These are the main question areas our investors and analysts have addressed during meetings and conferences in relation to our second quarter 2008 result release.
Q: The order intake for Q2 was lower than anticipated, what is the current market outlook for Ship Power?
A: The order intake for Ship Power came down from its very high levels during recent years. It is still good to remember that the order intake was at a good level and that our Ship Power book- to-bill ratio is >1. For Q3 we expect ordering activity to continue at the same good level as in Q2, in Q4 we might see some slowdown. Due to the current market conditions visibility has become shorter.
Q: What is the market outlook by Ship Power segment?
A: Due to the current market conditions it is very difficult to predict the different segments’ outlooks. On short term there is activity in the market but visibility has become shorter.
Q: Can we expect the order intake for Power Plants to be at the same level as in Q2 in Q3 and Q4?
A: As stated in our market outlook the situation in Power Plants remains favourable and we expect continued high ordering activity in all segments for the remainder of the year. It is difficult to be too exact on the levels of individual quarters since the Power Plants business is very lumpy with big projects and the timing of them leads to fluctuations in both order intake and net sales.
Q: How solid is the Ship Power order book? Have you had cancellations?
A: At the end of Q2 the advances paid by customers amounted to EUR 1.2 million which we consider a good security for the order book. We have had some smaller cancellations but we have been able to reallocate those to other customers.
Q: Wärtsilä’s market shares have been going steadily down in its main Ship Power segments. What are the reasons?
A: The reasons behind the decline are mainly capacity constraints and that they have been on an extremely high level due to the very high ordering activity of LNG-vessels in 2006-2007. The market shares are calculated on a twelve month rolling basis.
Q: How will Wärtsilä address this issue?
A: Our main focus is not on market shares but to sell our capacity to full extent where demand is the highest. The market share is mainly a residual of that. In this case we have allocated more capacity to the Power Plants business.
Q: You recently announced your intention to acquire Vik-Sandvik – what is the purpose with the acquisition?
A: This acquisition is a major step in Wärtsilä’s strategy to strengthen its position as a total solutions provider and to be the most valued partner for its customers. By combining ship design capability with its existing offering in propulsion systems and automation, Wärtsilä will be able to provide more added value to its customers, with further growth potential in new lifecycle services. Wärtsilä’s goal is to become the leading provider of ship design services in various segments.
Q: Don’t you think this is a risky acquisition now that the Ship Power market is going down?
A: The more competitive the market is the more important it is to be closely and broadly involved with the customers.
Q: In your opinion will the Power Plants and Services businesses be able to fill the gap that the slowdown in the Ship Power will bring?
A: Our capacity is well utilized and if needed production capacity can be shifted from Ship Power to Power Plants in the medium term. The high demand in Power Plants and somewhat slower demand in Ship Power has given us the opportunity to allocate more capacity to the Power Plants business. We see good demand continuing in the Power Plants business for at least the remainder of the year and Services continues to grow in a stable way.
Q: Where do you see the biggest demand potential in the Power Plant markets?
A: Biggest demand potential: Africa, Brazil, the Middle East and the Americas. Demand is driven by fuel flexibility, efficiency as well as features such as modular expansion possibility and load following capabilities.
Q: Have financing issues become bigger in the Power Plant projects due to the current world economy situation?
A: No. Projects are moving forward at the envisaged pace.
Q: What are the biggest risks in the Power Plants business?
A: General uncertainty in world economy could lead to financing issues. So far this has been outweighed by the need for better and more efficient energy production.
Q: What are Wärtsilä Power Plants’ competitive advantages?
A: Wärtsilä’s offering (including full project delivery capabilities globally, operations and management as well as the by far most comprehensive services network and offering in the industry) makes apple to apple comparison with the competition difficult. Our strong order intake and market shares show that we have a solid offering.
Q: Market share development in Power Plants?
A: Market shares are generally expected to be on a high level. There are fluctuations based on timing of large projects. We have strong expectations especially in the gas and bio-fuel power plants.
Q: What are the biggest risks that would have an impact on Wärtsilä’s ability to reach its 2008 full-year guidance?
A: We would experience a total unexpected break down within the supply chain hampering us from receiving supply of critical components.
Q: Raw material prices have been going up strongly lately and cost inflation has taken many by surprise. How well have you been able to monitor the price increases into your selling prices?
A: Rising material prices is a phenomenon we have lived with for a few years now. We monitor prices on a daily basis and act accordingly. With project based pricing we can keep risks within the scope of normal business risk. So far we have succeeded well.
Q: Have labour costs been going up?
Yes. There is a labour inflation picking up on global basis. This needs to be reflected in pricing, especially in Services where the labour cost is significant.
Q: Will 2008 be the peak in terms of profitability for Wärtsilä?
A: We guide on year at a time.
Q: What issues have impacted the financial items in Q2?
A: Dividends received as well as mark to market bookings on derivates etc.
Q: Your cash flow from operating activities is very strong - what are the reasons?
A: Good profitability, good working capital development and reasonable investments.
Q: How do you see the amount of advances received in your balance sheet developing in the future?
A: As explained during the latest CMD, there is some 200-300 MEUR above normal of advance payments. Power Plants: the need to secure production slots will keep advances received on a healthy level.
Q: How big is your working capital?
A: About 100 MEUR
Q: CAPEX guidance?
A: Total investments will be appr 200 million excluding acquisitions in 2008. Maintenance capex is in line or below depreciation. Depreciation is increasing due to the recent investments, this year around 100 MEUR, next year slightly more.
Q: Is there a risk that you have over invested and will be sitting with over capacity in 2009?
A: Our investments are based on solid business cases including higher productivity, capabilities and flexibilities to manoeuvre a +/- market environment.
Q: Tax rate?
A: 26-30%. Q2 was 27%, YTD 29%
Q: What is the situation with the component supply and sub-suppliers?
A: Investments by suppliers exceed EUR 600 million, all suppliers seem to run at capacity. Key focus remains related to Quality and Delivery accuracy.
Q: Have any other bottlenecks occurred?
A: Since all our operations run at capacity, “normal” disturbances tracked and resolved within “normal” lead times, key focus area for development for Wärtsilä relates to Propulsion products since the enlargement of capacity was based on the business cycle behind the engine increases.
Please also look at the Q2/08 webcast
