We hosted an investor call with our CEO Håkan Agnevall on February 27. In the call, Håkan discussed our announcement on 14 February, 2023 regarding the now-completed Voyage strategy review and plan to move Marine Electrical Systems, a business unit of Marine Systems, to Portfolio Business. The aim of these CEO calls is to offer an opportunity to discuss Wärtsilä’s strategy with the CEO. No new unpublished information is disclosed during the calls.
The recording of the call is available here and the presentation slides here.
Strategic review of Voyage and other Wärtsilä businesses completed
Håkan started the call by presenting recent development of Voyage strategy review. Last October, we announced that the Voyage business will be integrated to Marine Power as a new business unit with the aim to strengthen Wärtsilä’s lifecycle offering and to accelerate the turnaround. Starting from 1 January 2023, Voyage became part of Marine Power and its financial figures were consolidated in Marine Power financials. The Voyage strategy review is now completed, and the offering will be streamlined focusing on fleet and port optimisation and related simulation and training services. The other parts of Voyage, NACOS Navigation, NACOS Automation, Dynamic Positioning and sensors will be merged into a new business unit and moved to Wärtsilä Portfolio Business. Portfolio Business consists of business units which are run independently with the aim of accelerating performance improvement and unlocking value through divestments or other strategic alternatives.
In addition to the strategy review of Voyage, we have continued to review the strategic fit of other business units in Wärtsilä. Due to limited strategic fit with the rest of the group, we decided that Marine Electrical Systems, currently part of Marine Systems business, will be moved to Portfolio Business. Marine Electrical Systems does electrical integrations and has a fairly unique customer base.
Strategy progressing
Looking into our overall strategy, it is exciting to see the decarbonisation related discussions with our customers materialising to orders. We received our first methanol orders and we are working on our ammonia pilot projects. On the energy side, we also have hydrogen pilots ongoing. In marine, retrofits and upgrades have good potential, as well as hybrid systems where engines and batteries are combined. We are market leader in hybrid systems with around 25% market share, and we see that market growing significantly. We are also continuing our service journey on the 2-stroke side, where we are developing a new service concept based on renewable fuels and fuel efficiency.
In Energy, the demand for balancing power is growing and 42% of our Energy power plant order intake in 2022 was related to balancing power. We define engines that run less than 3,000 hours a year as balancing power. Growth in renewables is the underlying growth driver for balancing power, and the share of renewables is now growing rapidly especially in the USA. Energy storage also continues to grow. We disclosed the comparable operating result margin of energy storage for the first time in the financial statements bulletin, and it was -4% in 2022. Also Energy services is developing well, including Decarbonisation Services business model which was launched in 2022.
In terms of headwinds, we still have cost inflation in our existing order backlog, which continues to be a negative driver for the margin. However, the share of orders taken before the cost inflation accelerated is clearly lower. Voyage has also been a headwind, which is why we implemented the changes mentioned earlier.
Alfa Laval has talked about seeing a significant uplift in their content per ship. Are you seeing the same?
No, I would not say so. We see good price realisation in our new technology though.
How are you progressing in the energy storage business?
Our ambition is to turn the business around over a few years. The drivers to do this are scaling the business and leveraging our power system optimisation capabilities. We are on a positive trajectory.
How should we think about your presence in energy storage in the US?
US is our core market in energy storage and we have dedicated teams both in the East coast and the West coast. US is also clearly the fastest growing market. Other interesting market for us is Australia and also couple of markets in Europe. Customers value our track record and ability to deliver on time.
Could you explain how your Decarbonisation Services business model works?
This is a new model we launched in 2022. We interact with our industrial customers and look at their operating profile and energy mix and how those could be optimised and decarbonised. It works in the same way as our performance-based service agreements where we share the upsides and downsides with our customers. If we can guarantee a certain amount of savings for the customer, we can then also tap into a portion of those savings.
Are there many potential buyers for NACOS?
So far we have been contacted by quite many buyers, both strategic and other type of buyers. There is a strong initial interest in the market.
Is there a difference in the profitability of the different parts of Voyage, is the part you are moving to Portfolio Business more loss-making?
The speed of the turnaround has not been the main driver for making the changes. I would still say that the turnaround will happen in a couple of years. The primary driver has been the strategic fit with our Performance Services business. The part that is integrated to Marine Power is more software based, so the gross margin is higher than in hardware based business, but there is also more R&D costs.
Are you looking for new acquisition possibilities?
We are considering acquisitions, maybe not large ones like Hamworthy but ones such as PortLink where we acquire critical competence from smaller companies.
There is a large focus for local content in the US Inflation Reduction Act, can you meet the requirements?
This is a very central topic. US was a hot market for energy storage and thermal balancing power already before the IRA was put in place and now it is becoming even hotter. However, we have not seen any concrete results of the IRA yet. To be competitive in the US market going forward, you need to have sourcing of battery cells that have been manufactured in the US. We are not planning to start producing battery cells, so we are working with our supply partners on how to build up the US footprint. But it will take some time to get there.
How would you describe your competitive position with respect to your competitors such as Tesla and Fluence?
We focus on delivering our commitments on time with the right quality and safety. The market is broad with many customer segments that have different attributes. Some customers focus only on CapEx and some on track record. Our capability and experience in integrating different assets is well appreciated to guarantee best performance, lowest energy cost, and uptime reliability.
