Pre-silent call for the first quarter of 2024 was held on 3 April 2024 with our CFO Arjen Berends. In this blog post, we summarise the main messages and questions from the call. The recording of the call is available here and the presentation slides here.
Before the Q&A session, Arjen discussed the recent development of our businesses, profitability drivers for 2024, and the updated Clarksons forecast.
The reporting structure was updated at the beginning of the year, with two reporting segments going forward. These segments are Marine and Energy, and the Portfolio business continues to be reported as other business activities. The restated financial information has been published in March, and the release can be found here. The restated figures show that the group comparable EBIT excluding the Portfolio business is already close to double digits.
Wärtsilä is on a path to reach the financial targets, supported strongly by the improved new build opportunities driven by decarbonisation, as well as by moving up the service value ladder. The good development in cash flow from last year has been continuing also in Q1.
In the Marine business, all the key segments have a good momentum driven by decarbonisation. Wärtsilä’s market share has been strong in the cruise segment, around 85%. New orders have been placed in the cruise segment in Q1 as Carnival placed an order for a new vessel with a 2027 delivery, and both Carnival and Royal Caribbean announced orders contingent upon financing. In the ferry segment, anticipation is that new investments are needed soon to meet decarbonisation targets, as the average fleet age is ~25 years. The signal from ferry owners and operators is positive, with an increased commitment to either replace or modernize the fleet. The offshore utilisation levels are strong, clearly supporting the service business.
Wärtsilä Marine published a report, titled ‘Sustainable fuels for shipping by 2050 – the 3 key elements of success’, highlighting the EU Emissions Trading Scheme (ETS) and FuelEU Maritime Initiative (FEUM) seeing the cost of using fossil fuels more than double by 2030. By 2035 the price gap between fossil fuels and sustainable fuels is estimated to close for the first time. More about the report can be read here.
In the Energy business, Wärtsilä continues to have a favourable long-term demand outlook, for both the engine power plants and storage. Outlook is supported by the transition to more flexible energy systems, driven by the need and increased share of renewables, but also by the shutdown of coal power, requiring alternatives for intermittency.
The Energy business is lumpy by nature, which means that order intake and revenue recognition can vary significantly from one quarter to another. Last year the order intake for engine power plants was low at the beginning of the year, increasing towards the end of the year. Similar lumpiness has been recognized in ES&O (energy storage and optimisation) before. These factors are considered to tilt the revenue recognition towards the second half of the year in the Energy business.
Clarkson conducted an update to their forecasts in March. The anticipation for vessel orders has been increased by ~7.5% or 130 ships more for 2024 than in the previous forecast which was from September 2023. The main increase comes from tankers, bulkers, and LPG sector. There were no major changes in Wärtsilä’s key segments. Shipbuilding capacity is increasing mainly because of China, which is growing the fastest in capacity. According to Clarkson’s estimates, the Red Sea disruption is leading to 2.9% growth in tonne-mile trade, equivalent to one-year typical trade growth. That means extra running hours for ships. For us, the service business correlates with running hours, so the impacts are not necessarily negative at this point.
Finland has been facing political strikes in March-April, but these have not had any major impact on Wärtsilä. The strikes ended on 7 April 2024.
Q&A
Could you speak about the momentum in energy storage?
The momentum in energy storage is good, with long-term demand globally. That also translates to our opportunity queue. It is always difficult to estimate which orders we will land and when, as the business can be lumpy, but overall, the view is good and promising.
What's the outlook for pricing this year? How do raw material prices impact it?
In the services business, we evaluate the pricing consistently throughout the year. Inflation and cost structures affect the pricing. In ES&O we have implemented raw material indices which means that the sales prices (for new orders) develop in line with the raw material price development.
Wärtsilä has shown strong organic growth in the aftermarket business recently. Are there any reasons to assume moderation in the strong organic growth in the aftermarket business from now on, or are the underlying trends strong enough to continue the growth trajectory going forward?
We are very positive about continuous growth in services, as it is seen as part of the strategy execution. We believe that there will be more demand for retrofits in the future and thus, we feel optimistic about further service growth.
Could you give an update on the carbon capture system?
The perception of the business is very good. There is a lot of demand for it, and not many alternative fuels are available regarding CO2 outputs. We are currently looking for pilot installations, some booked already. The development is in good form. The test rig in Norway has shown good results. The full commercial release is planned for next year, and that is on schedule.
Is there still a backlog of cruise orders or contracts where the engine equipment has not been ordered?
No. When a cruise vessel order is placed, quite soon after the conclusion of the engine type will be included. Engine type and configuration get decided earlier and earlier.
You updated your Marine guidance in Q4 to be better for the next twelve months. What gave you the confidence to guide higher?
We have a very good pipeline in Marine, and we review opportunities every quarter to determine demand guidance. Our project portfolio is the main driver for the pipeline. The visibility of twelve months forward can come from already ordered ships or customer conversations that may lead to future orders. The length of discussions and orders can vary depending on the type of vessel.
How is the market for traditional versus alternative fuel auxiliary engines developing?
On a quarter basis, no major changes happen. The journey forward will be a mix of fuels. There will not be one fuel as the silver bullet for solving the whole marine decarbonisation, but rather multiple solutions. The solutions will include alternative fuels such as methanol and ammonia, hybrid installations, and energy-saving devices. For methanol, we have the widest portfolio in the market, for ammonia, we are among the first. Now, the ecosystem needs to follow with logistics and production of the fuels.
