We hosted a strategy call with our CEO Håkan Agnevall on June 6. 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. Decarbonisation is at the heart of our strategy, and the decarbonisation journey continues to play out in both of our segments providing us a structural growth opportunity.
Creating customer value through continuous improvement
One of the key themes in Wärtsilä is continuous improvement. We want to focus on what creates the greatest customer value and makes our customers successful. Our service business is an excellent example of the customer value creation: by continuously emphasising innovation and new sustainable technologies, we can help our customers improve their environmental and economic performance.
Over the past years, we have seen constant development in Artificial Intelligence, which has allowed us to enhance our value-add to customers. Wärtsilä uses AI to analyse real-time data to monitor the performance of engine systems. With AI, Wärtsilä can recognise deviations and anomalies very early on, generating actionable insights for customers. We combine the insights from the data with our four Marine and seven Energy Expertise Centres globally, where our experts are available round-the-clock to support the customers. This further increases the attractiveness of our agreements, supporting us on our journey of climbing up the service value ladder and reaching the 12% operating margin target. Services already account for ~50% of net sales, and we see additional growth opportunities. Around 30% of our installed base is under service agreement coverage, and we are very proud that the customer renewal rate for our service agreements is around 90%.
Decarbonisation is transforming the Marine industry
The decarbonisation in Marine is progressing constantly. During the past weeks, we have hosted Marine-themed events open to all investors. Firstly, we hosted a Marine theme call with the President of Marine, Roger Holm, highlighting Wärtsilä’s technology leadership, the recovery in Wärtsilä’s key segments, as well as the successful strategy of climbing up the service value ladder powering Wärtsilä’s growth in Marine in the coming years. Secondly, we hosted a site visit to our state-of-the-art manufacturing facility, Sustainable Technology Hub (STH), in Vaasa, Finland, where we took a deeper dive into future fuels and how combustion engines will power the green transition.
The industry’s net-zero targets will require a fundamental shift towards sustainable fuels, and multi-fuel internal combustion engines provide the most flexible pathway. Wärtsilä’s engines have built-in upgradability to future fuels, with significant part commonality between different fuel versions and a modular design. Retrofits will also play a significant role in decarbonising the industry. 53% of the current fleet is not CII (Carbon Intensity Indicator) compliant in 2024, and this figure will rise to 79% by 2028 if no action is taken. Wärtsilä offers a broad range of retrofit solutions for shipowners, including propulsion efficiency upgrades, electrification projects, as well as alternative fuel conversions.
The newbuild ordering of 4-stroke medium-speed main engines in Wärtsilä’s key segments, including Cruise, Ferries and Offshore, is expected to grow at 13% CAGR until 2030. We see regulatory changes impacting the maritime industry already; for example, half of the total shipbuilding order book is set to run on alternative fuels, and for Wärtsilä, alternative fuel-capable engines account for >60% MW ordered in 2023.
In addition, onboard carbon capture systems (CCS) can unlock EUR ~10bn business in the next 10 years. Wärtsilä’s solution will launch commercially in 2025, aiming to capture >70% of the CO2 generated onboard.
The energy transition is driven by the need for renewables
In the Energy industry, decarbonisation also plays a central role, and the transition is clearly progressing. 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. According to BNEF, investments in the energy transition increased by 17% in 2023. Investments in renewable energy deployment rose 8%, representing a third of the total investment. The gradual shift to renewables, replacement of coal, and ever-growing need for electricity results in growing demand for balancing, where our flexible engines are the superior solution. The addressable market in thermal balancing is expected to grow at 19% CAGR until 2030.
We have succeeded in improving the quality of revenues in Energy, driven by our decision to shift to EEQ (Engineered Equipment Delivery), with EPC (Engineering, Procurement, Construction) only considered in selected markets. This significantly improves the risk/reward profile of our order book.
Q&A
Have you seen a visible impact on the service business in Marine from the Suez Canal and the longer routes that vessels are taking?
The closure of the Suez Canal has led to longer routes for vessels, which in turn has slightly increased the demand for services due to the engines running more. However, this is not a significant driver of growth for the service business, for example when compared with the strategy of moving up the service value ladder.
What percentage of the ports globally can handle sustainable fuels already?
The industry is evolving at a fast pace and the outlook for sustainable fuels’ growth is positive. However, only a fraction of ports can currently handle methanol, as the development is ongoing. LNG is currently the most popular alternative fuel. Containerships are one of the frontrunner segments in alternative fuel pickup with ~60% of containership tonnage on order book enabled either for methanol- or LNG-power.
The discussions with our customers are increasingly strategic, as we aim to help them to choose the right fuel option among the rapidly changing landscape. Around 60% of Wärtsilä’s marine order backlog already includes engines enabled for alternative fuels, signalling a significant shift in the industry.
Regarding Wärtsilä’s strategy with the Portfolio Business units, are the businesses run differently once in the portfolio? Are there certain metrics, or a certain timeline to exit these assets?
The Portfolio Business units are operated in the same way as before, led by the same leaders. The goal is to improve profitability and prepare for divestments. The timeframe for divestments is a couple of years, and Wärtsilä’s business model for Portfolio Business has been working well so far.
Looking at Q1, the Energy side of the service business was a bit slow, whereas Marine seemed very strong. How are you seeing these trends developing?
The service business is developing positively overall. When looking at quarter-over-quarter figures, there can always be some variability due to project-related businesses, such as retrofits.
What is the impact of US data centre growth on your Energy Storage business, both directly as a backup for data centres and indirectly through the growth of renewables needed for powering the data centres?
The growth of data centres and the increasing energy needs due to AI, suggests that opportunities for Wärtsilä are increasing, as data centres look towards thermal power plants for energy needs. However, it is still early to evaluate the exact impact, but we see potential for the company’s favour as the market evolves and more and more energy is needed.
Are lower battery prices a stimulus to the current project pipeline in Storage?
The decrease in material prices, and consequently the overall costs, is positively influencing the business model calculations for customers. The Inflation Reduction Act (IRA) is helpful but not the primary driver of growth in the US; instead, the increase in renewables, driven by affordable energy, is the main factor.
What is the current capacity at repair yards for marine retrofits, and will this be a constraint for retrofit operations in the coming years?
The capacity at repair yards is not a constraint right now, but it is anticipated to become a challenge in the mid to long-term due to likely increases in retrofitting activities.
