Wärtsilä Corporation Annual report 2014

CEO review

2014 was a year of refocusing on Wärtsilä’s core areas of expertise, and on developing our business through new partnerships and acquisitions. It was also a year of good performance despite challenges in the market environment. Net sales grew by 4% with profitability at 11.9%, and I am pleased with the resilience that we have shown in reaching our targets for the year.

The power generation markets were impacted by continued macroeconomic uncertainty and slower global growth projections. However, activity improved significantly after the summer, supported by the demand for new power plants in the emerging markets and the US dollar strengthening against the euro. Power Plants’ order intake developed accordingly; the 32% growth seen in the second half resulted in the full year’s order intake reaching 2013 levels. Significant orders included those for a 120 MW dual-fuel power plant from Oman, and a 139 MW gas fuelled power plant from Mexico. During the year, we also received our first order for a turnkey LNG receiving terminal to be built in Tornio, Finland. This is a good illustration of the value that we can provide by combining our strong project execution skills with our LNG handling expertise.

Ship Power’s order intake increased by 6% during 2014, despite the general slowdown in vessel contracting and the lower demand for offshore vessels. The growth is largely due to our strong position in gas carriers, where contracting remained robust. It demonstrates the benefits of our broad offering and wide market exposure, which compensates for shifts in demand within the different vessel categories. Gas carriers represented 34% of the order intake, while interesting orders for dual-fuel engines and related systems were also received in other vessel segments. We are committed to maintaining our leading position in the marine gas markets. During the year we launched a new dual-fuel engine, the Wärtsilä 46DF, and a new LNGPac gas handling system.

Within the service markets, demand from our marine customers improved in the second half, and the demand for power plant related services was healthy throughout the year. Consequently, after several years of stable development, net sales from the Services business increased by 5%. I strongly believe that the Services organisation, with its unique offering and global reach, is one of our key strengths. Representing over 40% of Wärtsilä's sales, it offsets the cyclicality of our end-markets, while supporting our growth ambitions and our target to improve long-term profitability.

At the very start of 2014, the signs of continued market difficulties were evident. We therefore initiated measures to realign our operations globally, with the aim of securing future profitability and competitiveness. Such decisions are not made lightly; nevertheless, developing the efficiency and flexibility of our organisation is essential in order to adapt to changes in market demand.

The reorganisation of our operations was not limited to internal activities. In July, we announced a joint venture with China State Shipbuilding Corporation (CSSC), which will take over Wärtsilä's two-stroke engine business. Wärtsilä’s share of the joint venture is 30%. The partnership with CSSC, the largest shipbuilding conglomerate in China, will accelerate growth in important Asian markets and enhance the position of Wärtsilä’s two-stroke technology globally. The transaction will have a positive impact on our continuing operations, and represents a step forward in the work towards reaching our long-term profitability goals. During the summer we also announced the sale of our shares in the Wärtsilä TMH Diesel Engine Company LLC joint venture in Russia. The divestment will enable us to concentrate on our core areas of expertise, namely complete lifecycle power solutions for the marine and energy markets.

In order to further strengthen the position of our four-stroke technology in key emerging markets, we also agreed to establish a joint venture with CSSC for the manufacturing of our medium-speed diesel and dual-fuel engines in China. The joint venture will target the growing offshore and LNG markets, as well as the auxiliary engine market for very large container carriers.

Towards the end of the year we announced the acquisition of L-3 Marine Systems International, a company that supplies automation, navigation and electrical systems to the marine, naval and offshore markets. Through this acquisition we will create an electrical and automation business that is unique in terms of sector competence. The deal is fully in line with our strategy of acquiring companies that strengthen our position in markets where we are not yet a leading player.

Wärtsilä’s edge lies in its technological expertise. We continuously invest into technology development in order to maintain the competitiveness of our product portfolio, and to secure a leading position at the forefront of sustainable innovation. In 2014, our R&D investments represented approximately 3% of net sales, the key focus areas being efficiency improvement, fuel flexibility, and environmental performance. High ethical standards are our priority. We are committed to supporting the UN Global Compact and its principles with respect to human rights, labour, the environment and anti-corruption.

The demand for gas and energy efficiency, coupled with environmental considerations, drives our business. The need for efficient, flexible, and clean power generation in both the emerging markets and developed economies, offers growth opportunities for our Smart Power Generation power plants. Our gas expertise positions us well as there is a gradual transition in the marine markets to a wider scale use of gas as fuel. We also see opportunities in the development of medium-scale LNG infrastructures. More stringent environmental legislation is entering into force, which we expect will increase interest in our environmental solutions. By emphasising these strategic focus areas, we anticipate some growth in net sales and improved profitability for 2015, despite our cautious market outlook.

I would like to take this opportunity to thank our customers for the interest you have shown in our solutions and services, our shareholders for the confidence placed in Wärtsilä’s future development, and the entire Wärtsilä organisation for your dedication to reaching our common goals.

Björn Rosengren
President & CEO

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Key figures
Restated** Restated** Restated** Restated*
MEUR 2014 Q4 / 2014 Q3 / 2014 Q2 / 2014 Q1 / 2014 2013 2012
Net sales 4 779 1 549 1 117 1 116 997 4 607 4 725
Power Plants 1 138 433 282 233 190 1 459 1 498
Ship Power 1 702 552 363 415 371 1 309 1 301
Services 1 939 564 472 468 435 1 842 1 908
Depreciation and amortisations -115 -30 -29 -27 -29 -120 -139
Operating result1 569 196 142 132 98 557 517
Operating result1, % 11.9 12.7 12.7 11.8 9.8 12.1 10.9
Profit before taxes 494 157 129 119 89 544 453
Earnings per share, EUR 1.76 0.60 0.43 0.42 0.31 1.98 1.72
Balance sheet total 5 280 5 280 5 090 5 119 5 042 5 209 5 036
Interest-bearing liabilities, gross 666 666 679 697 633 665 794
Cash and cash equivalents 571 571 400 345 242 388 225
ROI, % 18.7 - - - - 21.2 20.4
Gearing 0.05 0.05 0.14 0.19 0.22 0.15 0.32
Order book, end of period 4 530 4 530 4 674 4 420 4 384 4 311 4 492
Order intake 5 084 1 522 1 309 1 138 1 115 4 821 4 940
Year-end market capitalisation 7 315 - - - - 7 055 6 454
Personnel, number at end of period 17 717 17 717 17 817 17 876 18 159 18 315 18 887
1 Figures exclude non-recurring items.
* The figures in the comparison period 2012 have been restated during 2013 according to the revised IAS 19.
** Figures related to the statement of income have been restated due to the reclassification of the two-stroke business as discontinued operations.

Corrections to the Key figures table in the CEO review

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