We hosted a service-themed investor call on September 16, 2024, with our CFO Arjen Berends; Vice President, Marine Performance Services, Andrea Morgante; and Vice President, Energy Services, Markus Ljungkvist.
The call served as a continuation of the service-themed call organized in June 2023, offering a good opportunity to learn more about Wärtsilä's service businesses, hear updates, and ask questions. No new material information was disclosed during the call.
The recording of the call is available here and the presentation slides here.
Arjen started the call by presenting an overview of service operations in Wärtsilä. Service business is a big and important contributor for customer satisfaction and an important driver towards the financial targets. Currently, the service agreement renewal rate is more than 90% in both Marine and Energy, which is a clear proof point that agreements are creating value for customers. Service agreement coverage has grown steadily, standing at around 30% in both Marine and Energy at the end of Q2 2024. The order intake in services has grown 55% between 2020 and 2023 with a CAGR of 15.8%, and net sales in services have grown 40% between 2019 and 2023 with a CAGR of 11.8%.
The global reach of Wärtsilä’s service network is a key differentiator and a clear competitive advantage. Our field services organization, with around 3,400 professionals globally, serves both marine and energy customers efficiently.
Lifecycle agreements are a major growth driver in Marine Services
The service business is a fundamental part of the Marine business, presenting over 60% of Marine sales. The business is developed for three integrated delivery models: transactional, agreements, and retrofits and upgrades. Transactional business is the foundational element, with the combination of field services, workshops, and spare part deliveries. Through the agreements, Wärtsilä operates closer to the customers helping them ensure optimal performance and reliability of their installations. The third delivery model, retrofits and upgrades, ensures that the assets stay relevant in the changing business environment. Decarbonisation has increased the need for retrofits and upgrades in the industry.
The service value ladder illustrates the development of service offerings from basic to comprehensive agreements. The agreement offering moves from operational support to guaranteed performance agreements, with steps of maintenance planning and AI-enabled remote support in between. As we move further in the service value ladder, we create a situation where customers gain more value from their assets, and we progressively increase our sales compared to transactional models. At the agreement level, we enhance our services with cutting-edge digital solutions. The capability to remotely monitor and assist our customers’ installations is crucial. We are pioneers in applying machine learning to combustion engines. Combining this technology with our extensive product knowledge and field experience, is called the “Expert Insight Service”.
In the Marine service business, the growth has been driven by solid installed base development, uptake of agreements, and decarbonisation-driven retrofits. The higher tier agreements, specifically OMA (Optimized Maintenance Agreements) and GAP (Guaranteed Asset Performance Agreement) have grown in sales by 15% in the last 12 months. Similarly, the order intake of decarbonisation-driven retrofits has grown by 67% in the previous 12 months.
In the Energy Services, lifecycle agreement coverage is increasing, and decarbonisation is driving future growth
In Energy, service sales have been growing steadily in recent years, with 24% growth of total service sales since 2021. The order book for Energy services has grown by 40% between the years 2020 and 2023. The growth is driven by increasing agreement coverage, growing installed base, upgrades and sustainable fuel conversion demand, and stable total running hours.
Similar to Marine, the aim of Energy services is to move customers up the service value ladder, from transactional business to agreements and more comprehensive services. The move to decarbonisation is presenting customers in the energy sector with complexities such as integrating fluctuating renewable energy sources without compromising reliability or cost efficiency. Wärtsilä’s “Decarbonisation services”-service model aim to support customers in solving these problems, taking into consideration long-term planning and CO2 emission reduction targets. This business model builds on Wärtsilä's extensive capabilities in power system modelling and analysis, energy system optimisation expertise, and market-leading flexible power generation technologies.
Wärtsilä believes that investments in autonomous power plants, digitalisation, and alternative fuels drive future service potential in Energy. We are driving customer value through optimisation and increased flexibility with autonomous power plants, being cost competitive for balancing power applications. We already are building a strong track record of 1.7 GW gas conversions in 25 countries with the future ability to convert power plants to hydrogen, ammonia, ethanol, and methanol.
Q&A
Currently, ~30% of Wärtsilä engines are under agreement in both businesses. Where do you expect this figure to get to and how fast?
In both the Marine and Energy business, agreements coverage is affected by several factors, such as the age and type of equipment. Both segments still have potential in the current installed base. Ensuring a high capture rate in new build projects and ensuring the renewal rate of existing contracts is important.
Can you discuss the competitive landscape in service?
In terms of service, our strategy has always been to offer the best service to our customers, leveraging new technologies to maintain direct relationships. We continuously innovate and improve our services, capturing synergies between the marine and energy sectors. This continuous improvement culture is deeply rooted in our company.
The toughest competition is usually in the new build phase, where technology comparisons are made between different engine makers and turbines. Once the installation is on the ground, competition tends to be more local, with local companies often being the main competitors. However, our strong offerings, digital capabilities, and status as the original equipment manufacturer help us retain many customers.
What are the advantages of power plants compared to gas turbines in terms of service, and why might customers prefer power plants for their requirements?
One of the biggest differences is the starting time. Engines are better suited for frequent starts and stops, which is crucial in balancing markets. Turbines, on the other hand, have maintenance challenges with frequent starts. Engines also offer competitive advantages in efficiency, especially when there are CO2 costs. Additionally, turbines often need to be brought to a service centre for certain types of maintenance, whereas engines can be serviced more flexibly on-site.
What kinds of risks does Wärtsilä take on with performance guarantees?
When considering the potential risks associated with performance guarantees, they generally fall into two categories: penalties for non-performance and outcome-based risks such as bonuses or maluses.
Our extensive experience combined with advanced digital capabilities and a comprehensive service network equip us with effective measures to manage these risks. We are confident in our ability to well manage such guarantees thanks to our people, competence and understanding of the technology involved, the use of advanced digital capabilities, AI, and strong contracting policies.
