Wärtsilä Oyj Abp (WRT1V) Earnings Call Transcript & Summary

So welcome -- good afternoon, and welcome to this Wärtsilä strategic call with CEO, Håkan Agnevall. My name is Hanna-Maria Heikkinen. I'm in charge of Investor Relations. The purpose of this call today is to discuss our long-term strategic and long-term opportunities. On April 3, we will have result call with our corporate CFO, Arjen Berends. So let's see the detailed financial questions and Q1 specific questions to that call. Håkan will start with key messages. And after that, we will continue with Q&A. [Operator Instructions] So Håkan, please, let's get started.

Thank you, Hanna-Maria, and warm welcome to everybody listening in. I see quite a few known investors, so a warm welcome. It's nice to see here all okay. And so I thought I spent some, let's say, 20 minutes on a little bit of strategic update. I mean, just reiterating some -- I'm reemphasizing some of our strategy messages. And then I -- on the second half of my presentation, bringing up some proof points on why we see our strategy playing out, so to say, because we do see that the demand side is holding up in line with our guidance, and we see a positive development in general, so to say. But I'd come to that in my second half of my presentation. And then after 20 minutes, let's open up for Q&A, and we'd take it from there. So if I start, and I know some of you know this and have followed us very closely. But for benefit, that is for everybody that is participating. If you take a step back, as you know, the strategy for Wärtsilä, it's really about shaping the decarbonization of Energy and Marine. And we see continued very strong movements. You know that we have 2 themes. It's about transform and perform. And the transformation is to play a part of transforming the industry and contributing to our customers' transformation, but also, of course, to benefit from the attractive growth opportunities that the decarbonization will result in. And things are happening short term. Things are happening long term. The big transformation will take decades, but things are happening step by step. So I'll come back to that. On the performance side, it is once again underlining that we have a clear path to reach our financial targets and also driven by operational improvements, so to say. So those are the 2 strategic themes as we have. So let's start with the Transform to Perform, and then, as I said earlier, proof points towards the end, so to say. If we start then on the transform and if I start on the energy side -- sorry, I start on the Marine side, we do see the decarbonization in Marine playing out as we speak. I mean you're all aware of the new IMO regulations that came into action, so to say, in 2023. You're also aware of MEPC 80, where the ambition levels of IMO was further strengthened. And we can clearly see that in the dialogue that we are having with our customers, they are at completely different levels. When Roger and some of the other, my colleagues in Marine, which has served large part of their careers or decades in Marine, they say that this situation they have never experienced before. We are in a very strategic dialogue, a very interesting dialogue with many of our big customers. And it's all centered around how are they going to decarbonize their fleets over time. It's not a 1-year or 2-year program. It's a program that plays out over decades. And the regulatory environment, I think everybody acknowledges that it will strengthen. It will not become more lax. It will further strengthen, both on IMO level, but also on regional level. We all know that with the Fit for 55, but also some of the levies that will be imposed on marine fuels in Europe, fuel costs for Marine in the European countries will double until 2030. And that is by the regulations and levies that are in place today already. So very interesting dialogue in decarbonization. Then in addition to that, we do see, based on Clarkson, that the growth in our core segments, cruise, ferry and special offshore vessels, the expected growth is double-digit or 11%, which is -- those segments will grow faster than the marine market in general, which is 1% or 2%. And we do see that playing out, and I'll come back to that a little bit on the proof point section. So there is 2 -- really, 2 strong trends: decarbonization, but also that our core segments, that's the core segments are really accelerating now. And that is, of course, makes us excited. Strategically, I think we have a very strong position. We are, I would say, a technology leader in the new fuels, also in hybrid solutions. And we think that we will be the leader or one of the very early movers on carbon capture for marine applications. Our engines are already ready for the carbon neutral fuels. And we also, as you remember, we launched our first ammonia engine towards the end of last year. So now we're also ready for the 0 carbon fuels. And we're adding several methanol variance to our engines. So we will have the broadest methanol engine offering in the market, clearly. Hybrids, we are a clear market leader, and we continue to grow that, I mean, combining the combustion engines with battery solutions. Our hybrid electric concept, we launched that. There is a lot of excitement. We haven't seen the first orders yet, but this will be an interesting growth journey going forward. We talked about it. It marks a start where 4-stroke will come back into certain 2-stroke segments. LNG carriers is one of those. Carbon capture, we said we kind of estimated to be a EUR 10 billion market over the next 10 years, and we will have commercial releases in 2025, and the first time is this year, and we go ahead, so to say. And then services. And services continues to grow. It benefits the company on the Marine side. 60% of the business, 60% of the revenues is services. On Energy, it's 40%. So combined, we normally say that more than half of that is actually services. And we see that we grow all parts of the service value ladder. So we -- service is clearly a key lever for us for growth and also for profitability. Now if we switch over to the energy side, it is the same story, I would say, about balancing power that is playing out. I mean, we -- certainly, we take orders on base load as well. We continue to do. So you had some examples towards the end. We had a fairly strong Q4 order intake. We came in, as we said, with a strong order intake in Energy in the second half of the year compared to the first half of the year. In Q4, we had orders in Indonesia, but not only in Indonesia. But going into this year, we see activities in South America, also in Asia, et cetera. And then on the thermal balancing side, we have seen some recent orders in the U.S. U.S. is one of the really hot markets for balancing power, for renewables as the share of renewables growth in the U.S. And we said if we look, we take the 2030 time frame, we see, yes, 19% growth in balancing and energy storage, 17%. So -- and we still see that we still have that view of the markets. And I would say that when it comes to our market position in the -- on the Energy side, we are clearly the market leader in engine power plants. And I know we have some of our competition listening in today, because they announced that they are coming, so I would say that even when competition is listening. So we are clearly the market leader. We see the big competition is more on the gas turbine side. And where we also think that our technology has some intrinsic benefits in terms of flexibility, in terms of capability to ramp up and ramp down quickly in many times. And that would be needed to balance renewable power. We've done our first hydrogen pilots. So we did our first 25% volumetric plant in the U.S. last year, a successful one. And that was with the existing technology. And we have communicated earlier that our ambition is to have a hydrogen, 100% hydrogen concept ready by 2025, and we are still working towards that plan. On storage, clearly, a focused geographical strategy focused on profitable growth. We know there has been some turbulence around Fluence. And I will not comment on Fluence, I think they can comment on that. I would say that, they have been growing faster than us. We have been growing also. I think we have been disciplined around our growth. We -- I mean, given the legacy, given where we are coming from, as a public company, I think we -- step by step, we have now turned this business around, and we are improving the profitability. And I would say that the order backlog is stable from a kind of project execution perspective. Also, we have profiled ourselves in thermal stability. I would say there that we are -- the customers, at least, says that we are market leading in thermal stability. So far, we haven't had any thermal incidents. We should be humble, but we haven't had it. And it's not by luck. It's by design and a bit of luck, I guess. The other element is our GEMS software. Our customers are also giving us really strong feedback that we have an industry-leading software, not for the software's sake, but it integrates our storage equipment together with other generating assets. The lowest overall energy cost and best uptime and reliability, so to say. So that is also still carrying us through the battery storage market. Services, it's a little bit the same story there. We are growing as in Marine. We are growing. We are moving up the service value ladder, and it's working out really well for us. And of course, we are leveraging AI and the digital toolbox to really increase our capability to service and support our customers. Now if we then -- so that was a snapshot of Marine and Energy, some common strategic themes, and we talked about that before. Of course, there's a lot of R&D going on. We have increased a little bit our R&D spending, so now we are around 4% of our sales, net sales. Earlier, you could say we are around 3%. So we really set out on a journey for technology and leadership within our selected core technologies. In the dialogue with our customers, we need to have -- I mean customers want to go green, but green is not black or white. There are no single simple solution. So it becomes a dialogue around for me, as a customer, what is the best solution for my application where I'm operating in the world. And this is a dialogue that we are having a lot these days. We are upskilling our people to have that dialogue, because you basically need to be able to talk about all technologies, some of the technologies we have and some that we don't have. And to be credible in that dialogue, we need to have a fairly broad product offering. If you come into a discussion and you only have a hammer in your toolbox, the customer would say, you're bringing the hammer again because it's the only tool you have. So to be credible, you need to have a fairly broad product offering. And how we do that still focusing and being world-class in our core technologies is with partnerships. So we focus on our core technologies, combustion engines, the barrier technology, the digital solutions. And we partner up for other technologies like fuel-saving devices or equipment like fuel cells, et cetera. So that type of strategy is still playing out. And what we can offer in those partnerships, I think, is 2 things. One, we know how to marry nice equipment. So help how to put things on vessels and have them working over 30, 40 years. And then I would say that we have the industry-leading service network, so we can provide services for all type of technologies. The good message is, I mean, when it comes to the decarbonization journey, is that we've been working on many of these new technologies, actually, for many, many years, even for decades. It's not that we started with hydrogen or ammonia yesterday. I mean, we've been working with these fuels many years ago, but of course, at a very early stage, because the market was not there. The other good message is that the combustion engine and with its piston, it's a very flexible technology. So you can adopt it to different fuels without needing to make a completely new engine, which then, of course, limits the R&D that we need to invest, so to say. There is still large technology synergies between energy and marine. It's a common engine technology, still. A lot of synergies in the industrial system also on the services side. So there is a very strong logic for why Wärtsilä is a group with, you could say, 2 legs. So those were the common themes. So that was transforming. If we go in to Perform, and the major story there is, of course, around our service business. It's -- we have a 25% growth of our service business since 2021. And you know the concept we've been talking about, moving up the service value ladder. There are 4 steps to the ladder. You start with the spare parts, the service arm as you move into agreements ,and there are many different types of agreements. Then you have retrofits when you're upgrading existing technology to new technology. It can be new fuel, so hybrid solutions. And the fourth step is what we call the performance-based contracts. And these are normally long-term contracts where -- service contracts with our customers, where we make commitments, and we share ups and downsides of those contracts, and we use digital toolbox to work with them. And it's not suddenly a step that we are growing. We also talked about moving up the service value ladder, which is basically moving transactional customers into their first agreements, moving agreement customers maybe to a little bit more advanced agreements and so on. And then you move up the service value ladder. And there is a scaling effect if you look on revenues per install, a kilowatt with a factor of 2 to 5. And we do see this playing out. Good things also that we are, of course, grateful for, but also very proud about the renewal rate of our service contracts is above 90%, both in Energy and Marine. And so far, we have 30% of our installed base covered under service contracts, so there is ample growth or bringing in of more of our installed base on their agreements. So for us, I think year-by-year, we have been going up about a percentage point of 29 to 30, et cetera, so. But Perform is, not only about services. I mean, we have -- I would say we have improved the quality of our revenues. We have improved the quality of the margin of the new order backlog. We have rebalanced our Energy business from EPC to Energy. So if you look at the current order backlog, 80% of the backlog is more equipment related than EPC-related. If you go back a couple of years, that percentage would have been 40%. So we are going from 40% EQ to 80% EQ. Storage is now profitable for the first time, and we continue to develop the profitability. And Voyage, you remember, we dissolved this division. But if we bring together those 2 units that used to form Voyage: one, we are keeping, the Marine services; the other one we are selling. If you bring them together, we see that the turnaround is now happening. They are still, combined, loss making, but the loss is so much less than before, so to say. Then footprint. We continue the journey in Italy by closing down our manufacturing. We will still be interested with R&D services, et cetera. But manufacturing, we have now stopped, and we are continuing to work on the so-called industrialization program, which involves having other parties taking over the staff and also the facilities, and that's an ongoing process. We earlier communicated that, that once this is closed, it should give an annual -- the cost reduction of about EUR 35 million a year. And we continue to divest the business unit that we have put in the portfolio business. So step by step, we are finding new owners for those businesses. I think that's the overall strategic theme, so to say. We also talked -- what will drive our profitability journey going forward, and we try to sketch the waterfall where services is the biggest driver, but then we also have Marine newbuild economy. The engine power plants, they're picking up, both in balancing and baseload. Storage, increasing profitability. And then the divestment of portfolio business units, because currently, they are diluting our profit margin. So as they go up, they will dilute anymore. Those are the major themes. So proof points, what is happening? You'll notice that we have a more positive view on the demand situation for Marine in our latest quarter. And we still see a positive trend there. And I mean if you follow the cruise industry, you've seen that Carnival placed a new order for a cruise vessel. It will be built by Myers and Cloppenburg. And just a couple of days after, Royal where we actually placed also an order with CDA in France for new cruise vessels. The orders -- I mean there was a vessel orders, so the engines have not been -- the orders for engines have not been given yet, so to say, but that will probably come to the market during this year. So cruise is coming back also in newbuild. Cruise is cruising like never before. Some on the services side is, of course, strong, which is good. If we look on the ferry segment is really coming alive. I mean, I think in January, there was 7 ferry orders. And you can compare that to the whole of last year, there were 14 orders overall. So only in 1 month, 7 compared to 14 the full year. And you could see several ferry operators, they are really coming to market. The average age profile of the ferry fleet is 29 years. So there is clearly a need for renewal going forward, not only for age reasons, but also for sustainability reasons and regulations. And then on the offshore, we also see our North market. And we started, clearly, taking assets out North Pole, providing, of course, our service business with -- but we also see going forward that the newbuilds will start to come, so to say. So that was the driver behind a more optimistic demand side. On the Energy side, it is what we talked about before. It's the potential business opportunities in South America with auctions, power auctions. Also some possibilities in Asia and then U.S. and balancing power. Now I'm talking total EPP, if I -- I mean the power plants business. If I go to the battery storage, we still see a very strong demand, and we still maintain, you could say, our focused strategy, focusing on the geographical regions that we have talked about before. Services, still playing out strong. We see strong demand side, so you could say the development confirms what we communicated at CMD, basically. All right. That was an attempt to make a short summary of the strategic situation. So let's open up for questions.

Yates, go ahead.

Could I just ask a little bit around the base order -- sorry, the thermal business in the U.S.? Because I guess when I look at the Americas orders, they were still down kind of year-over-year in 2023. I think we've been talking about the kind of balancing opportunity in the U.S. for a number of years. What is kind of -- what is happening there? Why is it sort of taking so long when we see headlines of kind of power outages in various parts of the country? And would you worry at all that some of your competitors that are maybe more local have taken some share there against you?

No, I'm not overly concerned about that. I mean, if you look at our -- I need to talk to Hanna-Maria, what have we announced here? So remind me, so I don't make any transgressions here.

Let me think about that.

U.S. order intake end of this year, beginning of this year.

I think -- when thinking about the base orders globally versus the balance...

No, balance. Yes.

Yes. So balancing orders were about 30%. Thermal power order intake in [ euros ], and in view of our -- for the share of balancing, it was 42%. For U.S., I don't think we have specifically announced those or disclosed of it as it is.

No. So let's put it like that. And sorry for -- because there are obviously things that we announced and some things that we haven't announced yet, so to say. I would say, without going into details, that the growth trajectory and the growth story that we have talked about in the U.S., we see it coming. Let's put it like that. So to your point, Max, no, I don't feel that we are losing out. Rather the opposite going forward, I would say so. Then, of course, if you look on a quarter-by-quarter development, et cetera, and we talked about that before, there can be rather big swings. But we see a positive trend in the U.S. on balancing, yes.

Okay. And maybe just, I guess, so given we're focusing on strategy, just a sort of follow-up question on the sort of penetration of your service contracts because I guess, you talked about being at sort of 30% today. I think you've talked about kind of the opportunity can be 2x even higher if you get people on these service contracts. I guess I'm trying to understand how many of your customers or what percentage of your kind of installed base do you actually see these contracts are applicable for in the long term? Because I assume they're not right for everyone, but how should we think about that? I mean is the opportunity that you get half of your installed base on this? Is it more than that? How would you frame that?

I understand the question, and I think it's a very legitimate question. But this one, we are not so particular on, so to say, because I mean, the straightforward questions, if you have 30% today, how far can you go? And we have not put our foot down and said x percent. And the only thing that we've been saying, we think we can grow significantly. But I'm not going to go into the actual percentages. But we do see continued growth opportunities.

Next question comes from Panu Laitinmäki.

I wanted to ask about the Marine business. You mentioned the IMO regulation, but what about the EU's extension of the emissions trading system at the Marine sector? Is this like an additional driver for you? And what, in practice, does it imply for your business?

Yes. You could say -- I'll answer your question, but I will make a little story, come to answering your question. I would say that the regulations that are being put in place, both in energy and marine will support the Wärtsilä business because -- I mean, clearly, the regulations are imposing more and more cost and coordination and also reducing the attractiveness to work with fossil fuels. And that is in line with how we envision the future and how we have positioned and not positioning Wärtsilä. So -- and in Energy, when we come to Marine and Energy, you also saw COP28, I think it was 120 countries coming together to say that we want to triple renewables until 2030. That is great, and it's really needed. Let's see all the financials and practical implications of that, then we can discuss how executable it is. But clearly, there is a need to grow renewables, and as renewables grow, there will be more need for balancing power. That's laws of physics basically. And we have some of the major -- not the only one, only at technologies, but we have some of the major technology for the future. Now coming to your question, Marine. How does IMO regulation play out and also EU Fit for 55 and some of the other levers that I'm talking about. How will they play out? I mean the biggest impact is that there are twofold. If we start with the EU ones, fuel costs will go up. And it's like we have our cost and some of us might still have petrol costs. If you look at what you pay at the pump, in many countries, 60%, 70% what you pay in the pump is taxes. And that is what is going to happen on the Marine side as well. And we have said -- and that is based on analysis of current regulations that the fuel price will double by all these levies until 2030. And that is considering the levies that are already in place. So it's not expecting new levies to come with the decision that has been made in Fit for 55, but also in some other rules and regulations, fuel cost -- fossil fuel cost will double until 2030. And we also said that because of that, the green fuels, they will be in cost parity with fossil fuels in EU in 2035, because we all -- as you might remember, we said that the green fuels, they would be 2 to 4x more costly than the fossil fuels, but with all the levies that are being put in place in Europe, by 2035, it will be on cost parity with the cost that we're seeing in today. So that is a major, major shift. Now people -- which is right. I mean, if you look at EU shipping, it's about 15%, 1-5 percent of the global shipping. So you could say it's not a super big chunk of the global shipping. But I think we have reasons to believe that EU will set a certain tone and will put pressure on IMO to also move in this direction. Now it's more likely that IMO will move slowly, so to say. But -- so this is EU. The other element where regulation is playing out. So it's not only about fuel costs, but it's also, of course, in the IMO regulatory context. You have the carbon intensity index, which basically means if you own a vessel or operate a vessel, year-on-year, you need to come down in your carbon emissions to stay in certain class and stay competitive, basically. So that is triggering fleet owners to look at hybridization, so introducing batteries, introducing energy saving devices and then also upgrading to new fuels, reduce methane slip, et cetera, et cetera.

Okay. Can I just ask a quick follow-up on the yard capacity. This has been discussed as one limiting factor for the ship contracting demand. And I think you have mentioned now it's getting better. Can you give any kind of indications how much more yard capacity is coming? And any kind of comments on that?

So when you talk about yard capacity, we also need to talk about the different segments in Marine. And different segments are going in different directions, so to say. But I think, certainly on the LNG carrier space, there has been shortage of yard capacity, both in South Korea, which is the main LNG carrier market, so to say, but in China. And on container vessel, it used to be a lack of capacity. But the container market, new build market has come down a bit. So now there is more capacity there. LNG, I still say, it's a very hot market. On cruise vessels. Of course, the capacity has not been heavily loaded, but if you make projections on what the big cruising companies, how they want to renew their fleets and how they want to evolve our asset programs they are -- they need to take decisions now, basically, because otherwise, the yard capacity will run out around '27, '28. If you talk about the overall yard capacity and international figures, the yard -- since 2020, if we use that as a starting point, yard capacity in China has gone up 8% to 10%. It really bottomed up. There was an overestablishment. Then it came down, but it bottomed up in 2020. Since then, yard capacity in China has -- sorry, accelerate -- increased, sorry, with 8% to 10%. In Korea, the corresponding will be capacity increasing 3% to 4%.

Question comes from Mikael Doepel.

I wanted to ask a bit on the service business, which I think you emphasized quite a lot in your intro there. I guess the performance has been quite impressive. It's been a double-digit organic growth for quite a few quarters already. And I guess there are multiple levers driving that, including the installed base, capture rates and climbing the value ladder and so on. But I mean are there any reasons to assume that this growth couldn't continue double-digit going forward? How should we kind of frame -- how do you think about the growth rates really here going forward is the question really.

So I wouldn't give a guidance if we're going to continue double-digit growth or not. But I would say, I think we have a strong growth agenda. And as I said, with the 30%, if we only look at the agreements, with 30%, there is clearly growth opportunities. If you look at the third in -- third step in this 4-step value ladder, which is about retrofits, this will accelerate because of the regulations where owners makes upgrades of existing vessels. So I won't make a statement on x percent growth, but I think there is a strong underlying logic for continued growth.

Right. Right. Okay. That's understandable. And then a question on the carbon capture systems. I think you mentioned that you see a EUR 10 billion market opportunity there. You seem to be a first mover in the space. What would you say are the main hurdles in that market in terms of the -- really getting to that EUR 10 billion? Is it the technology adoption? Is it the infrastructure at the boats or at the yards or in the terminals? I mean, what's really the -- how do you think about that?

Yes. So basically, I think the technology -- I think there is a fairly strong certainty on -- that the technology will work, because technology has been tested on that and now it's bearing very nice. And of course, there is technology risk, but I don't think that is the major hurdle. The major hurdle, it's an ecosystem that needs to evolve. So you will be -- it will be perfectly possible to capture the carbon, store it on the vessel, bring it to shore and aggregate it to shore. The big question is, okay, what do we do with it then? Do we pump it back where it came from, so to say? Or do we use it as, you could say, an ingredient in the chemical laboratory? I mean, do we use it to produce new fuels? Or do we use it for other usages, so to say? And that ecosystem still needs to evolve. Now, there is a lot of things happening in that ecosystem. And if you follow this, there is a plethora of different pilots all over the world, but these are still pilots. So I think there is the biggest uncertainty.

Right. Right. But it's your assumption that within a couple of years, we should already have that in place in…

Yes, yes. And we see -- yes. And we see a lot of interest among fleet owners and operators for this technology, so to say. But I don't think any -- as far as I know, I don't see anybody has really figured out all the steps of the value chain, what are we going to do the carbon that we capture. There are ideas and pilots, et cetera. But yes, it still needs to evolve.

This question comes from [indiscernible] for please.

Can you hear me?

Yes.

Can you just expand a bit on this idea of forward straight taking market share from 2-stroke, I think you said, particularly LNG? Why is that happening? And are there other areas where that could happen?

Yes. So hybrid electric, just to explain to everybody what it is it's a hybrid system. So you're combining battery with combustion engine, and you do it in a smart way, so to say. So there is some IP thinking around that. Now why -- so what's the logic for why could that be a competitor to 2-stroke going forward? So basically, if you look on how vessel are designed today, they are normally designed for running at the speed of 18, 19, 20 knots. But the -- and this is where you -- kind of how you dimension the 2-stroke application to be very efficient in that point. But in reality, because of gas price, because of other constraints, the fleets today, they are running on 13, 14 knots . And then you're not running the 2-stroke in its most efficient point. So that's one reason, because then what you can do with a 4-stroke engine solution, because then you have several engines and the battery, with the help of a battery, you can make sure that regardless of speed you're running with, you're always running at the most efficient point. You always get the most bang for your fuel buck, so to say. So that's the first. Second reason is that in the world of decarbonization, and I talked about the carbon intensity index, fleet owners, they need to -- will need to decrease their carbon footprint year-on-year. And so they will bring in new solutions. And then the best driveline is the driveline where you can add on fuel cells, you can add on Flettner rotors, da, da, da, and still run the engine at -- in an efficient way. And you understand, if 2-stroke is defined to be maximum efficiency and 18 knots, if you're bringing new energy-saving devices, it will be even less efficient because it will not be running at its most efficient point. Whereas on the hybrid electric, you can adapt. You can always make sure that the engines are running at the most efficient point and you save fuel. And that's, as we know -- and we are talking about very fine fuel savings of 8%, 9%, 10%. So -- and then there are side benefits. You actually -- an LNG carrier, you need less space, so you can have more cargo, et cetera, et cetera. So that, so LNG, it's a no-brainer. And I think there are companies -- Shell launched their initiative around this recently. And then the big players, they see the benefits, and we are working very closely with them. Now could there be other applications where this could mean the comeback of fossil? And this is still a little bit in the makings, so -- and we are still investigating this. But there are cases looking at some of the smaller container vessels and similar applications. I want to underline, I'm not saying that 4-stroke is going to take over 2-stroke. I mean, 2-stroke is clearly going to be there. But there will be applications where 4-stroke make a comeback, clearly.

Next question comes from Antti Kansanen.

I wanted to ask a little bit about, Håkan, you mentioned that there's a lot of discussions on your core marine clients regarding your carbonization and increased urgency around that theme. So what should we be more excited about for the next 5 years? The opportunity -- the retrofit opportunity, you addressing the existing fleet? Or the fact that you are seeing strong demand or contracting growth on your core segment? I just wanted to understand kind of the revenue and business potential for you when you go into existing fleets and address these minor single energy improvement factors, which, I guess, add up to a lot. And maybe additional question on that is regarding on the future fuels. What have you recently seen on development on supplying those fuels and having them available in 10 years' time?

So I think -- And I say this and did with a smile. I think your -- the excitement should not be on one or the other. The excitement should be in both. I mean, to your point, there is actually 2 growth generators, you could say. One is the growth of our core segments, the 11% CAGR that we talked about in ferries, in cruise and in offshore. And then in parallel to that, there is the decarbonization transformation, which gives us opportunities on new build, but also on the services side. We have not delineated how much growth is coming from that leg and how much coming -- that growth is coming from the other leg, so to say. So I'm sorry to -- I will not go into those details. There will be growth generated by both, that we can clearly say. Then, sorry, I missed the second question.

I think it was the availability of the grid.

Availabilities. Yes, no, thank you very much. Now that is a critical question. Now -- but please note, people invest in alternative drivelines already now, although fuels are not available. Why? Because lifetime of the assets is 35 to 40 years. If we look at the vessels that were contracted last year, I think it came to 43%, had alternative fuel as a possibility. And I think about 1/3 of that 43% are now methanol enabled. And there is not enough methanol available currently, no, no. People are looking for ethanol, and some of the big operators, they are engaging in building factories for methanol. But the important thing is to be ready, to have the fuel flexibility. And we talked about that before. I think the key component for the Wärtsilä going forward is fuel flexibility and fuel efficiency, because the new fuels will be more expensive. We talked about that. So although, clearly, the major bottleneck for the green transition, I would say, not only in Marine and then it will availability of the fuels. For us, as an equipment provider, it doesn't hold us back, because when people think about building new assets, they want to build in the flexibility.

Sure. And then, I guess, specifically on the cruise side, and it's, I guess, it's great to see your key clients coming back to the newbuild markets. So if you now -- and let's assume you get your fair share of your high market share on the cruise side. So if you look at your workload and kind of backlog situation now, how does it look like when you time these potential new orders coming in and work related that and the work that you still currently have on order -- cruise orders on your -- does it look fairly even that it will carry you through kind of the slower period that we have seen on cruise contracting? Just trying to understand how the cruise-related revenue will…

We have seen -- I mean we have -- overall, we have a fairly good order backlog going into 2024, and we talked about that overall. I think that if we look at newbuild marine in the last couple of years, it's been rather slow. With the things that we see, it will increase our cruise business, newbuild cruise business.

Okay. And then last one from me is capital allocation. I mean, the balance sheet is super strong after a strong cash flow last year.

Yes.

You might divest more or less of your businesses that are in portfolio and under strategic review. But when you talked about kind of wanting to focus on core technologies and partnering elsewhere, it doesn't seem like you have a lot of, let's say, capital-intensive growth plans going forward. So -- but you still have quite an ambitious growth targets overall. So what could this strong balance sheet be best used for going forward? What opportunities do you have?

So, I think, I mean, if we look at our growth opportunities, I think that, to your point, the 5% average growth, I think we are fairly confident in that because the core business is really growing. I mean, we're talking about services, but also the whole decarbonization theme. So that is a strong base to build upon when it comes to core. We have also talked about a lot of our acquisitions. We still talk about bolt-on acquisitions. So it's not big strategic acquisitions, so to say. And we keep on having that story. Now if -- and to your point, we have a strong balance sheet. I think we have the resources we need for our R&D program, scaled it up. We're investing a little bit more. I think we are very well capitalized. Now if the strategic review would result in some type of divestment decision, and it's a big if, because we talked about it. It's a strategic review. It's a strategic review. It could mean that we continue, today, in storage. It could mean that we divest partially or wholly. I think we need to come back. It's premature then that -- in that hypothetical scenario, we would have a lot of cash, even more cash than -- but what should we do then, so to say. I think that is a very good question, but we will have to come back to that later on, so to say, once we know the outcome of the strategic review.

Next question comes from Erkki Vesola.

On the energy side, Wärtsilä said some years back that when the share of renewables in electricity production exceeds 20% in a particular area or country, that will be the kind of tipping point for balancing demand really taking off. Do you still subscribe to this argument? And what's your view on the balancing market outlook in countries like India and even France, of course, in addition to U.S., where the tipping point has been passed? Do you see the market fully accelerating in this market?

So I think personally that this 20% -- and you're right, we used that percentage rate in the past. I think it's a little bit too simplistic because, basically, the power systems looks different in different parts of the world. And they are -- they have different types of stability so that is fairly complex. So I think this 20% is an oversimplification. And I think that we have really tuned -- toned -- sorry, not tune. Toned down that 20%. I think where we are consistent in our message is that increasing renewables, we will see increasing need for balance. U.S. is actually one of the major proof points. And we talk about Texas because there are a lot of public examples in Texas on the ecosystem. I mean 40% of the energy generation capacity in Texas these days are actually renewables. Everybody knows that 40%. And this is probably one of the most active markets on balancing power, both for thermal, but also for storage. I think we have 1 gigawatt of thermally installed and even -- about 1 gigawatt of battery. So 20%, I think that's too simplistic. The logic with increased renewables will drive balancing power is still there. If you talk about India, if we start there, it's a continent of -- so there, you need to look at different regions. They are balancing -- actually, thermal balancing projects and storage projects are ongoing in different states of India, and there will be a need for balancing power. In France, which has a very particular energy system, where there are not a lot of nuclear, let's see, I would say I'm not sure how France will evolve, how much renewables they intend to include in that power system going forward. That will be -- I mean, determining factor. One thing is clear, you cannot use nuclear power to balance renewables. It's far too slow, so to say, and it's not designed for that.

Okay. So to sum up what used to be 20%, it's anything between 20% and 50% depending…

Yes. I think in our message, we have stopped talking about this percentage rate because it's too simplistic. I know it's a good -- it's an easy way to communicate but it's oversimplifying, and it leads to the wrong conclusion, so to say, so.

It seems like that there are no thumbs up. [Operator Instructions] It seems like I don't have any e-mail questions either. Antti Kansanen. Yes.

I wanted to follow up on the storage side. And as you said, you've been quite disciplined on taking new orders and -- which has been visible on margin profile, and there hasn't been a lot of negative news for from your project execution. So what does this practically mean, Håkan? I mean, is it use case of the storage facility? Is it the market? Is it the client? If you could give us some examples when you are tendering an offer and you see something that doesn't really go through your risk assessment, what would it be?

That's a good question. So basically -- so some, I will mention a couple of examples. I mean, big EPCs is clearly something that we would take an extra look at. And sometimes if it's too big, we will say no. First of all, I should start at the first part of the funnel. As you know, we have a focused geographical strategy. And we talked about U.S., Australia, U.K., a couple of other countries. So you could say that's the first criteria. But second criteria, in those markets, it's -- one thing is to look at EPC, because big EPC, we are not really keen on in storage, so that is one qualifying. The other thing is delivery times, because there is always -- you can gamble a bit. You have a supply chain and can you meet certain delivery times. And we meet our obligations. In terms of delivering a good installation, a good product at the right time, and that works and has the right thermostability. So those are the type of decision criteria that comes in. I mean we are not the cheapest provider, clearly. So -- and we talked about that before. The energy storage market is a huge market. And there are different customer segments in that market. And those customer segments have different attributes. And some of the customers, they value this solid track record in execution because they signed contracts, they signed commitments. And if the batteries are not in shape or in place, it's costing them a fortune. So that's why some customers, no. But some customers say, I want to have somebody with a solid track record, the execute, has a really good track record of thermostability, because if I have a fire, it's a big disaster for me in my contract. And that also has proven capabilities in the markets that I want to address.

Okay. Because I remember a few years back, there was a talk about kind of it's a growing market, and there's a lot of different niches, and I understand the geographical focus, but you haven't really kind of had a clear focus on any certain application, whether it's renewable backup or grid balancing or industrial use or anything like that. It's more about the country and it's more about the contractual terms you have.

And that's still the same. And I would say that many of our core customers are utilities or project companies that, for them, it's really, really important because of the contractual they have entered into to have 100%, if you can have that, surety on delivery and quality, so to say.

And maybe last one on that theme, who is then sitting on the EPC risk if you are not willing to take it? Is there a project -- third-party project house? Is it a customer? How does it work?

So it varies. It could be the customer. It could be the end customer. It could also be that you bring in another party that takes that risk. But I would say many times, most of the times, it's sitting with the customer.

Okay. And then maybe a follow-up on, I guess this is the same strategy. You are now more pushing on the thermal side being an EEQ house, and now I'm assuming you are quoting for a couple of bigger orders this year. Is there then a third-party contractor with you or...

I would say, just to make a distinction, I mean, we are still doing EPC in thermal power plant. I think we have a much longer and stronger history in doing EPC in thermal, so I think we are more restrictive in our battery business compared to our power plant business on EPC. But even in our power plant business, as you know, we have rebalanced our risk appetite. But we are still doing EPCs in some of our core power plant markets. And we are very comfortable doing so, because we have the track record, and we do have the competence and experience, where, in this rebalancing of our thermal, is that there are certain markets where we didn't have that experience, and we don't have that experience. And then we say, let's not do EPC in those countries.

Thank you for great questions, and thank you for good answers and very good introduction also, Håkan, so it seems. So I am very convinced that we have lots of good long-term opportunities. So hope to see all of you in result call, which is taking place on April 4 then.

Thank you for today.

Thank you.

Buh-bye.