Message to the shareholders
2011 was a year of change, both external and internal. In the beginning of the year, Mr Ole Johansson announced his retirement and I was appointed the new CEO as of 1 September 2011. The first indications of financial problems within the EU and US markets appeared during the summer. These problems have since escalated, eventually affecting GDP development globally. In July, we had to inform the markets that our guidance to grow sales in 2011 would not be achieved.
Despite these tough market conditions, we have performed well. I am especially pleased with the continued strength of our order intake, which grew by 13%, and also with the resilience shown in reaching our profitability targets with lower sales. This is a result of good order mix, successful execution and keeping our costs under control. After a very strong fourth quarter, we managed to reach 11.1% profitability and fulfill our order intake target. Wärtsilä’s net sales for January-December 2011 totalled EUR 4,209 million, a decrease of 7.6% from the previous year. Unfortunately, this decrease in sales was slightly in excess of the estimated 0-5%.
The power plant markets remained active throughout the year with order intake at a good level. Only the first quarter order intake was below expectations, which also had an impact on the net sales development towards the year end. Market activity was strongest in the emerging markets’ flexible baseload and industrial self-generation segments. In the marine markets, overcapacity in the merchant segment continued. However, active ordering in the more specialised types of vessels, such as offshore applications, LNG carriers and cruise ships, resulted in a significant increase in order intake, both for Wärtsilä Ship Power and for our Korean joint venture company. In the beginning of the year 2011, the services markets appeared to be picking up, but the uncertainty in the global economy began to have an impact during the summer, especially in Europe. By contrast, the Middle East, Asia, and the Americas continued to be active. The development was strongest in the power plant services and offshore services markets.
Our business strategies were reviewed during autumn 2011. This process has served to direct our activities over the coming years, and we now have a well-anchored plan for reaching our growth and profit targets.
The power generation markets are undergoing important changes, all of which increase the need for flexible and efficient gas based power generation. Wärtsilä, with its Smart Power Generation concept, is in a unique position to grow in these changing markets. We will seek growth in the large gas based utility business, and we also believe that we can influence the dialogue regarding tariff systems that could facilitate investments by utilities in back-up power. These efforts will be stepped up and co-ordinated by a new Corporate Relations function within group management.
In the marine markets, new environmental regulations regarding both emissions and ballast water are being implemented in the near future, presenting challenges for our customers. The regulations will drive demand for gas as a marine fuel, as well as for various environmental solutions, including scrubbers. The development of environmental solutions and gas technology will be a priority for Wärtsilä in order to be able to serve the changing needs of our customers. We intend to make sure that we have the best gas engine technology, as well as the right competence and solutions for the safe and efficient handling of gas on board vessels. We also continue to develop our 2-stroke dual-fuel engines capable of running on low pressure gas.
Environmental regulations represent a business opportunity for both Ship Power and Services, and we will be making sure that we secure as large a share of these markets as possible. To strengthen our position in the offshore, the marine gas applications as well as the environmental solutions markets, we decided to acquire Hamworthy, a British company that has a strong product offering and position in these markets. I am delighted that the acquisition was finalised on 31 January 2012, and I welcome the management and employees of Hamworthy to Wärtsilä.
In 2011, all the hard work that was put into setting up joint ventures in China and South Korea began to pay off. The order intake in these companies was more than 30% of Wärtsilä Ship Power’s total order intake, and we have decided to continue to strengthen our position in Asia. Also in 2011, we made the decision to start producing our 32 engine in China by establishing a joint venture for this purpose in Nantong.
Almost 40% of our net sales in 2011 came from Asia. It is important that Wärtsilä has a strong position in this part of the world where there are significant growth opportunities. However, competition is getting tougher in Asia, and we must make every effort to ensure that we remain cost competitive and that we retain our technical leadership. For this reason, we are also strengthening our technical resources in this part of the world, intensifying the search for good quality suppliers and continuing to seek lower product costs.
Wärtsilä’s Services business is unique, representing more than 40% of our group’s net sales with a network covering more or less the whole globe. This global network, and our skilled personnel, will help us in our strategy to become the market leader in our industry for environmental solutions. The Services business is crucial, not only for our equipment sales, but also for providing the resilience to withstand downturns. This business is a good platform on which to build and improve profitability.
To make our strategy successful, we must continue to secure the right competence and motivation among our people. In order to put more emphasis on our people strategy, Wärtsilä’s Director of Human Resources was appointed a Group Vice President and part of the Board of Management as of 1 January 2012. We believe in a diversified management that represents employees of different nationalities and genders, and we are committed to equal opportunities within Wärtsilä.
Environmentally sound solutions are our key contribution to sustainable development. This work is supplemented by conducting our operations in a responsible way. In this context, we are committed to supporting the UN Global Compact and its ten principles with respect to human rights, labour, the environment, and anti-corruption.
Looking ahead, the pipeline of potential orders for Power Plants is promising and the power generation market is expected to remain at a good level in 2012. In the marine market, the contracting mix is expected to be in line with that seen in 2011, favouring contracting for offshore and other more specialised segments. There are no major changes in the service market outlook. The acquisition of Hamworthy will provide important synergies. It will increase our earnings in 2012; however, it will have a slightly negative impact on our profitability for the year. Taking into account the Hamworthy acquisition, we expect our net sales for 2012 to grow by 5-10% and our operational profitability to be 10-11%.
Overall, I am very excited and optimistic about Wärtsilä and the opportunities that exist to further grow and improve profitability, even if this means hard work in tough market conditions. By focusing on our three growth areas of gas, environmental services and Smart Power Generation, we will have a good chance of success. The Hamworthy acquisition is also important in reaching our ambitious targets.
I would like to thank our shareholders for their interest in our company, our customers for trusting us with their business, and the entire Wärtsilä organisation for doing a great job and keeping up the spirit.
President & CEO