Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

2022 has been a year of new highs and lows. On the downside, there has been war and increased geopolitical tensions, coupled with rising debt, high inflation and shortages in basic supplies. But we have also found hope in efforts towards building a greener planet, improving work for future generations and using the power of technology to enable sustainable societies. Let's look back at some of our top conversations this year. [Presentation]

In the past year, we have met some fascinating thought leaders from across the globe to speak about the pressing issues that the world is facing and the solutions for them. First up is a conversation that I had with Marcello Estevao, Global Director, Macroeconomics, Trade and Investment at the World Bank to talk about the global debt crisis and how it differs from the crisis in the past.

That landscape is much more diverse now with different types of creditors with different type of incentives. Another characteristics that I think is somewhat peculiar is that the very large emerging market countries haven't had a debt crisis now. I mean we don't have a case of a contagion like you saw for instance when Mexico stopped paying its debt in 1982, there was a contagion from that action to other Latin American countries and then other countries in the world, which was quite serious. I see the crisis right now being more of a common shock. We had COVID, we had this war that's going, the invasion of Ukraine. And that came in a situation where countries were already borrowing too much before COVID hit. So I see a bunch of countries in trouble, but not one huge country in trouble.

So when you say that it is not contagious, at least not yet contagious, so what kind of common denominators would there be between the regions and countries that are to be hit hardest by it?

I think the common denominator are countries that are relatively poor, but were growing significantly, and they basically overborrow in a group of 65 developing economies. What you see is that sustained primary deficits were the single largest driver of public debt in those countries. Countries are simply spending beyond their means.

With the current global debt crisis really looming over our heads, do you think that the governments and central banks right now today are acting speedily and responsibly enough to averting this?

Yes, I think we do not have a worst crises because policymakers in many countries, many big countries acted decisively. The issue now for all countries in the world is how to adjust now, including on the fiscal side because you do this fiscal policies when it's needed, but then you need to rebuild your capacity to fight crisis.

So there is hope that we can still avoid the worst of it all. In your mind, are there perhaps even some opportunities that can come out of all this adversity and crisis, perhaps a silver lining?

There's always a silver lining. First of all, yes, we can avert a major recession in the world. That's not our forecast. We are not -- we are forecasting a slowdown in growth in the world. We are not forecasting a world recession. And I think our forecast is good. So we have weaker growth but still we are not projecting global negative GDP growth, let's say. And the silver lining, I see quite a bit of silver lining in the climate area. So I think we learned quite a bit on how to have a lower carbon footprint. I'm just speculating here. But I can see like some silver lining in that regard with price of fuel going up to the roof. Of course, the incentive to invest in alternative source of energy which are less polluting and contribute much less to greenhouse gas emissions is also quite big now. So that's a good thing as well. So I think the silver lining on the climate agenda is clear.

Indeed, it is, and that's why investors around the world are willing to put their might behind it. Earlier in the year, I caught up with Kaisa Hietala, the new Board member of the American oil giant, ExxonMobil, who was appointed by shareholder activists. This is what she had to say about the changing foundation of a world built around hydrocarbons.

Well, that's why we are talking about transition. We will be needing many solutions. Fossil energy has been such a large solution for so long time and the world has developed a lot because of the abundancy of energy. However, this source of energy is no longer the right one, unless we can start to take the CO2 emissions away. So it is about the energy transition. But then the key question is that what would be the fastest way to go forward in order to start to make an impact? And how much time do we have? And how the policymakers are sort of supporting this transition?

How does one instill such a will to have the cultural transformation to go about that change?

I think it starts from the Board and from the top management. They really need to be willing and wanting to look into the future. Even though sometimes it's not nice what you see there, but those companies who dare to look into the mirror and dare to say that, okay, we believe we can navigate through this transition and reborn in a way as a new company and continue to exist and continue to create jobs for people and so on. I think eventually, they are in a better position because they are building a culture which is tolerant for change or culture which is even supporting the change.

So do you believe that we'll be able to limit the global warming to a sustainable level in the time needed?

Yes, absolutely. I mean we have all the tools in this world. Now it is a question of leadership. Leadership of companies. I truly believe that business will be making a big share of this transition to make it happen. I'm also expecting to see a leadership from the policymakers, even though I do understand that the political atmosphere is pretty challenging at the moment, and it's hard to make this type of decisions. I also believe that this world will be facing a situation that courage is the only way how we can go forward. And if it takes until the 11th moment for us as a human kind to do that, I hope it won't be too late. But as said, all the solutions are there. We just need the leadership and the courage to start to do this systemic change.

No doubt, we do. But we all have our roles to play in bringing about this big change. I spoke with Sini Harkki, Program Director of Greenpeace Nordic about it recently. And here's why corporations and nongovernmental organizations need to join forces and convert their turbulent relationship into collaborative and constructive efforts.

Well, I think the first step for both sides is to acknowledge that we're all people, and we don't need to be afraid of each other. And hopefully, like come to the talks with an open mind and really exploring and listening. And that really goes for both sides. That is the first step. And probably also to understand that NGOs, key thing really is their mission. Their mission really is the issue that they're working on. So for them, whether it makes sense for them to be involved in a dialogue is going to be measured up against that, against their goals around the issue and if there's going to be a real change as a result. Maybe to add one more, which I notice when talking to corporations that quite often, the people might even be a bit surprised to hear that, oh, you're like an organization and you have hundreds of people at work and you have similar organizational challenges as any company would do. So maybe there might be thinking that it's all a bit like very dogmatic, hippy culture kind of thing. And then it's good to share a little sometimes that we're actually not that different. And once that understanding is there, it's so much easier to find common ground also around the issues.

Yes. Recently published Trust Barometer by Edelman, it shows that NGOs and companies, they are seen as being more ethical and more competent compared to governments and media. And it also suggests that these 2 parties can really be a stabilizing force in this circle of distrust that we are seeing today. How does this view resonate to you?

I think that's a really interesting view. And personally, I'm really scared by statistics like that. I hope that we would, of course, see stronger democracies and trust in politics more than that. So that's, I think, for all of us definitely established democracies to think how can we get to a better place. But in the absence of that, I do think a little bit similar, I think that corporators can be a bit of a stabilizing force in the climate debate. And then when it comes to more kind of the problem of more populistic social debate, social media, sometimes completely out of hand with polarization. I also think that both companies and NGOs have responsibility there and a real chance as well to kind of make the decision not to go down that line, but more like keep it to the facts and try to stabilize more than shake the both. I don't know yet how to do that, but I think that is certainly something really important to think about for the next years to come.

What would be your recipe for success if the corporate NGO relationship has so much potential. So how to really grow it and make it more than an exchange of resources and competencies with limited common goals into something highly more impactful?

So I think quite often when NGOs and corporations truly come up with something new, it is as a result of a conflict or confrontation. And I think the reason why that happens is that so far, that's been almost the only time when NGOs and companies are actually negotiating. Otherwise, it's just like exchange of use that doesn't really go deeper. So for me, I think the answer is somewhere there. Like how can we make these dialogues and exchanges go deeper and like really push those parties a little bit to go out of their comfort zone and go the extra mile to try to find new solutions and ways of working that would work for both parties. Because I think when you put together 2 parties that come with very kind of different kinds of backgrounds and positions and then you find a common way, then something truly new has been born. But it's really hard to get there if there isn't some kind of force or reason for them to really push a little bit more. So how can we make this happen without conflict would be my question and answer to this as well.

Let's move on to more personal matters like the value of our jobs, the need for purpose and the future of work. We'll talk about all that after this short break. Stay with us. [Break] Welcome back. The world's workforce has been under great stress this year, and just 1 in 5 of us feels engaged at work. I caught up with Pa Sinyan, Managing Partner for the research company, Gallup, and ask him if lack of purpose was perhaps the reason for this.

The data clearly confirms that people have been trying to choose jobs now based on the purpose of this company. Now what is driving this change is very much the same thing that is driving the need for organizational purpose that we've seen movements like ESG, movements like Black Lives Matter, movements, particularly in Europe, we see this getting strong, the focus on the environment, what impact are we having on the environment and on our planet. We're seeing the growth of parties like the Green Party. So all of these movements together are really creating a more informed, a more conscious, a more reflective constituency where young people really care about more than just getting a paycheck or just have a job.

A recent McKinsey's survey reveals that only 15% of the frontline workers and managers agree that they're living their purpose at work. And in comparison, 85% of the executives and upper management agree. So that's a massive gap. How can we bridge that?

A lot of organizations invest a lot of time and energy in articulating a beautiful, cool, sexy fun purpose statement. And then we put it on posters everywhere and they put it on in their signatures. And it's basically a marketing campaign to get that purpose out here to the people. Now there's nothing wrong with that, but people don't feel purpose because you communicate purpose. People feel purpose because they feel. It's actually an emotional connection that has to be generated. So companies should invest time and energy in articulating a purpose that resonates with the business that is realistic, that is compelling, that is emotional, but they have to individualize purpose. It means that me, if you are my manager, you have to remind me why I matter. Regardless of what our company's purpose is, you have to make me feel that I am important. You have to recognize me for doing a good job. You have to take time to give me feedback when I don't do a good job. You have to accept really crystal clear expectations for me, so I know why what I'm doing matters.

So what can individuals do to have more clarity regarding their own purpose and align it with the company that they work with?

So I'm hesitant to put too much responsibility on employees because I do firmly believe in the power of leadership and the responsibility of leaders. So I think, firstly and foremost, employees deserve leaders who are engaging, who help them to see value. So that's first. But to your question specifically, of course, as individual employees, we also do have a responsibility. We are not victims who just sit around and wait for everything to be done with us. We also have a part to play. I think there are 2 ways to really do this well. The first one is deal with your strengths, right? Emphasize what are the strengths that you bring to the table, meaning self-reflection and self-awareness, not just in terms of can I use SBFS or can I use some technical tools. But what are my natural strengths? What do I bring to the table? How am I different from other people? Because what we clearly see is that the more people are aware of their natural strengths, the more appreciated people are of who they are, and that makes it easier for us to connect to some purpose that you have in the organization.

From purpose to potential, earlier I also caught up with Anu Madgavkar, partner at McKinsey to talk about human capital. I asked her, what were the top 3 things that enterprises could do to handle human capital better? Listen in.

Well, I think the first is really to view people in terms of their potential. People possess skills and more importantly, people can acquire skills well beyond what they currently do. And it's an important mindset for organizations and companies to think about recognizing and harnessing that potential. The second would be to focus on coaching and apprenticeship. And here, I mean, helping people learn while they're actually performing their jobs. And this is important because such learning while you're actually doing is deeper, it's more experiential and it's stickier. It actually lasts. And by the way, it pays back faster because it's directly applied. And the third thing I would say is just embrace mobility. Why is that? Because change in what you do is a fundamental aspect of the labor market, but it's also a fundamental way in which human capital gets built. It will not get built without change, people changing roles, learning new things and companies should understand that, embrace that mobility and provide greater opportunities for people, both inside their organizations as well as externally to explore change and realize their own potential that way.

I know most people switch jobs for more money and better prospects. What does your analysis reveal about this as far as development of human capital being concerned?

What we found is that people do want more money. There's no doubt about that. But that's not the only thing they want. We surveyed employees who left their employers and those who had returned to their employers but might consider leaving again or were considering what they wanted to do. We found that compensation mattered a lot. But the desire for better and more career development and opportunities for career advancement typically figures in the top 3 reasons for either leaving or coming back or considering leaving again. So this is something that I think employers have -- are beginning to understand, but they haven't fully acted on the implications of that or the opportunity that, that represents. And when we look at the big data analysis we did of all those millions of work histories, it tells us the same thing that when people move, they actually move to do things that help them raise their incomes and that's actually a powerful motivation for them to move. But 80% of all the moves in the sample we looked at was actually across organizations. It wasn't a role move within your own organization, but you typically left your company to join another company. It also tells you that there is an opportunity on the table for employers to harness this desire for career development, but to make it possible for people to do that within your own company. And if you can do that, presumably your attrition challenge can be addressed beyond the levers of just compensation and more money.

In that context, what is the future of work? I caught up with Antonio Nieto-Rodriguez, a noted Author and Professor of Project Management and Teija Sarajarvi, Wartsila's Head of Human Resources to know more about worker employer relationships of the past being disrupted and new models of talent management appearing.

We've been working on a system where it's very hierarchical. The boss is always right. You are empowered to do a certain type of activities, but that's it. If you want to discuss with the boss, schedule a meeting in 3 weeks and then you'll be able to talk about. And I think that maybe it was a model that worked for many years when the focus was on efficiency. I talked about the world driven by efficiency, volume, cost, automation. Now we're working on a more world driven by change, where change means we need to react fast. We need to have less structure, work more as a team. And I think this is the whole point is that I think it's an opportunity to get better leadership. Why can we not have a system where the best people, managers, the kindest persons who will empower people and fill more like cultures than directors, executives, lead companies. So I think this is a wake-up call for senior leaders that they radically need to change the way we behave as the leaders. I think this is the time where leaders are the ones that need to learn the most leaders. These are the ones that need to change the most if they want to create that organization of the future, where people can fulfill their aspirations as workers, as entrepreneurs. So I really want to put the emphasis of the leadership has to change. And I hope HR is able to convince them, because if you don't do that, we cannot keep having this type of leadership in organization. People will leave, they will find an empty company.

So Teija, how can the HR community do this convincing? How can companies and business leaders take the action to change themselves and help shape this new ecosystem and to stay relevant?

I think one way of phrasing this is that companies become a docking station or a platform for employees to dock into, which refers to a lot of the other topics we've discussed and we have to create that platform to work. So that is easy to dock in and dock out, so being a technology or the physical environment. But then from the business leaders perspective, I think it's -- first of all, the core case is not only training, which I partially agree with, that training we need, but I think it's more about being curious and having a learning mindset. I think that's the key for becoming a good business leader and to be able to coach and nurture your talent to grow. And then the nature of responsibility is to offer those learning opportunities, being training and so. I think we are stepping into an era even more where business leaders have to earn the employee experience and engagement. It's not given anymore. And I think it's about your personal characteristics and leadership skills that you have to be humble enough to reevaluate constantly in new context. And I think that's where HR can, of course, challenge, but also offer learning opportunities to develop yourself.

What kind of a relationship do you see employees will have with their employers in the future?

I think it's really a very different approach from top down to like a coach. If you like sports, there's always a coach who helps people to get their best. And I do see some changes. There are some exceptional examples where the leader is a facilitator, an orchestrator rather than somebody who makes all the key decisions and just makes people follow them. So I love the time we are, at the moment, work-based not on politics, but work by -- I think there is a time for transformation for good. I do hope that we take the opportunity for transformation for good, not for bad, for good. This is a unique opportunity, and I'm very hopeful that this will make a work-life balance or lives better.

If I build on that, I think on the words that Antonio were using, I think, the companies or the employers will become enablers. And actually, the question has the wisdom in it. I think it becomes a relationship, a mutual relationship where there has to be engagement factors for both. And we have to nurture those, as Antonio was saying. So a more equal relationship where we have to have a win-win approach for both. I think that's where we are heading.

Equality is an important factor, not just in work, but in society as a whole. How can we use technology to build more equitable societies? We'll tell you after this short break. Stay tuned. [Break]

Welcome back. artificial intelligence and algorithms have transformed business efficiency. But there's a doubt about the ethics of it and its social impact. I spoke with Keith E. Sonderling, Commissioner - U.S. Equal Employment Opportunity Commission; and François Candelon, Global Director of BCG Henderson Institute to discuss that.

AI can help eliminate bias from the earliest stages of the hiring process, and that's a very, very good use of AI. But at the same time, it can actually intentionally discriminate at the screening phase. It can unintentionally discriminate at the screening phase, which we'll talk about at length because if it is poorly designed and if carelessly implement, it can scale discrimination larger than one person. And you know why? That's because it's based on the predictions AI makes. It's only as sound as the training data, which those algorithms were like.

In terms of AI and equitable societies, would there be any examples of how to leverage on that front in a positive way?

Thanks to AI, you have 4 typical advantage. The ultra-granularity of data and the ability to deal with massive amounts of data, you have the, let's say, real-time decision-making, the scale and the continuous learning and improvement. And so when you take these 4 elements in mind, you can see that you can do many great things. For instance, we are working in Africa with some governments. And if I take Egypt, for instance, they wanted to do something and to better improve, let's say, the corn crops. But they didn't know where they were located. And by using data, lots of image, we're able to say where it was. So therefore, we will try granular and dealing -- the ability to deal with big data, we're able to customize the opportunities and the resource allocation. I have plenty of examples about forecasting for flood, for droughts where you can really do something extremely specific.

Keith, do you think what François described here can help not only control, but perhaps also bridge the social divide?

I know in the tech industry, a lot of job descriptions have -- we're looking for ninja coders that really lean towards friendly for males to apply, but not female. So there's now AI that goes through hundreds of thousands of job descriptions and looks for linguistic pattern and tries to pull out any references to gender, to race and makes it more inclusive for people to apply that I think those are very good uses of AI, again, in my space to really help diversify the workforce, to help workers who otherwise wouldn't have applied to these jobs, feel more comfortable to do so and also in the interview process, get rid of those biases, which are very historic and actually go to what the candidate skills are, what they're saying.

But we need to be careful not to become too dependent and that we're able to challenge, I would say, the results coming from the algorithm. It's not always sure and for sure that the algorithm is right. And I think that keeping this human supervision is something critical, but it won't be that easy. This is why I'm advocating the fact that companies at the moment, some of them at least are making a mistake trying to optimize human on one side and AI on the other side. So I think that for companies, they need to think about human plus as a system. AI can be a great support and they need to make sure that it is leveraged with its full potential. But at the same time, with human on top of it, because we have different capabilities, we're able to deal with ambiguity much more than AI, which on the other front, can work with much more big data or, let's say, a large amount of data. We've been doing with MIT -- every year with MIT, we do a joint report on the impact of AI on corporations and so on. And in the report we had in 2020, we found that the companies that were investing in AI and had a really significant financial benefit of these investments were the ones that were creating a kind of mutual learning between human and AI.

I think that's it. That's the secret formula.

No doubt, human-AI partnerships offer us a lot of hope for the future, and so does a regenerative, restorative circular economy. Connor Bryant of The Rubbish Project and Helen Burdett of the World Economic Forum provided some expert insights on the massive potential of a circular approach.

I would say that first circular economy protects nature through reduced reliance on virgin materials. Secondly, circular economy strengthens business resiliency and returns. Businesses that incorporate social and environmental aims in addition to their aims of growth and moneymaking are 43% more likely to scale. It's been identified that circular economy represents a $4.5 trillion business opportunity and circular economy and control that companies can have over their own supply chains can shield them from the current linear supply chain disruption. Third, circular economy reduces emissions. Nearly half of all emissions can only be tackled by how we make, take and use resources. So I guess those would be my top 3, are nature, business and climate.

I see another major benefit possibly even the biggest benefit is that humanity wants to continue to be able to exist and live on this planet indefinitely. And our current system is inherently unsustainable. And in simplest terms, that means we cannot keep doing what we're doing forever. We will simply run out of resources and there will be no more natural world to destroy. So as well as protecting nature, we also need to learn from nature. The natural systems on our planet have survived for billions of years, and without our intervention, would continue to exist for billions of years thereafter because they exist in cycles, the water cycle, the cycle of life and death, the nutrient cycle, they are infinite and continue because they exist in a loop. And that is, of course, a model that we are trying to emulate through biomimicry and learn from so that we can go on continuing to live on this planet forever, too.

Connor, you help businesses becoming circular. In your experience, what are the most common bottlenecks and practical problems in converting from the traditional linear system?

The top bottleneck or barrier is short-term thinking on both the government and company level. And this has been a major barrier to change for the circular economy, but also action on climate change and really any other sort of large existential issue for humanity. If you, as a company or government have spent a large amount of money on the infrastructure that already exists or that, that infrastructure is hard to replace or the world has been designed around it, then it can be quite challenging to build the investments to replace it and therefore write off the loss of the investment that you've already made. And then the other one is the desire to make small iterative changes rather than redesigning your whole approach. And while this is easier to do because it fits with your existing infrastructure and your existing business model and approach, ultimately, it could be that the problem is the way it's fundamental to your product or service, and therefore, the best way of tackling it is to completely rethink your offering and to reevaluate how you provide your product or service, but that is quite a challenging decision for businesses to make and really requires innovative thinking and great courage. And then finally is culture change is, of course, that we've designed these systems that are inherently wasteful by design.

Can you think of any practical example of how to overcome such a dilemma?

That concept came up in a conversation in Davos with an automotive company that gave the example of if you sell a car to someone else, then from a purely business perspective, you're incentivized that, that car eventually becomes obsolete or that, that car breaks down so you can fix it or that the consumer wants to buy another one. If you lease someone a car or you're renting out the car, then you want that car to last as long as possible and be desirable for as long as possible. And so there is the incentive piece of business models and circular business models.

So in essence, also this servitization of society that manufacturers start offering services instead of product is taking us quite a long way then?

Yes, exactly. Exactly. Switching to a service model from a model that relies on the continual consumption of objects is a huge leap that we can make in the right direction.

And I would say, is really one of many circular economy approaches, strategies or levers to change and that we also have to redesign how those things are made and think about their current use and their next use and what happens at their end of that use.

On that positive note, we have come to the end of this episode. Thank you, listeners. If you like what you hear, please subscribe and share the podcast link with your friends. I'm Atte Palomaki, and this year we went Beyond Business.