Wärtsilä Corporation Annual report 2014

Strategy

Wärtsilä aims to be the leader in complete lifecycle power solutions for the marine and selected energy markets worldwide. We see growth opportunities in gas fuelled power plants as part of our Smart Power Generation concept, in gas fuelled engines and related systems for the marine market, as well as in the development of medium-scale LNG infrastructures. We also seek growth in environmental solutions, including exhaust gas cleaning systems for SOx removal and ballast water management systems. Our strengths are our technological leadership, an integrated product and service offering, our close and long-standing customer relationships, and our unparalleled global presence. With our production and supply chain management we constantly seek ways to maintain cost efficiency and high quality – often in co-operation with leading industrial partners in our key growth markets. Our strong focus on R&D allows us to stay at the forefront of technology and innovation in our industry. We are determined to capture growth opportunities within our end markets, while maintaining a solid profitability.

Strategy implementation in 2014

The shift towards natural gas fuelled applications in the power generation market is evident, with gas and dual-fuel applications accounting for 70% of Power Plants' quotation activity and 61% of its order intake. Significant orders included those for a 120 MW dual-fuel power plant from Oman, and a 139 MW gas fuelled power plant from Mexico. Wärtsilä also received its first order for a turnkey liquefied natural gas (LNG) receiving terminal to be built in Tornio, northern Finland. In the marine markets, the importance of fuel efficiency and environmental regulations are clearly visible, driving interest in environmental solutions and in gas as a marine fuel. Gas carriers represented 34% of Ship Power’s order intake and Wärtsilä’s dual-fuel technology and gas handling systems were widely ordered in other vessel markets as well. Within environmental solutions, Wärtsilä received orders for a total of 41 exhaust gas cleaning systems for 26 vessels, as well as several orders for ballast water treatment systems. The Services business represented slightly over 40% of net sales, bringing stability to Wärtsilä’s overall development.

In order to strengthen its manufacturing footprint in key emerging markets, Wärtsilä announced the set-up of a joint venture with China State Shipbuilding Corporation (CSSC) for the manufacturing of medium and large bore medium-speed diesel and dual-fuel engines. The joint venture will target the growing offshore and LNG markets, as well as the auxiliary engine market for very large container vessels. During the year, the Wärtsilä Yuchai Engine Co. Ltd joint venture inaugurated its new factory in Zhuhai, China, and the set-up of Wärtsilä’s fully-owned manufacturing facility in Brazil progressed. Wärtsilä’s focus on R&D activities was strong, the key areas of emphasis being efficiency improvement, fuel flexibility, and the reduction of environmental impact. The R&D related expenditure totalled EUR 139 million, which represents 2.9% of net sales.

Financial targets and guidance realisation

Wärtsilä’s long-term financial target is to grow faster than global GDP and to maintain its operating profit margin between 14% at the peak of the cycle and 10% at the trough. Furthermore, the target is to maintain gearing below 0.50, and to pay a dividend equivalent to 50% of earnings per share over the cycle.

Wärtsilä’s performance in 2014 was in line with the company’s long-term targets and with the guidance set for the year. On 29 January 2014, Wärtsilä estimated its net sales for 2014 to grow by 0-10% and operational profitability to be around 11%. The expectations were revised on 18 July, whereby profitability was estimated to be around 11.5% due to the two-stroke business transaction, and net sales were expected to grow by around 5%. On 23 October, the prospects for profitability were further improved to 11.5-12.0% supported by an underlying business improvement.

Net sales for 2014 increased by 4%, while global GDP increased by 3.3%. Profitability reached 11.9%, well within the guided range. Gearing was 0.05 and the Board of Directors' proposed dividend of 1.15 euro per share represented 65% of operational earnings.

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Long-term financial targets
Target Development in 2014 Development in 2013
Net sales growth faster than global GDP 4% growth 1% decline
Operating profit margin between 10% and 14% 11.9% 12.1%
Gearing below 0.50 0.05 0.15
Dividend payment equivalent to 50% of earnings per share 65%1 53%
1 Proposal of the Board of Directors.

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