A pre-silent call for the fourth quarter of 2024 was held on 9 January 2025 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 fourth quarter and the year 2024, profitability drivers, and the market environment.
The market environment remained relatively stable in both of our businesses in the fourth quarter. We have continued the determined execution of our strategy and are on a clear path to reach financial targets. A key enabler for growth and profitability improvement is the service business. We continue moving up the service value ladder and see continued opportunities in the decarbonisation driven retrofits and conversions. Our cash flow generation has also continued at a solid level.
Wärtsilä becomes more stable, focused and profitable company through improved risk management
A key strategic action to improve our quality of revenues has been our decision to shift our offering in Energy from EEQ, with EPC only considered in selected markets. At the end of Q3 2024 80% of the order book was EEQ orders. Another proof point of our strategy execution was the announcement of the divestment of Automation, Navigation and Control System business (ANCS) in December. This clearly shows that we are making progress on divesting the non-core businesses reported under Portfolio Business. The divestment will not have a major impact on Wärtsilä’s financials – we will disclose more details in connection with our Q4 earnings.
The positive trend in Marine continues
In Marine, the positive market trends in our key segments continued in the fourth quarter and are expected to extend also into 2025. The cruise lines are seeing continued growth in demand, and further investments into capacity to cater for the growth are needed. In the ferry market, the aging fleet continues to drive demand for fleet replacement. In offshore markets the demand is expected to grow gradually due to current capacity limitations. The market for container vessels has also remained active. Across all vessel segments, the tightening regulations are expected to drive further growth in demand for new more efficient ships to replace older fleet, but also to retrofits making existing ships more energy efficient and competitive.
Lack of yard capacity continues to still be a headwind, but the situation is improving. The implication for our Marine business is that the lead times from equipment order intake to net sales are currently slightly longer: on average it now takes 12-18 months from our order intake to equipment delivery, up from 6-12 months some years ago.
The need for renewables drives the demand in Energy
In Energy, the outcome of the US election has raised questions regarding the potential impacts. While federal policies play a crucial role, states have significant autonomy in setting their own decarbonisation targets and energy policies. Many states are likely to continue their green initiatives regardless of federal changes, as renewable forms of energy are the cheapest form of generating electricity. We see continued long-term demand for our products driven by the gradual shift to renewables, replacement of coal, and ever-growing need for electricity.
Q&A
Has the lithium pricing trajectory impacted the tendering pace of activity or client thinking?
No significant impact has been observed. There is high demand and many opportunities. We are selective about the orders we take, focusing on good margins and the ability to deliver on promises.
Given the strong growth in service orders in Marine, will this growth moderate due to tougher comparables, or can double-digit growth continue into 2025?
We believe in continuous growth. The book-to-bill ratios for all service revenue streams have been above one for a long time, indicating growth. Instead of comparing quarters, looking at the rolling twelve-month trend on the book-to-bill ratio is more insightful. As long as it’s above one, growth is expected to continue. We are positive about the future, driven by decarbonisation and the need for retrofits.
Are the recent engine orders for data centers intended for on-site baseload power or backup power?
The engines are intended for baseload power. Data centers require continuous electricity, and due to the high demand on the grid, they often need their own power plants. These engines provide the primary source of power, which may later be converted to balancing power to support the grid.
Can you provide an update on carbon capture systems and market progress, particularly on infrastructure at land?
The interest in carbon capture remains high, especially in the marine market. Wärtsilä plans to commercially launch carbon capture system in 2025, with currently working on pilot installations. Ports, such as Rotterdam, are developing infrastructure to handle captured carbon, including pipelines to old oil and offshore fields for storage. The scaling of carbon capture technology will on the development of the infrastructure.
Considering the need for more balancing power plants in the US to help support the grid, how are customers thinking about new investments for balancing power plants given the subdued power prices and the need for grid support?
Customers need balancing power to support intermittent renewable energy sources like wind and solar. The high costs of new gas plants bring challenges. However, the need to avoid blackouts and meet energy commitments drives the demand for balancing power. Coal is being phased out, and renewable energy is the cheapest form of electricity generation, pushing the need for balancing power further. Batteries provide short-term balancing power, but for longer durations, engines are necessary. We expect an uptick in balancing power orders in the US.
Given the tough Q3 on the Energy Storage & Optimization’s order intake side and the hopeful outlook for the pipeline at that time, should we consider the one big announcement in Q4 as an outlier or representative of ongoing activity?
We are confident on good development in Q4. It is good to note, that we cannot announce all orders as press release if we don't get customer approval.
Are we heading to a period where we should see more activity in the Portfolio Business, and can we expect more profitability in the medium to short term?
Wärtsilä aims to sell non-core assets (Gas Solutions, Marine Electrical Systems, Water & Waste) at a good price. There is good activity in these businesses, supporting the journey of improving profitability. These businesses were loss-making a year or two ago but are now on the right track. We hope to continue this trend.
