Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

Welcome to this call focusing on Wärtsilä R&D and the purpose today is to give an update on our recent R&D progress and highlight the good progress we have in Wärtsilä future fuel's development program. I'm very happy to introduce Juha Kytölä, Director, R&D and Engineering. I checked Juha's Linkedin profile, and Juha's worked in Wärtsilä almost 35 years, which equals almost 140 quarters. So I'm very privileged to work with Juha. And also for your information that he has been awarded also as the Chief Technology Officer of the Year 2023 in Finland. So Juha will start with a short presentation. And after the presentation, there is an opportunity to ask questions. And I know that quite many of you want to understand better, for instance, the engine conversion opportunities. So I recommend to use the discussion opportunity with Juha. But Juha, please, time to start.

Okay. Thank you Hanna-Maria, and it's a pleasure to be here and to share the viewpoints from research development and engineering point of view, when it comes to Wärtsilä products, both for our Marine and Energy markets. I will share with you a short package that I plan to take you through first and then we can take the questions and comments, if you have any. And I hope you now can see the material.

Yes, we can see it.

So let us start along these lines. And first, to go through a little bit the importance and the efforts that we are doing in Wärtsilä, when it comes to research and development. We are actually having a high level of activity. And in the recent years, we have even increased our activity when it comes to research and development. You may recall that our strategy as such could be compressed into one world only which is decarbonization, and this is naturally also the main focus area, which we have in the company. So it's an active and interesting area to work in. Before I bring you into the recent development, what we have been doing in Wärtsilä, I would like to highlight our step-wise process always, when we create something new. From an idea and the market opportunity, our target is not to rush to the markets directly to bring new concepts to our customers or to the markets. Our concept is based on just the process where, first, we focus to understand the phenomenons. We want to understand the opportunities, how things are behaving based on the idea over the market opportunity. We call this as technology development. First, we develop a technology, which also works for us as a proof of concept, so that we can see if the idea has value. And then we can also offer more facts for our organization areas, which can then discuss and communicate with the markets where, of course, development is also involved. After seeing high value on a technology level, which has been developed, then we can consider to bring that idea to a product. As an example, can be let's take fuel development. If methanol as a fuel is attractive to the markets for various and decarbonization and carbon-neutral reasons, we first create a concepts where you can test how to use methanol, what are the aspects, what are the requirements? And then when we understand that, we bring it to the products which goes to markets. I opened this a little bit further in so that you also see a little bit more in-depth process on how to create the technology and how to create the products. I will not go deeper into the logic behind, but I think this is of relevance. We use and scale of maturity of technology based on the technology readiness level scale, which starts from Level 1 and a fully industrialized product is on Level 9. So tier L1-9, when we see the opportunities from the market need, new ideas, new concepts, first we use the first 3 levels on creating research projects, which we then run a few of those parallel. After passing through the Level 3, we have done the research work. And in some areas, we don't need to do the research that much. We can go directly to technology development some [indiscernible] relative basic research. We ourselves are not doing that much of Level 1 or 2, it's university research institutes, but on Level 3, we are open already in [indiscernible]. When going then further into the technology, there we passed Level 4, 5, 6 and we might have less projects than getting into there. And the partners we are involved, you see, from the bottom of the picture, start already to have our partners, maybe suppliers also included not only the university research institutes and partner can also be a customer for us. And then when we go to industrialization, Level 7, 8 and 9, where we are developing then the product. First is prototype, then it is limited release and Level 9 full release. Then naturally, customers are a big part of the collaboration there with manufacturing suppliers and others. Processes are also developed then so that we are maturing the industrialization. And all of this is leading to development to our customers. So this is about the process, how we work. And it has been especially valuable now to have the backbone on the processes, when we've gone further on, on the decarbonization. Then I go to the products. These are the products such products that we use both on Marine and the Energy areas. We have complemented our new portfolio just end of last year. When we introduced the last engine, it was the Wärtsilä 25. You see in the rectangular there. We have now 25-engine. It's a small engine, 31 medium-sized and a large engine 46TS. This is the basis of our modern engine portfolio. It's the platform. Now what we use, now already I'm [indiscernible] plan to use for future. What is special with this new product is that we have used and unique structure for modularity. Modularity for our engine platform means that we have categorized components in an engine, you see a split of an engine there into components and basis down there in the picture. Those are connected to modules and the modules are built according to customer function and customer value needs. A certain value and the need for a customer is fulfilled with a certain kind of a module. This is very important that when thinking about customers, who may have a change in their need after some time, they would like to adopt the engine product to a new need, then we can work within one module, and the rest can be maintained to be the same. They don't need to be touched. For example, if a fuel type there would be a need change with the customer going from one type of a fuel to another one and the fuel is so much different that adaptations on an engine would be needed, then one module or maximum 2 might be touched, the rest being the same. So the new modular platform gives the adaptability for different needs and especially valuable, when we come to the future fuels for coming years. How is the market then looking like? When we look into the towards the future, what are the fuel choices that are being used in the engine products and in the planes and in the ships. Today, when looking there, we are on this beginning part, the left part of this graph there, where a very big part of the fuel use. I use Marine as an example, but this is applicable also to stationary power plants. Major part is this darker gray low sulphur fuel oil, it's [ dark ] diesel oils, different kind of. In top, you see heavy fuel oils, that residue of refining process of crude. It's still having a share in the market, but it's going less and less. And then lighter gray, you see in the bottom is the natural gas based fuel. So these are being the biggest part and the gas is used for many good reasons, getting more and more gain. Thinking the market from Marine point of view, in Marine, when you invest into a vessel for a ship, you actually plan to have an economical life cycle for that around 25, 30 years. When we look on the evolvement of the few spectrum available in the markets for the following 25, 30 years, we see that, like based here on the DNV, Det Norske Veritas Maritime forecast 2015 model. The offering, the use of the fuels within the life cycle of a vessel will change a lot. Natural gas will take a much, much bigger share. If you look on 2030, there are already a big part of the offering is based on natural gas, and we start to see blends between fossil fuels and green fuels. When you go to 2040, you don't see any more diesel in the market. You see natural gas, the blends, but also carbon-neutral fuels as the biggest element there. And when you go to 2050, it again looks different. When making an investment decision on a ship or on a power plant, you see that there is quite a shift on focus and the availability of different fuels. Therefore, it's also became importance to have a product where you can adopt it towards the future opportunities and we could say resections as well. Let's have a brief look into some of these fuels, which are on the top of the discussion and development at the moment. Liquid fossil fuels, diesel heavy fuel, et cetera, have been in the offering of Wärtsilä for a very long time. Natural gas is a strong part of the offering, but now for carbon neutrality, the methanol, it's an alcohol has become very high in attention. Wärtsilä started working with methanol as an engine fuel already in 2015. Then we even made a conversion of one ship. It is called Stena Germanica [ car ] ferry, where we converted the engines to operate on methanol, [ 8ZA40 ] type -- engine type. And those have since then operated successfully on methanol and that was a proof of concept. We could show that it is possible to run engines and then the ship on methanol. We have done refinement then starting a bit later, when the market interest started to grow. 2020, we started technology refinement work further on. Then we went on '22 to the market with the completely new product based on our well-known 32 engine, we took to the market Wärtsilä 32 Methanol engine and important here, not only the engine, but also we developed the full offering on the fuel supply and fuel handling components. So what we call methanol pack. So all the offering around a product needed. And this mark -- has been brought to the Marine market, since Marine has been the market with the highest interest for methanol use. And within the course of this year, we have announced that we will launch further engine types and important, not only for new building, but also for retrofit purposes. So modifications possible for already delivered engines. Here is an illustration of the Wärtsilä 32 engine. It is an engine on what we call common base frame and then the other end of this base frame or the platform there is standing [indiscernible] generator. Engine is running in this case, full power to the generator and out is coming electricity and in goes methanol. It looks from the outside as a normal engine from the outside without those texts, you couldn't see that this is a methanol range. This is a flexible engine. It can operate on diesel fuel or it can switch to methanol back and forth, while it is running. There are power loss lowest emissions, methanol is burning very, very clean. And since as planned, it is bio or synthetic-based methanol, then although methanol contains carbon, but it comes from a source, where you can call it carbon-neutral. It's a carbon-neutral fuel. It converts electricity production on ships as the NOx engine can be for main engine or [indiscernible] engine and also variable speed mechanical drives. In addition to methanol, which is carbon neutral fuel when coming from biosynthetic sources Warstila is also working with purely zero-carbon fuels. And those are 2 ammonia and hydrogen. We started to work with ammonia in 2021 starting really when discussion about carbon neutrality came in our research, fuel research, laboratories starting to see the behavior of ammonia, when combusted and started to learn also how to release energy, how to release from this chemical substance. We learned that ammonia is rather slow in combustion. So it does not burn very quickly, but it burns well quick enough so that an engine operation can be made in a reliable manner. And therefore, we went on, we brought industry collaboration around this fuel. We are not working alone. And in technologies going further to the future, more and more important comes that industry collaborations, research collaborations take place. No company on its own can have all the wisdom and the experience to make things happen, which is very true also for ammonia. Here also, we have done good work collaboration also connecting with our customers in order to understand the opportunities and possibilities. We have promised that in year '23, meaning this year, we have a technical concept ready. We have done a lot of work and we are fully confident on this and that we are ready for first ammonia-driven engine deliveries next year. Here also, the product will be a dual-fuel engine in a way that there is an opportunity to use another still fossil-based fuel or it can be bio-based fuel in addition, before or after than ammonia is used, also here whilst running switch from fuel to another one. Then as I mentioned, the other zero-carbon fuel is hydrogen. Here, we have been active early on as well in year 2015. We already started to study the use of hydrogen in a reciprocating piston engine. We were blending at that time, origin to gases fuel, natural gas, and we created concepts, how hydrogen can be passed into natural gas up to 25% of volume. Energy content wise, that is slightly less than 10%, volume-wise 25% and that was a successful development as we saw. We have continued then going further on developing technology for pure hydrogen running. So technology for an engine, which is running only with hydrogen and no other fuel. We are currently validating our technologies on this fuel of hydrogen in comparison to ammonia, I said that ammonia burn slightly more slowly. So I call it a lazy fuel, but you can tune the engine to take same efficiency as with diesel, when you have the controls correct. Hydrogen on the other side is a nervous fuel, as I call, you need to treat it very well, so that it starts combustion only when you want it in a controlled manner, and that is also possible. So this is what we are doing in our research work and here, we have promised that for the markets, we would have the technical concept ready in year 2025. And this is as we are proceeding along with. So very interesting time and a lot of technologies for different fuels. When I look at the market. So currently, hydrogen is raising a lot of interest on the land-based side, whilst the methanol and ammonia on the shipping side. The hydrogen, although we come with the concept in '25 there, we also have interest from the markets already for hydrogen blends. And here is a good example from our energy markets, power plants. We have a customer in Michigan U.S. who became interested of this opportunity to reduce the emissions from the plant marginally by using hydrogen as a part of the fuel. They have 2 very big engines, Wärtsilä 50SG, very big ones from us. In their power plant, and they wanted to mix 25% of volume hydrogen into their plants. And what they used is an existing power plant with our engines and the test was conducted so that the engines without modifications started to get in fuel with hydrogen 25% [indiscernible] with the natural gas. And that was also witnessed by the third party doing the measurements and following up the tests and all the tests went very well. The plant was working very well. The customer was so happy on this that he also led that to be published in different magazines and gas compression magazine here as an example here, and they made a lot of advocacy of our technology, how it can go well. Also, the consultants who had been involved in other tests like this had been earlier involved into testing, where hydrogen was mixed into the fuel of gas turbine technology. And the consultant was also very pleased and impressed because having hydrogen as a part of the fuel in an engine-based plant, took the efficiency slightly up. So the efficiency was slightly improved, a very good combustion of hydrogen actually made it even better efficiency. Whilst in the turbine plant, the efficiency goes a little bit down, since the turbine blades and the status don't anymore have an optimal angle towards the flow, so it's physics there. So in an engine plant, you can actually get an improvement. There are now many more other customers, who are willing to repeat out testing in their own sites also, and we are participating with them. Here, I would like to do a short review of the characteristics of then these different fuels. On the dark bottom, I have marked the traditional for sulfur. It is the heavy fuel oil, and it is the liquified natural gas. And there are some key considerations there about the fuel itself. You see on the left-hand side, the fuel price factor, their energy content [ gigajoule ] and physical factor, the tank size, how big space does this kind of a fuel system take. If you take the methanol, the first one on the white bottom there, this is a liquid fuel can be storage in liquid format in 20 degrees of Celsius. It's mildly toxic. It's flexible. The tank arrangement on a ship or a band or can be very flexible, no restrictions. The price factor, we don't yet know what is really the price -- expect price for developed market for carbon-neutral methanol, but we expect that to be between 2.2x to 5.4x, the price for heavy fuel oil, which is the reference. Because the price is higher than the reference view, it is very important that the engine efficiency is high, and this is the starting point for Wärtsilä also, minimum the same efficiency on the engine, the gross size, tank size. So if such an installation would be on a vessel or a ship, also on land, the space for the tank would be 1.7x of the heavy fuel system. So it takes a little bit more of that space because the heating value is lower than volume. The next fuel is ammonia, ammonia needs to be liquified to minus 33 degrees in order to get it liquid. Otherwise, it's gaseous or you can compress it to [H bar ] and then it becomes also liquid. It's like [indiscernible] gas, but also in mixed propane gas. It's toxic and corrosive. So ammonia needs to be taken with care. There is a lot of shipping happening with ammonia, because it is transported for fertilizers use. But today, it's not common in the engines, but safety can be developed. Fuel costs, it's close to the same as for methanol, 2.2%, maybe max a little bit lower because so much used also for the fertilizers. But the tank size is almost 4x the same as for [ fuel ] so it takes space. Then liquid hydrogen, if we want to use hydrogen in a liquid format, it needs to be cooled very low down, 253 degrees of Celsius, very cold. It's possible technologies, cryo technologies exist. It's very reactive fuel, but the price level is expected to be not so different from the methanol or ammonia. But the tank in a liquefied system is very big, 7.3x, almost 8x bigger than heavy fuel. And this is a major restriction for ships use, so tank takes a lot of space. You could also compress hydrogen, so you will use it as a gas, but then the tank size is almost 20x that is hardly possible for shipping, but on land-based on power plant, where the space is not similarly always a problem, it is well considered. And the last comparison there, if you would have batteries. So there, the price factors are somewhat above the heavy fuel oil depending on the concepts then, but the size is very, very big. Current technology, 40x as big as for heavy fuel, and even with the future expectations, it will not come lower than 20x. But batteries are seeing as a good complement for engine technology also. Wärtsilä is already involved in 104 vessels, hybrid vessels, where on Merchant segment, cruise and ferry especially, we have seen a lot of interest, but also, of course, offshore and specials, lot of installations where batteries have been built in, in addition to the engine technology. They have basically 2 motivations. One is that you want to on a short term in the harbor, et cetera, you want to run with batteries only to make your environment footprint locally even lower or then that you want to have those complementing the variations of the power need in the ship, and therefore, you might get some savings on the fuel consumption. It's like in the cars, you can't refer to or the hybrid -- reuse concept on hybrid or similar. We started in 2012 and new builds is the retrofits and then newbuilds in 2016. This is a technology that can be applied for both newbuild and retrofit. Wärtsilä has also developed solutions for full electric ships. Here, we have a brand-new example. It's an Incat, Tasmania, 130 meters long ferry, which is fully electrically powered and battery-powered. All technical part of the ship being delivered by Wärtsilä. Waterjet propulsion from Wärtsilä there. It's a catamaran ship carrying both cars and passengers there. Vessel delivery will be at the end of '25. This vessel has an independency between the harbor of 80 minutes or 1 hour and 20 minutes between charging stations. So that is the concept here. Then my final slide here, when looking further forward, emission restrictions come harder and harder, you see there is an evolution between the different fuels in the markets. Old is calling for development of the ships, the vessels all along when going forward. And this is a Marine example, where we believe and we see that there will be more and more ships with electric propulsion -- electric-drive. And engines are a good source for powering ships for a longer independence time than in majority of the installations. But in order to make the ship concept more flexible with electrification, allowing then later on hybridization with batteries, with wind power with new technologies, even fuel cells is available 4-stroke technology, having multiple engines, smaller engines, instead of having one or two very big 2-stroke engines having direct mechanical drive. The concept with multiple engines, electrical support is proven to have a lot of potential, when going further forward. And this is an area, where Wärtsilä is also investing together with the customers and together with the fuel choices, the new choices and the hybridization. So this is completing my package, what I had here in order to prepare a little bit thinking and to motivate hopefully some questions.

Thank you, Juha for insightful presentation. So like I said, now there is a great opportunity to ask questions. [Operator Instructions] I will allocate the time here. So, Sven Weier. Please go ahead, you have the first question.

The first question I have is just coming back to ammonia given the great success we had on methanol in the last 2 years was probably much more successful than anybody saw 2 years ago. I mean, has that -- think you have changed the commercial take-up of ammonia? Do you think this will now happen much later than you would have originally thought? That's the first one.

Yes. When looking to the market interest, basically, we can say it is -- the starting point is the same as it has been all the time, especially the markets in Norway have an high interest towards ammonia. They have decided to go for zero-carbon emission. Additionally, we have seen markets developing positively in Japan. And there also, we see a lot of activity, when comparing the methanol and ammonia. Yes, the uptake on methanol has been earlier, and there is a high interest into that. But it is -- there is still a lot of interest around ammonia as well. And we have kept our timelines as they were originally set and promised to the market. So we are fully online on that.

And do you feel that the challenges with ammonia like the NOx emissions and various potent greenhouse gases. Is that now under control? Do you have capturing measures that this is no longer an issue?

Yes. We have never said it's an issue. It's a development, our focus area. And we have catalyst technology as a part of our own portfolio and in our ammonia concepts, catalysts will be used also there in order to secure that in together with the good engine technology, we don't harm environment. We are actually working in a sustainable way. [indiscernible] release the technology fully yet, so this is as much is to cover, but the environment is the full focus and greenhouse gas impact.

Next question comes from Panu Laitinmäki.

I have a couple of questions. Firstly, on the engine conversions, especially on ships, I guess. So is it mainly from heavy fuel oil to LNG or something else?

Yes, it is a good and important question. When ships use heavy fuel oil, they actually always have also a diesel fuel opportunity there. So those kind of -- that is inbuilt. Then what we have been promoting to the market earlier on has been the natural gas option. However, the choice to go to natural gas has been economically creating some pressure, because if you modified your ship to have a natural gas tank and the systems on board, you need to have the space. And of course, there is an investment. Additionally, you need to modify the engine. The engine actually is rather straightforward. So an engine when you change the fuel system, you actually only modify the top part of the engine, the way you introduced the fuel into the system, but in the ship, you might need to have consideration, do you have the place for the tank. Maybe you can put it on the top of the ship or at the -- but the -- typically the tanks are inside. We're now looking with these new fuels, for example, conversion to methanol, methanol tank can be rather easily placed in the ship. It can even be in a -- against ship hall, it doesn't necessarily need to have double wall system for the tank. It can be fitted in spaces, where the tank doesn't have a cylindrical or a specific geometry. You can use cavities in the ship for storaging your methanol. So it's an easier fuel to adapt in the ship. So methanol is providing a lot of opportunities in this direction. Naturally, natural gas is a choice still for many ships. But if the ship doesn't have natural gas system from the very beginning, it is a heavy fuel ship. So it is possible that the methanol concept is more attractive. Also ammonia could be perhaps within the rates then not being as exactly as easy as methanol, but it's a choice.

Okay. But just to understand kind of how many fuels can the engine ultimately run on? So if you kind of convert it from heavy fuel oil to LNG, can the same engine be converted to methanol? Or how does it kind of work? if you think about the engine only and not the stuff that you need to install to the ship?

Yes, basically, you can change it to anything. The question is then like our dual-fuel concept or it's sometimes it's a triple fuel concept, where you can run one engine. And while it's running, having, let's say, high power, without any gap in operation or power output, you change the fuel to another or another. There is a physical limitation, how many different fuels in that respect, you can have. It typically have 2 fuels. You can have a natural gas engine on Marine use what we use and sometimes in energy also, there you have a choice between liquid fuel and the gaseous fuel. If you have an ammonia engine in the future, you will have a choice to go to another fuel and ammonia, but it will not be like 4, 5, 6 different fuels. It will be between 2 or 3 fuels than what the same engine can take, but you can modify those engines later on to any other fuel as well, especially the new portfolio, which is so highly modular.

Okay. Just final one for me. I mean we usually hear about the conversions and the new fuels in the Marine side, but what about NHS, are this -- I assume that it was relevant there? Or is it like the engines we can run on hydrogen like in the future?

It's a great question. Today, majority on the land side seem to have high interest on hydrogen, it is because of potentially that they have possibility to get access to hydrogen or they are considering to have technology wise, there is no limitation, neither when it comes to methanol or other alcohols, like ethanol also or when it comes to ammonia. And there are discussions of all of these, but hydrogen seems to be very popular amongst all of these at this moment. Technology-wise, no difference.

Next question comes from John-B Kim.

Two questions, please. On the Marine applications, it does seem you have both space and fuel cost constraints. In your experience, when these 2 factors compete, what is the dominant variable that people -- are they when push comes to staff do they choose? Or are they forced to consider the space or the actual operating costs is one of bigger consideration than the other? And then second question, I'm sorry if I missed this, but can you talk a little bit about carbon capture tech and what sort of adoption velocity or applicability you see for that technology in the fleet call in the next 10 years?

At first, I'll take the decision criteria, if it is the space or the operational costs, et cetera. I would say that in all our markets where we see the customers are very, very focused on their operations financials. So operation cost is definitely an important factor for them. Although now, of course, we need to have some future views also involved into this, so that there are estimates also on the availabilities of the fuels and the cost, et cetera. The physical limitations, basically open, we then end up in discussing not so much of the space itself, but with the space, what they have, how long independence can they have for the vessel. And if you add one fuel choice there, you might want to take another fuel tank, which is not enough -- sorry, it's the same space as or the capacity has for the primary or the earlier fuel. You might want to invest into a fuel tank, which only gives you a 1/4 or 1/3 of the independency time on that fuel, but you still continue with the earlier fuel there to be the choice. So it's more about the time of the independency of the ship, which is being then discussed then if you -- they could match exactly the same. And finally, it is an economical compromise. Then you had another question about the CCS of the carbon capture storage concepts where Wärtsilä also is doing research and development and lot in comparison with our technologies for sulfur cleaning on the ships. This is a technology where we are also on earlier phase on doing the research, technology development looking already now anyhow for the first installations, where we could adopt that. It's a technology that they will adapt into ships, which have a longer route, so ocean-going ships, more commercial ships than the passenger ships, could be considered also for bigger cruise ships. And it's an interesting technology, where we need to see the potential together with the customers again as we are developing forward. It's a very potential ways to capture the carbon and then being still able to use low-cost fuel without loading them or impacting the environment.

And just reminding that the timeline for our carbon capture is such that we expect to be able to release the commercial solution in 2025. So no [indiscernible] be bothered. Next question comes from Sean.

I wanted to maybe to step back and look at the broader R&D. I mean is 4.1% in your view, the right level of R&D, do you need to push that further? That's the first question. The second question is how much of your R&D spend is going into the future fuel strategies that you've highlighted in this report? And how much goes into other areas? And thirdly, thinking about some of the, let's say, R&D avenues that you've ended up writing off over the years, what has changed in how you identify, which routes are the best to invest in and most likely to reach industrialization. Would you say, in fact, that your R&D today is more focused on industrialization maybe compared to before?

So maybe starting from here. So regarding the split, how the R&D budget has been split. We have already said that this future fuels program, it's one of the focus areas there. So we haven't split that to more detailed level. We'll see whether we can open that on Capital Markets Day. But unfortunately, this is not a place to give more color or more detailed disclosure on that.

If I respond to your first question, is this 4.1% enough, what we put to R&D, et cetera, you asked the wrong person. Since I'm, of course, very curious, would like to further study and to do. If I look it from the company point of view, I would say we have grown steadily now or actually very recently furthermore on the spending on research and development. But it's fantastic the way we have done it. You also asked us the last question, what has changed in that, earlier technologies were developed in companies like ours whilst the developers themselves created concepts and discovering new opportunities. Now development is much more open and transparent in a way. We are inviting much more collaborators around us, so we are much more open. We involve also much more people. We are in extremely good position in Wärtsilä, since we made a very big investment for new facilities. We have our new sustainable technology hub, a very big investment, which was made just recently one year ago, opened officially in our main R&D site at Vaasa, Finland, where we have a lot of collaboration possibilities also. So externals can come there. We have open innovation areas. We have partnered campuses. This is a big change in developing, creating research and technologies, the openness there. So that, I would say, and we are very happy on the level that the company is now investing into this. And I'm confident that we can prove it by bringing results also by showing to the markets the potential ways how to decarbonize and how to improve their own business and operations.

Next question comes from Johan Eliason.

Yes. I was just curious a little bit on these opportunities with the readiness of the different fuels going forward. I mean on LNG, you and MAN has been selling dual-fuel engines for a decade or more. And we obviously learned that in fact this dual-fuel that were sort of transformed -- occurred because of the tank issue that you brought up. But what it did do is that it allowed you to capture market share in the 4-stroke and MAN in the 2 stroke, where you were late with your sort of dual-fuel concept and eventually left the market. How would you say your readiness is now for methanol, hydrogen, et cetera? Will you be among the first one sort of being able to sort of offer these ready fuel type, whatever fuel there is going forward so that you don't lose risks losing any market shares?

Yes, you have multiple dimensions in your question, when you have -- asking about the market shares, et cetera. But I can respond to the technology part there, so like you said that we were early on with the dual-fuel technology. We also have, by the way, a single fuel technology, which we use for a land base. So we have engines which run purely only on natural gas, while marine preferences has currently been on the dual-fuel technology, maybe it will develop also and evolve a Marine side. When it comes to methanol, you ask if we are on time. We were clearly #1 in the market. So in year 2015 already, we made our research technology development earlier on than that. In 2015, we took it to the market with Stena Line with their vessel there and adopting that technology today set [indiscernible] engines there and we have continued on that path since then. So definitely, we are on time on there. And as was mentioned there, we come with other releases also within the course of this era of methanol. Then on ammonia, we are in a very good position on the ammonia technologies and development. And next year, the delivery capability is a proof of that. Hydrogen, we already have shown it with the customers in the field with the hydrogen blending. So I would say what we have is not only that we are early with these different choices. We have also been able to create the width, so that it's not only one fuel that we have been working with. We actually have all those mostly most attractive fuels now in the market on a very good development path. So naturally, I cannot comment where the competition is. So you probably ask them later on. But at least we are in a good position in the technology road map.

So that should be comforting for us. Excellent.

Next question comes from Max Yates.

I just want to ask 2 things. Just firstly, you talked about modularization at the start and everything you're doing there. Is that primarily about, I guess, making the engines ready for converting them? Or is there also a cost element? Does having modularization allow you to bring the cost down? And kind of -- do you have an ambition every year with this kind of modernization process of kind of how much cost you try and take out of production? Any kind of sense of how much you've been able to achieve over the last 3 years would be helpful.

Well, that's, again, a question which has actually a multiple of dimensions. And what I would say first about the modularization. The thing with modularization comes and start from categorizing customer needs, along with functionality, which then brings us into a structure, which finally goes to the mechanical and automation side, which is the concept. So product with modularity as we have built is -- built around customer functions, customer values, customer needs. It does serve at the same time kind of standardization. So with the product -- can be managed this way and structured this way, also meaning that the interfaces between modules are standardized and not touched every time, it means that the number of variants get less and the variance reduction actually is serving them on the benefits on the cost side. So then you are able to put some more volume on less components. Then otherwise, yes, on the cost development, cost reduction is all the time our target, but I don't think I'm in a position to tell, which the percentages are and where we are heading. But cost is naturally a high priority for all development what we do.

Okay. And just the second question was if you could talk a little bit around. You've talked a lot about the equipment, but obviously, service is a big part of what you do at Wärtsilä. So in terms of the offerings, could you talk about sort of from a technical standpoint, what you're able to offer the customers today on services that you maybe couldn't do 2, 3 years ago? Because I guess when we look at the figures on the outside, you're getting a lot more service contracts, you're trying to move up the service ladder. But what does that look like from a sort of product development standpoint in services or a development to the offering?

Yes, that's a great question. We indeed as a part of our high priorities. We are looking also how can we support our customers better, which means then that we also are able to climb the service leader also up because we can offer them more. We have, of course, improved a lot of our digital offering. We can have more monitoring. We have more adaptive sensors on the engine so that we can follow-up how the customers are operating the products and how those develop. We have utilized AI. So artificial intelligence on the analysis of the data so that we have not only like rule-based judgment if a product is behaving well or not, but we can also keep some modeling behind so that the AI model can then learn how the engine behaves in this specific installation. And that is made possible both through the data transfer, but also the data development so that we are measuring the correct things there in the installations, and we know how those behave and should behave. And we are using the same methods for our own test engines and the laboratory engines, so that we also see when we go out of boundaries on purpose. So we see also how the reaction is. So a lot of development on that side. And we've nicely seen that the customers want to rely further on, on us because we have the knowledge and the opportunity to assist them better than in the past.

Just perhaps one very quick final follow-up on that. When you talk about sort of getting data and sensors off the engines. Is that for only the engines that you have under contract? Or is that something that's used more widely across your installed base?

We can use also more widely it's technology that can be expanding too or else -- that's why we are also able to attract more customers to join this contract avenue because they can also take the same benefits then into their business if they so want.

Next question comes from Anders Idborg.

Just wanted to -- at the very end there, you talked about sort of the advantages of 4-stroke versus 2-stroke and going to hybrids, alternative fuels, et cetera. So if you could just talk a bit more specifically about those advantages. And if you think it could lead to sort of a meaningful shift from 2-stroke to 4-stroking in some categories?

Yeah, it's an interesting question. And indeed, we see this potential. When looking now a little bit open a different viewpoint on this business. So when looking on the development on the legislation on Marine side, IMO who is actually governing the target setting for the emissions of greenhouse gas is strongly now, had just there such a ruling meeting, MEPC meeting in the beginning of July this year in London, where they decided on more stronger regulation and limitations as a target now for the marine emissions. So in earlier times, they said that the shipping should remove their emissions to half by 2050. Now the target is that the greenhouse gas emissions should be eliminated by 2050. And when I showed this pathway for the different fuels, which was ending in 2050, and I explained that there is such a gradual development, the same development needs to be seen also not only from the fuel offering side, et cetera, but also on the regulation on the emission side. There will come different kind of taxation for CO2 emissions, et cetera, pushing also decisions towards minimizing the greenhouse gas emissions. One way, strong way to reduce already today with the ships is that you just start to drive them in a lower speed. You take a ship and you lower your speed, that's one way to reduce your emissions and by that, you become better and better in the greenhouse gas emissions. Of course, it has the counterpart that your cargo is moving slower and you earn a little bit in a lower frequency. But the big thing there also is that if your machinery is not allowing you maintaining a high efficiency, then whilst you are doing slower movement, but you start to drop in efficiency. This is what happens on the 2-stroke engines. They are very efficient mechanical drive, simple system, no gearbox, et cetera operating on a nominal efficiency or nominal power at a high efficiency. When you take down the speed of such a vessel, your efficiency start to drop and rather big also. If you instead make a machinery, which is future-proofed as we propose with multiple 4-stroke engines, then if you ultimately then, in addition to adding batteries, et cetera, changing probably fuel, at least to partially because it's more expensive. You do it partially. If you start to move the ship a little bit more slower, you can still have the same high efficiency, since then you operate less of your machinery, a switch off one engine or 2 engines, then if that is the way you want to adopt. So it's more tolerant for the future regulations also such a machinery. Future will show if that is a big thing there, but at least it is hinting a new potential in that kind of shipping market compared to the benefits of them earlier environments of the ship operations.

And I guess that's something you maybe already starting to see that. I mean this is something that's been a factor for some years already.

Correct. Yes.

Next question comes from Erkki Vesola.

First, a question regarding methanol and ammonia availability for vessels in harbors, I mean, in larger scale, what kind of timeline do you see there? And what kind of plans have you seen?

Methanol seemingly is fuel, and I now speak of carbon-neutral methanol is a fuel that is being, where a lot of supply is being developed. So we already see a couple of vessels in the market, which are operating on methanol and of course, methanol exist if you want to take a fossil-based methanol. You can get methanol, which is produced from natural gas, et cetera, but there is no -- it doesn't make sense in the decarbonization view point. But a lot of plans are being developed both for bio-based and also for synthetic-based fuels. And it is expected that by 2030, there will be a really good supply of methanol, I speak of pro terms now. Investments are being done on all the continents. It's not only in one spot in the geographical area. If you google methanol production, et cetera, you see from China, America, Europe, South America, lot of projects working, who are heading into that. Ammonia is not a fuel that would come from the bio-basis. That needs to come from the synthetic basis from hydrogen production and then you combine nitrogen there, that also can be as an outcome from these plants that are going to make methanol. Actually, when you start to break hydrogen, you can choose if you go to methanol, ammonia, even methane gases, fuel et cetera. So ammonia will come as well, but it will be probably a little bit more limited in the access, since currently, it is this Norway, Japan areas, which have the highest interest to [indiscernible] methanol it is many areas. But that is harder to predict when and what kind of availability is coming. But technology-wise, it's not more complex than methanol to produce.

And then the second one, our link to this. What do you think will the shipping companies, I mean, have the courage to start ordering vessels with methanol or ammonia engine alone or will the engines ordered in the coming years be multi-fuel modular engines, I mean, in the foreseeable future?

Yes. In all discussions where we are involved, they are looking for an engine which is using methanol or another fuel as the fuel. And I think it's a wise decision to do when the same as when the gas engines came into the market, their logistics supply was that widely available. So it was a good choice to use a dual-fuel engine. So it will be with the methanol as well. So but in addition to methanol, you can choose to use, not the fossil-diesel, you can also use biofuel, liquid biofuel. So you can have solution, where you use either biofuel or methanol, and that's a possibility with the technology, what we have.

And the conclusion is that there's much, much less interest in ammonia at this stage?

As I said, that the methanol interest is global, I would say, and the ammonia interest is in certain segments on geographical areas.

Next question comes from Akash Gupta.

I have only one question, and that is about Asian competition and clearly, in 4-stroke earlier, there was not much competition and 2-stroke was technology that you licensed out to some companies in Asia. But can you tell us about when we look at these new technologies like these methanol as well as these ammonia-driven vessels. Do you see any competition from Chinese and other, for example, Korean companies emerging?

Yes. We definitely are not alone in the market. So there are 2 as known projects here and there about these different fuels. We don't know so much about the content then behind, so if there are products or so on. What we know and what is official in the market that in South Korea, there is a player, who has already introduced to the market, the methanol engine. But besides of that, we have no firm evidence on others.

The next question comes from Vivek Midha.

I just have one more question on the energy storage business. I was curious if you could expand on what steps you're taking to drive your competitive advantage there through R&D and any improvements you're making to the GEMS software?

Yes, the energy storages and business of its own, which is on our energy area, and that's part of also research and development and also business what we are doing. Unfortunately, I'm not coming directly from that area. So I would refrain on commenting further on that, but it's a very active area.

Another question, if I may, on the Marine side. Sure. Another question was on the carbon capture side in Marine. In terms of the steps needed to turn a system, which maybe captures only 20% of carbon dioxide into one that can capture maybe 70%. What sort of technological steps do you need to take? And how do you expect the timelines for this evolution to evolve?

Well, of course, we need to start from a level where partial capture is ongoing in order to have the efficiency, i.e. possible. This is proving us the roadmap then going further forward and increasing improving that efficiency. But at the moment, what we are planning to prove and to show is that it is possible within the ship also to do the carbon capture and storaging. There also in the business side, then we need to have further developments also on the logistical path after the carbon has been captured, where to lead it and where to transport it and where to storage. So the starting point is very, very good and clear what we have and the next steps then the technology development, then will follow, but we are not ready to open those further up.

Next question comes from Sven Weier.

Yes. A few follow-ups, if I may. The first one is on fuel cells. I think we haven't really discussed fuel cells. You have a strong position on the auxiliary engine side. And I was wondering how much threat do you see that on the auxiliaries, the fuel cells will eventually take over? And are you planning to develop your own?

Yes. It's a good question. In year 2000, we started our own development of fuel cells and after a couple of years, I was actually myself in charge of that development also. And we developed it rather further far. So we actually had a working systems also on ships and on land-based. So we had the fuel cell system based on the solid oxide fuel cell at that time, which was out of choice then. And then we divested that company. We still own a small share of that company, by the way, but it's a small share only so that we can follow up, where the technology goes and we have a little bit in-depth into that. We also have been involved in projects where PEM fuel cells have been used as a part of the ship system and we are having our finger on the pulse, all the time on the fuel cells. I would say that a little bit earlier, within this decade, there was more focus on the direction of fuel cells. The challenge there is the CapEx cost and the life cycle of the cells. And if I would put in relative terms, we currently don't see that huge interest towards fuel cells. But if customers want and need to have, we are also integrating those into the deliveries. They have been very minor so far.

Okay. Second follow-up I had was just on the energy side and what you said on hydrogen. I mean, to what extent do you think clients are waiting for your full hydrogen engine to become available to make the investment? Or are they happy to go with the blend in now and then with the maybe retrofit later?

Yes. We see currently, customers are not ready to jump themselves either to full hydrogen use. This is how it looks. So they don't have a reliable supply of hydrogen. But there are 2 kind of customers, I would say. There are customers, who have interest to produce hydrogen themselves. There are those customers, who have an energy supply from different sources. And they think that when the electricity market is not strong or benefiting them economically strongly, they consider if they could use electrolysis to produce hydrogen. That is one segment, where they have a potentially need to storage hydrogen, use it as a part of their production, et cetera. Then there are those who think that they can source hydrogen from others, and they could use it as a part of their production. There also, we see that there is like seasonal or periodical flow of hydrogen expected, not a continuous flow. And therefore, this blending seems to be of high interest at this moment. The markets can develop, of course, further on. That's why we are developing the full hydrogen product. But at this moment, it seems that this spending is of high interest.

Final question I had was just on air lubrication and the winter system in which you covers through partnerships at the moment. I mean is that kind of your long-term plan? Or is there also maybe more interest from your side should get involved in lubrication? I mean the market is quite taking off and are you happy with those partnerships.

At first, I would address the concept, so to have the air lubrication. It's a good concept in order to reduce the friction under the hall or ship hall and when putting these air bubbles under the vessel there, it has been proven that it gives some efficiency gain. The same as with the wind-assist system as well. So you can gain some reduction on energy need, when you have a wind-assist system and when you don't have the favorable winds then you don't use it. All this fits well to the strategy of having a vessel concept, where you can adopt, you can use more power, less power from the engines and then you come into the either the directly the electricity grid in the ship you can fill in something that reduce the hallway systems. You can use wind-assist system. All of this supports the concept what we have a little bit with these hybrid systems on board of the ships. So technology-wise, these are interesting and attractive, when we definitely at Wärtsilä offering want to keep those nearby us. Then it's more a business decision then if the management would like to then invest or not invest this. I hope you get a chance to ask our CEO or our CFO later on then. But technically [indiscernible] yeah, hopefully, you're joining.

Next question comes from Tomi Railo.

It's Tomi from DNB. Just checking if there was a difference between the sort of technology methanol or ammonia in terms of the initial investment cost, when you take into account everything from that technology, engine, storage, installation cost point of view?

You mean difference in the cost to develop or cost to purchase or?

Yes. Basically the CapEx cost?

For a customer.

Yes.

Yes, good focus. They are not far from each other, but some small differences come. One is that on ammonia, you need to put a little bit further attention on the safety. So the safety aspects do require a little bit further aspects like you might put compartments, where you handle the ammonia in a more secure way than you would need to do with methanol, then on the tank sizes, the ammonia tank is slightly bigger. You need to cool it down to minus 33 degrees or you pressurize it to [ 8 bottom ] methanol you use it in atmospheric pressure and temperature. So ammonia installation, the CapEx part then from the system side has slightly more cost from the engine side differences are less, I would say, what is it in total in percentage on the total installation or so on, I don't unfortunately have that number with me, but it's not day and night, but there are some aspects.

That's very clear. The second question and maybe as a follow-up, referring to the beginning and the topic, what is really the potential? Is it in retrofits or new build and is there a difference for you in terms of value and the potential, whether the market is going to pick up in terms of retrofits or is it the new build market?

It's a large question as such. So if doing new build means that ship stays or a power plant stays in operation for 10 more years, then it can have a good impact, when whilst on the new build, there is an estimated lifetime already in built into that. What we do is that we are providing now technologies for both markets. So for the new build market for a new ship or a new power plant, but we also create an opportunity for the life cycle part what we call is the retrofit. And as when I showed in the slide with the different fuel evolutions, this has been very important part of the development program also. The customers will probably change at least once the fuel choice they are using during the lifetime. It may be even more. So this is a slight difference also when you compare to in the past of the company. So offering of existing is now also high in agenda.

If I can ask one follow-up. Currently, in terms of the activity, is it more like conversion market? Or is it new build?

Well, it depends rather much, but we have traditionally had always focus on the new build market, when it comes to these technologies. Now we have seen also growth in the retrofit market. New build is still dominant.

Next question comes from Antti Kansanen.

I had a follow-up on question on the hybrid model. And if you think about it, is that the retrofit opportunity in a sense that how big changes you would need to make in the overall design of a ship running with 2-stroke and mechanical powertrains to convert into 4-stroke electrical? Or is this a new build market going forward?

Maybe we need to separate a little bit. If you make a ship concept fully on 2-stroke and then you would like to convert that to something maybe you can add there also batteries to the auxiliary supply system there in the ship. So there you can improve also on that side. But you will have -- and you can take some power intake systems on the soft line there. So you can assist the 2-stroke by having through electricity some support of the 2-stroke engine there. So you have some limited improvements to do hybridization there also. When then thinking the ship concepts, having a full 4-stroke engine, multiple engine, electrical drive concepts compared to mechanical drive 2-stroke that you cannot really modify there. So the 2-stroke engines are such big products. They fill the last part of the ship almost completely. They take a lot of space there and taking them out from a ship replacing with a different machinery. I don't expect that to happen. So then it is a new build market in that respect.

So in a sense that kind of the clients who are struggling to keep up with the IMO regulations on existing fleet and choose to run with slower speeds. This is perhaps not the kind of the addressable market for that concept or only in a small scale.

That is probably like that and they certainly consider before they place next order for us.

Sure. And then the second question was on the industrialization on the methanol and ammonia engines. If you just look at kind of the product, is it and you talked about the difference combustion of the fuels and so forth. But is the engine itself notably more complex or more costlier to produce if it's designed for ammonia and methanol versus kind of the conventional fuels that you are doing today?

Some difference is there. So if you add on a fuel on top of what you have, like if you have a basic gas engine, you take another technology-based liquid fuel engine, you take another one. So there is some impact. There is some mechanical parts, where you need to lead this new fuel, whether it is gaseous or liquid there into the engine in the top part of the engine. Then the automation there needs to be adapted so that the automation can control some more solenoids and valves there, so to make it possible, but it's rather limited in the scope of the total product. The basics is the same. The frame is the same engine block and the crunch of the turbochargers and so on. So it's an unlimited area where it is. But the more you add, the more you have components and therefore, some cost as well.

Okay. And you mentioned kind of, obviously, if the fuels are more expensive, being fuel efficient is a bigger value add. But do you think that this will change kind of being fuel efficient has always been important for the client. But how much different do you think it will be going forward from kind of competition point of view or from a value-add point of view for you guys?

As we believe, and there will be these mechanisms that there will be these carbon [ taxes ] and different measures also, which are important for the customers there will be pressure actually to be very efficient. If the fuel cost is between 2x and 4x higher than it used to be in the liquid or fossil fuel as a reference, the value of efficiency comes also further up high. So therefore, in our development programs, fuel efficiency is playing an important role. And this is confirmed by the customers, when we have discussed with them as well.

Then we have 3 minutes time left, but Panu Laitinmäki.

Yes. Just a quick one to clarify. When do you expect the commercial launch of the ammonia and pure hydrogen engines to be?

Well, on ammonia, we've said that we, this year, tell the concept, and we are ready to deliver next year. And for hydrogen, we've said that in year '25, we are able to tell the technology or we come. So told so little bit on the when the customers want to [indiscernible] hydrogen lend it for 25% volume we deliver any day. It's available and the pure hydrogen technology is released in '25.

And then the last question comes from John-B Kim.

Kind of a bigger picture question. How do you think about return on investment and R&D efforts for the company or put slightly differently, how do you recoup your costs? What percentage of product services the last 5, 10 years or we'll call it the last 3 years or leveraging previous R&D efforts? How do you think about it?

Well, if you look into our new product portfolio, which is a part of the development also, which we've done from the research and development side, on the 25, 31, [ 46DF ] engines, we have been very successful to affect customers. We haven't released certainly all because there is a flow now on this new product, which is proving that these are attractive for the customers and those are coming out those releases when time is due. When we look into the new fuels, the methanol fuel, we have been very successful on selling methanol fuel engines already also. I'm sure in the discussion in week or 2 with our top management, you will hear those as well. So in that way, we have been meeting the customer needs, when it comes to the markets. These are also long-term investments, when we are now delivering these, which are serving not only the new build, but also the retrofit markets. So follow-up internally is very strict on that we are investing into the right areas, right places and minimize the risks, if we go into new and unknown areas, having good control all the time. So I think this is as much as I can open up the response on this side.

So first of all, thank you Juha for a great representation and everybody, thank you for a very active dialogues. Next Tuesday, on September 12, we are hosting the call with our CEO. So hope to see you then. But before that, in the case you have any feedback regarding this call, please let us know. We're happy to get any feedback. So thank you, everybody.

Great questions. Yes. Thank you. You really are into the business, Mercy.

That's very, very true. Thank you.