Wartsila's (WRTBF) CEO Jaakko Eskola on Q2 2016 Results - Earnings Call Transcript

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Wartsila Corp. (OTCPK:WRTBF)

Q2 2016 Earnings Conference Call

July 20, 2016 3:00 AM ET

Executives

Jaakko Eskola – President and Chief Executive Officer

Javier Cavada – President-Energy Solutions and Executive Vice President

Roger Holm – President-Marine Solutions and Executive Vice President

Pierpaolo Barbone – Deputy to the Chief Executive Officer and President, Services and Executive Vice President

Analysts

Max Yates – Credit Suisse

Ben Maslen – Morgan Stanley

Antti Suttelin – Danske Bank

Glen Liddy – JPMorgan

Manu Rimpelae – Nordea

Sean McLoughlin – HSBC

Andreas Koski – Deutsche Bank

Michael Kaloghiros – Bank of America Merrill Lynch

Tomi Railo – SEB

Sven Weier – UBS

Austin Earl – Marshall Wace

Presentation

Jaakko Eskola

Good morning, and welcome to Wartsila Second Quarter Result Presentation. As usual, I will give a short presentation, and then we have time for questions. And with me today I have the whole Board of Management; and Head of Investor Relations, Natalia Valtasaari, with me to answer all the questions.

First of all, the development of the first half of 2016 was satisfactory, given the prevailing conditions or challenges in our operating environment. And the highlights of the second quarter 2016. Order intake grew 3%; that’s a good development in these markets. Net sales, a bit down, 3%. Book-to-bill still 1. Result, 10.2%, and compared to last year, a bit down; and earnings per share, €0.19.

And here, I think it’s good to remember also what we announced about the write-downs of approximately €42 million related to some divestments of our 2-stroke business joint venture, and some realized exchange rate losses from our Brazilian projects, and some other receivables. Cash flow, very good, €202 million. And order book, still over €5 billion at the end of June.

Moving on to the order intake development, it was quite solid. A highlight, of course, was the extremely good development in energy solutions. And if you look at the six months’ development, only a 2% decrease compared to last year. Net sales at the stable level, highlight here was the marine solutions second quarter net sales increase.

And moving on to the businesses now, services is actually 48% of our Group net sales. Of course, energy solutions a bit down, so that might change the situation going forward. Book-to-bill 1.14. When you look at the order book distribution, here you can see the delivery of the current year being a little bit less than the first six months. But here, I want to highlight that we are still getting some important energy solutions orders, which will be also delivered at the fourth quarter and that will also change this picture.

As said, operating result was lower and that was affected by lower sales in energy solutions but also the tight competition, where the margins on earlier deals have been lower than before. Moving on to the businesses, energy solutions’ quotation level, very good. And also, when you look at the orders that has developed very well; a lot of IPPs, and still a lot of oil-fueled power plants.

When you look at the different markets, you can see here now, first of all, the new Argentinean deals in Americas; some highlights in Europe with our Turkish customer. And again, as we have earlier explained, many of those power plants are not going to Turkey, they are going to different areas like Indonesia and Africa. And Asia, a quite sizeable deal in Bangladesh on the second – during the second quarter.

If you look at our market shares on power plants which are smaller than 500 megawatts, we have increased the market share from 15% to over 20%. The market volume has dropped also at the same time. And it’s good to remember from the energy market that if you look at the bigger power plant markets, over 500 megawatts, there has been a lot of activity also by our competitors, GE, Siemens and Mitsubishi Heavy.

As announced, we were awarded five major power plant projects in Argentina. They are today equipment contracts, so no EPC. And three of those have already been included in our order intake and two additional projects are expected to be in Q3 order book. The projects are really supporting the development in the Argentina national grid electricity policy there, and here, we have been able to sell our multi-fuel or dual-fuel technology where the benefit is, of course, to change the engines running on gas whenever the gas infrastructure is in place.

Marine solutions; and let me start by highlighting this picture, Harmony of the Seas, the latest ships in our CCL fleet where Wartsila was actually developed, I think, in May or June – was delivered to the customer. It has Wartsila engines, propeller systems, scrubbers, navigation systems, electrical and automation system from Wartsila, CCTVs and so on.

It also has been included in our service portfolio, so it’s an extremely good package of Wartsila product, and as a good example of the broad portfolio and our services competencies going forward. Vessel contracting; the right number I think after six months is 241, which is historically extremely low and you have to go back many years to see so low numbers. Forecast for this year is also going to be low but here it’s important also to look at the vessels which have been contracted. So far, cruise liners, ferries, ro-ros, special vessels, which are, as you can see from the order intake development in marine solutions, important for Wartsila.

And here I have to say that we are happy to see how the development so far this year has been. It’s actually higher than last year, and a lot of cruise and ferry orders and some are other special segment orders. Offshore, very much down; only 4% in the review period. Joint venture activity very low, and that’s mainly because of almost no LNG carrier orders for our Korean joint venture factory, but there is good activity again in our newest joint venture in China where they are building engines for big merchant vessel for the auxiliary use.

And a highlight in second quarter was a complete electrical and automation order for a ro-ro ferry from the last year acquired MSI entity and where we can see definitely Wartsila’s position being extremely good in electrical and automation system packages. So far, strong position in marine engine market, main engines, and that’s because of the cruise line orders, but also, good stable development in auxiliary engines side.

And then moving on to services. Net sales development stable, and it’s at the good level. And if you look at six months’ development, actually there was a small increase, and bearing in mind and it has a negative ForEx rate impact, so taking that into account, we actually saw 3% higher increase. Sales distribution similar; a little bit less agreements here, as you see here in this picture. But moving on to the next one, you can see that the development of the installed base and where we have then agreements is going to the right direction. I think it’s a historically high number today, which is good going, of course, going forward.

We also announced two acquisitions. The one, American Hydro, which is supporting our expansion in renewables and in services business, was actually concluded at the last day of June. And the other one, acquisition of Eniram, a Finnish marine digital company which was concluded July 1. Eniram is a key step for Wartsila going even further in the digital development where we can now strengthen our competence in data analytics, modeling and performance optimization.

Some numbers about – comments about the financials. Cash flow improved very well in the second quarter and it should be improving also going forward. We still have quite high inventories which is, of course, now also helping us to deliver the whole year. And gearing, 0.25, same as last year.

Looking at the markets. In energy, there is activity at the moment; we have a good quotation level and a good pipeline going forward. There are definitely certain megatrends; one is investments also in renewables, and solar means a lot for us going forward. But also, these distributed flexible and gas-fired power plants continue going forward. Marine; a challenging market still, as you saw from the vessel ordering and there is an over-capacity.

And definitely, when you look at the merchant segment, it doesn’t look good. Oil price is still low, so we need to wait for offshore ordering. But so far, the cruise and ferry has been developing in the right direction and helping us also in our order intake numbers. Services market look is positive. There is a pipeline going forward, and I think this is the moment also to comment on when the orders have been a little bit less than last year.

The pipeline is really supporting that to change, and there is a healthy interest in signing also long-term agreements. But at the same time, it’s good to remember that we have transactional businesses with our customers every day, so either the customer signs the long-term agreement or we deal with the customer every day, and the numbers still look very healthy look very healthy.

With these comments, we keep the prospects for 2016 unchanged. We expect the net sales to grow by 0% to 5%; and the profitability to be 12.5% to 13%.

Here it’s good to remember now, which I already mentioned again, that we need a couple of energy solutions orders. And those orders are from our existing inventory, so they will be delivered in quarter 4, and that’s important for us. It looks like we will sign them in coming months, and with those we will reach the guided numbers.

So thank you, and now we have time for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Please continue, sir.

Jaakko Eskola

Anybody from the audience? Or from the lines?

Operator

Thank you, sir. We do have questions from the telephone line. Would you like to take these questions now sir?

Jaakko Eskola

Yes please.

Operator

Thank you. Your first question comes from the line of Max Yates of Credit Suisse. Please ask your question.

Max Yates

Thank you. Just three questions from me. Just firstly on the guidance, I was just trying to understand what kind of magnitude of orders you would need to win in Q3 in order to hit this guidance? And given we’ve had half the year already done, what the sort of range of outcomes are if we do or don’t get those orders? Are we now talking about just meeting the bottom end of the guidance or having to cut it? Or is there a scenario where you win orders and actually you get well into the guidance and are actually closer to 13% margins? So just trying to understand the variability around that firstly.

Jaakko Eskola

First of all, as I said, we need a couple of new deals in energy solutions and, as I said, they are from our inventory, so they are fast-track projects. The volume of those, I’m not going to guide any more. But looking at – you can see from the numbers, they are similar size of orders we have lately been getting from different places. And then we will hit the guidance, whether it’s the lowest end or close to the lowest end, let us see going also forward.

Max Yates

Okay, thank you. And just the second question was on, you mentioned a tougher pricing environment in energy solutions. Could you just give us a little bit of idea of how pricing pressure is running in that business? So when we think about orders being delivered next year, what kind of impact that might have on profitability. I’ve seen in larger turbine markets, pricing pressure can be as much as 3% to 4% on new orders.

Jaakko Eskola

There has been a price pressure already, starting I think last year, and of course it has affected the numbers, as you saw from the first six months. But why don’t you ask also Javier Cavada, Head of our Energy Solutions, a little bit to come to talk about the market; how does it look like? Please.

Javier Cavada

Excellent. Indeed, market condition is under big pressure regarding pricing, but already from the last four quarters, already more than one year ago. And what I can say is that we are really working hard on bringing our value to our customers, and the customers globally are getting the benefit from Wartsila technology and we are being able to win projects still with good prices. But we cannot deny that the competition, and the slow decision-making process for investment is making the price conditions tougher and tougher. But as said, we are working hard on succeeding and confident forward to maintain good prices and maintain a healthy business, as we are doing.

Max Yates

Would you say prices on new orders are below where they were this time last year?

Javier Cavada

We are being able, as said, by bringing value, proposition, technology proposition not selling single equipment, or by selling a solution, we are being able to defend our prices and our margins. And in energy solutions, let’s say the low profitability in the business is coming from the low volumes especially, so not from the fact that we are succeeding and we are confident forward to win projects with good prices.

Max Yates

Okay, thank you. And just one final question for Jaakko. I just wanted to know, given the weak marine environments, how you were thinking about your cost base as we move into 2017? Obviously, you have the two existing programs, and those will be helping, taking out around €90 million of cost. Do you think there’s more that needs to be done given what we’re seeing in the shipyard contracting, or do you expect that to sort of contracting eventually to normalize and you’ll just see it through the current cost savings balance is sufficient?

Jaakko Eskola

So far, of course, I mean, those two plans, last year and this year, they were very much done because of what we saw the market developing, also beginning of the year, and they have definitely helped us. But I think today, when you look at the market situation and when the vessel ordering is so low, that you need to be even more flexible; you need to be agile. And then we need to look at how the market develops. Today, I would say that what we have done is enough but let’s see how the market develops. I mean, if it stays for long as low as it is, I’m sure that we need to do something else.

Max Yates

Okay, thank you very much.

Jaakko Eskola

Thank you.

Operator

Thank you. Your next question comes from the line of Ben Maslen of Morgan Stanley. Please ask your question.

Ben Maslen

Thank you. Yes, good morning. Firstly, on marine, can you just give an outlook for the second-half in terms of the level of orders you’d expect to win given contracting has been weaker and that affects you with a lag I guess? Can the strength in the cruise markets that we’ve seen over recent quarters keep offsetting the weakness that you see in other areas? How does your pipeline of cruise and ferry orders look for the second-half of this year? That’s the first question. Thank you.

Jaakko Eskola

If I start by – I mean, of course, we are not guiding the quarters on order intake going forward, and how much do we need, or how much we don’t need. But of course it looks challenging. But when it comes to the cruise, let me ask Roger Holm, the Head of Marine Solutions, to cover a little bit where we are with cruise and the market going forward.

Roger Holm

Yes, if I start from general markets, we saw in beginning of July, Clarkson took down their contracting estimates for more than €900 million, now they say €650 million to €850 million. What we see is we have difficulties to see contracting in the high end of this range. To add on to that the visibility is quite poor at the moment in the market. From cruise point of view, we believe the cruise market will stay active going forward, and we look positively on that segment going forward. So that is, as you have seen already in the figures, is supporting us going forward, as well.

Ben Maslen

Thank you. And then maybe on services, I think it was a negative surprise for us that that was weaker this quarter in terms of orders. I mean, what level of confidence do you have that we’ll see a re-acceleration of service orders as we go through the second-half? How confident are you that you’ll put enough in the order funnel to drive 5% organic growth which is the target? Thank you.

Jaakko Eskola

Yes, first of all, the organic growth is in our sales, and whether we get it through the transactional sales or through agreements, basically it’s the same thing. We are confident, and let me ask Pierpaolo Barbone, the Head of Services, also to confirm that one, please.

Pierpaolo Barbone

Four considerations from my side. The first one is that the pipeline is solid, and is solid also for contracts, and especially for contracts. The second consideration is also underlying what Jaakko was saying before. For contracts we have this quarter the highest percentage of installed base covered by long-term agreement ever. This fact is also due to two specific agreements that were signed late June, and are included in the agreement portfolio so in the megawatts that we were showing before in the slide, but they are not yet included in the order book and the order intake.

The last consideration is related to the type of contract. The type of contract is influencing the order book and the order intake, so a maintenance agreement is influencing. We accrue 24 months, as you know in our order book, but when the agreement is a long-term purpose agreement, for example, we accrue the orders as they come, one by one. So these are the main aspects related to the figures this quarter, but the pipeline is solid including for contracts.

Ben Maslen

Many thanks.

Operator

Thank you. And your next question comes from the line of Antti Suttelin of Danske Bank. Please ask your question.

Antti Suttelin

Yes, hello. Yes, on the services orders, and you may just have answered this, I heard the later part of your answer, but I wonder, if you consider the order intake what is missing from the order intake compared to a year ago? I mean, we are down something like 10% to date. What is the component missing when we compare to a year ago in services orders?

Jaakko Eskola

Pierpaolo, do you want to comment again?

Pierpaolo Barbone

Yes, the order intake is fluctuating, as you know, is according to the business situation. Our transactional business, we have visibility for three months; on a long-term agreement we have longer visibility. Mainly, the specific delta is related to some contracts.

Antti Suttelin

I recall that a year ago, especially in Q1, you had refurbishment orders. Is it these kinds of orders that didn’t recur this year?

Pierpaolo Barbone

Well for project or refurbishment, in terms of sales, we are better than expected. In terms of order intake, we believe that they will – that we have many, many, let’s say, businesses under development, and many agreements under negotiation, so it is just time – a timing issue.

Jaakko Eskola

Timing issue.

Antti Suttelin

Okay. But basically, it’s not because of your contractual business would have gone down, it’s just the transactional business like refurbishment is just temporarily down in…

Pierpaolo Barbone

Yes, if you consider transactional or refurbishment can be also linked to projects, so the amount is considered under project, but if it is more it can be considered transactional, but if it is a big reconditioning or a big refurbishment or a big conversion is under project. That today is higher compared to last year in sales and for the order intake it is seasonal.

Antti Suttelin

Okay. All right, that’s all from me at this time. Thank you.

Pierpaolo Barbone

Thank you.

Jaakko Eskola

Thank you, Antti.

Operator

Thank you. Your next question comes from the line of Glen Liddy with JPMorgan. Please ask your question.

Glen Liddy

Good morning. The service business, you flagged up a while ago that there were a couple of contracts that were canceled in Brazil because they were unprofitable, but I think you were in discussions with the customer about re-signing them on different contracts. Is that already completed and happened or is that ongoing?

Jaakko Eskola

No, they are not. Actually, we canceled finally four contracts in Brazil because they were not – they were loss making. We are dealing with the customer daily, so we changed the contract to be a transactional daily business, so I mean, the customer is still our customer and we are negotiating new agreements with them but they have not signed yet. We want to do something which is profitable with the customer, otherwise we deal with them transactionally.

Glen Liddy

Do you have any other loss making contracts that need to be addressed?

Jaakko Eskola

No.

Pierpaolo Barbone

No.

Glen Liddy

No. And the refurbishment business; if you’re booking orders there, if they’re sort of large orders, what sort of magnitude of order would that be?

Jaakko Eskola

From €10 million to €40 million.

Glen Liddy

€10 million to €40 million. And on L-3 MSI, can you give us an update in terms of how that’s being progressed in terms of integration and getting customers to buy forwarder packages from you now you’ve got the better offering?

Jaakko Eskola

It’s actually developing extremely well and it’s a well developing entity. It’s included now in our electrical and automation business line in marine solutions where we included the existing – the old functions we had in Norway. You can also see from the numbers it’s actually developing very well, and combining in the prevailing market where we have cruise and ferry where MSI was a very strong player, it has actually definitely helped us doing business. Of course, vessel orders are so low that you can’t see yet the whole – all the positive elements of MSI. But so far, it’s doing very well and integration is as planned.

Glen Liddy

The margin was very low when it was acquired. Has that moved up materially?

Jaakko Eskola

We are improving that step by step.

Glen Liddy

Okay. Thank you very much.

Jaakko Eskola

Thank you.

Operator

Thank you. And your next question comes from the line of Manu Rimpelae of Nordea. Please ask your question.

Manu Rimpelae

Okay, good morning. It’s Manu from Nordea. Firstly, you mentioned that you expect to book some orders in the power plant business and sell them from inventory. So can you just explain to me what this means? And does it mean that you already have the engines or the equipment already built and you just – you don’t have a buyer for it? Or how should we think about it?

Jaakko Eskola

Yes, the equipment is in our stock. So they will be fast-track projects. We don’t need to build them.

Manu Rimpelae

Is this something that’s – do you normally do this? Do you build equipment into the stock that you don’t have already contracted out to somebody or is that something…

Jaakko Eskola

No, that’s not – that’s not normal business and as we have commented earlier, that in our energy solutions we, unfortunately and now I would actually say fortunately, finally, but unfortunately earlier we build engines into the stock and now we can finally sell them.

Manu Rimpelae

Okay. And does this have an impact on the margins? I mean are you less – increasingly likely to just rather sell them at the lower margin instead of having them burdening there in the working capital?

Jaakko Eskola

It’s – I mean. As you see from the guidance, of course, we will deliver them and that will help on our margins also.

Manu Rimpelae

Okay. Secondly, on the guidance, so can you just help me understand? If I compare just the first-half margin that is running at about 10% on EBIT and compare that with the in-flight range of your lower end of the guidance, I mean I get the 15% margin that you expect for the second-half of the year. And I don’t think you’ve ever done that high of a margin in the second-half of the year. In a couple of Q4 you’ve been able to do it, so what’s going to change this year second-half of the year, compared to the history that’s going to make those margins so high?

Jaakko Eskola

First of all, as already mentioned, we have realignment plans going forward; the second one we started this year and that will definitely give us savings. And there will be savings both in – actually in every division but mainly, it has affected the marine solutions and energy solutions going forward. And this year is a specific because some of these transactions, as already mentioned, they are lowering the inventory. They are deliveries from the stock which is where – we don’t even have time to build them. We are – our factories are working in a good capacity going forward, and they deliver the normal engine orders. But these couple of highlighted transactions, they will make the change. Plus, of course, the saving programs we have in our plans.

Manu Rimpelae

So is it fair to say that you booked already the cost for those engines and the sales that you are going to be able to will be pure profit?

Jaakko Eskola

Yes.

Manu Rimpelae

Okay, that helps to explain it. Finally, on the marine side, what are you – if you look at the shipyard orders done and your order intake, so are you in the second quarter? What part of – or when were you taking on those orders in terms of shipyard orders? So were you still delivering the Q4 2015 – taking orders from the Q4 2015 shipyard orders, or are you already kind of seeing in your order in taking marine the fall we saw from January onwards?

Jaakko Eskola

If I understand right your questions, the lead time is actually shorter than we have normally said. So we are taking orders this year and some of them delivering I mean some of the orders are from the vessel orders of this year. And the low ordering of the vessels you have seen we already have orders from those lower levels.

Manu Rimpelae

If I rephrase myself badly that way – if I rephrase the question, so are you delivering – are you getting the orders in the second quarter already reflecting the weak state of this year’s shipyard orders? Or is that going to still get weaker in Q3?

Jaakko Eskola

Let’s see how the ordering develops. If it continues as we have seen with cruise and ferries and so on, it will stay at the same level, but if it doesn’t, then we need to come back with the numbers.

Manu Rimpelae

Okay. No further questions, thank you.

Jaakko Eskola

Thank you.

Operator

Thank you. Your next question comes from the line of Sean McLoughlin of HSBC. Please ask your question.

Sean McLoughlin

Thank you and good morning. On the power segment, can I just understand; are we talking about the El Salvador contract here?

Jaakko Eskola

No.

Sean McLoughlin

No. So this is a completely different contract?

Jaakko Eskola

That’s completely different, yes.

Sean McLoughlin

Contract, right. And the fact that you’ve built the engines already, I mean is this a project that has been delayed? And if so, what makes you confident that you will be able to book it in, in the coming quarters? Just looking for reassurance that this is not subject to further delay?

Jaakko Eskola

Whether it has been it’s – those projects we are now talking about are not projects which have been delayed, they are new projects. The engines we have in our stocks, those are for different reasons and I’m not going to open all the reasons, but unfortunately, we have a stock portfolio of – and a high inventory and we are now able to use it. It’s – actually, when you look at some of the energy markets, there is a need for fast-track projects, and any player who is in a position to deliver fast can actually get a beneficial treatment.

Sean McLoughlin

Thank you. And just – if I think back to Q1, you’d said that you prefer to stand back from some orders rather than to chase low margin projects and that you’d lost market share. I see your quotation activity has come up quite significantly quarter-on-quarter. Is there any change in strategy on your side?

Jaakko Eskola

No, I don’t think we have changed any strategy. We have been able to improve the margin levels as Javier Cavada told that. We are able to actually bring value to the customer and keep the margins, and that has been mainly the reason why the development is so good at the moment.

Sean McLoughlin

Thank you.

Jaakko Eskola

Thank you.

Operator

Thank you. Your next question comes from the line of Andreas Koski of Deutsche Bank. Please ask your question.

Andreas Koski

Thank you and good morning. Most of my questions have been answered, but I just want to clarify one thing about the margin decline we have seen year-over-year during the first half. Is that only related to energy solutions or are you also seeing lower margins in service?

Jaakko Eskola

No, not in service, but I would say that a little bit lower in marine solutions. I mean the market, as you see from the low vessel ordering, it has also affected a bit in that market but mainly, it’s coming from the energy solutions.

Andreas Koski

Great. Thank you very much.

Jaakko Eskola

Thank you.

Operator

Thank you. Your next question comes from the line of Michael Kaloghiros of Bank of America Merrill Lynch. Please ask your question.

Michael Kaloghiros

Yes, good morning. A question first on marine solutions. If I look at the LNG, LPG orders, they are clearly down quite a bit in the first-half. I think, if I look at your market comments you say it’s a bit of a more challenged market. If we don’t see a material pickup in that market, how should we think for 2017? Because if I look in the last year you were – I mean for the past couple of years, you were probably at around €600 million orders for the year, you are probably delivering sales in the region of €450 million to €500 million and that could go down to maybe a couple of €100 next year. So I’m just wondering what are your view on these markets and what you are ready to do maybe to offset some of this pressure?

Jaakko Eskola

Yes, we are also worried about the LNG and LPG market but there are other gas-related businesses also moving. And let me ask Roger again, if you could tell a little bit about more the gas market?

Roger Holm

Yes, we have seen nine gas carrier orders so far year-to-date, so slow, and we believe that short-term it will continue slow on the gas carriers. Still we see activities in certain pockets, especially in the receiving end, so if we talk about FSRUs for example, there are good activities on that end. So when we look at the total gas side, there are still positive activities going on. Still back on the gas carriers, more activities we see at the moment on the smaller side of the LNG carriers, but as said, short-term we believe it will be quite slow.

Michael Kaloghiros

Okay. Just to get back on cruise, just based on the indication that the builders are telling you, I mean what’s the kind of rate increase, what kind of a growth we are – we should be expecting in the coming couple of years in the cruise segment in terms of deliveries not order intake?

Roger Holm

This is a tricky question because if you order a cruise vessel today you will have very long delivery time, but at the same time we also see activities on growing the capacity in cruise building, both in Germany and in China, and it will depend quite a lot on how fast those activities will ramp up. So as we said before, we believe the activities will continue strong and we see that more capacity is coming into the market to build cruise ships.

Jaakko Eskola

And the cruise industry is growing a little bit less than 10% – 8%. So it’s growing quite well and that definitely means that they need more vessels, and China is the next question mark, actually, in the market. They have promised that they will start building next year.

Roger Holm

Next year, first one.

Jaakko Eskola

First ones and that will definitely also bring new players in the market.

Michael Kaloghiros

Got it. Thank you. Just turning to energy solutions, I just wanted to come back to your comments regarding the orders you need to book in the third quarter in order to make the guidance. I think a few months ago we were supposed to get those orders in Q3 – in Q2 sorry. Now you’re expecting those in Q3 to maintain the guidance. I mean – are you about to finalize these orders? What is driving your confidence in the guidance in getting those orders?

Jaakko Eskola

I mean that the transactions are there, the deals are there, the customer is there. We are finalizing the contracts and whether it was in June, July, August, now, I mean those are the months now we are dealing with. So we are confident that we will get the deals. And if we don’t, I mean then of course we have a different situation.

Michael Kaloghiros

Okay. And just last then to come back to those questions on inventories and deliveries, I mean cash flow in Q2 was very strong; I mean it hasn’t been the case for a number of quarters before. If I look at the different moving parts in your balance sheet, I mean for me, inventories have done okay in the first half of the year, and probably especially in Q2 I guess. I mean have you already delivered equipment to some clients from your inventories in Q2? And just looking at the volumes in the energy division in the quarter, I mean are you seeing maybe other clients delaying deliveries at the moment for which you’re probably more prepared than you were in the previous quarters?

Jaakko Eskola

We haven’t seen any customers delaying orders at the moment. We have seen good developments on our customer payments. So I mean that has helped in the cash flow situation. And inventory level is going also down; at the same time we are building some engines in both marine and energy solutions if you look at the inventory numbers. So it’s growing because we need to deliver a lot of equipment out this year. But it’s definitely – we have been pushing and paying a lot of attention to the cash flow situation and the working capital and now we are seeing the results.

Michael Kaloghiros

Definitely you’ve done very well. Just a final question; I guess this situation is not brand new. You’ve had in the past situations where you have to transfer the delivery from one customer to the other. I mean when you talk to your customers and tell them we’ve got these engines on hand and are you happy to take this? I mean what’s the normal discussion? Are they asking for maybe a bigger discount or because it’s the same engine and it will be the same usage of the equipment, they don’t mind? What’s – how do you do commercially with your clients…

Jaakko Eskola

We shouldn’t talk too much about our strategy and our way of dealing with our customers, but we are doing well, both in marine and in energy now what comes to these situations where the market is moving and the volatilities there. So, I mean there are ways to handle the transactions.

Michael Kaloghiros

Understood. Thanks very much

Jaakko Eskola

Thank you.

Operator

Thank you. Your next question comes from the line of Pia Rosqvist of SEB. Please ask your question.

Tomi Railo

Hi, good morning. This is Tomi from SEB. Still on the needed bulk orders, I also think that in the second quarter, you mentioned that you need those towards the end of June in order to deliver those towards the end of the year. Again, repeating one earlier question, has there been a delay? And second question would be that, will we see the announcement? Will you announce something in early part of third quarter or during the third quarter so that we can see that if you really booked the order and you would be able to meet the guidance?

Jaakko Eskola

I’m really sorry if we have given or indicated that we needed them in June. I hope we have said all the time that we needed fast-track projects and those fast-track projects are there. They will be signed. Announcing a project and a transaction is totally dependent on the customer we see, and whether the customer accepts this and so on. Let’s come back to that one when we have finally signed the deals and if and when we can actually announce that.

Tomi Railo

Then can you give any divisional revenue guidance? What sort of the level of service growth, for example, for 2016? You have been mentioning earlier sort of a targeted 5% level. Would you think that you would be able to meet that growth level? And if you still assume, or if you assume that your marine business is growing or being flat or down this year.

Jaakko Eskola

We have told that our services business will grow at least 5%; that’s the comment we have been giving on the cycle and we are confident that it will grow. We haven’t told anything about marine solutions business so far, and let’s see where we end up this year. Of course, looking at the numbers today, they are performing well, but the market is extremely challenging. So let’s see where we end up at the end of the year. The order book is still good.

Tomi Railo

Then, apologies, if you have been overly commenting this, but did you give a number for cost savings, what you aim to achieve in the second half of 2016?

Jaakko Eskola

€65 million was now for the second half, yes. Marco Wiren, why don’t you tell about the whole program so we have the different numbers?

Marco Wiren

Yes. Our target is to get savings until the end of this year an amount of €65 million, including the €17 million we gained the first half year of this year and the €7 million that we gained last year already. The cost that we booked so far this year is €27 million, including €17 million which is write-offs, non-cash costs. And during the second half we estimate that we will get additional €20 million cost. So in total this year about €47 million.

Jaakko Eskola

And also some savings next year.

Marco Wiren

Next year as well.

Jaakko Eskola

€25 million

Marco Wiren

Yes. See, because the total savings amount is €90 million, so from the start of program until the end of this year, we will gain about €65 million and then we have additional next year.

Operator

Thank you. Your next question comes from the line of Sven Weier of UBS. Please ask your question.

Sven Weier

Yes, good morning. Three questions from my side. The first one is on emissions; if you could give us an update on your situation in Trieste, how that was proceeding? The second one is also on emissions. You mentioned in the market outlook the potential implementation of new emission regulations with regards to ferries. Are you referring there to the new sulfur rules potentially from 2018, or what exactly do you mean there? And the last question is the contract cancellations that you’ve mentioned on service. Did you actually book that as a negative order intake in Q2 and that’s why also the order intake was down? Or some color on that. Thank you.

Jaakko Eskola

Let me start by the fuel test case in Trieste. So far, we have, of course, been contacting our customers, all the related customers, and also informed everybody else who has been involved or has been interest of the case. And we are dealing customer by customer what has happened and how to go forward. So it’s proceeding as we expected; minimal effect to that Wartsila so far. And of course, as we announced earlier, we have checked all our facilities and also have hired a third-party company to check the procedures going forward. So that’s moving as planned.

Emission regulations; now I don’t exactly know what might be there but it must be the CO2 regulation – SOx regulation in a global forum which basically will be decided 2018. It might be that they decided earlier and whether it’s going to be global 2020 or 2025. But then of course already this year there was NOx regulation and there will be definitely some discussions going forward with the CO2 regulation which is again goes back to the efficiency of the ship.

Sven Weier

You mentioned that rather as a structural driver, not that you see really concrete enquiries for that yet.

Jaakko Eskola

No. I mean there is no concrete on SOx regulations which then basically means whether you need to order a scrubber or you need to go for LNG; we haven’t seen anything there yet. But it will come later on depending on the timing.

Sven Weier

Have you seen some more activity on scrubbers as well? Because Alfa Laval was mentioning some more activity the other day.

Jaakko Eskola

We have actually seen quite low activity in the scrubber market and it’s so far based again, I mean there is a lot of cruise ships and ferry orders and many of those have, I mean cruise lines have not gone to LNG though, so they order scrubbers. Some of the ferries have gone to LNG so they don’t need a scrubber. But it has been quite limited, scrubber orders so far. Many of our customers are waiting for the global regulation, but of course, if you are in a SECA area, you need to buy scrubber or go for LNG.

And environmental side, I think it’s good to mention that ballast water management convention has not yet been finalized. I mean the understanding we have is that the countries are there, the number of the fleet is 35.0 or 34.9; which one is the right one will finally depend I mean define it, and let’s see when IMO comes out later this month.

And the last one, last question was, sorry, Sven, what was it?

Sven Weier

I think that was mentioned that you had those contract cancellations in Brazil.

Jaakko Eskola

No, I mean we actually cancelled the contracts with services but we are dealing with the customer every day, so its…

Pierpaolo Barbone

These contracts are dynamic. Let say we – as soon as we need to have profitable growth so as soon as the growth or profitability is limited or we can be more efficient in terms of bottom line, then we act immediately. That’s the point.

Sven Weier

It was more of a technical question. I mean was that a contract you had in the backlog and that’s why taking it out had a negative order book…

Jaakko Eskola

No, no, no, it was not, no.

Sven Weier

Okay, okay, clear. Thank you.

Jaakko Eskola

Thank you.

Operator

Thank you. And your last question comes from the line of Austin Earl of Marshall Wace. Please ask your question.

Austin Earl

Hi, good morning, everyone. I just had a few questions. First of all, can I just clarify on the accounting on the restructuring charge? If I’ve understood correctly from the note, what its saying is there’s €26 million charge but €17 million of that €26 million appears under the depreciation line. Is that correct?

Jaakko Eskola

Marco Wiren, our CFO can explain a little bit more about that, please.

Marco Wiren

Yes. We have booked that in our P&L in non-comparable costs. So if you look at the comparable EBIT, it’s not included there, that €17 million. It’s write-offs of different kind of things…

Austin Earl

Sure. I’m just trying to understand, the €26 million obviously appears within the expenses of the profit and loss account, but I’m just wondering the allocation that – is it that some of it is within depreciation and some of it is in just the other expenses?

Marco Wiren

Yes, most of that is in depreciations. That’s correct.

Austin Earl

Okay, understood, great. The second question was just, if I could clarify, there was a comment saying that adjusted for currency, that services sales grew 3%. But was that in the second quarter or the first half?

Pierpaolo Barbone

The sales increase in absolute term now is 1%. If we would sterilize the FX factor, let’s say, in the first-half of the year, it would be 4%, so one plus three, four.

Austin Earl

Okay. So 4% excluding currency in the first-half?

Pierpaolo Barbone

Yes, yes.

Austin Earl

Okay, that’s a half number. And then I just want to understand, on the – within energy, the building for inventory of engines is, when did you make that decision to actually start building? Because I find just to correct you saying this was a relatively new policy. Is that in the last 12 months or 18 months or so that you’ve decided to do this?

Jaakko Eskola

First of all it has not been a policy. I think it has been more what has been happening there. So we haven’t changed our policies anywhere except that today we are very much following our inventory and working capital. So we don’t build engines in stock any more. But it has happened and that’s history.

Austin Earl

But just I don’t know, I mean was this something where you had an order and then it was cancelled and so you’d had it inventory, now you can deliver it very quickly to a client if there is an order?

Jaakko Eskola

Yes. Different reasons or building inventory and finally the customer disappeared.

Austin Earl

Okay, so it was just, let’s say in inverted commas, an accident as such, but now what you’re saying is you hope that you can then fast-track and you hope that that’ll be able to be fast-tracked in the second half of this year?

Jaakko Eskola

Yes, yes, correct, exactly.

Austin Earl

Okay. And you were saying this is two engines or I didn’t quite understand the volume that your value.

Jaakko Eskola

No. It’s a lot of engines.

Austin Earl

Okay. And the fact that they can fast-track is just because what, there’s a lot of bidding that’s potential in terms of fast-track that gives you the confidence or has that already been signed?

Jaakko Eskola

We are very well with the negotiations with the customer and so that’s why we are confident that the deals will be there. And we have the engines which, in this case is beneficial to us.

Austin Earl

Okay. Got you. That’s great. Thank you very much for your help.

Jaakko Eskola

Thank you.

Operator

Thank you. There are no further questions, sir.

Jaakko Eskola

And any further questions from the audience? No? All right. Then thank you for attending the result presentation and let’s see you then in three months. Thank you. Bye-bye.