Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

[Audio Gap] markets. And also some of those in -- the utility and industrial customers that we consider our core and that we are developing and have developed a relationship with.

Next question comes from Sean. I cannot see the last name.

We can't hear you.

We cannot hear you. Then you see.

Hopefully, that helps.

It helps.

Okay. I had a question around the decarbonization services. And I'm just wondering if we step back and we look at the 2 components of your Energy division services and thermal, I mean you've struggled, I guess your customers have struggled to integrate these. So how does the launch of decarbonization services change that? What kind of value-add will you expect to be able to deliver on top of the service packages that you already have for thermal and storage, just understanding a little bit about how that component might grow within the business?

Yes. So if we look at the decarbonization service, I should underline it's still at an early stage. We just launched the services. So it's not that it's generating significant top line and bottom line yet. But having said that, so what's the logic for the services? I mean, what we do is that we interact with our industrial customers. And looking at their operating profile, looking at their energy mix, and what we often see that there are significant opportunities to bring down the overall energy cost. It's how you run the plant and if you combine it with storage and/or with renewables, you can -- decarbonize your energy production, but you can also optimize it. And then basically, when we look at those, and of course, there is a lot of data share, et cetera, then the model is how do we share those upsides and downsides? So basically, if you can have X percent of energy saving for a certain plant, we would be willing to take on and guarantee a certain of that, but also tap into certain portion of the savings. So you could say it's the same logic that we are using for the performance-based services that we provide on the maritime side.

And a quick question as well, just on the restructuring of Voyage. The 300 roles that you're putting effectively at risk. Is that a cost in Q1?

Well, they are restructuring costs, and I think they will be taken throughout the year, so to say. so....

Too early maybe to comment.

Yes it's too early. That's when we got -- when we got to take that. But I would say -- I mean, we communicated that we will launch the new organization in April. So I think it's reasonable to assume that the restructuring is going to be a bit spread out all over. But as you also -- just to point out, so the -- we complete information, so it's 300 positions that will disappear, but it's also 150 that will appear, so to say. So you can say it's a net reduction number with 150.

Sorry, should we assume then that 150 effectively migrate to the new positions? Or is this -- or shouldn't we make that assumption?

Well, it's basically certain roads disappear and other roads might be changed or be put in place. And then, of course, we want to fill those roles with people that has the right competence and we have a preference for recruiting from our internal pool clearly.

Next question comes from Antti Kansanen.

A couple of questions from me. I guess, first on the services and kind of you -- referenced last year's growth kind of mid-teens on order side and double digit on sales. But how much do you reckon that it's kind of cyclical growth in the sense that your prices must be up quite a lot. You have a bit of FX tailwind there. I mean, cruise was notably up year-over-year. I'm just thinking about moving up the value ladder. What have we actually seen in your numbers? Or how much is that is still kind of a work in progress coming into the next couple of years?

And I think now, Hanna-Maria, I'm looking to you because we -- I think we also had a figure on the U.K. organic growth, excluding FX.

Actually, we have not published that.

Now for the services. But for overall, we haven't. Okay. I would say that the strong growth driver is not the price. There is a strong underlying demand side, so to say, and it's increasing. Then to delineate to your point, how much -- because we are running -- our machines or equipment are running with high utilization. That is definitely a part of this on the demand side. And -- but to delineate how much of the growth is coming from that and what are the real benefits of moving up the service value ladder. It's a little bit hard to say where we are on that one. What I can say, as I said before, if we -- for instance, if we look on the transactional side, I mean spare parts, service hours. I think we have a new way -- or somewhat new way of working with this because we are addressing new customer groups. Before we had the focus, and you could say the stamina to work with our biggest customers. But now with digital solutions, we are becoming meaningful. And we also make it meaningful to reachout to the smaller -- more transactionally-oriented customers. So there is growth related to the strategy. But to delineate, it's very hard to say which bucket is -- I mean, of the growth, which is coming from high demand and which is coming from moving up the service value ladder.

So coming back to the question of organic growth, so we have disclosed organic growth for -- on [ Wärtsilä level ] , not for services level, it was 18%, like I said, on financial statements release.

Yes, sure. Okay. The second one, maybe as hard to kind of differentiate. But if you now look forward on the Marine kind of equipment side, I mean, how much do you reckon kind of environmental products or things related to, let's say, [ EEXI ] or CII can actually drive the growth? And how much it is still dependent on what do we get from contracting and kind of conditional market level? What's kind of the outlook for '23, '24 and so forth?

I think, and I said this in the past also that if you look at some of the new engines that we are putting out, the green -- ready for the greening fuels. I think it would take a couple of years to really see a meaningful impact on the top line because as we all know, these are not slow -- these are not fast-moving industries. So the more short-term growth perspective is more related to our service business. And I think that is still the same message to say. I mean, we do see -- I mean, like -- we take the fan old order with the new methanol but there were a couple of more engines coming, but to really have the market, it takes a couple of years in the maritime side. And we'll take a couple of years, quite frankly, also on the energy side. Yes, please.

And just like short term kind of addressing the installed base regarding kind of the new regulator. What's the business opportunity? Just trying to get kind of some figures around.

It's a good point. I mean if we look on the retrofit side, and I think we identified that earlier, we identified just to retrofit. There is a service business of our existing fleet combined Energy in Marine of about EUR 2.5 billion. And we said that, that you could realize that, you could say, over the next 5, 6, 7 years. So what -- when you look at this, what has been holding us back a little bit on the retrofit side during last year was actually the supply situation for electronics. So -- and this is slowly getting into a better way. So we have identified before a significant retrofit potential and it's there.

Next question comes from Errki Vesola.

Hakan and Hanna. First, I would like to ask how does the detachment of[ NACOS ], so to speak, showing your customer in the phase. I mean have you talked with completely different people in supplying [ NACOS ] makes as you have when supplying fleet optimization stock? I mean, will the shipping companies be missing something when they have a look at your offering.

So if you look on our fleet optimization services and you know the software, they are actually, you could say, bridge agnostic. So they are set up to be able to communicate with [ Eni ] our competitor systems with our own systems. So from that perspective, I mean, having the bridge hardware equipment is not a pre-condition for doing the fleet optimization services. So what we take -- took -- have taken a forward look on this hardware-oriented, which equipment business is, are we the best owner or the profitability where it would be make attractive for [ Wärtsilä vessels? ] And can we leverage this part of the business with the rest of Wärtsilä. And we have found that the -- synergies with the rest of the group? Yes, there are synergies on the customer side because cruise is a big customer. But the synergies, if you look on the marine power offering are rather limited. So since we can do the fleet optimization, integrated with Performance Services, even without [ NACOS ] et cetera, [ NACOS and friends ], we have taken this decision.

Okay. Very good. And what's the market like when talking about the eventual divestment of [ NACOS ]makers? Are there many potential buyers?

Well, I think so far, we have -- had been contacted with quite a few actually, both, I would say, strategic and other type of buyers. But I also -- I mean we need -- we will do this in a properly -- I mean in a speedy, but also properly fashion. And you know the drill we -- first, we need to carve out and we need -- so to say. But there is -- I mean there is a strong initial interest from the market.

I do not see any thumbs up at the moment. [Operator Instructions] Max Yates.

I just had a quick sort of housekeeping question on the 2 different parts of Voyage. So is one materially more loss-making than another in terms of the bit that you're keeping versus -- that you're moving? And I guess, just in terms of kind of how we should think about the speed of turning around the business to get it back to breakeven? Do you think it's going to be faster to turn around a bit that you've kept, I would assume that's kind of the logic? So if you could give us any feel of kind of how profitability and that EUR 38 million loss that you made last year, how that may be just even if it's qualitative, fits between those businesses, that would be helpful.

So -- good question. So I'll answer from a different -- a couple of different angles. So -- the major driver of doing, you could say, the split and then -- with 1 piece in portfolio and another integrated with Marine Power has not been -- primarily been -- looking at the speed of a potential turnaround. I would still -- still say the speed is over a couple of years. Is that magnitude? The driver -- the primary driver for making this and it has been where we have seen this strategic fit with our Performance Services business and that we can really focus on that. Then -- which part is more profitable than the other? I think as I said before, Voyage -- old voyage, and I mean, the business we are carving out 2/3 that was or is still is -- it's a more traditional hardware business. The one that we are keeping and if I -- in integrating in Voyage services as a business unit, it's more of a software related. So they have a little bit different dynamics when it comes to how the P&L looks like. I mean as you would imagine, the gross margin in the software business is much higher, but you also have a lot of R&D whereas in the traditional hardware business, the gross money might be lower and R&D is less. So it's a little bit hard to -- benchmark say one is more loss-making than the other. And that has not been the primarily. The primarily driver is the strategic fit because the software-related business that we are now integrating. I mean, the primarily focus is not to sell software license. It's really how we can utilize this functionality to combine it with our performance-based tools to evolve our performance-based services and optimization.

Okay. And maybe just a quick follow-up, and I guess this is sort of more on portfolio, both in terms of acquisitions and divestments. I mean, I guess this -- the actions on Voyage too are great to see because I think it's something people have been sort of asking for a while. I mean do you see portfolio review is ongoing? And are that -- why might be finding kind of 6 months -- sort of actually, there's another area within Marine Systems area with Marine Power that might sort of help improve profitability? Or do you see that as a pretty isolated case on Voyage? And I guess then the same question on acquisitions. How much of a priority over the next 12 months is doing acquisitions? Or are you very much focused on just generating cash and improving margins and executing on what's in front of you? So slightly 2 questions there, but that would be great to hear.

If I start with the second -- your second question, I mean, when it comes to acquisitions, we would certainly consider acquisitions, but not maybe of the the bigger kind that we did, I mean, acquiring [ Hamworthy ] or something like that. I think what we are looking at is more like the Port link acquisitions. We acquired certain critical technical competence or critical competence in a -- in smaller companies. It's more of a bolt-on strategy. Then when it comes to portfolio and the way forward, I would say, like we regular do strategic reviews of all of our businesses and business units. So I mean, that is part of our normal process. And that's why I also know [ MES ] took the decision there. So this type of strategic reviews, they will continue, they are part of our regular process.

I mean the reason I ask is I can think of another company where, I mean, effectively, a few of the business units were kind of given the challenge of turnaround, improve your profitability or we need to find a solution like Voyage. And I guess my question is if -- if I saw the profitability of all of the business units and kind of look, I don't know how many business units are in Marine Power. Would I be surprised to find there are certain businesses within that line or within that division that are losing money? And therefore, maybe if they don't find a solution in the same way that Voyage has maybe struggled to improve organically that -- that we might find there's other areas of Marine Power, which are kind of [ locked in there ] where maybe another solution has to be found. I'm just -- or is the average profitability across Marine Power pretty consistent same with Marine Systems? I'm just wondering within the whether there's any sort of obvious candidates.

No, I wouldn't say so. Marine Power, we know regard as 1 unit we have a newbuild and then we have different service business units. They do different things, that spare part field service, performance service, now void service, it's a retrofit. So we regard that as 1 unit. And I think it comes together as a holistic business, so to say, even though we have business unit. On Marine Systems, you could say, rightfully say that this is a little bit more disparate collection of business units. And they -- if you look at the [ celes ] there is not the same. They are more discrete businesses. And -- but I mean, as far as where we stand now, how we look upon those businesses. I think they are definitely part of the Marine System, so to say. Then we will need to see going forward a little bit how -- the business -- those different businesses evolve. But for now, we don't have any plans.

Then a couple of questions I have received by e-mail. So how do you see the potential for sustainable mid- to long-term growth in your service business, given the potential from moving up the service value ladder? Should we think of the trend as similar to your group organic growth target or something higher or lower?

Well, I would say that if you look at our growth targets, and I really highlighted and said that services the major growth generator, you could say short term. I think that sends some signals. And so you have a certain average and we stress that services is a major growth generator. It's about half of the business.

Then on potential domestic U.S. content in storage. There's a big focus on local content within the U.S. Inflation Reduction Act. How are you looking into ways of meeting possible local content requirements particularly given the current concentration of battery manufacturing capacity in China?

Yes. No. And that is a very central topic. I mean I answer your question, but I'll first start to set a broader break-through and then zoom in on your question. So when we -- because I mentioned that we really see a very hot U.S. market when it comes to renewables and therefore, balancing power, both the thermal and the storage, battery storaging. And that was happening even before the IRA was put in place. And the IRA has now been put in place. And we start to see things moving in a further accelerating, but we haven't so far seen any concrete results of the IRA. So it's yet to come. But sometimes I get answered, do you see concrete results right here right now? No. So it was a hot market. It's becoming even hot especially on the storage side with IRA. Now as you know, IRA has -- it's a fairly complex framework. But it certainly involves requirements for -- by Americans. And it's clearly so -- that going forward to be competitive in the U.S. market, you need to have a sourcing of cells that have been manufactured in the U.S. So that's going to be a transition over a couple of years because it takes time to build up, and we are not integrating backhaul, so to say. Our ambition is not to produce battery cells. So we are working with our supply partners and how you can build up the U.S. footprint because that would be needed. But it will take some time to get to that.

Next question comes from John-B Kim.

I'd like to switch gears a little bit and talk about differentiation within storage. How would you characterize Wärtsilä's position perhaps versus other competitors like Fluence and some of the new entrants mentioned previously?

So I think we work -- where we try to differentiate is on our -- delivering our commitment. I deliver on time with the right quality and with a strong focus on safety, no thermal incidents. And I think this -- and then we combine it with the power system optimization, i.e., how you can bring different assets together. And I think that, that offering resonates with -- not with all customers in the market. We need to acknowledge it's a very big market. And there are many different customer segments. And these are those customers that looks entirely on CapEx, but there are also other customers that looks a little bit more on what's the value of actually having this storage in time with the right quality and supported by a company that has been around for 190 years and probably will be around for yes, the coming years. So I think we -- this is.

Sorry, we can't hear you.

Can you hear us now? Can you hear us now? There was some kind of technical.

So when did we drop out?

That's a good question. I think -- sorry. .

20 Seconds ago, Håkan.

All right. So -- okay. So I'll take a step back and then -- so the question was I restart on your question. So hopefully, I can answer it a good way. I mean, basically, my understanding of your question is how do we stick out eventually from a competitive angle. So -- and I think we -- first of all, we focus on delivering our commitments, delivering on time with the right quality and with the right safety. And we cater to customers that really value that. Because as I said, there is a very broad market, and there are many customer segments and the different segments have different attributes. Some customers, they focus on CapEx only and some focus focus -- some customers focus more on the surety of -- getting delivered, also doing business with the company that has been around for 190 years and therefore, probably will be around for some years in the future as well. So our proposition is very much based on -- our capabilities to deliver. The other element which we also differentiate that. And that is a differentiation that is appreciated and looked for -- by certain customers, but definitely not by all customers, is our capability to integrate different generating assets and also make sure that the equipment work in a complex power system. I mean we are a power system company. We have knowledge both in power generation and power transmission. And there is more to it than just hooking up the battery, so to say, if you want to have the best performance, lowest energy cost and uptime reliability.

Sure. Very helpful. One follow-on question. How should we think about where your business is today versus perhaps requirements in the IRA package in the U.S. for local content and local employment?

I think we will get there. so to say, as I said before, it's going to be a gradual shift because the battery cell manufacturers, they are building up their manufacturing footprint. So we have ongoing dialogue with our battery cell partners, and they are getting ready to step-by-step start manufacturing the U.S.

Then I can see hands up from Antti Kansanen.

I wanted to follow up a bit on kind of the competitive advantage on the storage side and perhaps something that happens after you have delivered kind of the projects regarding the aftermarket potential. And we talked a lot about services in a broader context moving up the value ladder. But then the storage seems to be a very much kind of a new installation, even consultancy type of a business for you. So -- just how do you see it longer term? What's the aftermarket revenues? What's the software potential? What's kind of the fit into your overall business model? Because it seems very different in that regard.

So yes, it is because -- I mean, if you look at the classical type of service business, like selling spare parts, providing service hours, I mean the technology in itself doesn't drive a lot of need for spare parts and service -- our -- I mean these are electronics. There are no electrical equipment, and there are no rotating parts, et cetera. So we always said that, that type of the service business is muted opportunity. I mean we have service contracts for most, I don't recall the percentage now. But for the vast majority, we have service contracts with our customers to maintain the storage, but this will be a limited business. Then you look at the software side of it. And there is certainly a potential here. But I think the -- the key element is what's the size of the software business in relation to the hardware business? And I would say you can certainly grow an interesting software business, but it will be relatively small in relation to the overall business, so to say, even if you are successful. And therefore, I mean, for us, it's really the third step when we talk about our performance-based services. If you can really work with the customer, and create lower energy cost and uptime reliability. There is significant value in that. And this is what we are aiming for.

But when you talk about kind of your capability to integrate the storage assets into renewables and the grid. Is this something that you are doing on the design phase? Or is this something that is the software capabilities that does it over the lifetime and ensures your customers to kind of get the optimal performance out. I'm just trying to understand what do you mean when you talk about these capabilities?

You can do it both when you install but also during operation. I mean -- we have customers, they have installed storage systems. And I mean, they have some wind farms. They have a -- small grid system. It doesn't work for them. They don't get the benefits. So you need to bring in this optimization to make sure that the wind farm works together with the storage in a good way. So you have the right security of your power supply. And there is great value. I mean if you install equipment, it doesn't work when you combine it, it's a hassle.

And the value kind of monetization for you guys, is it just market share gains? Or is it some type of a -- over the lifetime performance based in revenues?

Yes. No, it's over the lifetime in the sense that if you look on our industrial customer. If we can reduce their energy costs with X percent, there is great value in that. And there, when you enter in performance-based type of arrangements, we share the upside, but we also put skin in the game. We take a risk because we deliver on the uptime reliability, using data and service capabilities.

Max Yates, you have also raised your hand.

Apologies. I put it down.

No worries. Thank you. Then John-B Kim, you also have a hand up. Is it all thumb or do you have a follow-up question? John-B, we cannot hear you. You're muted.

I think John-B. took down is thumb.

Okay, yes. Panu Laitinmaki, please.

I just want to clarify what you said about the retrofit opportunity a bit earlier. So was it like EUR 2.5 billion over 5 to 6 years?

Yes, 5 to 10, yes. That's correct.

You can know that from our list on our last Capital Market Day. Any other questions? I have not received any questions by e-mail either so. So I guess then thank you, Hakan. Good discussion.

No. Thank you for listening in. And I know Hanna is looking forward to talking to you again in our pre-silent call in a couple of weeks.

Yes, it's on March 31.

Okay. Thank you, everybody.

See you there.

Bye.