the end of 2008, Wartsila’s market share in medium-speed main engines had increased to 37% (34 at the end of the third quarter 2008). This was mainly due to improved performance within the Merchant segment as well as bigger weighting of traditional Wartsila dominated areas such as Cruise&Ferry and Special vessels. The market share in low-speed engines increased slightly to 15% (13 at the end of the previous quarter). In auxiliary engines the market share was 8% (9).
THE MARKET CONDITIONS FOR SERVICES REMAINED FAVOURABLE
The market conditions in the Services business remained favourable throughout the year. Wartsila’s installed engine base of approx. 162,000 MW, for both the Ship Power and Power Plants markets, consists of thousands of installations distributed all over the world. Both end markets consist of several customer segments for Services. Therefore downturns within specific vessel segments or geographical areas should not significantly affect Services. Also, Wartsila’s portfolio is the broadest in the market and offers various sources of revenues, which also limits exposure to market fluctuations. Fluctuating energy prices, combined with new and more stringent environmental legislation are driving machinery development towards more complex technologies and advanced control systems. Maintaining, tuning or upgrading this equipment for optimal efficiency and emission compliance requires highly skilled specialists that aren’t always available to the market. The market for Wartsila’s Services remained active throughout the review period.
ORDER INTAKE AT LAST YEAR’S LEVEL, ORDER BOOK GREW 9%
In the fourth quarter Wartsila’s order intake totalled EUR 823 million (1,594), a decrease of 48%. Order intake for Wartsila Ship Power decreased significantly due to the current very unstable market conditions and totalled EUR 152 million (640).
The fourth quarter order intake for the Power Plants business totalled EUR 263 million (463), 43 % lower than the corresponding period last year. Ordering activity was slower during the first two months of the quarter, in the immediate wake of the financial crisis, but accelerated towards the end of the year. Due to its project nature the Power Plants business is lumpy and order intake, as well as net sales can vary significantly from one quarter to another. During the fourth quarter the largest oil-fired power plant orders were received from Brazil and Mali. The latest order from Brazil follows the five others from the same country signed earlier in the year. The largest gas power plants orders were received from Nigeria and the USA.
During the review period January-December 2008 the order intake totalled EUR 5,573 million (5,633), a decrease of 1%. The order intake for Ship Power totalled EUR 1,826 million (2,600), a 30% decrease. Order intake was brisk in Wartsila’s Ship Power business during the first half of 2008. Demand was especially high for bulk carriers as a result of the bulker boom in 2007 but demand was strong in other Merchant vessel types as well. Ordering within the Offshore vessels segment continued to be strong at the beginning of the year. Along with the global financial and economic crisis uncertainty grew for Wartsila’s Ship Power business. As a result, the order intake slowed down markedly during the second half of the year and speculations about potential cancellations of vessel orders increased. Towards the end of the year, activity in the shipbuilding markets had come to an almost complete halt. For the review period the Merchant vessel segment represented 47% of Wartsila Ship Power’s new orders. Offshore represented 27%, Special vessels 11%, Cruise&Ferry 10% and Navy represented 5% of the total Ship Power order intake.
The total order book at the end of the review period stood at EUR 6,883 million (6,308), a growth of 9% in relation to the corresponding date last year. During the period cancellations of EUR 333 million materialised and have been deducted from the order book. Wartsila sees an additional EUR 800 million at risk. In 2008 realised cancellations were concentrated mainly within the Merchant and Offshore vessel segments, with some minor impact on Special vessels.
At the establishment of the joint venture combining Metso’s Heat&Power and Wartsila’s BioPower businesses, Bio Power’s order book amounting to EUR 116 million, has been transferred. Additions relating to acquisitions and other adjustments amounted to EUR 158 million.
The Ship Power order book totalled EUR 4.486 million (4,292), a growth of 5%. At the end of the review period, the Power Plants order book amounted to 1,949 million (1,608), a growth of 21% compared to the corresponding date last year. Services order book totalled EUR 445 million (405), a growth of 10%.
NET SALES
During the fourth quarter Wartsila’s net sales increased by 20% to EUR 1,530 million (1,272) compared to the corresponding period last year. Net sales for Ship Power totalled EUR 579 million (449), a growth of 29%. Power Plants’ net sales for the fourth quarter totalled 464 million (390), which is 19% higher than in the corresponding quarter last year. The fourth quarter net sales for Services amounted to EUR 495 million (431), a growth of 15%, of which 14% was organic growth.
Wartsila’s net sales for January-December 2008 grew strongly by 23% and totalled EUR 4,612 million (3,763). Ship Power net sales grew by 16% and totalled EUR 1,531 million (1,320). Net sales for Power Plants developed very strongly during the review period and totalled 1,261 million (882), which represents a growth of 43% compared to the corresponding period last year. Net sales from the Services business increased to EUR 1,830 million (1,550), a growth of 18%. Organic growth represented 17% of Services’ net sales growth. For the review period January-December 2008, Services net sales accounted for 40%,Ship Power net sales for 33% and Power Plants for 27% of the total net sales.
FINANCIAL RESULTS
The operating result for the fourth quarter amounted to EUR 197 million (147) or 12.9% (11.5) of net sales. The operating result for the review period January-December 2008 rose to EUR 525 million (380), which is 11.4% of net sales (10.1). Financial items amounted to EUR -9 million (-8). Net interest totalled EUR -19 million (-11). Dividends received totalled EUR 7 million (7). Other financial items developed positively due to the favourable development of derivative interest differentials despite the negative impact from fair value adjustments. Profit before taxes amounted to EUR 516 million (372). Taxes in the review period amounted to EUR 127 million (106). The profit for the financial period amounted to EUR 389 million (265). Earnings per share were EUR 3.88 (2.74). Return on Investment (ROI) was 32% (26). Return on Equity (ROE) was 31% (21).
BALANCE SHEET, FINANCING AND CASH FLOW
Cash flow from operating activities for January-December 2008 totalled EUR 278 million (431). Liquid reserves at the end of the period amounted to EUR 197 million (296). Net interest-bearing loan capital amounted EUR 455 million (-27). Going forward Wartsila’s financial room to manoeuvre is secured by committed long-term finance agreements. Advance payments at the end of the period totalled EUR 1,243 million (860). The solvency ratio was 34.3% (45.9) and gearing was 0.39 (-0.01). The main reason for the drop in solvency relates to dividends paid, balance sheet growth and the decrease in mark-to-market bookings of assets and hedges.
HOLDINGS
Wartsila owns 7,270,350 B shares in Assa Abloy, or 2.0% of the total. This holding has been registered in the balance sheet at its market value at the end of the reporting period, EUR 59 million.
CAPITAL EXPENDITURE
Gross capital expenditure during the review period totalled EUR 366 million (231), which comprised EUR 198 million (65) in acquisitions and investments in securities, and EUR 168 million (166) in production and information technology investments. Investments related mainly to the increase in capacity and the expansion of the Services activities around the world. Depreciation for the review period amounted to EUR 99 million (78).
Due to continued volume growth, efficiency improvements and Services related logistical development plans, the total capital expenditure excluding acquisitions for 2009, is expected to be approx. EUR 180 million.
SUSTAINABLE DEVELOPMENT
Wartsila’s Sustainability Report, which is part of the annual report, is prepared in accordance with the GRI G3 guidelines. It represents a balanced and reasonable view of Wartsila’s economic, environmental and social performance. The Sustainability Report is assured.
PERSONNEL
Wartsila's personnel on average during the review period was 17.623 (15.337). At the end of December Wartsila had 18,812 (16,336) employees, an increase of 15%. The largest personnel increases took place in the Services business where 11,011 (9,563) people were employed at the end of December.
During the review period Wartsila launched a Top Graduates professional programme for R&D. During the programme, attendees will drive R&D projects throughout Wartsila’s international organisation. Similar programmes for finance and IM graduates have been in place since March 2007.
OTHER STRATEGIC INITIATIVES
Wartsila intends to strengthen its international customer service by centralising its spare parts logistics, and by building a new spare parts distribution centre in the Netherlands. A large and modern central warehouse will be built near the company’s current service unit. By this action Wartsila seeks faster and more efficient deliveries of spare parts. The distribution centre will become fully operational in mid 2011.
Wartsila and Emerson Process Management announced the expansion of their global offshore alliance in June. Under the expansion, the companies can now deliver integrated energy and automation systems for Floating Production Storage and Offloading (FPSO) vessels and for semi submersible oil and gas drilling rigs. The collaboration between the companies began in 2006 within an alliance that at the time covered mainly FPSO vessels.
The importance of Asia as a shipbuilding hub has increased during recent years. In order to be closer to the main shipbuilding markets, the senior management of Wartsila Ship Power has relocated to Shanghai.
MANUFACTURING
During the fourth quarter Wartsila established a new global environmental products know-how unit, known as Delivery Centre Ecotech. The unit will focus on developing and delivering environmental technologies, as well as products for emissions reduction and efficiency improvement. By centralising the broad and outstanding know-how that exists within the company, Wartsila will strengthen its global leadership position in offering environmental technologies for power solutions.
In Vaasa, Finland an important environmental initiative was taken by launching a modernisation programme to reduce energy consumption in test bed facilities. Wartsila is further promoting similar initiatives globally.
During 2008, new license agreements were signed for the manufacturing and sale of Wartsila low-speed marine diesel engines with Jiangsu Rongsheng Heavy Industries Group Co. Ltd. (RSHI), Zhenjiang CME Co. Ltd. (CME) and CSSC-MES Diesel Co. Ltd. (CMD) in China.
In 2008, capacity additions were made in Korea, Norway and India. In Korea the Wartsila-Hyundai Engine Company, a joint venture with Hyundai Heavy Industries, was inaugurated. This 50/50 joint venture company manufactures Wartsila 50DF dual fuel engines for LNG carriers and other applications. In Rubbestadneset, Norway, Wartsila extended its gear plant. This extension will strengthen Wartsila’s position as leading provider of power solutions to marine customers globally. In Khopoli, India, Wartsila inaugurated the extension of its plant for auxiliary units and modules for power stations. This new extension will cater to the demand for supplying auxiliaries all over the world. In Shanghai, China, Wartsila inaugurated a new facility related to quality assurance and optimised supply management that will further strengthen the Asian supply chain.
The investment programmes for enhancing productivity in Trieste, Italy and for the extension of propulsion capacity in Drunen, the Netherlands as well as in Zhenjiang, China have proceeded during 2008. These programmes are important for the execution of Wartsila’s record high order book.
RESEARCH & DEVELOPMENT
During 2008 several R&D milestones were passed. The HALT-chamber (Highly Accelerated Life Test) was inaugurated in January at the University of Applied Sciences in Vaasa. The HALT project is executed in cooperation between Wartsila and the University of Applied Sciences. Highly Accelerated Life Test methods provide a way to efficiently develop products to reach increased lifetime and reliability.
In May, Wartsila and Mitsubishi Heavy Industries Ltd. signed a joint development agreement to design and develop new small, low-speed marine diesel engines of less than 450 mm cylinder bore. This agreement is an extension of the strategic alliance created by Wartsila and Mitsubishi in September 2005.
During the second quarter, the new RTX-4 full-scale, low-speed research engine was inaugurated in the Diesel Technology Centre in Winterthur, Switzerland. This large research engine is employed to further develop Wartsila low-speed marine diesel engines to meet market needs
The first RT-flex 82C common rail engine successfully completed its official shop test in September at the Hyundai Heavy Industries Co. Ltd. licensee facilities in Korea. The engine is an addition to Wartsila’s low speed engine portfolio and has been developed in collaboration with Hyundai Heavy Industries.
The Wartsila fuel cell power plant at the Vaasa Housing Fair in Finland was inaugurated during the third quarter. The fuel cell unit, developed by Wartsila, is based on planar solid oxide fuel cell (SOFC) technology, and is the first of its kind in the world. The plant is fuelled by methane gas originating from a nearby landfill, a gas that would otherwise be harmful to the environment. The fuel cell power plant produces both electricity and heating for the residential area’s needs. In the next stage the fuel cells will be tested for other applications.
In October, the International Maritime Organization (IMO) approved amendments to the MARPOL Annex VI regulations on ship emissions. The amended regulation on NOx emissions will be introduced in two additional tiers; Tier 2 represents a global 20% NOx reduction from the present Tier 1 level and will come into force in 2011, and the Tier 3 level in 2016 represents a massive 80% NOx reduction from the present Tier 1 level when applied to specific designated NOx Emission Control Areas. The engine concepts for meeting the Tier 2 NOx level are ready for the whole Wartsila marine engine portfolio and some engines are already pre-certified. For Tier 3, the “Selective Catalytic Reduction” (SCR catalyst) represents a means by which the level can already be achieved today. Wartsila has over 100 SCR equipped engines in operation. Wartsila is currently investigating and developing other measures to ensure cost efficient compliance with IMO Tier 3 regulations. The revised Annex VI also sets limits on the fuel sulphur content. Wartsila engines are designed for operation on any fuel sulphur content.
In the engine laboratory in Vaasa, a 6-cylinder prototype of the new Wartsila 34DF, dual-fuel gas engine, was introduced. Testing started in order to confirm the performance of this new engine type. The first orders for the new engine W20V46F for power plant applications were received, and serial production has been started.
In 2008 Wartsila’s research and development expenses totalled EUR 121 million (122), or 2.6% of net sales.
SHARES AND SHAREHOLDERS
In March Wartsila’s A and B-series shares were combined. Following this combination all shares now carry one vote and equal rights. The combination of the share series involved a free share issue directed to the holders of Series A-shares so that holders of Series A-shares received one share free of charge for each nine Series A-shares. In the directed share issue 2,619,954 shares were given. Trading with the new and combined shares started on 27th of March 2008.
BOARD OF DIRECTOR’S PROPOSAL TO THE AGM 2009
The Board of Directors proposes to the Annual General Meeting to be held on the 11 March 2009 that a dividend of 1.50 euros per share be paid for the financial year 2008. Wartsila’s distributable funds at the end of the period totalled EUR 415,185,892.59 million.
RISKS AND BUSINESS UNCERTAINTIES
The global financial crisis has rapidly changed the economic environment and the shipping market. Fears of an oversupply in some vessel types have become evident and freight rates have fallen drastically. The ship owners’ asset values have dropped and, in some cases, second hand values are not even available. In most parts of the market, ordering a new vessel is not feasible as new build prices are still high, despite the very recent softening. Banks have almost completely ceased lending for new projects, opting to focus on securing current vessels under construction. Some owners are facing difficulties in taking delivery of their orders and trading of orders is already taking place. The balance is gradually moving from a shipyard market to a ship owners’ market as orders have become scarcer. The slippage in shipyard delivery schedules is also a risk that affects the Ship Power business. Due to this uncertainty within the shipbuilding markets, the risk of cancellation of vessel orders has increased from the previous quarter. Wartsila sees a potential cancellation risk of approximately EUR 800 million.
Even though the fundamentals within the Power Plant business remain unchanged, the current financial crisis has an effect on the timing of orders. The financing of some future projects may also face difficulties. To date this risk has not materialised. Offering activity remains at a high level. The funding of many future projects appears to be secure, particularly in countries with continued GDP growth. Government funded projects for utilities also seem to be on the upturn, as economic stimulus packages are being implemented in many parts of the world. Infrastructure projects are often prioritised. As expected, the uncertainty in the market has created a slowdown in the industrial self generation segment, in particular in the mining industry where new investments are postponed, down-scaled or put on hold. At the end of 2008, industrial self generation projects represented 19% of the total order book of the Power Plants business.
During the year the risk related to the uncertainty in the global market for raw materials eased and raw material prices became more stabilised. Constraints relating to the availability of key components, previously limiting Wartsila’s growth, has eased. Due to the current market situation and economical development, Wartsila closely monitors the impacts of the financial crisis on the whole supply chain.
MARKET OUTLOOK
Due to the extensive financial crisis and the economic recession, the shipbuilding and shipping environment is in a very different situation compared to six months ago. Ordering activity for new vessels has come to an almost complete stand still, and it is hard to estimate at what point activity could start to pick up again. There is an imbalance between vessel capacity and demand in certain vessel segments such as bulk carriers and container vessels. Ship owners have started to lay up parts of their fleet as well to reduce operating frequency to balance the capacity. In the longer term, the most decisive factor is how fast the market will be able to adapt to this situation and regain balance. In addition to the general global economical development, vessel order cancellations and scrapping of older fleets will play an important role in the market’s recovery.
In vessel segments of greater importance to Wartsila, such as Offshore, Special vessels and Cruise&Ferry, there is still activity on the market. However, difficulties in funding and stricter lending conditions, are affecting these projects as well. These markets are the ones most likely to pick up the fastest when the most acute phase of the crisis is over.
Demand within the Power Plants market remains at a good level. The need for a more efficient and CO2-friendly power generation mix remains. The main drivers for demand in this market remain the quest for increased efficiency, and versatility in power generation due to environmental concerns and fuel availability issues. The flexible baseload market segment is expected to remain active, especially throughout the Middle East, Africa and the Americas. Continued potential is seen in the grid stability services market in North America as well as in other developed countries. A slow down will be seen in the industrial self-generation market segment, especially in mining but also in the cement industry. Wartsila’s power plant solutions are ideally suited for today’s markets, which require high efficiency and operational flexibility as well as environmental sustainability. For Wartsila Power Plants, ordering activity is estimated to be at a good level during the next two quarters. Visibility into the timing of orders is harder to predict.
Services, which during the review period constituted 40% of total net sales, continues its stable development.
The long order book and flexible manufacturing model, in combination with the stable Services business and its global network, gives Wartsila time to react to fluctuations in the market.
WaRTSILa’S PROSPECTS FOR 2009
Despite the risk of cancellations, the substantial order book at the end of the year should support a 10-20 percent growth in net sales for 2009, which would maintain the profitability at last year’s good level.

Source: Wartsila