A pre-silent call for the second quarter of 2024 was held on 19 June 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.
Before the Q&A session, Arjen discussed the recent development of our businesses, profitability drivers, and the overall momentum of the industries.
Wärtsilä is on a path to reaching its financial targets, supported strongly by the improved new build opportunities driven by decarbonisation and moving up the service value ladder. The good development in cash flow has been continuing.
Good momentum in Marine is building up in our key segments driven by decarbonization
In Marine, the long-term opportunities remain good. The service environment continues to be favourable, with the demand for service being supported by longer trade routes driven by disruptions in Red Sea/Panama and the regulatory drive for retrofits. We see good opportunities in the passenger and offshore segments, both markets where we have a very strong presence. In the cruise segment, new capacity is needed to secure long-term growth expectations. Our market share in cruise has been ~85%.
In the ferry segment, Wärtsilä has ~65% market share. The average age of the fleet is ~25 years, which means that new investments are needed. In the past few months, major ferry owners, such as Attica Group, DFDS and Baleària have announced initiatives worth ~1BEUR each to modernise their fleet and to reach their climate goals either with new builds or retrofits.
The earnings of cruise and ferry operators are recovering, and the limited order book, ageing fleets, as well as the pressure to reduce emissions are expected to drive new builds and retrofit activities. At the beginning of April, Norwegian Cruise Line announced a strategic long-term fleet expansion plan of eight vessels, scheduled for delivery over a ten-year period between 2026 and 2036.
In offshore (~55% market share), strong utilisation levels have continued, which supports our service business. The demand outlook is positive for offshore, as supportive energy prices are resulting in further fleet reactivations and increasing interest in new equipment.
Energy continues to have a favourable long-term demand outlook in both EPP and ES&O
The outlook of Energy is supported by the transition towards more flexible energy systems with the rapidly increasing share of renewables and the diminishing role of coal power. However, as we have also previously highlighted the nature of the business is very lumpy as the impact of single orders can be large. This means that order intake, but also the revenue recognition can vary significantly from one quarter to another.
Equipment deliveries and revenue will be tilted towards the second half of the year 2024 both in Engine Power Plants and Energy Storage. Engine Power Plants and especially Energy Storage and Optimisation continue to have a favourable demand environment outlook. Constraints in global and energy-related supply chains have eased, which is driving demand, especially in the Energy Storage and Optimisation business. In the Energy Power Plants business, there is a good pipeline, especially in the Americas region. The utilisation of our Energy installed base is stable, providing good opportunities for services going forward. It is good to note though that in the comparison period in Q2/2023, the service order intake was very high due to the timing of long-term agreements.
Q&A
Do you track the utilisation of power plant business in your installed base?
The running hours of our engine power plants are holding up, even though more and more are shifting to balancing power. As shown on the service theme call a year ago, the running hours of the engine power plants have been holding up, but those vary by location. For example, in Brazil, when the water levels of the dams are high, the engines don’t run, but when the dams are at lower water levels, the engines run flat out.
Regarding the announcement of the pure hydrogen-ready concept, the announcement implies that you expect commercialization towards 2026, what shall we expect in between?
The development of hydrogen-ready engines is an ecosystem development. Firstly, in the journey to decarbonize and make power plants run on hydrogen, there needs to be technology providers that have the technology available running in hydrogen, for the logistics providers to invest in it. Therefore, we have been fast with launching the concept to be able to convert engines that now run on LNG to run on hydrogen immediately when the time comes.
How do you see the overall price-cost equation evolving currently and what are your expectations for the second half of the year?
When we receive signals from price changes, we immediately inform the relative departments, in order to adjust the pricing accordingly for particular parts, components, or equipment.
The raw material price increases or decreases have an impact on the pricing of our suppliers, but often there is a delay because we typically agree on a certain price level for a certain period of time with the suppliers. Therefore, a change in price now will only show to us after several months.
Which of the core segments you are the most optimistic about regarding not having any big bottleneck or uncertainties on the demand growth for the next couple of years?
I would not rule out any specific segment, because we have opportunities in quite many of the segments today. Cruise and ferry segments are the strongest because a lot of renewal is needed in those segments. On the offshore segment, the timing is difficult to say, but the view is good.
How would you describe the overall demand environment for the energy storage business?
The demand for storage has been high for a long now, and there have been no big changes in that during the last months. The battery prices have been declining for a while, and the pipeline of projects is good.
Can you give an update on the wage inflation and its relationship with the service pricing, is it indexed?
No, service pricing is typically not indexed. We have a global lease prices for spare parts and engineering. We update the pricing accordingly to the markets. Regarding agreements, labour and material costs are indexed.
