We hosted a strategy call with our CEO Håkan Agnevall on December 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 execution. Decarbonisation is at the heart of our strategy, and the journey continues to play out in both of our segments. Our strategy is based on two key themes: Transform and Perform. Transform refers to attractive growth opportunities at the centre of decarbonisation transformation both in Marine and Energy, and our value creation potential as a pioneer and leading partner with decarbonisation. Perform refers to our capability to leverage market recovery and growth, and to create sustainable long-term value.
Positive trends in Marine continuing
Positive trends in our key segments will continue and our core segments are growing faster than the sector in general. The cruise lines are expecting the demand for cruises in 2025 exceeding the levels of prior years, while further investments into capacity to cater for the growth in demand are needed. Clarksons Research forecasts the newbuild ordering of cruise ships to remain elevated in 2025, with 20 orders projected. It is over 40% above the long-term average (1996-2023) activity level. In the ferry segment, the aging fleet continues to drive demand for fleet replacement. Clarksons Research is expecting the newbuild demand for ferries to increase in 2025 by 25% year-over-year. In offshore markets the demand is expected to grow gradually and due to current capacity limitations, the expectation is that owners will need to order more capacity than in 2024. Clarksons Research forecasts that there will be around 14% growth for offshore units ordered in 2025 compared to 2024. Across all vessel segments, the mix of global and regional regulations aiming to reduce the GHG emissions of the shipping fleet will increase the cost of compliance for shipping companies.
Energy transition is progressing
In Energy, transition is clearly progressing. According to BNEF, investments in renewable energy deployment rose 8% in 2023, representing a third of the total investment, while investments in the energy transition increased by 17% in 2023. Our operating environment is dependent on geopolitics and global trade, and although those are difficult to predict for next year, the macroeconomic environment appears to be improving while protectionism is increasing.
We continue to have a favourable demand outlook in the Engine Power Plants business and in the Energy Storage & Optimisation (ES&O) business. Our flexible engine power plants are clearly a superior solution when it comes to balancing. Also, the ability to convert the engines to run on different fuels as they become available is a vital for our customers. In ES&O, our superior safety record and dependability when it comes to project execution, as well as our market-leading GEMS software solution give us a competitive advantage.
Service business is a key enable for growth and profitability
A key enabler for growth and profitability is our service business. Our strategy of moving up the service value ladder towards agreements and performance-based agreements offers a 2-5X spend ratio (EUR/kW) relative to transactional services. The book-to-bill is over 1 in all our service streams – transactional services, retrofits and agreements, indicating a growing business. The group level service book-to-bill has been over 1 on annual basis since 2006. Services already account for ~50% of net sales, and we see additional growth opportunities. One strong proof point of the customer value that we are creating on the agreements is that we have a 90% renewal rate from the customers. Currently approximately 30% of installed base is covered with an agreement, both in Marine and Energy. Green transition is also offering us opportunities in retrofits. In Marine, we estimate the market for retrofits to be EUR 15-20 bn, including opportunities in Carbon Capture & Storage.
Q&A
How do you see the economics of developing green fuels like hydrogen and methanol? Is LNG still more viable?
The development of green fuels is challenging due to the “chicken and egg” effect. Zero carbon fuels like hydrogen and ammonia will take longer to build demand. Carbon neutral fuels like methanol and biofuel are progressing but at a slower pace. The transition is gradual, and LNG remains an important transition fuel.
Given the solid double-digit margins in thermal energy, do you see further margin potential on the services side, the mix of services versus equipment, or on the equipment side?
While we don’t provide specific guidance on margin development, the key changes include a shift from EPC (engineering, procurement and construction) to EEQ (extended equipment supply) projects and an increased focus on services. Currently, 80% of our order backlog is equipment deliveries, and 20% is EPC, compared to a higher EPC percentage in the past. This shift, along with improved risk management and streamlined operations, has driven profitability. The outlook is positive, with continued growth in services expected.
How does profitability in life-cycle service contracts evolve over time?
Moving up the service value ladder is a key growth driver. The service business includes spare parts, field service, various agreements, some of which are performance-based, and retrofits. All these areas are growing, with a book-to-bill ratio above one. Performance-based agreements are developing well. In these agreements, execution relies on big data and a strong service network, and demand for these contracts is progressing positively, delivering value for customers in terms of fuel savings and uptime reliability, and for us in terms of revenues and profitability.
How do you approach new equipment profitability? Do you prioritize high margin, being cash positive, avoiding risks or ensuring installed base growth?
We look at equipment and service business holistically. Previously, we had separate segments for service and equipment, but now both Energy and Marine businesses handle both. This holistic approach allows flexibility in optimizing business based on customer and segment. Sometimes we may accept lower margins on equipment to secure service business, and other times we aim for higher margins if service potential is less. The overall goal is to improve profitability while considering the entire business.
How do you see the infrastructure around the carbon capture business developing? When can we expect it to become more significant?
Carbon capture is an extension of our scrubber business. We handle the capture and storage on vessels, but the broader infrastructure for aggregating and utilizing the captured carbon is still developing. This includes decisions on whether to pump it back into wells or use it for producing green fuels. The ecosystem around carbon capture is evolving, with few commercially operational solutions currently. We see this as a long-term opportunity, potentially a €10 billion business over the next ten years. The infrastructure and regulatory framework need to evolve before we see significant commercial adoption.
