We hosted a strategy call with our CEO Håkan Agnevall on September 10. The CEO strategy calls aim to offer an opportunity to discuss Wärtsilä’s strategy and the progress of its implementation 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 based on decarbonisation, and we are consistently making progress in delivering results. We see that decarbonisation continues to provide structural growth opportunities for both of our segments.
Decarbonisation is transforming the Marine industry
The decarbonisation in Marine is progressing constantly. 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 upgrade capability for future fuels, with significant commonality between different fuel versions and a modular design. Retrofits will also play a significant role in decarbonising the industry.
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, driven by limited order books, ageing fleets and pressure to reduce emissions. 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 a service business, the disruption in the Red Sea is leading to longer routes and thus higher operating hours which supports our business.
The energy transition is driven by the need for renewables
Decarbonisation also plays a central role in the energy sector, and the transition is clearly progressing. 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.
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.
A gradual shift to renewables, replacement of coal, and ever-growing need for electricity results in the 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, and at 17% CAGR in energy storage.
Artificial Intelligence and the growth of data centres are driving the electricity demand
Over the past years, we have seen constant development in Artificial Intelligence, which has allowed us to enhance our value-add to customers. The rapid growth of artificial intelligence (AI) is having a sizable impact on the global electricity demand. According to the IEA, data centres consume approximately 1-2% of global electricity at present, potentially doubling in share by 2026. Driven by larger data storage demand, data centres are growing in size and entering Wärtsilä’s scope as it is more efficient to run a larger centre with a medium-speed engine. As data centres are becoming larger, the need for on-site power generation arises, where Wärtsilä can help. In Q2 Wärtsilä signed a cooperation agreement with AVK to deliver on-site power generation for data centres in Europe. Wärtsilä and AVK are currently executing two energy centre projects in Ireland.
Q&A
What is the service potential for the engines capable of running with alternative fuels?
One key thing in the transformation of decarbonisation is multifuel capability. Owners and operators want flexibility because, as we say in Wärtsilä, green is not black and white. With multifuel engines, there might be a slightly higher need for spare parts, but the major theme when it comes to service potential in alternative fuel engines is the move to agreements.
How should we think about the balance sheet going forward, what are your priorities?
We have a good and strong balance sheet, and we will continue to maintain that. Last year Wärtsilä increased the R&D spending target, from an annual ~3% to an annual ~4% of the net sales. We continue to have a positive development in working capital, however, that is not at a sustainable level, and we expect the working capital rate to stabilize at some point.
Is slower new build sales hampering growth in Energy services?
The installed base is still growing. Running hours are stable as our engines are so efficient. Moving up the service value ladder supports us as well as decarbonisation services.
Where do you currently stand in the journey of moving up the service value ladder from transactional to performance-based agreements, and what is the speed of change?
The journey from transactional (one euro per megawatt) to performance-based agreements (two to three times that) is more of a strategic concept. The share of service agreements is a key performance indicator, currently at 30%, which has been growing by about one percentage point each year. Agreements and spare parts have been growing significantly. Performance-based agreements take longer to develop as they are customised for each customer’s needs.
What are the most important drivers for the company to achieve a target margin of 12% or more, considering the recent positive developments and the various ongoing initiatives within the company?
The primary driver for achieving the target margin is the service business. The second driver is the new build business on the marine side, focusing on new fuels and engines, and growth in core segments like cruise, ferries, and offshore. The third driver is the margin expansion in the energy business, driven by disciplined project execution, the right risk-reward balance, and a shift towards more EEQ (Engineered Equipment Delivery) and less EPC (Engineering, Procurement, and Construction).
