We hosted a strategy call with our CEO Håkan Agnevall on February 29. The CEO strategy calls aim to offer an opportunity to discuss Wärtsilä’s strategy with the CEO. No material new information was disclosed during the call.
The recording of the call is available here.
Håkan started the call by presenting an overview of Wärtsilä’s strategy by re-emphasising the messages and offering proof points on the implementation. Wärtsilä’s strategy is about shaping the decarbonisation of the Marine and Energy industries based on two themes: Transform and Perform. Wärtsilä wants to play a part in transforming and decarbonising the industry and contributing to customers’ transformation journeys. The strategic themes are underlining the path to reaching the financial targets and operational improvements.
The decarbonisation in Marine is progressing constantly. The IMO (International Maritime Organisation) regulations and targets which were further strengthened in 2023, are increasing the need for actions in the industry. That is also noted in the dialogue with our customers, where the focus is strongly on decarbonising the fleets. Strategic performance is supported by steadily growing newbuild activity in Wärtsilä’s key segments: cruise, ferry, and offshore. Wärtsilä’s leadership in decarbonisation is evident from recent technological developments, such as the launching of the first ammonia engine in late 2023.
“We are the technology leader in new fuels and hybrid solutions, and we think that we will be the leader in carbon capture for marine applications. Our engines are already ready for carbon-neutral fuels”, states Håkan.
In the Energy industry, decarbonisation also plays a central role. Order intake was strong in the second half of the year 2023. In thermal balancing, the United States is currently the “hot market” as the share of renewable energy sources is growing at a fast pace. Wärtsilä is still a clear market leader in engine power plants, despite strong competition in the markets. Our balancing technology is market leading in terms of flexibility and the capability to ramp up and down quickly. In the energy storage business, Wärtsilä’s solutions are proving their quality compared to competitors.
The first hydrogen pilots for Wärtsilä engines have now been made, and the first 25% volumetric hydrogen blend to the existing technology was successful last year. Wärtsilä’s vision is to have a 100% hydrogen concept ready by 2025, and the continuous work towards that is progressing steadily.
Wärtsilä is also constantly moving up the service value ladder, both in Marine and Energy. We are leveraging AI and digital toolbox to increase the capabilities to serve and support the customers. R&D spending is a strategically key area in the journey for technology leadership within the core technologies. Last year Wärtsilä increased the R&D spending target, from an annual ~3% to an annual ~4% of the net sales. Wärtsilä wants to have a broad product offering, where customers can develop existing product portfolios also within the decarbonisation targets. Large technology synergies between Energy and Marine support the aim and strategy. Moving up the service value ladder also means moving transactional customers into their first agreements, and agreement customers towards the more advanced agreements. The renewal rate of our service contracts is about 90%, both in Marine and Energy.
Wärtsilä’s financial performance has improved significantly, driven, for example, by having improved the margin of the newbuild order backlog and turned the energy storage business profitable, among others. Activity in the Marine market is accelerating. For example, in the ferry segment, the clear need for the new fleet is visible, not only because the average age of the ferry fleet is around 29 years, but also because of the sustainability aspects and regulations. Customers must anticipate the future.
In Energy, the orders are shifting from EPC to the EEQ (i.e. from turnkey projects to equipment deliveries). At the end of 2023, 80% of the order backlog was EEQ, compared to a couple of years ago when the backlog was 40%. The potential business opportunities for Energy markets are in South America, where auctions are taking place, and in the US, where the need for balancing power is strong. The energy storage business has a strong demand environment, especially in the strategic geographical regions where Wärtsilä focuses.
Q&A
What is the situation with yard capacity limitations currently?
When talking about the yard capacity, different segments are moving in different directions. Certainly, in the LNG segment, which is an active market, a shortage of yard capacity has been visible both in South Korea and China. In the container vessel segment, the yard capacity is improving due to the new build market decreasing. On the cruise segment, the capacity is not heavily loaded, but to maintain the yard capacity in the future, actions have to be taken soon.
Regarding the carbon capture markets, where you mentioned seeing a ten-billion-euro opportunity. What would be the main hurdles in that market in terms of getting to that ten billion, technology adaptation or infrastructure?
We have a strong certainty of the technology. It has been tested on land and currently aiming at sea. Even though risks are always present, there is no major hurdle there. The hurdle would be more in the whole ecosystem that needs to evolve, to enable the most efficient possibilities to capture the carbon, store it on the vessel, and bring it to the shore. A lot is happening in the ecosystem.
Can you elaborate on the reasons behind a shift from two-stroke engines to four-stroke engines in the LNG market, and are there potential other areas for similar shifts?
Hybrid electric systems, which combine batteries with combustion engines, are taking market share from two-stroke engines in the LNG industry. This is because vessels are often designed to run at speeds that are not the most efficient for two-stroke engines. Hybrid electric systems allow engines to always run at the most efficient point, resulting in fuel savings of 8-10%. In addition to fuel savings, hybrid electric systems also offer other benefits such as requiring less space on LNG carriers. While the comeback of four-stroke engines is still in the making, there are potential applications in smaller container vessels.
For the next five years, are you most excited about the retrofit opportunity, addressing the existing fleet, or the strong demand for contracting growth on your core segments?
The excitement should not be one or another. There are two growth generators for Wärtsilä; growth in our core segments, and then the decarbonisation transformation, which gives us opportunities to build on the service business.
What have you recently seen on development of the future fuels and having them available in ten years?
The availability of alternative fuels is a critical question for the shipping industry. Despite the current lack of availability, many are investing in alternative fuels due to the long lifetime of their vessels. Methanol is one such alternative fuel that is in high demand. Fuel flexibility and efficiency are key components for the future of the industry, as new fuels will be more expensive. The availability of these fuels will be a major bottleneck for the green transition in the marine sector. However, as an equipment provider, the lack of availability does not hold the company back, as we prioritize building flexibility into our assets.
Some years ago, the estimates stated that when the share of renewables in electricity production exceeds 20% in particular areas, demand for balancing accelerates. Do you think the estimates are accurate?
Using a fixed percentage to represent the need for balancing power in power systems is too simplistic. Different regions have different power system characteristics and stability, so a one-size-fits-all approach does not work. However, the need for balancing power will increase with the growth of renewable energy. As an example, Texas, where 40% of energy generation capacity comes from renewables. In conclusion, the percentage rate for balancing power should be flexible and dependent on the specific characteristics of each region.
